<PAGE>1
As filed with the U.S. Securities and Exchange Commission
on September 22, 1995
Securities Act File No. 33-82362
Investment Company Act File No. 811-8686
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 3 [x]
(Check appropriate box or boxes)
Warburg, Pincus Japan OTC Fund, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................ .....................
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus Japan OTC Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
.........................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
<PAGE>2
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
_________________________________
DECLARATION PURSUANT TO RULE 24f-2
Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933, as amended, pursuant to Section (a)(1) of Rule
24f-2 under the Investment Company Act of 1940, as amended. The Rule 24f-2
Notice for Registrant's fiscal year ending on October 31, 1994 was filed on
December 29, 1994.
<PAGE>3
WARBURG, PINCUS JAPAN OTC FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
Heading for the Common Shares
Part A and the Advisor Shares
Item No. Prospectuses*
-------- -----------------------------
1. Cover Page . . . . . . . Cover Page
2. Synopsis . . . . . . . . The Funds' Expenses
3. Condensed Financial Financial Highlights
Information . . . . . .
4. General Description of
Registrant . . . . . . . Cover Page; Investment
Objectives and Policies;
General Information
5. Management of the Fund . Management of the Funds
6. Capital Stock and Other
Securities . . . . . . . Dividends, Distributions and
Taxes; Management of the
Funds; General Information
7. Purchase of Securities
Being Offered . . . . . How to Purchase Shares;
Management of the Funds
8. Redemption or Repurchase How to Redeem and Exchange
Shares
9. Legal Proceedings . . .
Not applicable
- -----------------------
* With respect to the Advisor Prospectus, all references to "the Funds" in
this cross-reference sheet should be read as "the Fund."
<PAGE>4
10. Cover Page . . . . . . . Cover Page
11. Table of Contents . . . Table of Contents
12. General Information and
History . . . . . . . . Management of the Fund; Notes
to Financial Statements; See
Prospectuses--"General
Information"
13. Investment Objectives and
Policies . . . . . . . . Investment Objective;
Investment Policies
14. Management of the
Registrant . . . . . . . Management of the Fund
15. Control Persons and
Principal Holders of
Securities . . . . . . . Management of the Fund;
Miscellaneous; See
Prospectuses--"General
Information"
16. Investment Advisory and
Other Services . . . . . Management of the Fund; See
Prospectuses--"Management of
the Funds"
17. Brokerage Allocation and
Other Practices . . . . Investment Objective;
Investment Policies
18. Capital Stock and Other
Securities . . . . . . . Management of the Fund; See
Prospectuses--"Dividends,
Distributions and Taxes" and
"General Information"
19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . Additional Purchase and
Redemption Information
20. Tax Status . . . . . . . See Prospectuses--"Dividends,
Distributions and Taxes";
Additional Information
Concerning Taxes
<PAGE>5
21. Underwriters . . . . . . Management of the Fund;
Additional Purchase and
Redemption Information; See
Prospectuses--"Management of
the Funds" and "Shareholder
Servicing"
22. Calculation of
Performance Data . . . . Determination of Performance
23. Financial Statements . . Report of Independent
Auditors; Financial Statements
Part C
Information required to be included in Part C is set forth after the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>1
PROSPECTUS
The Fund's Common Shares Prospectus is incorporated by reference
to the Prospectus that forms part of Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A of Warburg, Pincus Post-Venture Capital
Fund, Inc. (Securities Act File No. 33-61225; Investment Co. Act File
No. 811-07327).
<PAGE>
[Logo]
PROSPECTUS
SEPTEMBER 29, 1995
[ ] WARBURG PINCUS JAPAN OTC FUND
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 1995
WARBURG PINCUS ADVISOR FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
September 29, 1995
PROSPECTUS
Warburg Pincus Advisor Funds are a family of open-end mutual funds that are
offered to financial institutions investing on behalf of their customers and to
retirement plans that elect to make one or more Advisor Funds an investment
option for participants in the plans. One Advisor Fund is described in this
Prospectus:
WARBURG, PINCUS JAPAN OTC FUND seeks long-term capital appreciation by investing
in a portfolio of securities traded in the Japanese over-the-counter market.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
The Fund currently offers two classes of shares, one of which, the Series 2
Shares (referred to as the Advisor Shares), is offered pursuant to this
Prospectus. The Advisor Shares of the Fund, as well as Series 2 (Advisor) Shares
of certain other Warburg Pincus-advised funds, are sold under the name 'Warburg
Pincus Advisor Funds.' The Advisor Shares may not be purchased by individuals
directly but institutions and retirement plans ('Institutions') may purchase
Advisor Shares for individuals. The Advisor Shares impose a 12b-1 fee of up to
.75% per annum, which is the economic equivalent of a sales charge. Common
Shares are available for purchase by individuals directly and are offered by a
separate prospectus.
NO MINIMUM INVESTMENT
There is no minimum amount of initial or subsequent purchases of shares imposed
on Institutions. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Advisor Funds at (800) 888-6878.
Information regarding the status of shareholder accounts may also be obtained by
calling Warburg Pincus Advisor Funds at (800) 888-6878. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
THE FUND'S EXPENSES
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See 'General Information' and 'Shareholder Servicing.' Because
of the higher fees borne by Advisor Shares, the total return on such shares can
be expected, at any time, to be lower than the total return on Common Shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)................................................................................... 0
Redemption Fee (as a percentage of the value of shares redeemed).................................... 1.00%*
Annual Fund Operating Expenses (after fee waivers) (as a percentage of average net assets)
Management Fees..................................................................................... .97%
12b-1 Fees.......................................................................................... .75%`D'
Other Expenses...................................................................................... .53%
-----
Total Fund Operating Expenses....................................................................... 2.25%
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 year.............................................................................................. $23
3 years............................................................................................. $70
</TABLE>
- ------------
* Redemption fees are charged to shareholders redeeming their shares within six
months after the date of purchase and are paid to the Fund. The redemption
fee is currently being waived until such later date as the Fund may
determine. See 'How to Redeem and Exchange Shares.'
`D' At least a portion of these fees should be considered by the investor to be
the economic equivalent of a sales charge.
------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an Advisor Shareholder of the Fund. 'Other Expenses'
are based on estimated amounts to be charged in the current fiscal year.
Institutions also may charge their clients fees in connection with investments
in the Series 2 Shares, which fees are not reflected in the table. Absent the
voluntary waiver of fees payable to the Fund's investment adviser and
co-administrator, estimated Management Fees would have equalled 1.25%, Other
Expenses would have equalled .75% and Total Fund Operating Expenses would have
equalled 2.75%; the investment adviser and co-administrator are under no
obligation to continue these waivers. The Example should not be considered a
representation of past or future expenses; actual Fund expenses may be greater
or less than those shown. Moreover, while the Example assumes a 5% annual
return, the Fund's actual performance will vary and may result in a return
greater or less than 5%. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the National
Association of Securities Dealers, Inc. (the 'NASD').
2
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR AN ADVISOR SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The information regarding the Fund for the fiscal period ending October 31,
1994 has been derived from information audited by Coopers & Lybrand L.L.P.,
independent auditors, whose report dated December 12, 1994 appears in the Fund's
Statement of Additional Information. The information for the six months ended
April 30, 1995 is unaudited. Further information about the performance of the
Fund is contained in the annual report, dated October 31, 1994, copies of which
may be obtained without charge by calling Warburg Pincus Advisor Funds at (800)
888-6878.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX SEPTEMBER 30, 1994
MONTHS ENDED (COMMENCEMENT OF
APRIL 30, 1995 OPERATIONS) THROUGH
(UNAUDITED) OCTOBER 31, 1994
--------------- -------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................................ $9.85 $10.00
--------------- -------
Income from Investment Operations
Net Investment Income..................................................... .00 .00
Net Gains (Losses) from Securities and Foreign Currency Related Items
(both realized and unrealized)......................................... (2.01) (.15)
--------------- -------
Total from Investment Operations.......................................... (2.01) (.15)
--------------- -------
Less Distributions
Dividends (from net investment income).................................... .00 .00
Distributions (from capital gains)........................................ .00 .00
--------------- -------
Total Distributions....................................................... .00 .00
--------------- -------
Net Asset Value, End of Period.............................................. $7.84 $ 9.85
--------------- -------
--------------- -------
Total Return................................................................ (36.89%) (15.84%)*
Ratios/Supplemental Data
Net Assets, End of Period (000s)............................................ $ 1 $ 1
Ratios to average daily net assets:
Operating expenses........................................................ 1.25%* 1.18%*
Net investment income..................................................... (.16%)* .12%*
Decrease reflected in above expense ratios due to waivers/
reimbursements......................................................... 2.28%* 4.74%*
Portfolio Turnover Rate..................................................... 138.17%* .00%
</TABLE>
- ------------
* Annualized.
The Total Return shown above has been annualized; the actual Total Return
(after the effect of expense waivers) for the one-month period from September
30, 1994 (commencement of operations) through October 31, 1994 was -1.50%, and
the actual Total Return (after the effect of expense waivers) for the six
months ended April 30, 1995 was -20.41%.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks long-term capital appreciation. This objective is a
fundamental policy and may not be amended without first obtaining the approval
of a majority of the outstanding shares of the Fund. Any investment involves
risk and, therefore, there can be no assurance that the Fund will achieve its
investment objective. See 'Certain Investment Strategies' for descriptions of
certain types of investments the Fund may make.
The Fund is a non-diversified management investment company that pursues
its investment objective by investing in a portfolio of securities traded in the
Japanese over-the-counter market. The Fund is designed to provide an opportunity
to participate in the dynamic structural changes in the Japanese industrial
system through investment in less-established, higher growth companies that can
be expected to benefit from these changes. At all times, except during temporary
defensive periods, the Fund will maintain at least 65% of its total assets in
securities of companies traded through JASDAQ, the primary Japanese
over-the-counter market, or the Japanese Second Section OTC Market (the
'Frontier Market'). The portion of the Fund's assets that is not invested
through JASDAQ or the Frontier Market may be invested in securities of Japanese
issuers that are not traded through JASDAQ or the Frontier Market or
exchange-traded and over-the-counter securities of issuers in other Asian
markets, in addition to the other instruments described below. The Fund may
invest up to 35% of its total assets in securities of other Asian issuers, with
no more than 10% invested in any one country. The Fund will not invest in
securities of non-Asian issuers, except that the Fund may, for defensive
purposes, invest in U.S. debt securities and money market instruments. The Fund
intends its portfolio to consist principally of equity securities (common stock,
warrants and securities convertible into common stock), which may include shares
of closed-end investment companies investing in Asia. The Fund may also invest
up to 5% of the Fund's net assets in each of the following: foreign debt
securities (including foreign government securities and debt obligations of
supranational entities), mortgage-backed securities, asset-backed securities and
zero coupon securities. The Fund may involve a greater degree of risk than an
investment in other mutual funds that seek capital appreciation by investing in
better-known, larger companies. From time to time, the Fund may hedge part or
all of its exposure to the Japanese yen, thereby reducing or substantially
eliminating any favorable or unfavorable impact of changes in the value of the
yen in relation to the U.S. dollar.
At December 31, 1994, 581 issues were traded through JASDAQ, having an
aggregate market capitalization of approximately 14 trillion yen (approximately
$134 billion as of September 19, 1995). The entry requirements for JASDAQ
generally require a minimum of 2 million shares outstanding at the time of
registration, a minimum of 200 shareholders, minimum pre-tax profits of 10 yen
(approximately $.10 as of September 19, 1995) per share over the prior fiscal
year and net worth of 200 million yen (approximately $1.92 million as of
September 19, 1995). JASDAQ has generally attracted small growth companies or
companies whose major shareholders wish to sell only a small portion of the
company's equity.
The Frontier Market is under the jurisdiction of JASDAQ, which is overseen
by the Japanese Securities and Exchange Commission. The Frontier Market has less
stringent entry requirements than those described above for JASDAQ and is
designed to enable early stage companies access to capital markets. Frontier
Market companies need not have a history of earnings, provided their spending on
research and development equals at least 3% of revenues. In addition, companies
traded through the Frontier Market are not required to have 2 million shares
outstanding at the time of registration. As a result, investments
4
<PAGE>
in companies traded through the Frontier Market may involve a greater degree of
risk than companies traded through JASDAQ. As of the date of this Prospectus,
there were not yet any registrations on the Frontier Market, but the first
registrations are expected to be effective in November 1995.
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The Fund may invest up to 35% of its total assets in
investment grade debt securities (other than money market instruments) and
preferred stocks that are not conver-
tible into common stock for the purpose of seeking capital appreciation. The
interest income to be derived may be considered as one factor in selecting debt
securities for investment by Warburg, Pincus Counsellors, Inc., the Fund's
investment adviser ('Counsellors'). Because the market value of debt obligations
can be expected to vary inversely to changes in prevailing interest rates,
investing in debt obligations may provide an opportunity for capital
appreciation when interest rates are expected to decline. The success of such a
strategy is dependent upon Counsellors' ability to accurately forecast changes
in interest rates. The market value of debt obligations may also be expected to
vary depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions. A security will be deemed to be investment grade if it is rated
within the four highest grades by Moody's Investors Service, Inc. ('Moody's') or
Standard & Poor's Ratings Group ('S&P') or, if unrated, is determined to be of
comparable quality by Counsellors. Bonds rated in the fourth highest grade may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities. Counsellors will consider
such event in its determination of whether the Fund should continue to hold the
securities. The Fund does not currently intend during the coming year to hold
more than 5% of its net assets in securities that have been downgraded below
investment grade.
When Counsellors believes that a defensive posture is warranted, the Fund
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements
as discussed below. When such a defensive posture is warranted, the Fund may
also invest temporarily without limit in securities of U.S. companies.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
circumstances, up to 20% of its total assets in domestic and foreign money
market obligations having a maturity of one year or less at the time of purchase
and for temporary defensive purposes may invest in these securities without
limit. These short-term instruments consist of obligations issued or guaranteed
by the United States government, its agencies or instrumentalities ('U.S.
government securities'); bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of domestic or foreign banks, domestic
savings and loans and similar institutions) that are high quality investments
or, if unrated, deemed by Counsellors to be high quality investments; commercial
paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the equivalent
from another major rating service or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. Among the types of money market investments in which
the Fund may invest are repurchase agreement transactions on portfolio
securities with member banks
5
<PAGE>
of the Federal Reserve System and certain non-bank dealers.
Repurchase agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under the terms of a typical repurchase agreement, the Fund
would acquire any underlying security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will at all times
be at least equal to the total amount of the purchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations or becomes bankrupt and the
Fund is delayed or prevented from exercising its right to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while the Fund seeks to assert this
right. Counsellors, acting under the supervision of the Fund's Board of
Directors (the 'Board'), monitors the creditworthiness of those bank and
non-bank dealers with which the Fund enters into repurchase agreements to
evaluate this risk. A repurchase agreement is considered to be a loan under the
Investment Company Act of 1940, as amended (the '1940 Act').
Money Market Mutual Funds. Where Counsellors believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, the Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund, Counsellors or SPARX
Investment & Research, USA, Inc., the Fund's sub-investment adviser ('SPARX
USA') (each of Counsellors and SPARX USA referred to individually as an
'Adviser'). As a shareholder in any mutual fund, the Fund will bear its ratable
share of the mutual fund's expenses, including management fees, and will remain
subject to payment of the Fund's administration fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. The Fund will invest only in convertible securities
rated investment grade at the time of purchase or deemed to be of equivalent
quality. The Fund does not currently intend during the coming year to hold more
than 5% of its net assets in the aggregate of investment grade convertible
securities and investment grade debt downgraded below investment grade
subsequent to acquisition by the Fund.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
EMERGING GROWTH AND SMALL COMPANIES. Investing in common stocks and securities
convertible
6
<PAGE>
into common stocks is subject to the inherent risk of fluctuations in the prices
of such securities. Investing in securities of emerging growth companies, which
may include JASDAQ and Frontier Market securities, may involve greater risks
since these securities may have limited marketability and, thus, may be more
volatile. In addition, small- and medium-sized companies are typically subject
to a greater degree of changes in earnings and business prospects than are
larger, more established companies. Because smaller companies normally have
fewer shares outstanding than larger companies, it may be more difficult for the
Fund to buy or sell significant amounts of such shares without an unfavorable
impact on prevailing prices. There is typically less publicly available
information concerning smaller companies than for larger, more established ones.
Although investing in securities of emerging growth companies offers potential
for above-average returns if the companies are successful, the risk exists that
the companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Fund may involve
a greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in better-known, larger companies. For certain
additional risks relating to the Fund's investments, see 'Portfolio Investments'
beginning at page 5 and 'Certain Investment Strategies' beginning at page 9.
JAPANESE INVESTMENTS. Trading of equity securities through JASDAQ market is
conducted by securities firms in Japan, primarily through an organization which
acts as a 'matching agent,' as opposed to a recognized stock exchange.
Consequently, securities traded through JASDAQ may, from time to time, and
especially in falling markets, become illiquid and experience short-term price
volatility and wide spreads between bid and offer prices. This combination of
limited liquidity and price volatility may have an adverse effect on the
investment performance of the Fund. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts the Fund's ability to adjust its portfolio
quickly in order to take full advantage of a significant market increase, and
conversely, during periods of rapid price declines, it restricts the ability of
the Fund to dispose of securities quickly in order to realize gains previously
made or to limit losses on securities held in its portfolio. In addition,
although JASDAQ has generally experienced sustained growth in aggregate market
capitalization and trading volume, there have been periods in which aggregate
market capitalization and trading volume have declined. The Frontier Market is
expected to present greater liquidity, volatility and trading considerations
than JASDAQ.
Investing in Japanese securities may involve the risks described below
associated with investing in foreign securities generally. In addition, because
the Fund invests primarily in Japan, the Fund will be subject to general
economic and political conditions in Japan. The Fund should be considered a
vehicle for diversification, but the Fund itself is not diversified.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by fluctuations in the value of Japanese yen relative to the U.S.
dollar.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible
7
<PAGE>
products such as automobiles, machine tools and semiconductors, and the large
trade surpluses ensuing therefrom, Japan has entered a difficult phase in its
relations with its trading partners, particularly with respect to the United
States, with whom the trade imbalance is the greatest.
JASDAQ-traded securities can be volatile, which would result in the Fund's
net asset value fluctuating in response. The decline in the Japanese securities
markets since 1989 has contributed to a weakness in the Japanese economy, and
the impact of a further decline cannot be ascertained. The common stocks of many
Japanese companies continue to trade at high price-earnings ratios in comparison
with those in the United States, even after the recent market decline.
Differences in accounting methods make it difficult to compare the earnings of
Japanese companies with those of companies in other countries, especially the
United States.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms on the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Fund.
For additional information, see 'Japan and its Securities Markets' beginning at
page 29 of the Statement of Additional Information.
EMERGING MARKETS. The Fund may invest in securities of issuers located in less
developed countries considered to be 'emerging markets.' Investing in securities
of issuers located in emerging markets involves not only the risks described
below with respect to investing in foreign securities, but also other risks,
including exposure to economic structures that are gener-ally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of emerging
markets that may affect investment there include certain national policies that
may restrict investment by foreigners in issuers or industries deemed sensitive
to relevant national interests and the absence of developed legal structures
governing private and foreign investments and private property. The typically
small size of the markets for securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
INVESTMENTS IN NON-PUBLICLY TRADED SECURITIES. Although the Fund expects to
invest primarily in publicly traded equity securities, it may invest up to 15%
of its assets in non-publicly traded equity securities, which may involve a high
degree of business and financial risk and may result in substantial losses.
Because of the absence of any liquid trading market currently for these
investments, the Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose securities
are not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose, securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply
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with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the 'Code'), for qualification as a regulated investment company. As
a non-diversified investment company, the Fund may invest a greater proportion
of its assets in the obligations of a small number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. To the
extent that the Fund assumes large positions in the securities of a small number
of issuers, its return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever an
Adviser believes it to be in the best interests of the Fund. The Fund will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. It is not
possible to predict the Fund's portfolio turnover rate. However, it is
anticipated that the Fund's annual turnover rate should not exceed 100%. Higher
portfolio turnover rates (100% or more) may result in dealer mark ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See 'Dividends, Distributions and Taxes -- Taxes' below and 'Investment
Policies -- Portfolio Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by an Adviser with broker-dealers that it selects, including
Counsellors Securities Inc., the Fund's distributor ('Counsellors Securities').
The Fund may utilize Counsellors Securities in connection with a purchase or
sale of securities when Counsellors believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, the Fund
is authorized to engage in the following investment strategies: (i) purchasing
securities on a when-issued basis and purchasing or selling securities for
delayed delivery and (ii) lending portfolio securities. As described below, the
Funds may invest in instruments commonly referred to as 'derivative securities,'
such as options on securities, stock indexes and currencies; futures contracts
and options on futures contracts; and currency forward contracts. These
strategies may be used for the purpose of hedging against a decline in value of
its portfolio holdings or to generate income to offset expenses or increase
return. SUCH TRANSACTIONS THAT ARE NOT CONSIDERED HEDGING SHOULD BE CONSIDERED
SPECULATIVE AND MAY SERVE TO INCREASE THE FUND'S INVESTMENT RISK. The Fund may
not enter into transactions in options or options on futures contracts except
for hedging purposes unless the Fund's position is 'covered' as described below.
Detailed information concerning these and other strategies and their related
risks is contained below and in the Fund's Statement of Additional Information.
FOREIGN SECURITIES. The Fund will ordinarily hold no less than 65% of its total
assets in foreign securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future adverse political and economic developments and the possible
imposition of
9
<PAGE>
currency exchange blockages or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers, the lack of
uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
RULE 144A SECURITIES. The Fund may purchase securities that are not registered
under the Securities Act of 1933, as amended (the '1933 Act'), but that can be
sold to 'qualified institutional buyers' in accordance with Rule 144A under the
1933 Act ('Rule 144A Securities'). An investment in Rule 144A Securities will be
considered illiquid and will be limited to 10% of the Fund's net assets,
included within the Fund's 15% limit on illiquid securities. See 'Investments in
Non-Publicly Traded Securities' above. The Board will carefully monitor any
investments by the Fund in Rule 144A Securities.
WRITING OPTIONS ON SECURITIES. The Fund may write covered put and call options
on up to 25% of the net asset value of the stock and debt securities in its
portfolio and will realize fees (referred to as 'premiums') for granting the
rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security at a specified price for a specified time period or at a
specified time. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price for a specified time period or at a specified
time. Thus, the purchaser of a put option written by the Fund has the right to
compel the purchase by the Fund of the underlying security at an agreed-upon
price for a specified time period or at a specified time, while the purchaser of
a call option written by the Fund has the right to purchase from the Fund the
underlying security owned by the Fund at the agreed-upon price for a specified
time period or at a specified time.
Upon the exercise of a put option written by the Fund, the Fund may suffer
an economic loss equal to the excess of the exercise price of the option over
the security's market value at the time of the option exercise, less the premium
received for writing the option. Upon the exercise of a call option written by
the Fund, the Fund may suffer an economic loss equal to the excess of the
security's market value at the time of the option exercise over the Fund's
acquisition cost of the security, less the premium received for writing the
option.
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security
10
<PAGE>
prior to the outstanding option's expiration). To effect a closing purchase
transaction, the Fund would purchase, prior to the holder's exercise of an
option that the Fund has written, an option of the same series as that on which
the Fund desires to terminate its obligation. The obligation of the Fund under
an option that it has written would be terminated by a closing purchase
transaction, but the Fund would not be deemed to own an option as the result of
the transaction. The ability of the Fund to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market. While
the Fund generally will purchase or write options only if there appears to be a
liquid secondary market for the options purchased or sold, for some options, no
such secondary market may exist or the market may cease to exist, particularly
with options that trade over-the-counter ('OTC options').
Option writing for the Fund may be limited by position and exercise limits
established by securities exchanges and the NASD. Furthermore, the Fund may, at
times, have to limit its option writing in order to qualify as a regulated
investment company under the Code.
In addition to writing covered options to generate income, the Fund may
enter into options transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite direction of a
portfolio position. A hedge is designed to offset a loss on a portfolio position
with a gain on the hedge position; at the same time, however, a properly
correlated hedge will result in a gain on the portfolio position being offset by
a loss on the hedge position. The Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by an Adviser.
Successful use by the Fund of options for hedging purposes will depend on an
Adviser's ability to correctly predict movements in the direction of the
security underlying the option or, in the case of stock index options (described
below), the underlying securities market, which could prove to be inaccurate.
Losses incurred in options transactions and the costs of these transactions will
affect the Fund's performance. Even if an Adviser's expectations are correct,
where options are used as a hedge there may be an imperfect correlation between
the change in the value of the options and of the portfolio securities hedged.
Therefore, an investment in the Fund may involve a greater risk than an
investment in other mutual funds that seek capital appreciation.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may utilize up to 10% of
its assets to purchase put and call options on stocks and debt securities that
are traded on foreign as well as U.S. exchanges, as well as OTC options.
By buying a put, the Fund limits its risk of loss from a decline in the
market value of the underlying security until the put expires. Any appreciation
in the value of and yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Call options may be purchased by the
Fund in order to acquire the underlying securities for the Fund at a price that
avoids any additional cost that would result from a substantial increase in the
market value of a security. The Fund also may purchase call options to increase
its return to investors at a time when the option is expected to increase in
value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the Fund, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the sale
will depend on whether the amount received is more or less than the premium paid
for the option plus the related transaction costs.
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STOCK INDEX OPTIONS. In addition to purchasing and writing options on
securities, the Fund may utilize up to 10% of its total assets to purchase
exchange-listed and OTC put and call options on stock indexes, and may write put
and call options on such indexes. A stock index measures the movement of a
certain group of stocks by assigning relative values to the common stocks
included in the index. Options on stock indexes are similar to options on stock
except that (i) the expiration cycles of stock index options are monthly, while
those of stock options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive a cash 'exercise settlement amount' equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise multiplied by (b) a fixed 'index multiplier.' The
discussion of options on securities above, and the related risks, is applicable
to options on securities indexes.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options that are traded on an exchange designated by the Commodity
Futures Trading Commission (the 'CFTC') or consistent with CFTC regulations on
foreign exchanges. These transactions may be entered into for 'bona fide
hedging' as defined in CFTC regulations and other permissible purposes including
(i) protecting against anticipated changes in the value of portfolio securities
the Fund intends to purchase and (ii) increasing return.
A foreign currency futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specified
foreign currency at a specified price, date, time and place. An interest rate
futures contract is a standardized contract for the future delivery of a
specified interest rate sensitive security (such as a U.S. Treasury Bond or U.S.
Treasury Note or its equivalent) at a future date at a price set at the time of
the contract. Stock indexes are capitalization weighted indexes which reflect
the market value of the stock listed on the indexes. A stock index futures
contract is an agreement to be settled by delivery of an amount of cash equal to
a specified multiplier times the difference between the value of the index at
the beginning and at the end of the contract period. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time prior to the expiration date of the option.
Parties to a futures contract must make 'initial margin' deposits to secure
performance of the contract. There are also requirements to make 'variation
margin' deposits from time to time as the value of the futures contract
fluctuates. The Fund is not a commodity pool and, in compliance with CFTC
regulations currently in effect, may enter into any futures contracts and
related options for 'bona fide hedging' purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be 'bona fide
hedging' will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts. The Fund
reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time
and in accordance with the Fund's policies. Certain provisions of the Code may
limit the extent to which the Fund may enter into futures contracts or engage in
options transactions.
There are several risks in connection with the use of futures contracts.
Successful use of futures contracts is subject to the ability of the
Advisers to predict correctly movements in the direction of the currency,
interest rate or stock
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<PAGE>
index underlying the particular futures contract or related option. These
predictions and, thus, the use of futures contracts involve skills and
techniques that are different from those involved in the management of portfolio
securities. In addition, there can be no assurance that there will be a
correlation between movements in the currencies, interest rate or index
underlying the futures contract and movements in the price of the portfolio
securities which are the subject of a hedge. A decision concerning whether, when
and how to utilize futures involves the exercise of skill and judgment, and even
a well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends in interest rates or stock indexes. Losses incurred in
futures transactions and the costs of these transactions will affect the Fund's
performance.
A further risk involves the lack of a liquid secondary market for a futures
contract and the resulting inability to close out a futures contract. Futures
and options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, the Fund may realize a
loss on a futures contract or option that is not offset by an increase in the
value of the Fund's securities that are being hedged or the Fund may not be able
to close a futures or options position without incurring a loss in the event of
adverse price movements.
CURRENCY EXCHANGE TRANSACTIONS. The Fund may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates and to increase the Fund's income and total return. 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, through entering into forward
contracts to purchase or sell currency or by purchasing currency options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The use of forward
currency contracts 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 will segregate cash, U.S. government securities or other
high-grade liquid debt obligations with its custodian in an amount at all times
equal to or exceeding the Fund's commitment with respect to these contracts.
Currency Options. The Fund may purchase exchange-traded put and call
options on currencies. An option on a foreign currency gives the purchaser, in
return for a premium, the right to sell, in the case of a put, and buy, in the
case of a call, the underlying currency at a specified price during the term of
the option. The benefit to the Fund derived from purchases of foreign currency
options, like the benefit derived from other types of options, will be reduced
by the amount of the premium and related transaction costs. In addition, if
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion or all of the benefits of
advantageous changes in the rates.
ASSET COVERAGE FOR FORWARD CONTRACTS, OPTIONS, FUTURES AND OPTIONS ON FUTURES.
The Fund will comply with guidelines established by the SEC
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designed to eliminate any potential for leverage with respect to currency
forward contracts; options written by the Fund on currencies, securities and
indexes; currency, interest rate and index futures contracts and options on
these futures contracts. The use of these strategies may require that the Fund
maintain cash or certain liquid high-grade debt securities or other assets that
are acceptable as collateral to the appropriate regulatory authority in a
segregated account with its custodian or a designated sub-custodian to the
extent the Fund's obligations with respect to these strategies are not otherwise
'covered' through ownership of the underlying security, financial instrument or
currency or by other portfolio positions or by other means consistent with
applicable regulatory policies. Segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing cash or liquid high-grade debt securities
having a value not less than the repurchase price (including accrued interest).
The assets contained in the segregated account will be marked-to-market daily
and additional assets will be placed in such account on any day in which the
assets fall below the repurchase price (plus accrued interest). The Fund's
liquidity and ability to manage its assets might be affected when it sets aside
cash or portfolio securities to cover such commitments. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale may decline below the price of the securities the Fund has sold but
is obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision. Reverse repurchase agreements are considered
to be borrowings under the 1940 Act.
DOLLAR ROLL TRANSACTIONS. The Fund also may enter into 'dollar rolls,' in which
the Fund sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund would forego principal and interest paid on such securities.
The Fund would be compensated by the difference between the current sales price
and the forward price for the future purchase, as well as by the interest earned
on the cash proceeds of the initial sale. At the time that the Fund enters into
a dollar roll transaction, it will place in a segregated account maintained with
an approved custodian cash or liquid high-grade debt obligations having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained. For
financial reporting and tax purposes, the Fund proposes to treat dollar rolls as
two separate transactions, one involving the sale of a security and a separate
transaction involving the purchase of a security. The Fund does not currently
intend to enter into dollar rolls that are accounted for as a financing.
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INVESTMENT GUIDELINES
The Fund may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (i) securities issued as part of a privately
negotiated transaction between an issuer and one or more purchasers; (ii)
repurchase agreements with maturities greater than seven days; (iii) time
deposits maturing in more than seven calendar days; and (iv) Rule 144A
Securities. Up to 5% of the Fund's total assets may be invested in the
securities of issuers which have been in continuous operation for less than
three years. Up to an additional 5% of its total assets may be invested in
warrants. The Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that borrowings by the
Fund may not exceed 30% of its total assets, and may pledge up to 30% of its
assets in connection with borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the governing
Board, subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that the Fund has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISERS. The Fund employs Counsellors as its investment adviser and
SPARX USA as its sub-investment adviser. Counsellors has general oversight for
the day-to-day management of the Fund, manages the Fund's U.S. investments and
investments in debt securities, determines the country allocation and industry
allocation of Fund assets, monitors Fund expenses and evaluates the services
provided by the sub-investment adviser to the Fund. Counsellors also employs a
support staff of management personnel to provide services to the Fund and
furnishes the Fund with office space, furnishings and equipment. SPARX USA, in
accordance with the investment objective and policies of the Fund and under the
supervision of Counsellors and the Board, makes investment decisions for the
Fund involving Japanese and other Asian equity securities, places orders to buy
and sell such securities on behalf of the Fund and provides research to the Fund
relating to Japanese and other Asian companies and securities markets.
The Fund pays Counsellors an advisory fee calculated at an annual rate of
1.25% of the Fund's average daily net assets, out of which Counsellors pays
SPARX USA a fee of .625%. Although this advisory fee is higher than that paid by
most other investment companies, including money market and fixed income funds,
Counsellors believes that it is comparable to fees charged by other mutual funds
with similar policies and strategies. The advisory agreement between the Fund
and Counsellors provides that Counsellors will reimburse the Fund to the extent
certain expenses that are described in the Statement of Additional Information
exceed applicable state expense limitations. Counsellors, SPARX USA and the
Fund's co-administrators may voluntarily waive a portion of their fees from time
to time and temporarily limit the expenses to be borne by the Fund.
Counsellors is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of August 31,
1995, Counsellors managed approximately $11.4 billion of assets, including
approximately $5.8 billion of assets of twenty investment companies or
portfolios. Incorporated in 1970, Coun-
15
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sellors is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P.
('Counsellors G.P.'), a New York general partnership. E.M. Warburg, Pincus &
Co., Inc. ('EMW') controls Counsellors through its ownership of a class of
voting preferred stock of Counsellors. Counsellors G.P. has no business other
than being a holding company of Counsellors and its subsidiaries. Counsellors'
address is 466 Lexington Avenue, New York, New York 10017-3147.
SPARX USA, a Delaware corporation, is a wholly owned subsidiary of SPARX.
SPARX USA, which has not previously acted as adviser to a U.S. investment
company, is registered as an investment adviser under the U.S. Investment
Advisers Act of 1940. SPARX is an independent investment advisory company, which
is owned by Shuhei Abe. The predecessor of SPARX was incorporated in Tokyo in
July 1988 and was registered as an investment adviser under the Investment
Advisory Act of 1986 of Japan. SPARX has no business other than providing
investment advisory services, and as of August 31, 1995 had approximately $554
million in assets under management.
PORTFOLIO MANAGERS. Richard H. King, Nicholas P.W. Horsley, Nicholas P. Edwards
and Shuhei Abe of SPARX USA are co-portfolio managers of the Fund. Mr. King, Mr.
Horsley and Mr. Abe have been co-portfolio managers since its inception on
September 30, 1994, and Mr. Edwards has been a co-portfolio manager since
October 1995. Mr. King is president of the Fund. Mr. King has been a managing
director of EMW since 1989. From 1984 until 1988 he was chief investment officer
and a director at Fiduciary Trust Company International S.A. in London, with
responsibility for all international equity management and investment strategy.
From 1982 to 1984 he was a director in charge of Far East equity investments at
N.M. Rothschild International Asset Management, a London merchant bank. Mr.
Horsley is a senior vice president of Counsellors and has been with Counsellors
since 1993, before which time he was a director, portfolio manager and analyst
at Barclays de Zoete Wedd in New York City. Mr. Edwards has been with
Counsellors since August 1995, before which time he was a director at Jardine
Fleming Investment Advisers, Tokyo. He was a vice president of Robert Fleming,
Inc. in New York City from 1988 to 1991.
Shuhei Abe of SPARX USA is the founder and president of SPARX Asset
Management Company Ltd. ('SPARX'), the parent company of SPARX USA. Prior to
founding SPARX in 1989 (by assuming control of a predecessor company), Mr. Abe
worked for Soros Fund Management and Credit Suisse Trust Bank as an independent
adviser. Toshikatsu Kimura is an associate portfolio manager of the Fund. Mr.
Kimura has been a portfolio manager and analyst at SPARX since 1992, before
which time he was a warrant trader and portfolio manager, respectively, at Sanyo
Securities and Sanyo Investment Management from 1986 to 1990, and at Funai
Capital from 1990 to 1992.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Counsellors, as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the governing Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in other
regulatory filings as necessary and monitoring and developing compliance
procedures for the Fund. As compensation, the Fund pays Counsellors Service a
fee calculated at an annual rate of .10% of its average daily net assets.
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Counsellors may, at its own expense, provide promotional incentives to
qualified recipients who support the sale of shares of the Funds. Qualified
recipients are securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
The Fund employs PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary
of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation, the Fund
pays to PFPC a fee calculated at an annual rate of .12% of the Fund's first $250
million in average daily net assets, .10% of the next $250 million in average
daily net assets, .08% of the next $250 million in average daily net assets, and
.05% of average daily net assets over $750 million, subject to a minimum annual
fee and exclusive of out-of-pocket expenses. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
TRANSFER AGENT AND CUSTODIAN. State Street Bank and Trust Company ('State
Street') serves as custodian for the Fund's assets and shareholder servicing
agent, transfer agent and acts as dividend disbursing agent for the Fund. It has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
('BFDS'), responsibility for most shareholder servicing functions. State
Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Fund. Counsellors Securities is a wholly owned subsidiary of Counsellors and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No compensation
is payable by the Advisor Shares to Counsellors Securities for distribution
services.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Warburg Pincus Advisor Fund shares are only available for investment by
Institutions on behalf of their customers and through retirement plans that
elect to make one or more Advisor Funds an option for participants in the plans.
Individuals, including participants in retirement plans, cannot invest directly
in Advisor Shares of the Fund, but may do so only through a participating
Institution. The Fund reserves the right to make Advisor Shares available to
other investors in the future. References in this Prospectus to shareholders or
investors are generally to Institutions as the record holders of the Advisor
Shares.
Each Institution separately determines the rules applicable to its
customers investing in the Fund, including minimum initial and subsequent
investment requirements and the procedures to be followed to effect purchases,
redemptions and exchanges of Advisor Shares. There is no minimum amount of
initial or subsequent purchases of Advisor Shares imposed on Institutions,
although the Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
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<PAGE>
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 888-6878 for instructions, an
Institution should then wire federal funds to Counsellors Securities Inc. using
the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
Warburg Pincus Advisor Japan OTC Fund
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
Orders by wire will not be accepted until a completed account application
has been received in proper form, and an account number has been established. If
a telephone order is received by the close of regular trading on the New York
Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment by
wire is received on the same day in proper form in accordance with instructions
set forth above, the shares will be priced according to the net asset value of
the Fund on that day and are entitled to dividends and distributions beginning
on that day. If payment by wire is received in proper form by the close of the
NYSE without a prior telephone order, the purchase will be priced according to
the net asset value of the Fund on that day and is entitled to dividends and
distributions beginning on that day. However, if a wire in proper form that is
not preceded by a telephone order is received after the close of regular trading
on the NYSE, the payment will be held uninvested until the order is effected at
the close of business on the next business day. Payment for orders that are not
accepted will be returned after prompt inquiry. Certain organizations that have
entered into agreements with the Fund or its agent may enter confirmed purchase
orders on behalf of customers, with payment to follow no later than the Fund's
pricing on the following business day. If payment is not received by such time,
the organization could be held liable for resulting fees or losses.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund or its agent and should clearly indicate the investor's
account number. In the interest of economy and convenience, physical
certificates representing shares in the Fund are not normally issued.
The Fund understands that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients that invest in the
Fund, which are in addition to or different than those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority, may
charge their clients direct fees. Certain features of the Fund, such as initial
and subsequent investment minimums, may be modified in these programs, and
administrative charges may be imposed for the services rendered. Therefore, a
client or customer should contact the organization acting on his behalf
concerning the fees (if any) charged in connection with a purchase or redemption
of Fund shares and should read this Prospectus in light of the terms governing
his accounts with the organization.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor may redeem (sell) shares on any day that the
Fund's net asset value is calculated (see 'Net Asset Value' below). Requests for
the redemption (or exchange) of Advisor Shares are placed with an Institution by
its customers, which is then responsible for the prompt transmission of the
request to the Fund or its agent.
Institutions may redeem Advisor Shares by calling Warburg Pincus Advisor
Funds at (800)
18
<PAGE>
888-6878 between 9:00 a.m. and 4:00 p.m. (Eastern time) on any day on which the
Fund's net asset value is calculated. An investor making a telephone withdrawal
should state (i) the name of the Fund, (ii) the account number of the Fund,
(iii) the name of the investor(s) appearing on the Fund's records, (iv) the
amount to be withdrawn and (v) the name of the person requesting the redemption.
After receipt of the redemption request, the redemption proceeds will be
wired to the investor's bank as indicated in the account application previously
filled out by the investor. The Fund does not currently impose a service charge
for effecting wire transfers but reserves the right to do so in the future.
During periods of significant economic or market change, telephone redemptions
may be difficult to implement. If an investor is unable to contact Warburg
Pincus Advisor Funds by telephone, an investor may deliver the redemption
request to Warburg Pincus Advisor Funds by mail at Warburg Pincus Advisor Funds,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Redemption proceeds will normally be wired to an
investor on the next business day following the date a redemption order is
effected. If, however, in the judgment of Counsellors, immediate payment would
adversely affect the Fund, the Fund reserves the right to pay the redemption
proceeds within seven days after the redemption order is effected. Furthermore,
the Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of an exchange
of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
The Fund imposes a redemption charge on any redemption of shares (which
includes an exchange of Advisor Shares of the Fund into another Warburg Pincus
Advisor Fund, described below) made within six months from the date of purchase.
The charge, which is deducted from the redemption proceeds and retained by the
Fund, is equal to 1.00% of the current value of shares redeemed that were held
for less than six months, including any appreciation in value of the redeemed
shares. If shares being redeemed were not all held for the same length of time,
those shares held longest will be redeemed first for purposes of determining
whether the charge applies. The redemption charge will not be imposed on
redemptions (or exchanges) of shares acquired through the reinvestment of
dividends, and these shares will be redeemed before any shares to which the
redemption charge applies. The redemption fee will not apply to shares purchased
prior to September 29, 1995 or such later date as the Fund may determine.
EXCHANGE OF SHARES. An Institution may exchange Advisor Shares of the Fund for
Advisor Shares of the other Warburg Pincus Advisor Funds at their respective net
asset values. Exchanges may be effected in the manner described under
'Redemption of Shares' above. If an exchange request is received by Warburg
Pincus Advisor Funds prior to 4:00 p.m. (Eastern time), the exchange will be
made at each fund's net asset value determined at the end of that business day.
Exchanges may be effected without a sales charge. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
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<PAGE>
The exchange privilege is available to shareholders residing in any state
in which the Advisor Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Advisor
Shares of the Fund for Advisor Shares in another Warburg Pincus Advisor Fund
should review the prospectus of the other fund prior to making an exchange. For
further information regarding the exchange privilege or to obtain a current
prospectus for another Warburg Pincus Advisor Fund, an investor should contact
Warburg Pincus Advisor Funds at (800) 888-6878.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
semiannually and pays them in the calendar year in which they are declared. Net
investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of net realized long-term
and short-term capital gains are declared annually and, as a general rule, will
be distributed or paid in November or December of each calendar year. Unless an
investor instructs the Fund to pay dividends or distributions in cash, dividends
and distributions will automatically be reinvested in additional Advisor Shares
of the Fund at net asset value. The election to receive dividends in cash may be
made on the account application or, subsequently, by writing to Warburg Pincus
Advisor Funds at the address set forth under 'How to Redeem and Exchange Shares'
or by calling Warburg Pincus Advisor Funds at (800) 888-6878.
The Fund may be required to withhold for U.S. federal income taxes 31% of
all distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. The Fund intends to continue to qualify each year as a 'regulated
investment company' within the meaning of the Code. The Fund, if it qualifies as
a regulated investment company, will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, in each case regardless of how long
investors have held Advisor Shares or whether received in cash or reinvested in
Advisor Shares. As a general rule, an investor's gain or loss on a sale or
redemption of its Fund shares will be a long-term capital gain or loss if it has
held its shares for more than one year and will be a short-term capital gain or
loss if it has held its shares for one year or less. However, any loss realized
upon the sale or redemption of shares within six months from the date of their
purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain during such six-month
period with respect to such shares. Investors may be proportionately liable for
taxes on income and gains of the Fund, but investors not subject to tax on their
income will not be required to pay tax on amounts distributed to them. The
Fund's investment activities will not result in unrelated business taxable
20
<PAGE>
income to a tax-exempt investor. The Fund's dividends, to the extent not derived
from dividends attributable to certain types of stock issued by U.S. domestic
corporations, will not qualify for the dividends received deduction for
corporations.
Dividends and interest received by the Fund may be subject to withholding
and other taxes imposed by foreign countries. However, tax conventions between
certain countries and the United States may reduce or eliminate such taxes. If
the Fund qualifies as a regulated investment company, if certain asset and
distribution requirements are satisfied and if more than 50% of the Fund's total
assets at the close of its fiscal year consist of stock or securities of foreign
corporations, the Fund may elect for U.S. income tax purposes to treat foreign
income taxes paid by it as paid by its shareholders.
The Fund may qualify for and make this election in some, but not
necessarily all, of its taxable years. If the Fund were to make an election,
shareholders of the Fund would be required to take into account an amount equal
to their pro rata portions of such foreign taxes in computing their taxable
income and then treat an amount equal to those foreign taxes as a U.S. federal
income tax deduction or as a foreign tax credit against their U.S. federal
income taxes. Shortly after any year for which it makes such an election, the
Fund will report to its shareholders the amount per share of such foreign income
tax that must be included in each shareholder's gross income and the amount
which will be available for the deduction or credit. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Certain
limitations will be imposed on the extent to which the credit (but not the
deduction) for foreign taxes may be claimed.
In the opinion of Japanese counsel for the Fund, the operations of the Fund
will not subject the Fund to any Japanese income, capital gains or other taxes
except for withholding taxes on interest and dividends paid to the Fund by
Japanese corporations and securities transaction taxes payable in the event of
sales of portfolio securities in Japan. In the opinion of such counsel, under
the tax convention between the United States and Japan (the 'Convention') as
currently in force, a Japanese withholding tax at a rate of 15% is, with certain
exceptions, imposed upon dividends paid by Japanese corporations to the Fund.
Pursuant to the present terms of the Convention, interest received by the Fund
from sources within Japan is subject to a Japanese withholding tax at a rate of
10%.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of the Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities. Individuals investing in the
Fund through Institutions should consult those Institutions or their own tax
advisers regarding the tax consequences of investing in the Fund.
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares'
21
<PAGE>
pro rata share of the value of the Fund's assets, deducting the Advisor Shares'
pro rata share of the Fund's liabilities and the liabilities specifically
allocated to Series 2 Shares and then dividing the result by the total number of
outstanding Advisor Shares. Generally, the Fund's investments are valued at
market value or, in the absence of a quoted market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
the Board.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges preceding the calculation of the Fund's net asset value, except that
when an occurrence subsequent to the time a value was so established is likely
to have changed such value, then the fair market value of those securities will
be determined by consideration of other factors by or under the direction of the
Board.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
will be valued on the basis of the closing value on the date on which the
valuation is made. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter market
are valued on the basis of the bid price at the close of business on each day.
Option or futures contracts will be valued at the last sale price at 4:00 p.m.
(Eastern time) on the date on which the valuation is made, as quoted on the
primary exchange or board of trade on which the option or futures contract is
traded, or in absence of sales, at the mean between the last bid and asked
prices. Unless the Board determines that using this valuation method would not
reflect the investments' value, short-term investments that mature in 60 days or
less are valued on the basis of amortized cost, which involves valuing a
portfolio instrument at its cost initially and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Any assets and
liabilities initially expressed in non-U.S. dollar currencies are translated
into U.S. dollars at the prevailing rate as quoted by an independent pricing
service on the date of valuation. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Fund quotes the performance of Advisor Shares separately from Common
Shares. The net asset value of the Advisor Shares is listed in The Wall Street
Journal each business day under the heading Warburg Pincus Advisor Funds. From
time to time, the Fund may advertise the average annual total return of Advisor
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Advisor Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Advisor Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Advisor Shares. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as on a year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the Fund's annual total return for one year
in the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that the Fund seeks long-term appreciation and
that such return may not be representative of the Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of
Advisor
22
<PAGE>
Shares for various periods, representing the cumulative change in value of an
investment in the Advisor Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs, and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes the method used to determine the total return.
Current total return figures may be obtained by calling Warburg Pincus Advisor
Funds at (800) 888-6878.
In reports or other communications to investors or in advertising material,
the Fund may describe general economic and market conditions affecting the Fund.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) the Morgan Stanley Capital International
Europe, Australia and Far East ('EAFE') Index; the Salomon Russell Global Equity
Index; the FT-Actuaries World Indices (jointly compiled by The Financial Times,
Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.); the S&P 500; the Nikkei
over-the-counter average; the JASDAQ Index; the Nikkei 225 and 300 Stock Indexes
and the Topix Index, which are unmanaged indexes of common stocks; or (iii)
other appropriate indexes of investment securities or with data developed by
Counsellors derived from such indexes. The Fund may also include evaluations of
the Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Morningstar, Inc. and Financial Times.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. The Fund may also discuss the continuum of risk and return relating
to different investments and the potential impact of foreign stocks on a
portfolio otherwise composed of domestic securities. In addition, the Fund may
from time to time compare the expense ratio of Advisor Shares to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated on July 26, 1994 under the laws of the
State of Maryland. The charter of the Fund authorizes the Board to issue three
billion full and fractional shares of capital stock, $.001 par value per share,
of which one billion shares are designated Series 2 Shares (the Advisor Shares).
Under the Fund's charter documents, the Board has the power to classify or
reclassify any unissued shares of the Fund into one or more additional classes
by setting or changing in any one or more respects their relative rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Board may similarly classify or reclassify any
class of its shares into one or more series and, without shareholder approval,
may increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the Common
Shares, directly to individuals pursuant to a separate prospectus.
23
<PAGE>
Shares of each class represent equal pro rata interests in the Fund and accrue
dividends and calculate net asset value and performance quotations in the same
manner, as described elsewhere in this Prospectus, except that Advisor Shares
bear fees payable by the Fund to service organizations for services they provide
to the beneficial owners of such shares and enjoy certain exclusive voting
rights on matters relating to these fees. Because of the higher fees borne by
the Advisor Shares, the total return on such shares can be expected to be lower
than the total return on Common Shares. Investors may obtain information
concerning the Common Shares by calling Counsellors Securities at (800)
888-6878.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the governing Board
unless and until such time as less than a majority of the members holding office
have been elected by investors. Any member of the governing Board may be removed
from office upon the vote of shareholders holding at least a majority of the
Fund's outstanding shares, at a meeting called for that purpose. A meeting will
be called for the purpose of voting on the removal of a Board member at the
written request of holders of 10% of the outstanding shares of the Fund. John L.
Furth, a Director of the Fund, and Lionel I. Pincus, Chairman of the Board and
Chief Executive Officer of EMW, may be deemed to be controlling persons of the
Fund as of August 31, 1995 because they may be deemed to possess or share
investment power over shares owned by clients of Counsellors and certain other
entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
its account, as well as a statement of its account after any transaction that
affects its share balance or share registration (other than the reinvestment of
dividends or distributions). The Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund. Each Institution that is the record owner of Advisor Shares on behalf
of its customers will send a statement to those customers periodically showing
their indirect interest in Advisor Shares, as well as providing other
information about the Fund. See 'Shareholder Servicing.'
SHAREHOLDER SERVICING
The Fund is authorized to offer Advisor Shares exclusively to Institutions
whose clients or customers (or participants in the case of retirement plans)
('Customers') are beneficial owners of Advisor Shares. Either those Institutions
or companies providing certain services to Customers (together, 'Service
Organizations') will enter into account servicing agreements ('Agreements') with
the Fund pursuant to a Distribution Plan as described below. Pursuant to the
terms of an Agreement, the Service Organization agrees to provide certain
distribution, shareholder servicing, administrative and/or accounting services
for its Customers. Distribution services would be marketing or other services in
connection with the promotion and sale of Advisor Shares. Shareholder services
that may be provided include responding to Customer inquiries, providing
information on Customer investments and providing other shareholder liaison
services. Administrative and accounting services related to the sale of Advisor
Shares may include (i) aggregating and processing purchase and redemption
requests from Customers and placing net purchase and redemption orders with the
Fund's transfer agent, (ii) processing dividend payments from the Fund on behalf
of Customers and (iii) providing sub-accounting related to the sale of Advisor
Shares beneficially owned by Customers or the information to the Fund
24
<PAGE>
necessary for sub-accounting. The Board has approved a Distribution Plan (the
'Plan') pursuant to which the Fund will pay each participating Service
Organization a negotiated fee on an annual basis not to exceed .75% (up to a
.25% annual service fee and a .50% annual distribution fee) of the value of the
average daily net assets of its Customers invested in Advisor Shares. The Board
evaluates the appropriateness of the Plan on a continuing basis and in doing so
considers all relevant factors.
Counsellors and Counsellors Securities may, from time to time, at their own
expense, provide compensation to these institutions. To the extent they do so,
such compensation does not represent an additional expense to the Fund or its
shareholders since it will be paid from the assets of Counsellors, Counsellors
Service or their affiliates.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUND, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
ADVISOR SHARES IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY
NOT LAWFULLY BE MADE.
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<PAGE>
TABLE OF CONTENTS
THE FUND'S EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ........................................ 4
PORTFOLIO INVESTMENTS .................................................... 5
RISK FACTORS AND SPECIAL
CONSIDERATIONS ........................................................ 6
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE .................................................................. 9
CERTAIN INVESTMENT STRATEGIES ............................................ 9
INVESTMENT GUIDELINES ................................................... 15
MANAGEMENT OF THE FUND .................................................. 15
HOW TO PURCHASE SHARES .................................................. 17
HOW TO REDEEM AND EXCHANGE
SHARES ............................................................... 18
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 20
NET ASSET VALUE ......................................................... 21
PERFORMANCE ............................................................. 22
GENERAL INFORMATION ..................................................... 23
SHAREHOLDER SERVICING ................................................... 24
ADOTC-1-0995
[LOGO]
[ ] WARBURG PINCUS
JAPAN OTC FUND
PROSPECTUS
SEPTEMBER 29, 1995
STATEMENT OF DIFFERENCES
The dagger shall be expressed as......... 'D'
<PAGE>1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>1
Subject to Completion, dated September 22, 1995
STATEMENT OF ADDITIONAL INFORMATION
September 29, 1995
________________________
WARBURG PINCUS JAPAN OTC FUND
P.O Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
________________________
Contents
Page
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Japan and Its Securities Markets . . . . . . . . . . . . . . . . . . 29
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 40
Additional Purchase and Redemption Information . . . . . . . . . . . . . 48
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . 50
Determination of Performance . . . . . . . . . . . . . . . . . . . . . . 53
Auditors and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Appendix - Description of Ratings . . . . . . . . . . . . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P., Independent Auditors . . . . . . . . A-5
This Statement of Additional Information is meant to be read in
conjunction with the combined Prospectus for the Common Shares of Warburg
Pincus Japan OTC Fund (the "Fund"), Warburg Pincus Capital Appreciation Fund,
Warburg Pincus Emerging Growth Fund, the Warburg Pincus Post-Venture Capital
Fund and Warburg Pincus International Equity Fund, and with the Prospectus for
the Advisor Shares of the Fund, each dated September 29, 1995, and is
incorporated by reference in its entirety into those Prospectuses. Because
this Statement of Additional Information is not itself a prospectus, no
investment in shares of the Fund should be made solely upon the information
contained herein. Copies of the Fund's Prospectuses and information regarding
the Fund's current performance may be obtained by calling the Fund at
(800) 257-5614. Information regarding the status of shareholder accounts may
be obtained by calling the Fund at (800) 888-6878 or by writing to the Fund,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term capital
appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectuses.
As described in the Prospectuses, the Fund will maintain at least
65% of its total assets in securities of companies traded in the Japanese
over-the-counter market ("JASDAQ"), including the Frontier Market. In
addition, the Fund may invest up to 35% of its total assets in securities of
other Asian issuers, with no more than 10% invested in any one country. Asian
issuers are (i) companies (A) organized under the laws of an Asian country or
its predecessors, or (B) whose principal business activities are conducted in
one or more Asian countries, and which derive at least 50% of their revenues
or profits from goods produced or sold, investments made, or services
performed in one or more Asian countries, or have at least 50% of their assets
in one or more such countries, or (C) which have issued securities which are
traded principally in an Asian country, and (ii) governments, governmental
entities or political subdivisions of Asian countries. Determinations as to
the eligibility of issuers under the foregoing definition will be made by the
investment advisers based on publicly available information and inquiries made
to the companies. The Fund considers Asia to be comprised of the contiguous
eastern Eurasian land mass and adjacent islands, including the countries of
Taiwan, Korea, Indonesia, China, Hong Kong, Israel, Turkey, India, Malaysia,
Pakistan, the Philippines, Sri Lanka, Singapore and Thailand. For purposes of
applying the foregoing limitations, if a company meets the definition of an
Asian issuer as a result of relationships with respect to more than one Asian
country, the Fund may consider the company to be associated with any of such
countries. Due to the rapidly evolving nature of Asian markets, the Fund
reserves the ability to modify its limitation on investments relating to any
one Asian country (other than Japan) and to consider additional countries to
be included in Asia if market conditions should develop so as to warrant such
a change in investment policy.
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 U.S. issuers. See "Japan
and Its Securities Markets" for a discussion of factors relating to Japanese
investments specifically.
Foreign Currency Exchange. Since the Fund will be investing in
securities denominated in Japanese yen and currencies of other Asian
countries, and since the Fund may temporarily hold funds in bank deposits or
other money market investments denominated
<PAGE>3
in foreign currencies, the Fund may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between such
currencies and the dollar. A change in the value of a foreign currency
relative to the U.S. dollar will result in a corresponding change in the
dollar value of the Fund assets denominated in that foreign currency. Changes
in foreign currency exchange rates may also affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by the
Fund. The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal
and trade policies pursued by the governments of the United States and foreign
countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls
or taxes, to affect the exchange rates of their currencies. See "Japan and
Its Securities Markets -- Economic Background -- Currency Fluctuation" below.
The Fund may use hedging techniques with the objective of guarding against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Transactions" and "Futures Activities" below.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal
and trade policies pursued by the governments of the United States and foreign
countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls
or taxes, to affect the exchange rates of their currencies.
Information. 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
<PAGE>4
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or domestic developments which could affect U.S.
investments in those and neighboring countries. For example, tensions in Asia
have increased following the announcement in March 1993 by The Democratic
People's Republic of Korea ("North Korea") of its intention to withdraw from
participation in the Nuclear Non-Proliferation Treaty and its refusal to allow
the International Atomic Energy Agency to conduct full inspections of its
nuclear facilities. Military action involving North Korea or the economic
deterioration of North Korea could adversely affect the entire region and the
performance of the Fund.
Delays. Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the
trade and settlement dates of securities purchased or sold. Due to the
increased exposure of the Fund to market and foreign exchange fluctuations
brought about by such delays, and due to the corresponding negative impact on
Fund liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable risk of
loss.
Foreign Taxes and Increased Expenses. The operating expenses of the
Fund can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the rate
of the investment advisory fees, though similar to such expense of some other
international funds, are higher than those costs incurred by other investment
companies. 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.
General. In general, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. The 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.
<PAGE>5
U.S. Government Securities. The Fund may invest in debt obligations
of varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ
in their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. The Fund may also invest in
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury and instruments that are supported by the credit of the
instrumentality. Because the U.S. government is not obligated by law to
provide support to an instrumentality it sponsors, the Fund will invest in
obligations issued by such an instrumentality only if Warburg, Pincus
Counsellors, Inc., the Fund's investment adviser ("Counsellors," sometimes
referred to herein either together or alternatively with SPARX Investment &
Research, USA, Inc. ("SPARX USA"), the Fund's sub-investment adviser, as the
"Advisers"), determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by the
Fund.
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.
Downgraded Debt and Convertible Securities. Although the Fund may
invest only in investment grade securities (as described in the Prospectuses),
it is not required to dispose of debt and convertible securities that are
downgraded below investment grade subsequent to acquisition by the Fund.
However, it is the Fund's current intention during the coming year to restrict
its holding of such downgraded debt and convertible securities to no more than
5% of its net assets. While the market values of medium and lower-rated
securities and unrated securities of comparable quality tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-quality bonds. In addition, medium and lower-rated
securities and comparable unrated securities generally present a higher degree
of credit risk. Issuers of medium and lower-rated securities and unrated
securities are often highly leveraged and may not have more traditional
methods of financing available to them so that
<PAGE>6
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk
of loss due to default by such issuers is significantly greater because medium
and lower-rated securities and unrated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The market for medium and lower-rated and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers
of such securities to repay principal and pay interest thereon.
The Fund may have difficulty disposing of certain of these
securities because there may be a thin trading market. Because there is no
established retail secondary market for many of these securities, the Fund
anticipates that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
for these securities does exist, it generally is not as liquid as the
secondary market for higher-rated securities. The lack of a liquid secondary
market, as well as adverse publicity and investor perception with respect to
these securities, may have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in lower-rated categories is more
volatile than that of higher quality securities. Factors adversely impacting
the market value of these securities will adversely impact the Fund's net
asset value. The Fund will rely on the judgment, analysis and experience of
Counsellors in evaluating the creditworthiness of an issuer. In this
evaluation, Counsellors will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. Normally, lower-rated and comparable unrated securities
are not intended for short-term investment. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings of such securities.
Recent adverse publicity regarding lower-rated bonds may have depressed the
prices for such securities to some extent. Whether investor perceptions will
continue to have a negative effect on the price of such securities is
uncertain.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those
countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed-income securities. The relative performance of various
countries' fixed-income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-
year fluctuations in certain
<PAGE>7
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign government securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international
organizations designated or backed by governmental entities to promote
economic reconstruction or development, international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank"), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt
securities of quasi-governmental agencies are issued by entities owned by
either a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government's full faith and
credit and general taxing powers. An example of a multinational currency unit
is the European Currency Unit ("ECU"). An ECU represents specified amounts of
the currencies of certain member states of the European Economic Community.
The specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
Mortgage-Backed Securities. The Fund may invest up to 5% of its net
assets in mortgage-backed securities, such as those issued by GNMA, FNMA,
FHLMC or certain foreign issuers. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property. The mortgages backing these securities
include, among other mortgage instruments, conventional 30-year fixed-rate
mortgages, 15-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. The government or the issuing agency typically
guarantees the payment of interest and principal of these securities.
However, the guarantees do not extend to the securities' yield or value, which
are likely to vary inversely with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the Fund's shares. These
securities generally are "pass-through" instruments, through which the holders
receive a share of all interest and principal payments from the mortgages
underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general
<PAGE>8
economic conditions, the location, scheduled maturity and age of the mortgage
and other social and demographic conditions. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. For pools of fixed-rate 30-year mortgages,
a common industry practice in the U.S. has been to assume that prepayments
will result in a 12-year average life. At present, pools, particularly those
with loans with other maturities or different characteristics, are priced on
an assumption of average life determined for each pool. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of a pool of mortgage-related securities. Conversely,
in periods of rising rates the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. However, these effects may
not be present, or may differ in degree, if the mortgage loans in the pools
have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates than
the original investment, thus affecting the Fund's yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA,
and due to any yield retained by the issuer. Actual yield to the holder may
vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the
issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces
the effective yield to the holder of such securities.
Asset-Backed Securities. The Fund may invest up to 5% of its net
assets in asset-backed securities, which represent participations in, or are
secured by and payable from, assets such as motor vehicle installment sales,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables
may not have a proper security interest
<PAGE>9
in the underlying automobiles. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. Credit card receivables are generally
unsecured, and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Because asset-backed securities are relatively new, the market
experience in these securities is limited, and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
Zero Coupon Securities. The Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and custodial receipts or certificates of participation
representing interests in such stripped debt obligations and coupons. The
Fund currently anticipates that during the coming year zero coupon securities
will not exceed 5% of its net assets. A zero coupon security pays no interest
to its holder prior to maturity. Accordingly, such securities usually trade
at a deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. The Fund anticipates that it will not normally hold zero coupon
securities to maturity. Federal tax law requires that a holder of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest
payment on the security during the year. Such accrued discount will be
includible in determining the amount of dividends the Fund must pay each year
and, in order to generate cash necessary to pay such dividends, the Fund may
liquidate portfolio securities at a time when it would not otherwise have done
so.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of
such company, (ii) do not exceed 5% of the value of the Fund's total assets
and (iii) when added to all other investment company securities held by the
Fund, do not exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may
not exceed 20% of the Fund's total assets taken at value. The Fund will not
lend portfolio securities to affiliates of the Advisers 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
<PAGE>10
that might occur during the term of the loan would be for the account of the
Fund. From time to time, the Fund may return a part of the interest earned
from the investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the Fund and that is
acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral. Although
the generation of income is not an investment objective of the Fund, income
received could be used to pay the Fund's expenses and would increase an
investor's total return. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Fund must receive at
least 100% cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (iii) the Fund must be able to terminate the loan at
any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the Board must terminate the
loan and regain the right to vote the securities. Loan agreements involve
certain risks in the event 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.
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 15% of its net assets in illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market, repurchase agreements which have a maturity of longer than seven days,
time deposits maturing in more than seven days and Rule 144A securities.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby
<PAGE>11
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions
could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A adopted by the SEC allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Counsellors anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this regulation and use of automated
systems for the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc.
Counsellors will monitor the liquidity of restricted securities in
the Fund under the supervision of the Board. In reaching liquidity decisions,
Counsellors may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes
for the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer
undertakings to make a market in the security and (v) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
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 and may also engage in
currency transactions to increase income and total return. Currency exchange
transactions may be from any non-U.S. currency into U.S. dollars or into other
appropriate currencies. The Fund will conduct its currency exchange
transactions (i) on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, (ii) through entering into forward contracts to
purchase or sell currency, (iii) by purchasing currency options or
(iv) through entering into foreign currency futures contracts or options on
such contracts. 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. The cost to the Fund of
<PAGE>12
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 generally involved.
Forward Currency Contracts. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract as agreed upon
by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Fund may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected
to be lower than the spot price of the currency at the time the option is
exercised.
A decline in the dollar value of a foreign currency in which the
Fund's securities are denominated will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of securities it holds,
the Fund may purchase put options on the foreign currency. If the value of
the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part,
the adverse effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby potentially increasing the
cost of the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates.
Foreign Currency Futures. As described below under "Futures
Activities," the Fund may enter into foreign currency futures contracts and
related options.
Currency Hedging. The Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect
to specific receivables or payables of the
<PAGE>13
Fund generally accruing in connection with the purchase or sale of its
portfolio securities. Position hedging is the sale of forward currency with
respect to portfolio security positions. The Fund may not position hedge to
an extent greater than the aggregate market value (at the time of entering
into the hedge) of the hedged securities.
A decline in the dollar value of a foreign currency in which the
Fund's securities are denominated will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against such
diminutions in the value of securities it holds, the Fund may purchase put
options on the foreign currency. If the value of the currency does decline,
the Fund will have the right to sell the currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on
its securities that otherwise would have resulted. Conversely, if a rise in
the dollar value of a currency in which securities to be acquired are
denominated is projected, thereby potentially increasing the cost of the
securities, the Fund may purchase call options on the particular currency.
The purchase of these options could offset, at least partially, the effects of
the adverse movements in exchange rates. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline
in the value of a hedged currency, at the same time, they also limit any
potential gain that might result should the value of the currency increase.
While the values of forward currency contracts, currency options,
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 a 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 in mitigating changes in the value of the
Fund's investments denominated in that currency over time.
Futures Activities. The Fund may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes
including hedging against changes in the value of portfolio securities due to
anticipated changes in interest rates, currency values and/or market
conditions and increasing return. The ability of the Fund to trade in futures
contracts may be limited by the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to a regulated investment company.
<PAGE>14
The Fund will not enter into futures contracts and related options
for which the aggregate initial margin and premiums required to establish
positions other than those considered to be "bona fide hedging" by the CFTC
exceed 5% of the Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into.
There is no overall limit on the percentage of Fund assets that may be at risk
with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. 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. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specific financial instrument (debt security) at a
specified price, date, time and place. Stock indexes are capitalization
weighted indexes which reflect the market value of the firms listed on the
indexes. A stock index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the beginning and at the end of
the contract period. In entering into these contracts, the Fund will incur
brokerage costs and be required to make and maintain certain "margin" deposits
on a mark-to-market basis, as described below.
One of the purposes of entering into a futures contract may be to
protect the Fund from fluctuations in value of its portfolio securities
without its necessarily buying or selling the securities. Since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's
assets. No consideration is paid or received by the Fund upon entering into a
futures contract. Instead, 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 obliga-
tions, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. The
broker will have access to amounts in the margin account if the Fund fails to
meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the currency, financial
instrument or stock index underlying the futures contract fluctuates, making
the long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." 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).
<PAGE>15
No secondary market for such contracts exists. Although the Fund intends to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may
be made that day at a price beyond that limit. It is possible that futures
contract prices could move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting the Fund to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be required
to make daily cash payments of variation margin. In such circumstances, an
increase in the value of the portion of the Fund's securities being hedged, if
any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities being hedged will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses on the futures contract.
If the Fund has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does
not occur, the Fund will lose part or all of the benefit of the increased
value of securities which it has hedged because it will have offsetting losses
in its futures positions. Losses incurred in futures transactions and the
costs of these transactions will affect the Fund's performance. In addition,
in such situations, if the Fund had insufficient cash, it might have to sell
securities to meet daily variation margin requirements at a time when it would
be disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in currency
values, interest rates or stock indexes, as the case may be.
Options on Futures Contracts. The Fund may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected.
An option on a currency, interest rate or stock index futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in a currency, interest rate or stock index futures contract at a specified
exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option is fixed
at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying
<PAGE>16
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 the Advisers. This requires
different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
portfolio strategies will be successful. Even if the Advisers' 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.
Options on Securities. The Fund may purchase put and call options
on stocks and debt securities that are traded on foreign and 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 10% of its total
assets to purchase exchange-traded and OTC options on stock and debt
securities. In addition, the Fund may write covered put and call options on
up to 25% of the stock and debt securities in its portfolio. Options on
securities and stock indexes (described below) may be purchased and written
for hedging purposes or to increase income and total return. The aggregate
value of the securities underlying the calls or puts on securities written by
the Fund, determined as of the date the options are sold, when added to the
securities underlying the calls on securities indexes written by the Fund, may
not exceed 25% of the Fund's net assets.
The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options it has written. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price for a specified time
period or at a specified time. In contrast, a call option embodies the right
of its purchaser to compel the writer of the option to sell to the option
holder an underlying security at a specified price for a specified time period
or at a specified time.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the Fund
as the writer of a covered call option forfeits the right to any appreciation
in the value of the underlying security above the strike price for the life of
the option (or until a closing purchase transaction can be effected).
Nevertheless, the Fund as a put or call writer retains the risk of a decline
in the price of the underlying security. The size of the premiums that the
Fund may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their
option-writing activities.
<PAGE>17
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at
a lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Options written by the Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (i) in-the-money call
options when the Advisers expect that the price of the underlying security
will remain flat or decline moderately during the option period,
(ii) at-the-money call options when the Advisers expect that the price of the
underlying security will remain flat or advance moderately during the option
period and (iii) out-of-the-money call options when the Advisers expect that
the premiums received from writing the call option plus the appreciation in
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
In any of the preceding situations, if the market price of the underlying
security declines and the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation of exercise price to market price) may be used
in the same market environments that such call options are used in equivalent
transactions. To secure its obligation to deliver the underlying security
when it writes a call option, the Fund will be required to deposit in escrow
the underlying security or other assets in accordance with the rules of the
Options Clearing Corporation (the "Clearing Corporation") and of the
securities exchange on which the option is written.
In the case of options written by the Fund that are deemed covered
by virtue of the Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed stock,
but the Fund may incur additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Fund may write covered call options. If the Fund writes covered
call options on mortgage-backed securities, the mortgage-backed securities
that it holds as cover may,
<PAGE>18
because of scheduled amortization or unscheduled prepayments, cease to be
sufficient cover. If this occurs, the Fund will compensate for the decline in
the value of the cover by purchasing an appropriate additional amount of
mortgage-backed securities.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group
of investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of Counsellors or SPARX USA and
certain of their affiliates may be considered to be such a group. A
securities exchange may order the liquidation of positions found to be in
violation of these limits and it may impose certain other sanctions. These
limits may restrict the number of options the Fund will be able to purchase on
a particular security.
Prior to their expirations, put and call options may be sold in
closing sale transactions (sales by the Fund, prior to the exercise of options
that it has purchased, of options of the same series) in which the Fund may
realize a profit or loss from the sale. An option position may be closed out
only where there exists a secondary market for an option of the same series on
a recognized securities exchange or in the over-the-counter market. In cases
where the Fund has written an option, it will realize a profit if the cost of
the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. Similarly, when the Fund has purchased an option and engages in a
closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is
more or less than the premium the Fund initially paid for the original option
plus the related transaction costs. So long as the obligation of the Fund as
the writer of an option continues, the Fund may be assigned an exercise notice
by the broker-dealer through which the option was sold, requiring the Fund to
deliver the underlying security against payment of the exercise price. This
obligation terminates when the option expires or the Fund effects a closing
purchase transaction. The Fund can no longer effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice.
Although the Fund will generally purchase or write only those
options for which the Advisers believe 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.
<PAGE>19
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 the Advisers, are considered to be investment grade. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. In either case, the Fund would continue to be at market risk on the
security and could face higher transaction costs, including brokerage
commissions.
Options as a Hedge. In addition to entering into options
transactions 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 the Advisers. Successful use by the Fund of options will be
subject to the Advisers' ability to predict correctly movements in the
direction of the security underlying the option used as a hedge. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
OTC Options. The Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing corporation is then
obligated to pay the writer the exercise price of the option. If the Fund
were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
<PAGE>20
dealer to which the Fund originally wrote the option. Although the Fund will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to
sell portfolio securities or, with respect to currency options, currencies at
a time when such sale might be advantageous. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option.
Stock Index Options. In addition to utilizing up to 10% of its
assets to purchase options on securities, the Fund may utilize up to an
additional 10% of its total assets to purchase exchange-listed and OTC put and
call options on stock indexes and may write put and call options on such
indexes to hedge against the effects of market wide-price movements or to
increase income and total return. A stock index measures the movement of a
certain group of stocks by assigning relative values to the common stocks
included in the index, fluctuating with changes in the market values of the
stocks included in the index. Some stock index options are based on a broad
market index, such as the NYSE Composite Index, or a narrower market index
such as the Standard & Poor's 100. Indexes may also be based on a particular
industry or market segment. Examples of stock index derivatives which the
Fund may utilize are the Nikkei 225 Index, the Nikkei 300 Index, the OTC
(JASDAQ) Index and the Topix Index.
Options on stock indexes are similar to options on stock except that
(i) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier."
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.
Stock Index Options as a Hedge. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the portion of a securities portfolio being hedged
correlate with price movements of the stock index selected. Because the value
of an index option depends upon
<PAGE>21
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 the Advisers' ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price
of individual stocks, and there can be no assurance that the use of these
portfolio strategies will be successful.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the SEC with respect to coverage of currency forward
contracts; options written by the Fund on currencies, securities and indexes;
currency, interest rate and index futures contracts and options on these
futures contracts. These guidelines may, in certain instances, require
segregation by the Fund of cash or liquid high-grade debt securities or other
securities that are acceptable as collateral to the appropriate regulatory
authority.
For example, a call option written by the Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written
by the Fund may require the Fund to segregate assets (as described above)
equal to the exercise price. The Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by the Fund. If the Fund holds a futures or forward contract,
the Fund could purchase a put option on the same futures or forward contract
with a strike price as high or higher than the price of the contract held.
The Fund may enter into fully or partially offsetting transactions so that its
net position, coupled with any segregated assets (equal to any remaining
obligation), equals its net obligation. Asset coverage may be achieved by
other means when consistent with applicable regulatory policies.
When-Issued Securities and Delayed-Delivery Transactions. The Fund
may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if the Advisers deem 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 com-
mitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on such
<PAGE>22
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations or other securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case the Fund may be required subsequently to place additional assets
in the segregated account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitment. It may be expected that
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets
aside cash. When the Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure
of the seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Securities of Smaller Companies and Emerging Growth Companies. The
Fund's investment in OTC securities involves considerations that are not
applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent accounting standards, illiquidity of securities and
markets, higher brokerage commissions and fees and greater market risk in
general. Investors should expect some volatility due to the risks involved
and should regard their investment as long term. In addition, securities of
emerging growth and smaller companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices.
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.
Warrants. The Fund may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase).
Because a warrant does not carry with it the
<PAGE>23
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.
Borrowing. The Fund may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption
requests so as to permit the orderly disposition of portfolio securities or to
facilitate settlement transactions on portfolio securities. Investments
(including roll-overs) will not be made when borrowings exceed 5% of the
Fund's net assets. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. The Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
a suitable subcustodian, which may include the lender.
Other Investment Limitations
The investment limitations numbered 1 through 7 may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 10 through 16
may be changed by a vote of the Board at any time.
The Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
<PAGE>24
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in (a)
securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase and
sell futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis.
9. Issue any senior security except as permitted in these
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in connection with the writing of covered
put and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale
or securities for which there are
<PAGE>25
no readily available market quotations. For purposes of this limitation,
repurchase agreements with maturities greater than seven days shall be
considered illiquid securities. In no event will the Fund's investment in
restricted and illiquid securities exceed 15% of the Fund's assets.
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 ("unseasoned companies").
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 or SPARX USA 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.
16. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
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 (including JASDAQ and the Frontier Market) 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
<PAGE>26
are not readily available, at fair value, as determined in good faith pursuant
to consistently applied procedures established by the Board. A security which
is listed or traded on more than one exchange is valued at the quotation on
the exchange determined to be the primary market for such security. In
determining the market value of portfolio investments, the Fund may employ
outside organizations (a "Pricing Service") which may use a matrix or formula
method that takes into consideration market indexes, matrices, yield curves
and other specific adjustments. The procedures of Pricing Services are
reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board, which may replace any such
Pricing Service at any time. Short-term obligations with maturities of 60
days or less are valued at amortized cost, which constitutes fair value as
determined by the Board. The amortized cost method of valuation may also be
used with respect to debt obligations with 60 days or less remaining to
maturity. All other securities and other assets of the Fund will be valued at
their fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. In addition, the Board or its delegates
may value a security at fair value if it determines that such security's value
determined by the methodology set forth above does not reflect its fair value.
Trading in securities in Japan and other Asian countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which the New York Stock Exchange (the "NYSE") is
open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not
calculated. As a result, calculation of the Fund's net asset value does not
take place contemporaneously with the determination of the prices of the
majority of the 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
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
<PAGE>27
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. On most foreign exchanges,
commissions are generally fixed. There is generally no stated commission in
the case of securities traded in domestic or foreign over-the-counter markets,
but the price of securities traded in over-the-counter markets includes an
undisclosed commission or mark-up. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality.
SPARX USA will select specific portfolio investments and effect
transactions for the Fund for the Fund's equity investments in Japan and other
Asian countries. SPARX USA seeks to obtain the best net price and the most
favorable execution of orders, effecting transactions only through brokers and
dealers approved by Counsellors. In evaluating prices and executions, SPARX
USA 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, SPARX USA 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 SPARX USA, the
Fund or Counsellors and/or other accounts over which Counsellors or SPARX USA
exercise investment discretion. Research and other services received may be
useful to Counsellors or SPARX USA 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 or SPARX USA in
carrying out its obligations to the Fund. The fees to Counsellors under its
advisory agreement with the Fund and SPARX USA under its sub-investment
advisory agreement with Counsellors and the Fund are not reduced by reason of
its receiving any brokerage and research services.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Counsellors or SPARX USA. 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 or SPARX USA 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 or SPARX USA 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.
<PAGE>28
During the fiscal period ended October 31, 1994, the Fund paid an
aggregate of approximately $89,270 in commissions to broker-dealers for
execution of portfolio transactions. No portfolio transactions have been
executed through Counsellors Securities, Inc., the Fund's distributor
("Counsellors Securities"), since the commencement of the Fund's operations.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities if, in the Advisers' judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to Counsellors, SPARX USA or Counsellors Securities or any affiliated person
of such companies. In addition, the Fund will not give preference to any
institutions with whom the Fund enters into distribution or shareholder
servicing agreements ("Agreements") concerning the provision of distribution
services or support services to customers ("Customers") who beneficially own
the Fund's Common Stock, par value $.001 per share, designated Common Stock -
Series 1 (the "Series 1 Shares") or Common Stock - Series 2 (the "Advisor
Shares"). See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when the
Advisers, in their sole discretion, believe 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
<PAGE>29
purchase securities. The Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of its portfolio securities for the
year by the monthly average value of the portfolio securities. Securities
with remaining maturities of one year or less at the date of acquisition are
excluded from the calculation.
Certain practices that may be employed by the Fund could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold.
JAPAN AND ITS SECURITIES MARKETS
The Fund will be subject to general economic and political
conditions in Japan. 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.
Domestic Politics
Japan has a parliamentary form of government. The legislative power
is vested in the Japanese Diet, which consists of a House of Representatives
and a House of Councillors. Members of the House of Representatives are
elected for terms of four years unless the House of Representatives is
dissolved prior to the expiration of their full elected terms. Members of the
House of Councillors are elected for terms of six years with one-half of the
membership being elected every three years. Various political parties are
represented in the Diet, including the conservative Liberal Democratic Party
("LDP"), which until August 1993 had been in power nationally since its
formation in 1955. The LDP ceased to have a majority of the House of
Representatives in June 1993, when certain members of the House of
Representatives left the LDP and formed two new political parties. After an
election for the House of Representatives was held on July 18, 1993 and the
LDP failed to secure a majority, seven parties formed a coalition to control
the House of Representatives and chose Morihiro Hosokawa, the Representative
of the Japan New Party, to head their coalition. In April 1994, amid
accusations of financial improprieties, Prime Minister Hosokawa announced that
he would resign. Tsutomu Hata succeeded Mr. Hosokawa as prime minister and
formed a new cabinet as a minority coalition government. In June 1994 Mr.
Hata yielded to political pressure from opposition parties and resigned. He
was
<PAGE>30
succeeded by Social Democratic Party leader Tomiichi Murayama, Japan's first
Socialist prime minister since 1948, who was chosen by a new and unstable
alliance between left-wing and conservative parties, including the LDP. On
September 18, 1994, 187 opposition politicians founded a new party, the Reform
Party led by Ichiro Ozawa, to oppose the government of Prime Minister Murayama
in the next elections. Political realignment has continued in 1995 as the
Social Democrats incurred significant losses in the July elections. On
August 28, 1995, the LDP elected Ryutaro Hashimoto, the minister for trade
and industry, as its new leader. Mr. Hashimoto, who favors a stronger
Japanese role in world affairs, is considered a leading candidate for prime
minister in the next elections. This political instability may hamper
Japan's ability to establish and maintain effective economic and fiscal
policies, and recent and future political developments may lead to changes in
policy that might adversely affect the Fund's investments.
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 has been plagued by rising unemployment, excess
capacity and significant bad debts in the banking sector.
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. In 1995, however, the trade surplus has decreased due to a drop in
exports. The reduced exports are due primarily to the strength of the yen and
the impact of the threatened U.S. trade sanctions. 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
<PAGE>31
States, with whom the trade imbalance is the greatest. The United States and
Japan have engaged in "economic framework" negotiations to help increase the
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. On June 28, 1995, the United States agreed not
to impose trade sanctions in return for a modest commitment by Japan to buy
more American cars and auto parts. Any trade sanctions imposed upon Japan by
the United States as a result of the current friction or otherwise could
adversely affect Japan and the performance of the Fund.
The following table sets forth the composition of Japan's trade
balance, as well as other components of its current account, for the years
shown.
CURRENT ACCOUNT
<TABLE>
<CAPTION>
Trade
--------------------------------------------------------------------------
Change from Change from Current
Year Exports Preceding Year Imports Preceding Year Trade Balance Services Transfers Balance
---- ------- -------------- ------- -------------- ------------- -------- --------- -------
(U.S. dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 168,290 15.7 124,003 8.8 44,257 (7,747) (1,507) 35,003
1985 174,015 3.4 118,029 (4.8) 55,986 (5,165) (1,652) 49,169
1986 205,591 18.1 112,764 (4.5) 92,827 (4,932) (2,050) 85,845
1987 224,605 9.2 128,219 13.7 96,386 (5,702) (3,669) 87,015
1988 259,765 15.7 164,753 28.5 95,012 (11,263) (4,118) 79,631
1989 269,570 3.8 192,653 16.9 76,917 (15,526) (4,234) 57,157
1990 280,374 4.0 216,846 12.6 63,528 (22,292) (5,475) 35,761
1991 306,557 9.3 203,513 (6.1) 103,044 (17,660) (12,483) 72,901
1992 330,850 7.9 198,502 (2.5) 132,348 (10,112) (4,685) 117,551
1993 351,292 6.2 209,778 5.7 141,514 (3,949) (6,117) 131,448
1994 384,176 9.4 238,232 13.6 145,944 (9,296) (7,508) 129,140
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
<PAGE>32
Economic Trends. The following table sets forth Japan's gross
domestic product for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(yen in billions)
Consumption
Expenditures
Private [Y]*277,676.8 [Y]270,919.4 [Y]264,824.1 [Y]255,084.2 [Y]243,628.1 [Y]228,483.2 [Y]215,122.0 [Y]204,585.3
Government 46,108.0 44,666.4 43,257.9 41,232.0 38,806.6 36,274.8 34,184.3 32,974.5
Capital Formation
(incl.
inventories)
Private 93,111.4 99,180.1 108,727.6 116,638.0 110,871.9 100,130.8 89,043.7 76,176.5
Government 42,227.3 40,295.8 35,110.1 30,062.3 28,182.6 25,724.5 24,660.9 23,673.8
Exports of Goods
and Services 44,449.2 44,243.8 47,409.4 46,809.7 45,919.9 42,351.8 37,483.2 36,209.6
Imports of Goods
and Services 34,424.0 33,333.1 36,183.8 38,529.3 42,871.8 36,768.1 29,065.1 25,194.9
GDP
(Expenditures) 469,148.7 465,972.4 463,145.3 451,296.9 24,537.2 396,197.0 371,429.0 348,425.0
Change in GDP
from Preceding
Year
Nominal terms 0.7% 0.6% 2.6% 6.3% 7.2% 6.7% 6.6% 4.1%
Real Terms 0.5% -0.2% 1.1% 4.3% 4.8% 4.7% 6.2% 4.1%
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
- ------------------------
* - [Y] is being used in place of the yen symbol.
<PAGE>33
The following tables set forth certain economic indicators in Japan
for the years shown.
<TABLE>
<CAPTION>
UNEMPLOYMENT
Labor Productivity
Index
Year Number Unemployed Percent Unemployed (Manufacturing)
---- ----------------- ------------------ ------------------
(in millions) (Base Year: 1990)
<S> <C> <C> <C>
1984 1.61 2.7 72.4
1985 1.56 2.6 75.6
1986 1.67 2.8 77.0
1987 1.73 2.8 81.4
1988 1.55 2.5 90.8
1989 1.42 2.3 96.2
1990 1.34 2.1 100.0
1991 1.36 2.1 102.5
1992 1.42 2.2 97.0
1993 1.66 2.5 95.4
1994 1.92 2.9 98.3
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
WHOLESALE PRICE INDEX
(Base Year: 1990)
<TABLE>
<CAPTION>
Change from
All Preceding
Year Commodities Year
---- ----------- -----------
<S> <C> <C>
1985 110.4 (1.1)%
1986 100.3 (9.1)
1987 96.5 (3.8)
1988 95.6 (0.9)
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
<PAGE>34
CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
Change from
Year General Preceding Year
---- ------- --------------
(Base Year: 1990)
<S> <C> <C>
1985 93.5 2.0%
1986 94.1 0.6
1987 94.2 0.1
1988 94.9 0.7
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
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:
CURRENCY EXCHANGE RATES
Year Yen Per U.S. Dollar
---- -------------------
1985 [Y]*238.47
1986 168.35
1987 144.60
1988 128.17
1989 138.07
1990 145.00
1991 134.59
1992 126.79
1993 111.08
1994 102.18
Source: Board of Governors of the Federal Reserve System, Federal Reserve
Bulletin
- ------------------------
* - [Y] is being used in place of the yen symbol.
On September 19, 1995, the noon buying rate in New York City for
cable transfers payable in Japanese yen was 104.20 yen per U.S. dollar. The
recent relative
<PAGE>35
strength of the yen to the U.S. dollar may adversely affect the economy of
Japan, and, in particular, the export sector thereof.
Geological Factors. The islands of Japan lie in the western Pacific
Ocean, off the eastern coast of the continent of Asia. Japan has in the past
experienced earthquakes and tidal waves of varying degrees of severity. On
January 17, 1995, the Great Hanshin Earthquake killed over 5,000 people and
severely damaged the port of Kobe, Japan's largest container port. The
government has announced a $5.9 billion plan to repair the port and estimates
that damage to the region equals $96 billion. However, the long-term economic
effects of the earthquake on the Japanese economy as a whole and on the Fund's
investments cannot be predicted.
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.
The following table sets forth the number of Japanese companies
listed on each of the eight Japanese stock exchanges as of the end of 1994.
<TABLE>
<CAPTION>
NUMBER OF DOMESTIC COMPANIES LISTED ON ALL STOCK EXCHANGES
Tokyo Osaka Nagoya
--------------- ------------- -------------
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec. Kyoto Hiroshima Fukuoka Nigata Sapporo
---- ---- ---- ---- ---- ---- ----- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,235 454 855 344 431 129 240 203 260 200 193
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
<PAGE>36
The following table sets forth the trading volume and value of
Japanese stocks on each of the eight Japanese stock exchanges for the years
shown.
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
<TABLE>
<CAPTION>
All Exchanges Tokyo Osaka Nagoya
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Volume Value Volume Value Volume Value Volume Value
------ ----- ------ ----- ------ ----- ------ -----
1989 . . . . . 256,296 [Y]*386,395 222,599 [Y]332,617 25,096 [Y]41,679 7,263 [Y]10,395
1990 . . . . . 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991 . . . . . 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992 . . . . . 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993 . . . . . 101,172 106,123 86,934 86,889 10,439 14,635 2,779 3,459
1994 . . . . . 105,936 114,622 84,514 87,356 14,903 19,349 4,719 5,780
</TABLE>
<TABLE>
<CAPTION>
Kyoto Hiroshima Fukuoka Niigata Sapporo
------------------ ------------------ ------------------ ----------------- -----------------
Volume Value Volume Value Volume Value Volume Value Volume Value
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 . . . 331 [Y]443 190 [Y]235 268 [Y]330 398 [Y]475 151 [Y]221
1990 . . . 416 770 169 261 203 405 245 334 195 286
1991 . . . 220 300 125 149 122 174 181 208 113 123
1992 . . . 225 322 110 136 139 129 163 178 149 129
1993 . . . 222 340 185 178 229 225 206 226 173 170
1994 . . . 447 562 255 312 578 669 249 299 267 296
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange
New York
- ------------------------
* - [Y] is being used in place of the yen symbol.
<PAGE>37
The following table sets forth the stock trading value of Japanese
stocks on the Tokyo Stock Exchange for the years shown.
TOKYO STOCK EXCHANGE
STOCK TRADING VALUE
<TABLE>
<CAPTION>
Year Total Daily Average High Low Turnover Ratio
---- ----- ------------- ---- --- --------------
(yen in millions)
<S> <C> <C> <C> <C> <C>
1984 . . . . . . . . . . . . . [Y] 7,974,003 [Y] 36,843 [Y] 75,652 [Y] 3,682 47.1%
1985 . . . . . . . . . . . . . 78,711,048 276,179 727,316 110,512 44.7
1986 . . . . . . . . . . . . . 159,836,218 572,890 1,682,060 115,244 67.2
1987 . . . . . . . . . . . . . 250,736,971 915,098 2,382,114 221,230 80.6
1988 . . . . . . . . . . . . . 285,521,260 1,045,865 2,768,810 192,704 70.2
1989 . . . . . . . . . . . . . 332,616,597 1,335,810 2,796,946 392,347 61.1
1990 . . . . . . . . . . . . . 186,666,820 758,808 1,464,920 218,205 37.7
1991 . . . . . . . . . . . . . 110,897,491 450,803 1,531,064 151,565 29.3
1992 . . . . . . . . . . . . . 60,110,391 243,362 686,737 97,616 18.0
1993 . . . . . . . . . . . . . 86,889,072 353,208 1,422,760 61,747 28.3
1994 . . . . . . . . . . . . . 87,355,567 353,666 1,114,216 123,904 25.6
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange New York
- ------------------------
* - [Y] is being used in place of the yen symbol.
OTC Market. Trading of securities on the Japanese OTC market ("OTC
Market" or "JASDAQ") is regulated primarily by the Japan Securities Dealers
Association (the "JSDA"). The JSDA reports the daily high and low selling
prices, the last selling price on each day, trading volumes, market
capitalization and the number of corporate issues registered with the JSDA as
traded over-the-counter by the member firms of the JSDA.
<PAGE>38
The following table sets forth the number of issues traded in, the
market capitalization of, and the trading value of stocks in, the Japanese OTC
market for the years shown.
JAPANESE OTC MARKET
NUMBER OF ISSUES, MARKET CAPITALIZATION
AND TRADING VALUE
<TABLE>
<CAPTION>
Stock Trading Value
---------------------------------------
(yen in thousands)
No. of
Year Issues Market Capitalization Total Daily Average
---- ------ --------------------- ----- -------------
(yen in millions)
<S> <C> <C> <C> <C>
1985 150 1,572,308 195,711,396 686,706
1986 161 2,138,063 450,081,898 1,642,634
1987 172 2,489,409 400,065,211 1,460,092
1988 216 4,270,830 721,639,214 2,643,367
1989 279 12,508,712 2,085,482,912 8,375,433
1990 357 11,972,160 6,111,700,820 24,844,312
1991 446 13,001,864 5,043,126,216 20,500,513
1992 451 8,008,572 1,091,101,849 4,417,416
1993 491 11,318,446 2,880,539,952 11,709,512
1994 581 14,628,729 5,384,108,058 21,798,008
</TABLE>
Source: JSDA, 1993 Annual Statistics for the OTC Market; Japan Securities
Research Institute
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.
<PAGE>39
The following table sets forth the high, low and year-end TOPIX for
the years shown.
TOPIX (Tokyo Stock Price Index)
(Jan. 4, 1968=100)
<TABLE>
<CAPTION>
Year Year-end High Low
---- -------- ---- ---
<S> <C> <C> <C>
1985 1,049.40 1,058.35 916.93
1986 1,556.37 1,583.35 1,025.85
1987 1,725.83 2,258.56 1,557.46
1988 2,357.03 2,357.03 1,690.44
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 1995; Tokyo Stock
Exchange New York
The Nikkei OTC Average is a price weighted index of the quotations
of the OTC registered stock traded by members of the JSDA. The following
table sets forth the year-end Nikkei OTC Average for the years shown.
NIKKEI OTC AVERAGE
Nikkei OTC
Year Average
---- ----------
1985 814.2
1986 1,056.4
1987 1,107.0
1988 1,313.1
1989 2,597.5
1990 2,175.5
1991 1,946.1
1992 1,227.9
1993 1,447.6
1994 1,776.1
Sources: The Nikkei Shimbun; Bloomberg Financial Markets
As these indexes reflect, share prices of companies traded on
Japanese stock exchanges and on the Japanese OTC market reached historical
peaks (which were later referred to as the "bubble") in 1989 and 1990.
Afterwards stock prices in both markets decreased significantly, reaching
their lowest levels in the second half of 1992. There can be no assurance
that additional market corrections will not occur.
<PAGE>40
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
Richard N. Cooper (61) Director
Room 7E47OHB National Intelligence Counsel;
Central Intelligence Agency Professor at Harvard University; Director
930 Dolly Madison Blvd. or Trustee of CNA Financial Corporation,
McClain, Virginia 22107 Circuit City Stores, Inc. (retail electronics
and appliances) and Phoenix Home Life Insurance
Co.
Donald J. Donahue (71) Director
99 Indian Field Road Chairman of Magma Copper Company since
Greenwich, Connecticut 06830 January 1987; Director or Trustee of GEV
Corporation and Signet Star Reinsurance
Company; Chairman and Director of NAC Holdings
from September 1990-June 1993.
Jack W. Fritz (68) . . Director
2425 North Fish Creek Road Private investor; Consultant and Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (64) . . Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of E.M. Warburg,
New York, New York 10017-3147 Pincus & Co., Inc. ("EMW"); Associated with
EMW since 1970; Chairman of the Board of 15
other investment companies advised by
Counsellors; President of one other investment
company advised by Counsellors.
- ------------------------
* Indicates a Director who is an "interested person" of the fund as defined
in the 1940.
<PAGE>41
Thomas A. Melfe (63) . Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure
New York, New York 10112 Newton & Irvine; Director of Municipal Fund
for New York Investors, Inc.
Alexander B. Trowbridge (66) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc.
Suite 700 (business consulting) from January
Washington, DC 20036 1990-January 1994; President of the National
Association of Manufacturers from 1980-1990;
Director or Trustee of New England Mutual Life
Insurance Co., ICOS Corporation
(biopharmaceuticals), P.H.H. Corporation
(fleet auto management; housing and plant
relocation service), WMX Technologies Inc.
(solid and hazardous waste collection and
disposal), The Rouse Company (real estate
development), SunResorts International Ltd.
(hotel and real estate management), Harris
Corp. (electronics and communications
equipment), The Gillette Co. (personal care
products) and Sun Company Inc. (petroleum
refining and marketing).
Richard H. King (51) . President and Co-Portfolio Manager
466 Lexington Avenue Portfolio Manager or Co-Portfolio Manager of
New York, New York 10017-3147 other Warburg Pincus Funds; Managing Director
of EMW since 1989; Associated with EMW since
1989; President or Vice President of 3 other
investment companies advised by Counsellors.
Arnold M. Reichman (47) Executive Vice President
466 Lexington Avenue Managing Director and Assistant Secretary of
New York, New York 10017-3147 EMW; Associated with EMW since 1984; Senior
Vice President, Secretary and Chief Operating
Officer of Counsellors Securities; President
or Executive Vice President of 15 other
investment companies advised by Counsellors.
<PAGE>42
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 15 other investment
companies advised by Counsellors.
Eugene P. Grace (44) . Vice President and Secretary
466 Lexington Avenue Associated with EMW since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General
Counsel and Secretary, Home Unity Savings Bank
from 1991-1992; Vice President and Chief
Compliance Officer of Counsellors Securities;
Vice President and Secretary of 15 other
investment companies advised by Counsellors.
Stephen Distler (42) . Vice President and
466 Lexington Avenue Chief Financial Officer
New York, New York 10017-3147 Managing Director, Controller and Assistant
Secretary of EMW; Associated with EMW since
1984; Treasurer of Counsellors Securities;
Vice President, Treasurer and Chief Accounting
Officer or Vice President and Chief Financial
Officer of 15 other investment companies
advised by Counsellors.
Howard Conroy (41) . . Vice President, Treasurer and Chief
466 Lexington Avenue Accounting Officer Associated with EMW since
New York, New York 10017-3147 1992; Associated with Martin Geller, C.P.A.
from 1990-1992; Vice President, Finance with
Gabelli/Rosenthal & Partners, L.P. until 1990;
Vice President, Treasurer and Chief Accounting
Officer of 14 other investment companies
advised by Counsellors.
Karen Amato (31) . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987; Assistant
New York, New York 10017-3147 Secretary of 15 other investment companies
advised by Counsellors.
<PAGE>43
No employee of Counsellors, SPARX USA 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, SPARX USA,
PFPC or any of their affiliates receives an annual fee of $500, and $250 for
each meeting of the Board attended by him for his services as Director and is
reimbursed for expenses incurred in connection with his attendance at Board
meetings.
Directors' Compensation
<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 $1,500 $39,500
Donald J. Donahue $1,500 $39,500
Jack W. Fritz $1,500 $39,500
Thomas A. Melfe $1,500 $39,500
Alexander B. Trowbridge $1,500 $39,500
</TABLE>
__________________
+ Since the Fund had not completed its first full fiscal year as of October
31, 1994, amounts shown are estimates of future payments to be made in
the fiscal year ending October 31, 1995 pursuant to existing
arrangements.
* Each Director also serves as a Director or Trustee of 15 other investment
companies advised by Counsellors.
** Mr. Furth is considered to be an interested person of the Fund and
Counsellors, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receives no compensation from the Fund or any other
investment company managed by Counsellors.
Mr. Richard H. King, president and co-portfolio manager of the Fund,
earned a B.A. degree from Durham University in England. Mr. King is also
portfolio manager of Warburg Pincus International Equity Fund and the
International Equity Portfolios of Warburg Pincus Institutional Fund, Inc. and
Warburg Pincus Trust and a co-portfolio manager of Warburg Pincus Emerging
Markets Fund. From 1968 to 1982, he worked at W.I. Carr Sons
<PAGE>44
& 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.
Mr. Nicholas P.W. Horsley, co-portfolio manager of the Fund, is also
a co-portfolio manager of Warburg Pincus Emerging Markets Fund and an
associate portfolio manager and research analyst of Warburg, Pincus
International Equity Fund and the International Equity Portfolios of Warburg
Pincus Institutional Fund, Inc. and Warburg Pincus Trust. 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.
Nicholas Edwards, co-portfolio manager of the Fund, is also an
associate portfolio manager and research analyst of Warburg Pincus
International Equity Fund and the International Equity Portfolios of Warburg
Pincus Institutional Fund, Inc. and Warburg Pincus Trust. Prior to joining
Counsellors in August 1995, Mr. Edwards was a director at Jardine Fleming
Investment Advisors, Tokyo. He was a vice president of Robert Fleming Inc. in
New York City from 1988 to 1991. Mr. Edwards earned M.A. degrees from Oxford
University and Hiroshima University in Japan.
Mr. Shuhei Abe of SPARX USA is also a Co-Portfolio Manager of the
Fund. Mr. Abe is the founder and president of SPARX Asset Management Company,
Ltd. ("SPARX"). Prior to founding SPARX in 1988, Mr. Abe worked for Soros
Fund Management and Credit Suisse Trust Bank as an independent adviser. Mr.
Abe began his career as an analyst at Nomura Research Institute in 1982 and
worked in institutional equity sales at Nomura Securities International (New
York).
Mr. Toshikatsu Kimura is an associate portfolio manager of the Fund.
Mr. Kimura has been a portfolio manager and analyst at SPARX since 1992,
before which time he was a warrant trader and portfolio manager, respectively,
at Sanyo Securities and Sanyo Investment Management from 1986 to 1990, and at
Funai Capital from 1990 to 1992.
As of August 31, 1995, Directors and officers of the Fund as a group
owned of record 32,667 of the Fund's outstanding Common Shares. As of the
same date, Mr. John L. Furth may be deemed to have beneficially owned 14.57%
of the Fund's outstanding
<PAGE>45
Common Shares, including shares owned by clients for which Counsellors has
investment discretion. Mr. Furth disclaims ownership of these shares and does
not intend to exercise voting rights with respect to these shares. No
Directors or officers owned of record any Advisor Shares.
Investment Adviser, Sub-Investment Adviser and Co-Administrators
Counsellors serves as investment adviser to the Fund and SPARX USA
serves as sub-investment adviser to the Fund pursuant to separate written
agreements (the "Advisory Agreement" and the "Sub-Advisory Agreement,"
respectively). Counsellors Funds Service, Inc. ("Counsellors Service") and
PFPC serve as co-administrators to the Fund pursuant to separate written
agreements (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,
SPARX USA under the Sub-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, SPARX USA, Counsellors Service and PFPC in the proportion that
its assets bear to the aggregate assets of the Fund at the time of
calculation.
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 period ending
October 31, 1994, Counsellors voluntarily waived $13,176 of the $13,176 in
investment advisory fees earned and reimbursed $39,144 in expenses. During
the fiscal period ending October 31, 1994, no fees were waived by SPARX USA.
For the fiscal period ending October 31, 1994, PFPC received $7,084 under the
PFPC Co-Administration Agreement. During the fiscal period ending October 31,
1994, Counsellors Service received $1,054 under the Counsellors Service Co-
Administration Agreement.
Organization of the Fund
The Fund was incorporated on July 26, 1994 under the laws of the
State of Maryland. The Fund's charter authorizes the Board to issue three
billion full and fractional
<PAGE>46
shares of common stock, $.001 par value per share. Common Stock ("Common
Shares"), Common Stock - Series 1 and Advisor Shares have been authorized by
the Fund's charter, although only Common Shares and Advisor Shares have been
issued by the Fund. When matters are submitted for shareholder vote, each
shareholder will have one vote for each share owned and proportionate,
fractional votes for fractional shares held. Shareholders generally vote in
the aggregate, except with respect to (i) matters affecting only the shares of
a particular class, in which case only the shares of the affected class would
be entitled to vote, or (ii) when the 1940 Act requires that shares of the
classes be voted separately. There will normally be no meetings of
shareholders for the purpose of electing Directors unless and until such time
as less than a majority of the Directors holding office have been elected by
shareholders. The Directors will call a meeting for any purpose when
requested to do so in writing by shareholders of record of not less than 10%
of the Fund's outstanding shares.
All shareholders of the Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's assets pursuant to a custodian agreement (the
"Custodian Agreement"). Under the Custodian Agreement, State Street (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds
and transfers portfolio securities on account of the Fund, (iii) makes
receipts and disbursements of money on behalf of the Fund, (iv) collects and
receives all income and other payments and distributions on account of the
Fund's portfolio securities and (v) makes periodic reports to the Board
concerning the Fund's custodial arrangements. State Street 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 State Street 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.
State Street also serves as the shareholder servicing, transfer and
dividend disbursing agent of the Fund pursuant to a Transfer Agency and
Service Agreement, under which State Street (i) issues and redeems shares of
the Fund, (ii) addresses and mails all communications by the Fund to record
owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders,
(iii) maintains shareholder accounts and, if requested, sub-accounts and
(iv) makes periodic reports to the Board 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. State Street has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
("BFDS"), responsibility for most shareholder servicing functions. BFDS's
principal business address is 2 Heritage Drive, Boston, Massachusetts 02171.
<PAGE>47
Distribution and Shareholder Servicing
Common Shares. The Fund has entered into a Shareholder Servicing
and Distribution Plan (the "12b-1 Plan"), pursuant to Rule 12b-1 under the
1940 Act, pursuant to which the Fund will pay Counsellors Securities, in
consideration for Services (as defined below), a fee calculated at an annual
rate of .25% of the average daily net assets of the Common Shares of the Fund.
Services performed by Counsellors Securities include (i) the sale of the
Common Shares, as set forth in the 12b-1 Plan ("Selling Services"), (ii)
ongoing servicing and/or maintenance of the accounts of Common Shareholders of
the Fund, as set forth in the 12b-1 Plan ("Shareholder Services"), and (iii)
sub-transfer agency services, subaccounting services or administrative
services related to the sale of the Common Shares, as set forth in the 12b-1
Plan ("Administrative Services" and collectively with Selling Services and
Administrative Services, "Services") including, without limitation, (a)
payments reflecting an allocation of overhead and other office expenses of
Counsellors Securities related to providing Services; (b) payments made to,
and reimbursement of expenses of, persons who provide support services in
connection with the distribution of the Common Shares including, but not
limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding the Fund, and providing any other Shareholder
Services; (c) payments made to compensate selected dealers or other authorized
persons for providing any Services; (d) costs relating to the formulation and
implementation of marketing and promotional activities for the Common Shares,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising, and related travel and
entertainment expenses; (e) costs of printing and distributing prospectuses,
statements of additional information and reports of the Fund to prospective
shareholders of the Fund; and (f) costs involved in obtaining whatever
information, analyses and reports with respect to marketing and promotional
activities that the Fund may, from time to time, deem advisable. The Fund's
Common Shares paid Counsellors Securities $2,635 in the period ending October
31, 1994, all of which was spent on advertising.
Pursuant to the 12b-1 Plan, Counsellors Securities provides the
Board with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
Advisor Shares. The Fund may, in the future, enter into Agreements
with institutions ("Institutions") to perform certain distribution,
shareholder servicing, administrative and accounting services for their
Customers who are beneficial owners of Advisor Shares. See the Prospectuses,
"Shareholder Servicing." The Fund's Agreements with Institutions with respect
to Advisor Shares will be governed by a distribution plan (the "Distribution
Plan"). The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purpose for which such expenditures were made.
General. An Institution with which the Fund has entered into an
Agreement with respect to either its Common Shares or Advisor Shares may
charge a Customer one or
<PAGE>48
more of the following types of fees, as agreed upon by the Institution and the
Customer, with respect to the cash management or other services provided by
the Institution: (i) account fees (a fixed amount per month or per year);
(ii) transaction fees (a fixed amount per transaction processed); (iii)
compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or
of the dividend paid on those assets). Services provided by an Institution to
Customers are in addition to, and not duplicative of, the services to be
provided under the Fund's co-administration and distribution and shareholder
servicing arrangements. A Customer of an Institution should read the 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 the Institution to its Customers prior to any purchase of
Fund shares. Prospectuses are available from the Fund's distributor upon
request. No preference will be shown in the selection of Fund portfolio
investments for the instruments of Institutions.
The Distribution Plan and the 12b-1 Plan will continue in effect for
so long as their continuance is specifically approved at least annually by the
Board, including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan or the 12b-1 Plan, as the case may be
("Independent Directors"). Any material amendment of the Distribution Plan or
the 12b-1 Plan would require the approval of the Board in the manner described
above. Neither the 12b-1 Plan nor the Distribution Plan may be amended to
increase materially the amount to be spent thereunder without shareholder
approval of the relevant class of shares. The Distribution Plan or the 12b-1
Plan may be terminated at any time, without penalty, by vote of a majority of
the Independent Directors or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on
how to purchase and redeem Fund shares and how such shares are priced is
included in the 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.)
<PAGE>49
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other property. If a redemption is
paid wholly or partly in securities or other property, a shareholder would
incur transaction costs in disposing of the redemption proceeds. The Fund
intends to comply with Rule 18f-1 promulgated under the 1940 Act with respect
to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. To the extent that withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All dividends and distributions on shares in the Plan
are automatically reinvested at net asset value in additional shares of the
Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Counsellors is available to investors in the Fund. The funds into which
exchanges can be made by holders of Common Shares currently are the Common
Shares of Warburg Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt
Fund, Warburg Pincus New York Intermediate Municipal Fund, Warburg Pincus Tax-
Free Fund, Warburg Pincus Intermediate Maturity Government Fund, Warburg
Pincus Fixed Income Fund, Warburg Pincus Short-Term Tax-Advantaged Bond Fund,
Warburg Pincus Global Fixed Income Fund, Warburg Pincus Balanced Fund, Warburg
Pincus Growth & Income Fund, Warburg Pincus Capital Appreciation Fund, Warburg
Pincus Emerging Growth Fund, Warburg Pincus Post-Venture Capital Fund, Warburg
Pincus International Equity Fund and Warburg Pincus Emerging Markets Fund.
Common Shareholders of the Fund may exchange all or part of their shares for
Common Shares of these or other mutual funds organized by Counsellors in the
future on the basis of their relative net asset values per share at the time
of the exchange. Exchanges of Advisor Shares may currently be made with
Advisor Shares of Warburg Pincus Balanced Fund, Warburg Pincus Capital
Appreciation Fund, Warburg Pincus Emerging Growth Fund, Warburg Pincus Growth
& Income Fund and Warburg Pincus International Equity Fund at their relative
net asset values at the time of the exchange.
The exchange privilege enables shareholders to acquire shares in a
fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Common Shares or
Advisor Shares being acquired, as relevant, may legally be sold. Prior to any
exchange, the investor should obtain and review a copy of the current
<PAGE>50
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.
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 intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, the Fund will pay no federal income taxes on its taxable
net investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to
shareholders. To qualify under Subchapter M, the Fund must, among other
things: (i) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment
income and net realized short-term capital gains); (ii) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to the Fund's business of investing in
securities; (iii) derive less than 30% of its annual gross income from the
sale or other disposition of securities, options, futures or forward contracts
held for less than three months; and (iv) diversify its holdings so that, at
the end of each fiscal quarter of the Fund (a) at least 50% of the market
value of the Fund's assets is represented by cash, U.S. government securities
and other securities, with those other securities limited, with respect to any
one issuer, to an amount no greater in value than 5% of the Fund's total
assets and to not more than 10% of the outstanding voting securities of the
issuer, and (b) not more than 25% of the market value of the Fund's assets is
invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or of two or
more issuers that the Fund controls and that are determined to be in the same
or similar trades or businesses or related trades or businesses. In meeting
these requirements, the Fund may be restricted in the selling of securities
held by the Fund for less than three months and in the utilization of certain
of the investment techniques described above and in the Fund's
<PAGE>51
Prospectuses. As a regulated investment company, the Fund will be subject to
a 4% non-deductible excise tax measured with respect to certain undistributed
amounts of ordinary income and capital gain required to be but not distributed
under a prescribed formula. The formula requires payment to shareholders
during a calendar year of distributions representing at least 98% of the
Fund's taxable ordinary income for the calendar year and at least 98% of the
excess of its capital gains over capital losses realized during the one-year
period ending October 31 during such year, together with any undistributed,
untaxed amounts of ordinary income and capital gains from the previous
calendar year. The Fund expects to pay the dividends and make the
distributions necessary to avoid the application of this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (i) will require the Fund to mark-to-
market certain types of its positions (i.e., treat them as if they were closed
out) and (ii) may cause the Fund to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it acquires any foreign currency, forward contract, option, futures contract
or hedged investment so that (a) neither the Fund nor its shareholders will be
treated as receiving a materially greater amount of capital gains or
distributions than actually realized or received, (b) the Fund will be able to
use substantially all of its losses for the fiscal years in which the losses
actually occur and (c) the Fund will continue to qualify as a regulated
investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Upon the sale or exchange of
shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and the basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and, as described above, will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the
<PAGE>52
shares disposed of are replaced, including replacement through the
reinvestment of dividends and capital gains distributions in the Fund, within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired
will be increased to reflect the disallowed loss.
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Fund for the
prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable
year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is
not subject to "backup withholding," the shareholder may be subject to a 31%
"backup withholding" tax with respect to (i) taxable dividends and dis-
tributions and (ii) the proceeds of any sales or repurchases of shares of the
Fund. An individual's taxpayer identification number is his social security
number. Corporate shareholders and other shareholders specified in the Code
are or may be exempt from backup withholding. The backup withholding tax is
not an additional tax and may be credited against a taxpayer's federal income
tax liability. Dividends and distributions also may be subject to state and
local taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will
<PAGE>53
provide that regulated investment companies may elect the mark-to-market
election for tax years ending after March 31, 1992 and before April 1, 1993.
Whether and to what extent the notice will apply to taxable years of the Fund
is unclear. If the Fund is not able to make the foregoing election, it may be
able to avoid the interest charge (but not the ordinary income treatment) on
disposition of the stock by electing, under proposed regulations, each year to
mark-to market the stock (that is, treat it as if it were sold for fair market
value). Such an election could result in acceleration of income to the Fund.
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. With respect to the Fund's Common Shares, the
Fund's average annual total return for the period commencing September 30,
1994 (commencement of operations) and ending October 31, 1994 and for the six-
month period ended April 30, 1995 was -15.84% and
- -36.72%, respectively (-17.76% and -38.02%, respectively, 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)[*GRAPHIC OMITTED-SEE FOOTNOTE BELOW] = ERV. For purposes
of this formula, "P" is a hypothetical investment of $1,000; "T" is average
annual total return; "n" is number of years; and "ERV" is the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of
the one-, five- or ten-year periods (or fractional portion thereof). Total
return or "T" is computed by finding the average annual change in the value
of an initial $1,000 investment over the period and assumes that all
dividends and distributions are reinvested during the period. The Advisor
Shares average annual total return for the period commencing September 30,
1994 (commencement of operations) and ending October 31, 1994 and for the
six-month period ended April 30, 1995 was -15.84% and -36.89%, respectively
(-20.58% and -38.50%, respectively, without waivers).
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar-year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be. With respect to the Fund's Common Shares, the
Fund's actual total return for the three-month period ending on December 31,
1994 was -3.70% (-4.20% without waivers). With respect to the Advisor Shares,
the Fund's actual total return for the three-month period ending on December
31, 1994 was -3.70% (-4.60% without waivers). Investors should note that this
performance may not be representative of the Fund's total return in longer
market cycles.
- --------------------
* - The expression (1 + T) is being raised to the nth power.
<PAGE>54
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.
Counsellors 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 shown.
<PAGE>55
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
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
<PAGE>56
MS-EAFE Index in composition. The Fund may also discuss in advertising and
sales literature the history of Japanese stock markets, including the Tokyo
Stock Exchange and OTC market. Sales literature and advertising may also
discuss trends in the economy and corporate structure in Japan, including the
contrast between the sales growth, profit growth, Price/Earnings ratios, and
Return on Equity (ROE) of large older export-dominated companies and smaller
service companies; it may discuss the cultural changes taking place among
consumers in Japan, including increasing cost-consciousness and accumulation
of purchasing power and wealth among Japanese consumers, and the ability of
new companies to take advantage of these trends. The Fund may also discuss
current statistics and projections of the volume, market capitalization,
sector weightings and number of issues traded on the Japan OTC market and
Tokyo Stock Exchange, and may include graphs of such statistics in advertising
and other sales literature.
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves
as independent auditors for the Fund. The financial statements that appear in
this Statement of Additional Information for the fiscal period ended October
31, 1994 have been audited by Coopers & Lybrand, whose report thereon appears
elsewhere herein and has been included herein in reliance upon the report of
such firm of independent auditors given upon their authority as experts in
accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Fund as well as
counsel to Counsellors, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of August 31, 1995, the name, address and percentage of ownership
of each person (other than Mr. Furth, see "Management of the Fund") that owns
of record 5% or more of the Fund's outstanding shares were as follows:
Common Shares
Charles Schwab & Co., Inc. ("Schwab") Reinvest Accounts, Attn:
Mutual Funds Department, 101 Montgomery Street, San Francisco, CA 94104-4122 -
- - 28.90%. The Fund believes that Schwab is not the beneficial owner of shares
held of record by it. Mr. Lionel I. Pincus, Chairman of the Board and Chief
Executive Officer of EMW, may be deemed to have beneficially owned 14.65% of
the Common Shares outstanding, including shares owned by clients for which
Counsellors has investment discretion and by companies that EMW may be deemed
to control. Mr. Pincus disclaims ownership of these shares and does not
intend to exercise voting rights with respect to these shares.
<PAGE>57
Advisor Shares
Warburg, Pincus Counsellors, Inc., Attn: Stephen Distler, 466
Lexington Avenue, New York, NY 10017-3140 -- 87.00%. Counsellors holds these
shares as a result of limited distribution activities of the Advisor Shares
since commencement of the Fund's operations. Mr. Pincus may be deemed to have
beneficially owned 86.96% of the Advisor Shares outstanding, including shares
owned by clients for which Counsellors has investment discretion and by
companies that EMW may be deemed to control. Mr. Pincus disclaims ownership
of these shares and does not intend to exercise voting rights with respect to
these shares.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal period ended October
31, 1994 (audited) and for the period ended April 30, 1995 (unaudited) follow
the Report of Independent Auditors.
<PAGE>A-1
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in
<PAGE>A-2
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B, and CCC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Bonds rated BB have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions, which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt
rated D.
To provide more detailed indications of credit quality, the ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
<PAGE>A-3
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
<PAGE>A-4
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Boards of Directors, Trustees and Shareholders of
Warburg Pincus Equity Funds:
We have audited the accompanying statements of net assets of the following
Warburg Pincus Funds (consisting of Warburg Pincus Capital Appreciation Fund
('Capital Appreciation Fund'), Warburg Pincus Emerging Growth Fund ('Emerging
Growth Fund') and Warburg Pincus International Equity Fund ('International
Equity Fund') and the accompanying statement of assets and liabilities including
the schedule of investments of Warburg Pincus Japan OTC Fund (with the Capital
Appreciation Fund, Emerging Growth Fund and International Equity Fund, the
'Warburg Pincus Equity Funds') as of October 31, 1994, and the related
statements of operations for the year (or period) then ended, and the statements
of changes in net assets and the financial highlights for each of the two years
(or period) in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Warburg Pincus Equity Funds
for each of the three years in the period ended October 31, 1992, except for the
Warburg Pincus Japan OTC Fund, which commenced operations on September 30, 1994,
were audited by other auditors, whose report dated December 15, 1992, expressed
an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Warburg Pincus Equity Funds as of October 31, 1994, and the results
of their operations for the year (or period) then ended, and the changes in
their net assets and their financial highlights for the two years (or period) in
the period then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 12, 1994
40
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -----------
<S> <C> <C>
JAPAN COMMON STOCK (83.5%)
Apparel (1.0%)
Yagi Corp. 6,000 $ 164,791
-----------
Auto Parts (4.3%)
Hirata Technical Co., Ltd. 9,000 227,672
SNT Corp. 37,000 469,902
-----------
697,574
-----------
Commercial Services (9.8%)
Daiwabo Information System Co. 3,000 88,900
Data Communication System Co. 4,000 113,578
Jastec Corp. 2,000 31,182
Kanto Biomedical Laboratory 8,000 152,814
Kyosei Rentemu Co., Ltd. 18,000 537,119
Nagase Brothers Inc. 2,000 67,321
N. I. C. Corp. 4,000 125,555
Nihon Jumbo Co., Ltd. 3,000 178,111
Square Co., Ltd. + 6,000 304,182
-----------
1,598,762
-----------
Computers (4.3%)
I. O. Data Device Inc. 12,000 509,241
Yamaichi Electric Co., Ltd. 9,000 191,430
-----------
700,671
-----------
Cosmetics/Personal Care (2.7%)
Mandom Corp. 21,000 440,165
-----------
Electrical Equipment (0.7%)
Optex Co., Ltd. 4,000 99,122
Tokyo Seimitsu 1,000 14,559
-----------
113,681
-----------
Electronics (3.1%)
Fujitsu Denso Ltd. 2,000 44,605
New Japan Radio Co., Ltd. + 19,000 255,034
Y. A. C. Co., Ltd. 3,000 203,820
-----------
503,459
-----------
Engineering & Construction (1.3%)
Suruga Construction Co., Ltd. 7,000 219,721
-----------
Financial Services (2.1%)
Acom Co., Ltd. 4,000 147,031
Japan Associated Finance Co., Ltd. 1,000 147,651
Promise Co., Ltd. 1,000 55,756
-----------
350,438
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -----------
<S> <C> <C>
JAPAN COMMON STOCK (CONT'D)
Food Processing (7.1%)
Iwatsuka Confectionery Co., Ltd. 18,000 $ 219,308
Kadoya Sesame Mills Inc. 5,000 148,167
O. K. Food Industry Co., Ltd. + 18,000 86,794
Sato Foods Industries Co., Ltd. 10,000 216,830
Taiyo Kagaku Co., Ltd. 31,000 499,329
-----------
1,170,428
-----------
Machinery (0.5%)
Nissei ASB Machine Co., Ltd. + 2,000 25,400
Sato Corp. 2,000 54,930
-----------
80,330
-----------
Medical Supplies (1.4%)
Seed Co., Ltd. 6,000 226,123
-----------
Metal Fabricate/Hardware (3.8%)
KDK Corp. 36,000 472,070
Sankyo Frontier Co., Ltd. 4,000 144,140
-----------
616,210
-----------
Office/Business Equipment (3.8%)
King Jim Co., Ltd. 9,000 241,611
Katsuragawa Electric Co., Ltd. 17,000 382,654
-----------
624,265
-----------
Pharmaceutical (3.1%)
Seikagaku Corp. 12,000 514,197
-----------
Restaurants/Food Service (5.3%)
Coco's Japan Co., Ltd. 1,000 14,455
Daisyo Corp. 15,000 480,124
Plenus Co., Ltd. 5,000 366,546
-----------
861,125
-----------
Retail (13.6%)
Belluna Co., Ltd. + 6,000 265,772
Cowboy Co., Ltd. 9,000 418,173
Fast Retailing Co., Ltd. 2,000 223,025
Home Wide Corp. 5,000 108,415
Kahma Co., Ltd. 3,000 92,308
Kuroganeya Co., Ltd. 15,000 309,757
Nikku Sangyo Co., Ltd. + 10,000 179,659
Sari Corp. 5,000 180,692
Sundrug Co., Ltd. 6,000 442,953
-----------
2,220,754
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -----------
<S> <C> <C>
JAPAN COMMON STOCK (CONT'D)
Transportation (2.7%)
Daito Koun Co., Ltd. 38,000 $ 447,290
-----------
Wholesale/Distribution (12.9%)
Arc Land Sakamoto Co., Ltd. 4,000 99,122
Hikari Furniture Co., Ltd. 41,000 766,237
Kuraya Corp. 26,600 604,234
Nikkodo Co., Ltd 12,000 167,269
Toho Pharmaceutical Co., Ltd. 44,000 481,569
-----------
2,118,431
-----------
TOTAL JAPAN COMMON STOCK (Cost $13,713,446) 13,668,415
-----------
<CAPTION>
SHORT-TERM INVESTMENTS (16.5%) PAR
----------
<S> <C> <C>
Repurchase agreement with PNC Securities Corp. dated 10/31/94 at 4.30% to be
repurchased at $2,700,323 on 11/01/94. (Collateralized by $2,760,000 U.S. Treasury
Bill due 03/16/95, with a market value of $2,703,420.) (Cost $2,700,000) $2,700,000 $ 2,700,000
-----------
TOTAL INVESTMENTS (100.0%) (Cost $16,413,446*) $16,368,415
-----------
-----------
</TABLE>
+ Non-income producing security.
* Also cost for Federal income tax purposes.
See Accompanying Notes to Financial Statements.
25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at value (Cost $16,413,446) $16,368,415
Cash 2,171,652
Receivable for Fund shares sold 1,377,671
Foreign currency (Cost $546,981) 546,981
Deferred organizational costs 177,649
Receivable for unrealized gain on forward contracts 11,591
Interest receivable 322
-----------
Total assets 20,654,281
-----------
LIABILITIES
Payable for investments purchased (Cost $554,864) 556,523
Deferred organizational costs payable 180,660
Accrued expenses 37,706
Other liabilities 756
-----------
Total liabilities 775,645
-----------
NET ASSETS APPLICABLE TO 2,017,092 COMMON SHARES OUTSTANDING AND
115 SERIES 2 SHARES OUTSTANDING $19,878,636
-----------
-----------
NET ASSET VALUE, offering and redemption price per common share
($19,877,503[div]2,017,092) $9.85
-----
-----
NET ASSET VALUE, offering and redemption price per Series 2 share
($1,133[div]115) $9.85
-----
-----
</TABLE>
See Accompanying Notes to Financial Statements.
26
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Year or Period Ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity Japan OTC
Fund Fund Fund Fund*
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,956,407 $ 739,797 $ 15,187,073 $ 0
Interest 239,527 876,658 2,739,415 15,656
Foreign taxes withheld (1,168) (24,340) (1,836,587) 0
-------------------- --------------- -------------------- --------------
Total investment income 2,194,766 1,592,115 16,089,901 15,656
-------------------- --------------- -------------------- --------------
EXPENSES:
Investment advisory 1,172,857 2,234,376 9,879,319 13,176
Administrative services 300,806 451,159 1,722,729 8,138
Audit 24,264 27,121 65,628 15,000
Custodian/Sub-custodian 50,291 90,040 1,017,575 1,054
Directors/Trustees 10,000 10,000 11,000 1,250
Distribution 0 0 0 2,635
Insurance 15,532 15,918 32,972 0
Legal 25,034 31,983 47,493 0
Organizational 0 0 4,756 3,011
Printing 29,531 42,588 94,447 1,000
Registration 28,348 77,436 580,302 14,597
Shareholder servicing 53,002 226,626 593,276 0
Transfer agent 79,364 131,476 675,657 3,000
Miscellaneous 32,670 32,446 53,814 0
-------------------- --------------- -------------------- --------------
1,821,699 3,371,169 14,778,968 62,861
Less: fees waived and expenses
reimbursed (11,179) (100,408) 0 (52,320)
-------------------- --------------- -------------------- --------------
Total expenses 1,810,520 3,270,761 14,778,968 10,541
-------------------- --------------- -------------------- --------------
Net investment income (loss) 384,246 (1,678,646) 1,310,933 5,115
-------------------- --------------- -------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND FOREIGN CURRENCY RELATED
ITEMS:
Net realized gain (loss) from security
transactions 11,173,174 (5,721,525) 48,091,665 0
Net realized loss from foreign currency
related items 0 0 (2,772,944) (294,437)
Net increase (decrease) in unrealized
appreciation from investments and
foreign currency related items (9,106,613) 10,930,919 82,484,415 (35,099)
-------------------- --------------- -------------------- --------------
Net realized and unrealized gain
(loss) from investments and
foreign currency related
items 2,066,561 5,209,394 127,803,136 (329,536)
-------------------- --------------- -------------------- --------------
Net increase (decrease) in net
assets from operations $ 2,450,807 $ 3,530,748 $129,114,069 $ (324,421)
-------------------- --------------- -------------------- --------------
-------------------- --------------- -------------------- --------------
</TABLE>
* For the period September 30, 1994 (Commencement of Operations) through
October 31, 1994.
See Accompanying Notes to Financial Statements.
27
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth
Fund Fund
------------------------ ------------------------
For the Year Ended October 31, For the Year Ended October 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 384,246 $ 401,157 ($1,678,646) $(902,442)
Net realized gain (loss) from
security transactions 11,173,174 13,675,715 (5,721,525) 12,312,484
Net realized loss from foreign
currency related items 0 0 0 0
Net change in unrealized
appreciation (depreciation) from
investments and foreign currency
related items (9,106,613) 14,209,067 10,930,919 26,564,947
----------- ----------- ----------- ------------
Net increase (decrease) in net
assets resulting from
operations 2,450,807 28,285,939 3,530,748 37,974,989
----------- ----------- ----------- ------------
FROM DISTRIBUTIONS:
Dividends from net investment
income:
Common shares (419,337) (459,634) 0 0
Series 2 shares (27,724) (95) 0 0
Distributions in excess of net
investment income:
Common shares 0 0 0 0
Series 2 shares 0 0 0 0
Distributions from capital gains:
Common shares (12,899,141) (6,877,271) (10,576,150) (2,054,285)
Series 2 shares (852,608) (102,444) (1,639,316) (132,545)
------------ ------------ ------------ ------------
Net decrease from distributions (14,198,810) (7,439,444) (12,215,466) (2,186,830)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 45,617,531 46,439,011 180,813,270 89,478,924
Reinvested dividends 13,809,167 7,199,391 12,758,387 2,166,694
Net asset value of shares redeemed (49,851,500) (24,352,588) (71,767,717) (40,840,041)
------------ ------------ ------------ ------------
Net increase in net assets from
capital share transactions 9,575,198 29,285,814 121,803,940 50,805,577
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets (2,172,805) 50,132,309 113,119,222 86,593,736
NET ASSETS:
Beginning of period 169,687,298 119,554,989 191,553,536 104,959,800
------------ ------------ ------------ ------------
End of period $167,514,493 $169,687,298 $304,672,758 $191,553,536
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
28
- ------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus
Japan OTC
Fund
Warburg Pincus --------------
International Equity For the Period
Fund September 30, 1994
------------------------ (Commencement of
For the Year Ended October 31, Operations through
1994 1993 October 31, 1994
----------- ----------- --------------
<S> <C> <C> <C>
$1,310,933 $ 638,986 $ 5,115
48,091,665 1,176,172 0
(2,772,944) (48,647) (294,437)
82,484,415 63,734,670 (35,099)
------------- ------------- --------------
129,114,069 65,501,181 (324,421)
------------- ------------ --------------
(1,764,380) (242,119) 0
(218,961) (9,224) 0
(223,659) 0 0
0 0 0
(1,047,367) (995,091) 0
(129,979) (16,719) 0
-------------- ------------ --------------
(3,384,346) (1,263,153) 0
-------------- ------------ --------------
1,430,739,923 283,608,350 20,287,158
2,950,772 1,184,585 0
(249,050,078) (29,360,993) (185,101)
------------- ------------ --------------
1,184,640,617 255,431,942 20,102,057
------------- ------------ --------------
1,310,370,340 319,669,970 19,777,636
422,905,163 103,235,193 101,000
-------------- ------------ --------------
$1,733,275,503 $422,905,163 $19,878,636
-------------- ------------ --------------
-------------- ------------ --------------
</TABLE>
See Accompanying Notes to Financial Statements.
29
- ------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares Series 2 Shares
------------------- -------------------
For the Period For the Period
September 30, 1994 September 30, 1994
(Commencement of (Commencement of
Operations) through Operations) through
October 31, 1994 October 31, 1994
------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
--------- ---------
Income from Investment Operations:
Net Investment Income (Loss) .00 .00
Net Gain (Loss) on Securities and
Foreign Currency Related Items
(both realized and unrealized) (.15) (.15)
--------- ---------
Total from Investment Operations (.15) (.15)
--------- ---------
Less Distributions:
Dividends from net investment income .00 .00
Distributions from capital gains .00 .00
--------- ---------
Total Distributions .00 .00
--------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.85 $ 9.85
--------- ---------
--------- ---------
Total Return (15.84%)* (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 19,878 $ 1
Ratios to average daily net assets:
Operating expenses 1.00%* 1.18%*
Net investment income (loss) .49%* .12%*
Decrease reflected in above expense
ratios due to waivers/reimbursements 4.96%* 4.74%*
Portfolio Turnover Rate .00% .00%
</TABLE>
* Annualized
See Accompanying Notes to Financial Statements.
33
- ------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
October 31, 1994
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund') and Warburg Pincus
International Equity Fund (the 'International Equity Fund') which are registered
under the Investment Company Act of 1940, as amended (the '1940 Act'), as
diversified, open-end management investment companies, and Warburg Pincus
Emerging Growth Fund (the 'Emerging Growth Fund') and Warburg Pincus Japan OTC
Fund (the 'Japan OTC Fund,' together with the Capital Appreciation Fund, the
International Equity Fund and the Emerging Growth Fund, the 'Funds') which are
registered under the 1940 Act as non-diversified, open-end management investment
companies.
Investment objectives for each Fund are as follows: the Capital
Appreciation Fund, the International Equity Fund and the Japan OTC Fund seek
long-term capital appreciation; the Emerging Growth Fund seeks maximum capital
appreciation.
The net asset value of each Fund is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Fund's investments are
valued at market value, which is currently determined using the last reported
sales price. If no sales are reported, investments are valued at the last
reported bid price. In the absence of a quoted market value, investments are
valued at fair value as determined by or under the direction of the Fund's
governing Board. Short-term investments that mature in 60 days or less are
valued on the basis of amortized cost, which approximates market value.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate
at the end of the period. Translation gains or losses resulting from changes in
the exchange rate during the reporting period and realized gains and losses on
the settlement of foreign currency transactions are reported in the results of
operations for the current period. The Funds do not isolate that portion of
gains and losses on investments in equity securities which are due to changes in
the foreign exchange rate from that which is due to changes in market prices of
equity securities.
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and income tax purposes.
Dividends from net investment income are declared and paid semiannually for
all Funds. Distributions of net realized capital gains, if any, are declared and
paid annually. However, to the extent that a net realized capital gain can be
reduced by a capital loss carryover, such gain will not be distributed.
Each Fund intends to continue to comply with the special provisions of the
Internal Revenue Code available to investment companies and therefore no Federal
income tax provision is required.
Costs incurred by the Japan OTC Fund in connection with its organization
have been deferred and are being amortized over a period of five years from the
date the Japan OTC Fund commenced its operations.
34
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Each Fund may enter into repurchase agreement transactions. Under the terms
of a typical repurchase agreement, each Fund acquires an underlying security
subject to an obligation of the seller to repurchase. The value of the
underlying security will be maintained at an amount at least equal to the total
amount of the purchase obligation, including interest. The collateral is in the
Fund's possession.
As of November 1, 1993, or inception, in the case of the Japan OTC Fund,
each Fund implemented AICPA Statement of Position 93-2 -- Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Adoption of this
standard results in the reclassification to paid-in capital of permanent
differences between tax and financial reporting of net investment income and net
realized gain (loss). The change has had no material effect on paid-in capital
or other components of the net assets of any of the Funds at November 1, 1993 or
inception, as the case may be. Distributions to shareholders and net asset
values were not affected by this change.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Counsellors'), a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as
each Fund's investment adviser. For its investment advisory services,
Counsellors receives the following fees based on each Fund's average daily net
assets:
<TABLE>
<CAPTION>
FUND ANNUAL RATE
- --------------------------------- ----------------------------------
<S> <C>
Capital Appreciation .70% of average daily net assets
Emerging Growth .90% of average daily net assets
International Equity 1.00% of average daily net assets
Japan OTC 1.25% of average daily net assets
</TABLE>
For the period or year ended October 31, 1994, investment advisory fees,
waivers and reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
FUND ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- ------------------------------------------- ------------ --------- -------------- --------------
<S> <C> <C> <C> <C>
Capital Appreciation $1,172,857 $ (11,179) $1,161,678 0
Emerging Growth 2,234,376 (100,408) 2,133,968 0
International Equity 9,879,319 0 9,879,319 0
Japan OTC 13,176 (13,176) 0 $(39,144)
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Counsellors pays SPARX USA a fee at an annual rate of .625% of the average daily
net assets of the Japan OTC Fund. No compensation is payable by the Japan OTC
Fund to SPARX USA for its sub-investment advisory services.
35
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Counsellors, and PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary of PNC
Bank Corp. ('PNC'), serve as each Fund's co-administrators. For its
administrative services, CFSI currently receives a fee calculated at an annual
rate of .10% of each Fund's average daily net assets. For the period or year
ended October 31, 1994, administrative services fees earned by CFSI were as
follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $133,255
Emerging Growth 202,895
International Equity 871,165
Japan OTC 1,054
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Counsellors, serves as each Fund's distributor. No compensation is payable by
the Capital Appreciation Fund, the Emerging Growth Fund or the International
Equity Fund to CSI for distribution services. For distribution services with
respect to the Common Shares of the Japan OTC Fund, CSI receives a fee at the
annual rate of .25% of the Japan OTC Fund's average daily net assets
attributable to the Common Shares; no compensation is payable to CSI with
respect to the Fund's Series 2 Shares. For the period ended October 31, 1994,
CSI earned $2,635 in distribution fees.
3. INVESTMENTS IN SECURITIES
For the period or year ended October 31, 1994, purchases and sales of
investment securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ----------------------------------------------------------- -------------- ------------
<S> <C> <C>
Capital Appreciation $ 89,218,905 $ 82,854,233
Emerging Growth 245,154,617 138,723,249
International Equity 1,224,880,044 155,267,110
Japan OTC 13,713,446 0
</TABLE>
At October 31, 1994, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
depreciation from investments for those securities having an excess of cost over
value (based on cost for Federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
- ----------------------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Capital Appreciation $ 34,034,231 $ (4,091,250) $ 29,942,981
Emerging Growth 59,051,417 (8,336,497) 50,714,920
International Equity 198,971,180 (57,952,506) 141,018,674
Japan OTC 254,382 (299,413) (45,031)
</TABLE>
36
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund and the Japan OTC Fund may enter into forward
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. Each Fund will enter into forward contracts
primarily for hedging purposes. The forward currency contracts are adjusted by
the daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
At October 31, 1994, the Japan OTC Fund had the following open forward
foreign currency contract and had recorded an unrealized gain of $11,591:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- --------- ----------------------- --------------------------
<S> <C> <C>
11/30/94 14,000,000 U.S. Dollars 1,351,700,000 Japanese Yen
</TABLE>
5. SERIES 2 SHARES
The Emerging Growth Fund, the International Equity Fund and the Japan OTC
Fund are each authorized to issue three billion full and fractional shares of
capital stock, $.001 par value per share, of which one billion shares are
designated Series 2 Shares. The Capital Appreciation Fund is authorized to issue
an unlimited number of full and fractional shares of beneficial interest, $.001
par value per share, of which one billion shares are classified as Series 2
Shares. Series 2 Shares are identical to Common Shares in all respects except
that Series 2 Shares are sold to institutions ('Service Organizations') that
perform certain distribution, shareholder servicing, accounting and/or
administrative services for their customers who are beneficial owners of Series
2 Shares. Series 2 Shares bear the fees paid pursuant to a distribution plan
adopted by each Fund in an amount not to exceed .75 of 1.00% (on an annualized
basis) of the average daily net asset value of the shares held by the
institutions for the benefit of their customers and enjoy certain exclusive
voting rights on matters relating to those fees.
With respect to Series 2 Shares, Service Organizations earned the following
shareholder servicing fees for the year ended October 31, 1994:
<TABLE>
<CAPTION>
FUND SHAREHOLDER SERVICING FEES
- ----------------------------------------------- --------------------------
<S> <C>
Capital Appreciation $ 53,002
Emerging Growth 226,626
International Equity 593,276
</TABLE>
37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Series 2 Shares Common Shares Series 2 Shares
------------------------ ----------------------- ------------------------- ------------------------
For the Year Ended October 31, For the Year Ended October 31,
------------------------------------------------- ---------------------------------------------------
1994 1993 1994 1993 1994 1993 1994 1993
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold 2,958,494 2,705,720 290,193 588,424 6,133,751 3,295,313 2,233,737 871,054
Shares issued to
shareholders on
reinvestment of
dividends 920,210 535,112 61,526 7,739 506,720 101,352 80,473 6,644
Shares redeemed (3,126,497) (1,710,437) (460,020) (38,003) (2,859,413) (1,870,167) (517,898) (67,545)
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Net increase
(decrease) in
shares
outstanding 752,207 1,530,395 (108,301) 558,160 3,781,058 1,526,498 1,796,312 810,153
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Proceeds from sale
of shares $41,570,590 $38,018,578 $ 4,046,941 $8,420,433 $132,922,995 $71,149,417 $47,890,275 $18,329,507
Reinvested
dividends 12,945,690 7,096,852 863,477 102,539 11,015,146 2,034,149 1,743,241 132,545
Net asset value of
shares redeemed (43,449,501) (23,821,721) (6,401,999) (530,867) (61,126,667) (39,393,274) (10,641,050) (1,446,767)
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Net increase
(decrease) from
capital share
transactions $11,066,779 $21,293,709 $(1,491,581) $7,992,105 $ 82,811,474 $33,790,292 $38,992,466 $17,015,285
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
</TABLE>
6. NET ASSETS
Net Assets at October 31, 1994, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Series 2 Shares Total Common Shares Series 2 Shares Total
------------- --------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed, net $118,516,377 $ 8,060,714 $126,577,091 $199,119,705 $60,627,302 $259,747,007
Accumulated net investment
income (loss) 0 0 0 0 0 0
Accumulated net realized
gain (loss) from security
transactions 10,795,522 198,899 10,994,421 (3,706,511 ) (2,122,042) (5,828,553)
Net unrealized appreciation
(depreciation) from
investments and foreign
currency related items 30,034,085 (91,104) 29,942,981 45,250,539 5,503,765 50,754,304
------------- --------------- ------------ ------------- --------------- ------------
Net assets $159,345,984 $ 8,168,509 $167,514,493 $240,663,733 $64,009,025 $304,672,758
------------- --------------- ------------ ------------- --------------- ------------
------------- --------------- ------------ ------------- --------------- ------------
</TABLE>
7. CAPITAL LOSS CARRYOVER
At October 31, 1994, the Emerging Growth Fund has a capital loss carryover
of $5,789,170 expiring in 2002 to offset possible future capital gains of the
Fund.
38
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Series 2
Shares Shares
Common Shares Series 2 Shares ------------- ---------------
---------------------------- ------------------------- For the Period
For the Year Ended October 31, September 30, 1994
------------------------------------------------------- (Commencement of Operations)
1994 1993 1994 1993 through October 31, 1994
-------------- ------------ ------------ ----------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
64,218,907 15,914,077 7,956,088 2,510,712 2,025,697 15
147,031 89,544 6,879 1,957 0 0
(11,861,720) (2,060,764) (795,406) (16,861) (18,605) 0
-------------- ------------ ------------ ----------- ------------- ---------------
52,504,218 13,942,857 7,167,561 2,495,808 2,007,092 15
-------------- ------------ ------------ ----------- ------------- ---------------
-------------- ------------ ------------ ----------- ------------- ---------------
$1,275,306,263 $244,888,526 $155,433,660 $38,719,824 $20,287,008 $ 150
2,820,903 1,158,643 129,869 25,942 0 0
(233,614,600) (29,121,414) (15,435,478) (239,579) (185,101) 0
-------------- ------------ ------------ ----------- ------------- ---------------
$1,044,512,566 $216,925,755 $140,128,051 $38,506,187 $20,101,907 $ 150
-------------- ------------ ------------ ----------- ------------- ---------------
-------------- ------------ ------------ ----------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Shares Series 2 Shares Total Common Shares Series 2 Shares Total
-------------- --------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1,368,158,592 $ 180,212,108 $1,548,370,700 $19,924,176 $ 1,150 $19,925,326
4,309,014 429,089 4,738,103 0 0 0
34,680,906 4,327,914 39,008,820 (11,574) (17) (11,591)
126,723,436 14,434,444 141,157,880 (35,099) 0 (35,099)
-------------- --------------- -------------- ------------- ------- ------------
$1,533,871,948 $ 199,403,555 $1,733,275,503 $19,877,503 $ 1,133 $19,878,636
-------------- --------------- -------------- ------------- ------- ------------
-------------- --------------- -------------- ------------- ------- ------------
</TABLE>
39
- --------------------------------------------------------------------------------
STATEMENT OF DIFFERENCES
The division symbol shall be expressed as .........[div]
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -----------
<S> <C> <C>
JAPAN COMMON STOCK (90.0%)
Automotive Parts-Equipment (1.9%)
Harada Industry Co., Ltd. + 8,000 $ 185,714
SNT Corp. 28,000 270,000
-----------
455,714
-----------
Building Materials (2.6%)
Furusato Industries 35,000 379,167
Nozawa Corp. + 48,000 241,143
-----------
620,310
-----------
Computers (5.6%)
I.O. Data Device Inc. 26,000 1,247,381
Toyo Information Systems 11,000 116,547
-----------
1,363,928
-----------
Construction (18.8%)
Kawasho Lease System Corp. 56,500 975,298
Nishio Rent All 20,000 554,762
Onoken Co., Ltd. 38,900 1,004,917
Sacos Corp. 13,000 386,905
Sankyo Frontier Co., Ltd. 20,000 647,619
Tokai Lease Co., Ltd. 38,000 440,619
Yamadai Corp. + 10,000 103,571
Yamazaki Construction Co., Ltd. 18,000 349,286
Yokogawa Construction Co., Ltd. 5,000 122,619
-----------
4,585,596
-----------
Cosmetics/Personal Care (2.9%)
Mandom Corp. 37,500 709,821
-----------
Distribution/Wholesale (2.8%)
Arc Land Sakamoto Co., Ltd. 12,500 224,702
Hakuto Co., Ltd. 5,000 103,571
Trusco Nakayama Corp. 15,200 358,286
-----------
686,559
-----------
Electronics (13.0%)
Apic Yamada Corp. 500 17,798
KDK Corp. 17,000 155,833
New Japan Radio Co., Ltd. + 74,000 925,000
Satori Electric 17,000 847,976
Yaesu Musen Co., Ltd. 35,000 520,833
Yamaichi Electronics Co., Ltd. 41,000 707,738
-----------
3,175,178
-----------
Financial Services (1.7%)
Acom Co., Ltd. 4,400 126,238
Japan Associated Finance Co., Ltd. 2,000 245,238
Promise Co., Ltd. 1,200 52,429
-----------
423,905
-----------
Food Processing (7.8%)
Ito En Ltd. 15,000 300,000
Iwatsuka Confectionery Co., Ltd. 21,000 237,500
Sato Food Industries Co., Ltd. 35,000 650,000
Taiyo Kagaku Co., Ltd. 54,000 707,143
-----------
1,894,643
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
18
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -----------
<S> <C> <C>
JAPAN COMMON STOCK (CONT'D)
Glass Products (4.3%)
Kuramoto Seisakusho Co., Ltd. 16,000 $ 1,051,429
-----------
Home Furnishings/Housewares (3.2%)
Hikari Furniture 39,000 580,357
Nikku Sangyo Co., Ltd. 13,200 194,857
-----------
775,214
-----------
Lodging (1.9%)
Royal Hotel 46,000 461,095
-----------
Machinery/Heavy Equipment (5.6%)
Iseki Poly-Tech Inc. 34,000 485,714
Kito Corp. 45,000 883,929
-----------
1,369,643
-----------
Mail Order (1.2%)
Belluna Co., Ltd. 11,700 285,536
-----------
Manufacturing (5.7%)
Nakakita Seisakusho Co., Ltd. 44,000 209,000
Nitta Industrial Corp. 81,000 1,176,429
-----------
1,385,429
-----------
Pharmaceutical (5.6%)
Seikagaku Corp. 30,000 1,375,000
-----------
Printing/Publishing (0.8%)
Asia Securities Printing Co. 4,400 193,810
-----------
Restaurants/Food Service (1.3%)
Plenus Co., Ltd. 6,500 324,226
-----------
Retail Merchandising (0.7%)
Kraft Inc. + 8,000 175,238
-----------
Shipbuilding (1.2%)
Namura Shipbuilding 51,000 303,571
-----------
Transportation (1.4%)
Daito Koun Co., Ltd. 28,000 340,000
-----------
TOTAL JAPAN COMMON STOCK (Cost $21,905,994) 21,955,845
-----------
<CAPTION>
PAR
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (10.0%)
Repurchase agreement with State Street Bank & Trust Co. dated 04/28/95 at 5.87% to be
repurchased at $2,439,193 on 05/01/95. (Collateralized by $2,475,000 U.S. Treasury
Note 6.50%, due 09/30/96, with a market value of $2,488,835.) (Cost $2,438,000) $2,438,000 2,438,000
-----------
TOTAL INVESTMENTS (100.0%) (Cost $24,343,994*) $24,393,845
-----------
-----------
</TABLE>
+ Non-income producing security.
* Also cost for Federal income tax purposes.
See Accompanying Notes to Financial Statements.
19
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
$24,393,845
Investments at value (Cost $24,343,994)
1,692,568
Foreign currency (Cost $1,726,495)
382,536
Receivable for investments sold (Cost $383,328)
190,166
Deferred organizational costs
83,602
Dividends and interest receivable (Cost $78,651)
30,313
Receivable for Fund shares sold
13,751
Receivable for unrealized gain on forward contracts
115,556
Other receivables
-----------
26,902,337
Total assets
-----------
LIABILITIES
292,097
Payable for investments purchased (Cost $293,187)
36,528
Accrued expenses
181
Other liabilities
-----------
328,806
Total liabilities
-----------
$26,573,531
NET ASSETS applicable to 3,386,751 Common Shares outstanding and
115 Advisor Shares* outstanding
-----------
-----------
$7.85
-----
-----
NET ASSET VALUE, offering and redemption price per Common Share ($26,572,630 [div] 3,386,751)
$7.84
-----
-----
NET ASSET VALUE, offering and redemption price per Advisor Share*
($901 [div] 115)
</TABLE>
* Advisor Shares refer to Series 2 Shares herein and in the prospectus.
See Accompanying Notes to Financial Statements.
20
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Six Months Ended April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity Japan OTC
Fund Fund Fund Fund
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 866,566 $ 385,287 $ 16,884,622 $ 92,394
Interest 417,191 777,120 6,035,578 52,639
Foreign taxes withheld (2,423) 0 (2,632,413) (13,859)
-------------------- --------------- -------------------- --------------
Total investment income 1,281,334 1,162,407 20,287,787 131,174
-------------------- --------------- -------------------- --------------
EXPENSES:
Investment advisory 572,180 1,428,874 8,871,020 141,840
Administrative services 163,480 317,528 1,516,613 53,847
Audit 11,486 11,348 25,098 9,837
Custodian/Sub-custodian 26,453 56,264 900,807 22,943
Directors/Trustees 4,960 4,960 4,960 3,720
Distribution 0 0 0 28,368
Insurance 7,467 7,935 20,767 2,266
Legal 13,889 13,785 24,437 12,397
Organizational 0 0 0 19,066
Printing 12,853 16,604 39,399 7,690
Registration 16,018 43,913 292,491 24,613
Shareholder servicing 20,418 188,426 532,559 0
Transfer agent 37,099 60,883 532,321 41,327
Miscellaneous 17,498 15,667 38,126 3,712
-------------------- --------------- -------------------- --------------
903,801 2,166,187 12,798,598 371,626
Less: fees waived and expenses
reimbursed 0 0 0 (258,152)
-------------------- --------------- -------------------- --------------
Total expenses 903,801 2,166,187 12,798,598 113,474
-------------------- --------------- -------------------- --------------
Net investment income (loss) 377,533 (1,003,780) 7,489,189 17,700
-------------------- --------------- -------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND
FOREIGN CURRENCY RELATED ITEMS:
Net realized gain (loss) from security
transactions 6,497,435 14,451,273 (53,266,705) (1,943,522)
Net realized gain (loss) from foreign
currency related items 0 0 3,272,321 (3,394,945)
Net increase (decrease) in unrealized
appreciation from investments and
foreign currency related items 3,936,137 11,679,784 (110,594,381) 70,023
-------------------- --------------- -------------------- --------------
Net realized and unrealized gain
(loss) from investments and
foreign currency related
items 10,433,572 26,131,057 (160,588,765) (5,268,444)
-------------------- --------------- -------------------- --------------
Net increase (decrease) in net
assets from operations $ 10,811,105 $25,127,277 $ (153,099,576) $ (5,250,744)
-------------------- --------------- -------------------- --------------
-------------------- --------------- -------------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements.
21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth
Fund Fund
----------------------------------- -----------------------------------
For the For the
Six Months Ended For the Six Months Ended For the
April 30, 1995 Year Ended April 30, 1995 Year Ended
(Unaudited) October 31, 1994 (Unaudited) October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 377,533 $ 384,246 $ (1,003,780) $ (1,678,646)
Net realized gain (loss) from security
transactions 6,497,435 11,173,174 14,451,273 (5,721,525)
Net realized gain (loss) from foreign currency
related items 0 0 0 0
Net change in unrealized appreciation
(depreciation) from investments and foreign
currency related items 3,936,137 (9,106,613) 11,679,784 10,930,919
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in net assets
resulting from operations 10,811,105 2,450,807 25,127,277 3,530,748
---------------- ---------------- ---------------- ----------------
FROM DISTRIBUTIONS:
Dividends from net investment income:
Common shares 0 (419,337) 0 0
Advisor shares 0 (27,724) 0 0
Distributions in excess of net investment
income:
Common shares 0 0 0 0
Advisor shares 0 0 0 0
Distributions from capital gains:
Common shares (10,460,742) (12,899,141) 0 (10,576,150)
Advisor shares (575,892) (852,608) 0 (1,639,316)
---------------- ---------------- ---------------- ----------------
Net decrease from distributions (11,036,634) (14,198,810) 0 (12,215,466)
---------------- ---------------- ---------------- ----------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 39,742,671 45,617,531 111,724,784 180,813,270
Reinvested dividends 10,763,492 13,809,167 347,867 12,758,387
Net asset value of shares redeemed (27,720,617) (49,851,500) (54,921,210) (71,767,717)
---------------- ---------------- ---------------- ----------------
Net increase in net assets from capital
share transactions 22,785,546 9,575,198 57,151,441 121,803,940
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in net assets 22,560,017 (2,172,805) 82,278,718 113,119,222
NET ASSETS:
Beginning of period 167,514,493 169,687,298 304,672,758 191,553,536
---------------- ---------------- ---------------- ----------------
End of period $190,074,510 $167,514,493 $386,951,476 $304,672,758
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
See Accompanying Notes to Financial Statements.
22
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
International Equity Japan OTC
Fund Fund
------------------------------------ ---------------------------------------
For the Period
For the For the September 30, 1994
Six Months Ended For the Six Months Ended (Commencement of
April 30, 1995 Year Ended April 30, 1995 Operations) through
(Unaudited) October 31, 1994 (Unaudited) October 31, 1994
---------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
$ 7,489,189 $ 1,310,933 $ 17,700 $ 5,115
(53,266,705) 48,091,665 (1,943,522) 0
3,272,321 (2,772,944) (3,394,945) (294,437)
(110,594,381) 82,484,415 70,023 (35,099)
---------------- ---------------- ---------------- -------------------
(153,099,576) 129,114,069 (5,250,744) (324,421)
---------------- ---------------- ---------------- -------------------
(5,808,212) (1,764,380) 0 0
(332,184) (218,961) 0 0
0 (223,659) 0 0
0 0 0 0
(42,332,078) (1,047,367) 0 0
(5,756,403) (129,979) 0 0
---------------- ---------------- ---------------- -------------------
(54,228,877) (3,384,346) 0 0
---------------- ---------------- ---------------- -------------------
826,097,889 1,430,739,923 17,783,234 20,287,158
49,503,945 2,950,772 0 0
(345,979,679) (249,050,078) (5,837,595) (185,101)
---------------- ---------------- ---------------- -------------------
529,622,155 1,184,640,617 11,945,639 20,102,057
---------------- ---------------- ---------------- -------------------
322,293,702 1,310,370,340 6,694,895 19,777,636
1,733,275,503 422,905,163 19,878,636 101,000
---------------- ---------------- ---------------- -------------------
$2,055,569,205 $1,733,275,503 $ 26,573,531 $19,878,636
---------------- ---------------- ---------------- -------------------
---------------- ---------------- ---------------- -------------------
</TABLE>
23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares Advisor Shares
----------------------------------- -----------------------------------
For the Six For the Period For the Six For the Period
Months Ended September 30, 1994 Months Ended September 30, 1994
April 30, (Commencement of April 30, (Commencement of
1995 Operations) through 1995 Operations) through
(Unaudited) October 31, 1994 (Unaudited) October 31, 1994
------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85 $ 10.00 $ 9.85 $ 10.00
----- ------ ----- ------
Income from Investment Operations:
Net Investment Income .01 .00 .00 .00
Net Loss from Securities and Foreign
Currency Related Items (both realized and
unrealized) (2.01) (.15) (2.01) (.15)
----- ------ ----- ------
Total From Investment Operations (2.00) (.15) (2.01) (.15)
----- ------ ----- ------
Less Distributions:
Dividends from net investment income .00 .00 .00 .00
Distributions from capital gains .00 .00 .00 .00
----- ------ ----- ------
Total Distributions .00 .00 .00 .00
----- ------ ----- ------
NET ASSET VALUE, END OF PERIOD $ 7.85 $ 9.85 $ 7.84 $ 9.85
----- ------ ----- ------
----- ------ ----- ------
Total Return (36.72%)* (15.84%)* (36.89%)* (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $26,573 $19,878 $ 1 $ 1
Ratios to average daily net assets:
Operating expenses 1.00%* 1.00%* 1.25%* 1.18%*
Net investment income (loss) .16%* .49%* (.16%)* .12%*
Decrease reflected in above expense ratios
due to waivers/reimbursements 2.28%* 4.96%* 2.28%* 4.74%*
Portfolio turnover rate 138.17%* .00% 138.17%* .00%
</TABLE>
* Annualized
See Accompanying Notes to Financial Statements.
27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund') and Warburg Pincus
International Equity Fund (the 'International Equity Fund') which are registered
under the Investment Company Act of 1940, as amended (the '1940 Act'), as
diversified, open-end management investment companies, and Warburg Pincus
Emerging Growth Fund (the 'Emerging Growth Fund') and Warburg Pincus Japan OTC
Fund (the 'Japan OTC Fund,' together with the Capital Appreciation Fund, the
International Equity Fund and the Emerging Growth Fund, the 'Funds') which are
registered under the 1940 Act as non-diversified, open-end management investment
companies.
Investment objectives for each Fund are as follows: the Capital
Appreciation Fund, the International Equity Fund and the Japan OTC Fund seek
long-term capital appreciation; the Emerging Growth Fund seeks maximum capital
appreciation.
The net asset value of each Fund is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Fund's investments are
generally valued at market value, which is currently determined using the last
reported sales price. If no sales are reported, investments are valued at the
last reported bid price. In the absence of market quotations, investments are
generally valued at fair value as determined by or under the direction of the
Fund's governing Board. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost, which attempts to approximate market
value.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate.
Translation gains or losses resulting from changes in the exchange rate during
the reporting period and realized gains and losses on the settlement of foreign
currency transactions are reported in the results of operations for the current
period. The Funds do not isolate that portion of gains and losses on investments
in equity securities which are due to changes in the foreign exchange rate from
that which are due to changes in market prices of equity securities.
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and income tax purposes.
Dividends from net investment income are declared and paid semiannually for
all Funds. Distributions of net realized capital gains, if any, are declared
annually. However, to the extent that a net realized capital gain can be reduced
by a capital loss carryover, such gain will not be distributed. Income and
capital gain distributions are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
Each Fund intends to continue to comply with the special provisions of the
Internal Revenue Code available to investment companies and therefore no Federal
income tax provision is required.
28
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Costs incurred by the Japan OTC Fund in connection with its organization
have been deferred and are being amortized over a period of five years from the
date the Japan OTC Fund commenced its operations.
Each Fund may enter into repurchase agreement transactions. Under the terms
of a typical repurchase agreement, a Fund acquires an underlying security
subject to an obligation of the seller to repurchase. The value of the
underlying security collateral will be maintained at an amount at least equal to
the total amount of the purchase obligation, including interest. The collateral
is in the Fund's possession.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Counsellors'), a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as
each Fund's investment adviser. For its investment advisory services,
Counsellors receives the following fees based on each Fund's average daily net
assets:
<TABLE>
<CAPTION>
FUND ANNUAL RATE
- --------------------------------- ----------------------------------
<S> <C>
Capital Appreciation .70% of average daily net assets
Emerging Growth .90% of average daily net assets
International Equity 1.00% of average daily net assets
Japan OTC 1.25% of average daily net assets
</TABLE>
For the six months ended April 30, 1995, investment advisory fees, waivers
and reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
FUND ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- ------------------------------------------ ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Capital Appreciation $ 572,180 $ 0 $ 572,180 $ 0
Emerging Growth 1,428,874 0 1,428,874 0
International Equity 8,871,020 0 8,871,020 0
Japan OTC 141,840 (141,840) 0 116,312
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Counsellors pays SPARX USA a fee at an annual rate of .625% of the average daily
net assets of the Japan OTC Fund. No compensation is payable by the Japan OTC
Fund to SPARX USA for its sub-investment advisory services.
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Counsellors, and PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary of PNC
Bank Corp. ('PNC'), serve as each Fund's co-administrators. For its
administrative services, CFSI receives a fee calculated at an annual rate of
.10% of each Fund's average daily net assets. For the six months ended April 30,
1995, administrative services fees earned by CFSI were as follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 81,740
Emerging Growth 158,764
International Equity 887,102
Japan OTC 11,347
</TABLE>
29
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
For the six months ended April 30, 1995, administrative services fees
earned by PFPC were as follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 81,740
Emerging Growth 158,764
International Equity 629,511
Japan OTC 42,500
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Counsellors, serves as each Fund's distributor. No compensation is payable by
the Capital Appreciation Fund, the Emerging Growth Fund or the International
Equity Fund to CSI for distribution services. For distribution services with
respect to the Common Shares of the Japan OTC Fund, CSI receives a fee at an
annual rate of .25% of the Japan OTC Fund's average daily net assets
attributable to the Common Shares; no compensation is payable to CSI with
respect to the Fund's Advisor Shares. For the six months ended April 30, 1995,
CSI earned $28,368 in distribution fees.
3. INVESTMENTS IN SECURITIES
For the six months ended April 30, 1995, purchases and sales of investment
securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Capital Appreciation $132,677,612 $117,699,248
Emerging Growth 191,272,370 144,738,127
International Equity 550,909,981 176,630,818
Japan OTC 23,632,862 13,544,562
</TABLE>
At April 30, 1995, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
depreciation from investments for those securities having an excess of cost over
value (based on cost for Federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
- --------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
Capital Appreciation $ 35,905,406 $ (2,026,288) $ 33,879,118
Emerging Growth 69,461,748 (7,067,044) 62,394,704
International Equity 174,273,357 (142,868,247) 31,405,110
Japan OTC 1,197,112 (1,147,261) 49,851
</TABLE>
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund and the Japan OTC Fund may enter into forward
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the
30
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. Each Fund may enter into forward
contracts for hedging purposes or to increase income and total return. The
forward currency contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
At April 30, 1995, the International Equity Fund had the following open
forward currency contract and had recorded an unrealized loss of $1,662,070:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- ---------- ------------------------ ---------------------------
<S> <C> <C>
06/21/95 55,000,000 U.S. Dollars 4,725,050,000 Japanese Yen
</TABLE>
At April 30, 1995, the Japan OTC Fund had the following open forward
currency contract and had recorded an unrealized gain of $13,751:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- ---------- ------------------------ ---------------------------
<S> <C> <C>
05/31/95 23,000,000 U.S. Dollars 1,922,340,000 Japanese Yen
</TABLE>
5. CAPITAL SHARE TRANSACTIONS; ADVISOR SHARES
The Emerging Growth Fund, the International Equity Fund and the Japan OTC
Fund are each authorized to issue three billion full and fractional shares of
capital stock, $.001 par value per share, of which one billion shares are
designated Advisor Shares. The Capital Appreciation Fund is authorized to issue
an unlimited number of full and fractional shares of beneficial interest, $.001
par value per share, of which one billion shares are classified as Advisor
Shares. Advisor Shares are identical to Common Shares in all respects except
that Advisor Shares are sold to institutions ('Service Organizations') that
perform certain distribution, shareholder servicing, accounting and/or
administrative services for their customers who are beneficial owners of Advisor
Shares. Advisor Shares bear the fees paid pursuant to a distribution plan
adopted by each Fund in an amount not to exceed .75% (on an annualized basis) of
the average daily net asset value of the shares held by the Service
Organizations for the benefit of their customers and enjoy certain exclusive
voting rights on matters relating to those fees.
With respect to Advisor Shares, Service Organizations earned the following
shareholder servicing fees for the six months ended April 30, 1995:
<TABLE>
<CAPTION>
FUND SHAREHOLDER SERVICING FEES
- ----------------------------------------------- --------------------------
<S> <C>
Capital Appreciation $ 20,418
Emerging Growth 188,426
International Equity 532,559
</TABLE>
31
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Advisor Shares Common Shares Advisor Shares
-------------------------- -------------------------- -------------------------- --------------------------
For the Six For the Six For the Six For the Six
Months Ended For the Months Ended For the Months Ended For the Months Ended For the
April 30, Year Ended April 30, Year Ended April 30, Year Ended April 30, Year Ended
1995 October 31, 1995 October 31, 1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994 (Unaudited) 1994 (Unaudited) 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold 2,912,613 2,958,494 78,480 290,193 3,619,699 6,133,751 1,394,795 2,233,737
Shares issued to
shareholders on
reinvestment of
dividends 818,282 920,210 46,554 61,526 15,653 506,720 0 80,473
Shares redeemed (2,028,054 ) (3,126,497 ) (58,310) (460,020 ) (2,361,976 ) (2,859,413 ) (162,815 ) (517,898 )
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease) in
shares
outstanding 1,702,841 752,207 66,724 (108,301 ) 1,273,376 3,781,058 1,231,980 1,796,312
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Proceeds from
sale of shares $38,700,495 $41,570,590 $1,042,176 $ 4,046,941 $81,131,951 $132,922,995 $30,592,833 $47,890,275
Reinvested
dividends 10,187,616 12,945,690 575,876 863,477 347,867 11,015,146 0 1,743,241
Net asset value
of shares
redeemed (26,954,367 ) (43,449,501 ) (766,250) (6,401,999 ) (51,476,215 ) (61,126,667 ) (3,444,995 ) (10,641,050 )
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease) from
capital share
transactions $21,933,744 $11,066,779 $ 851,802 $(1,491,581 ) $30,003,603 $82,811,474 $27,147,838 $38,992,466
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
6. NET ASSETS
Net Assets at April 30, 1995, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Advisor Shares Total Common Shares Advisor Shares Total
------------- -------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed, net $140,449,920 $8,912,717 $149,362,637 $228,499,590 $ 87,395,078 $315,894,668
Accumulated net investment
income (loss) 377,867 (334) 377,533 0 0 0
Accumulated net realized
gain (loss) from security
transactions 6,503,951 (48,729) 6,455,222 7,352,467 1,270,253 8,622,720
Net unrealized appreciation
(depreciation) from
investments and foreign
currency related items 33,776,938 102,180 33,879,118 53,373,929 9,060,159 62,434,088
------------- -------------- ------------ ------------- -------------- ------------
Net assets $181,108,676 $8,965,834 $190,074,510 $289,225,986 $ 97,725,490 $386,951,476
------------- -------------- ------------ ------------- -------------- ------------
------------- -------------- ------------ ------------- -------------- ------------
</TABLE>
32
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
Common Shares Advisor Shares
----------------------------- ---------------------------
For the Six For the Six
Months Ended For the Months Ended For the
April 30, Year Ended April 30, Year Ended
1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994
------------ -------------- ------------ ------------
<S> <C> <C> <C>
41,252,304 64,218,907 4,502,485 7,956,088
2,339,190 147,031 329,647 6,879
(19,160,200) (11,861,720) (224,062) (795,406)
------------ -------------- ------------ ------------
24,431,294 52,504,218 4,608,070 7,167,561
------------ -------------- ------------ ------------
------------ -------------- ------------ ------------
$745,654,489 $1,275,306,263 $80,443,400 $155,433,660
43,415,366 2,820,903 6,088,579 129,869
(341,896,486) (233,614,600) (4,083,193) (15,435,478)
------------ -------------- ------------ ------------
$447,173,369 $1,044,512,566 $82,448,786 $140,128,051
------------ -------------- ------------ ------------
------------ -------------- ------------ ------------
<CAPTION>
JAPAN OTC FUND
Common Shares Advisor Shares
----------------------------------- ----------------------------------
For the Period For the Period
For the Six September 30, 1994 For the Six September 30, 1994
Months Ended (Commencement of Months Ended (Commencement of
April 30, Operations) Through April 30, Operations) Through
1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994
------------- ------------------- ------------ -------------------
<S> <C> <C> <C>
2,027,520 2,025,697 0 15
0 0 0 0
(657,861) (18,605) 0 0
------------- ---------- - ---
1,369,659 2,007,092 0 15
------------- ---------- - ---
------------- ---------- - ---
$ 17,783,234 $20,287,008 $0 $ 150
0 0 0 0
(5,837,595) (185,101) 0 0
------------- ---------- - ---
$ 11,945,639 $20,101,907 $0 $ 150
------------- ---------- - ---
------------- ---------- - ---
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Shares Advisor Shares Total Common Shares Advisor Shares Total
-------------- -------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$1,815,331,961 $262,660,894 $2,077,992,855 $28,492,692 $1,028 $28,493,720
8,381,424 977,793 9,359,217 0 0 0
(54,458,264) (7,888,102) (62,346,366) (1,955,020) (93) (1,955,113)
27,448,056 3,115,443 30,563,499 34,958 (34) 34,924
-------------- -------------- -------------- ------------- ------ -----------
$1,796,703,177 $258,866,028 $2,055,569,205 $26,572,630 $ 901 $26,573,531
-------------- -------------- -------------- ------------- ------ -----------
-------------- -------------- -------------- ------------- ------ -----------
</TABLE>
33
- --------------------------------------------------------------------------------
STATEMENT OF DIFFERENCES
The divided by symbol will be expressed as ....................... [div]
<PAGE>C-1
PART C
OTHER INFORMATION
WARBURG, PINCUS JAPAN OTC FUND, INC.
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part B:
(1) Financial Statements included in Part A:
(a) Financial Highlights
(2) Audited Financial Statements included in Part B:
(a) Report of Coopers & Lybrand L.L.P., Independent
Auditors
(b) Schedule of Investments at October 31, 1994
(c) Statement of Assets and Liabilities at
October 31, 1994
(d) Statement of Operations+
(e) Statement of Changes in Net Assets+
(f) Financial Highlights+
(g) Notes to Financial Statements
+ For the period September 30, 1994 (commencement
of operations) through October 31, 1994.
(3) Unaudited Financial Statements included in Part B:
(a) Schedule of Investments at April 30, 1995
(b) Statement of Assets and Liabilities at April 30,
1995
(c) Statement of Operations for the six months ended
April 30, 1995
(d) Statement of Changes in Net Assets for the
period September 30, 1994 through October 31,
1994 and for the six months ended April 30, 1995
(e) Financial Highlights (for a share of the Fund
outstanding throughout each period) for the
period September 30, 1994 through October 31,
1994 and for the six months ended April 30, 1995
(f) Notes to Financial Statements
<PAGE>C-2
(b) Exhibits:
1(a) Articles of Incorporation.
(b) Articles Supplementary.
2(a) By-Laws.
(b) Amendment to By-Laws.
3 Not applicable.
4 Forms of Share Certificates.*
5(a) Investment Advisory Agreement.
(b) Forms of Sub-Investment Advisory Agreement.
6 Form of Distribution Agreement.**
7 Not applicable.
8 Form of Custodian Agreement, as amended.***
9(a) Form of Transfer Agency Agreement.***
(b) Form of Counsellors Service Co-Administration Agreement.***
(c) Form of PFPC Co-Administration Agreement.****
______________________
* Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-1A of
Warburg, Pincus Post-Venture Capital Fund, Inc. filed on
September 22, 1995 (Securities Act File No. 33-61225).
** Contained in Exhibit No. 15 hereto.
*** Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A of Warburg,
Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125;
EDGAR Accession No. 950117-95-221).
**** Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A of
Counsellors International Equity Fund, Inc. filed on September 22, 1995
(Securities Act File No. 33-27031).
<PAGE>C-3
10(a) Opinion of Willkie Farr & Gallagher.*****
(b) Consent of Willkie Farr & Gallagher.
(c) Consent of Hamada & Matsumoto.
11(a) Consent of Coopers & Lybrand L.L.P.
12 Not applicable.
13 Form of Purchase Agreement.
14 Retirement Plans.******
15(a) Form of Shareholder Services and Distribution Plan.*
(b) Form of Shareholder Services Plan.****
(c) Form of Distribution Agreement.*
(d) Form of Distribution Plan.****
(e) Form of Rule 18f-3 Plan.*
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to
semiannual financials (Common Shares).
(b) Financial Data Schedule relating to
semiannual financials (Advisor Shares).
_______________
***** Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 29, 1994.
****** Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A for Warburg, Pincus Managed Bond
Trust, filed on February 28, 1995 (Securities Act File No. 33-73672).
<PAGE>C-4
Item 25. Persons Controlled by or Under Common Control with Registrant
Warburg, Pincus Counsellors, Inc. ("Counsellors"), Registrant's
investment adviser, may be deemed a controlling person of Registrants because
it possesses or shares investment or voting power with respect to more than
25% of the outstanding securities of Registrant. E.M. Warburg, Pincus & Co.,
Inc. ("EMW") controls Counsellors through its ownership of a class of voting
preferred stock of Counsellors. John L. Furth, director of the Fund, and
Lionel I. Pincus, Chairman of the Board and Chief Executive Officer of EMW,
may be deemed to be controlling persons of the Fund because they may be deemed
to possess or share investment power over shares owned by clients of
Counsellors and certain other entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of August 31, 1995
-------------- ------------------------
Shares of beneficial interest,
par value $.001 per share 1,631
Shares of beneficial interest,
par value $.001 per share
- Series 1 0
Shares of beneficial interest,
par value $.001 per share
- Series 2 (Advisor Shares) 4
Item 27. Indemnification
Registrant, officers and directors of Counsellors, of Counsellors
Securities Inc. ("Counsellors Securities") and of Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Registration Statement of Warburg,
Pincus Post-Venture Capital Fund, Inc., filed on July 21, 1995 (EDGAR
Accession No. 899140-95-149).
<PAGE>C-5
Item 28. Business and Other Connections of Investment Adviser
Counsellors, a wholly owned subsidiary of Warburg, Pincus
Counsellors G.P., acts as investment adviser to Registrant. Counsellors
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 28 of officers and directors of
Counsellors, together with information as to their other business, profession,
vocation or employment of a substantial nature during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by
Counsellors (SEC File No. 801-07321).
SPARX Investment & Research, USA, Inc. ("SPARX"), a wholly owned
subsidiary of SPARX Asset Management Co., Ltd. ("SPARX Management"), acts as
sub-investment adviser to Registrant. SPARX is an independent investment
advisory company owned by its president and founder, Shuhei Abe. The list
required by this Item 28 of officers and directors of SPARX, together with
information as to their other business, profession, vocation or employment of
a substantial nature during the past two years, is incorporated by reference
to Schedules A and D of Form ADV filed by SPARX (SEC File No. 801-47433).
Item 29. Principal Underwriter
(a) Counsellors Securities will act as distributor for Registrant.
Counsellors Securities currently acts as distributor for Warburg, Pincus
Capital Appreciation Fund; Warburg, Pincus Cash Reserve Fund; Warburg, Pincus
Emerging Growth Fund; Warburg, Pincus Emerging Markets Fund; Warburg, Pincus
Fixed Income Fund; Warburg, Pincus Global Fixed Income Fund; Warburg, Pincus
Institutional Fund, Inc.; Warburg, Pincus Intermediate Maturity Government
Fund; Warburg, Pincus International Equity Fund; Warburg, Pincus New York
Intermediate Municipal Fund; Warburg, Pincus Post-Venture Capital Fund;
Warburg, Pincus New York Tax Exempt Fund; Warburg, Pincus Short-Term Tax-
Advantaged Bond Fund; The RBB Fund, Inc. and Warburg, Pincus Trust.
(b) For information relating to each director, officer or partner
of Counsellors Securities, reference is made to Form BD (SEC File No. 8-32482)
filed by Counsellors Securities under the Securities Exchange Act of 1934, as
amended.
<PAGE>C-6
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Japan OTC Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, by-laws and minute books)
(2) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-administrator)
(3) PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as co-administrator)
(4) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
(5) Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as investment adviser)
(6) SPARX Investment & Research, USA, Inc.
413 Seaside Avenue
Honolulu, Hawaii 96815
(records relating to its function as sub-investment adviser)
(7) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian, transfer agent
and dividend disbursing agent)
Item 31. Management Services
Not applicable.
<PAGE>C-7
Item 32. Undertakings
(a) Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of Registrant's Registration Statement under
the Act.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
(c) Registrant hereby undertakes to call a meeting of its
shareholders for the purpose of voting upon the question of removal of a
director or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares. Registrant
undertakes further, in connection with the meeting, to comply with the
provisions of Section 16(c) of the Investment Company Act of 1940, as amended,
relating to communications with the shareholders of certain common-law trusts.
<PAGE>C-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and the State of New York,
on the 20th day of September, 1995.
WARBURG, PINCUS JAPAN OTC FUND, INC.
By: /s/Richard H. King
Richard H. King
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John L. Furth Chairman of the Board and September 20, 1995
John L. Furth Director
/s/ Richard H. King President September 20, 1995
Richard H. King
/s/ Stephen Distler Vice President and Chief September 20, 1995
Stephen Distler Financial Officer
/s/ Howard Conroy Vice President, Treasurer September 20, 1995
Howard Conroy and Chief Accounting
Officer
/s/ Richard N. Cooper Director September 20, 1995
Richard N. Cooper
/s/ Donald J. Donahue Director September 20, 1995
Donald J. Donahue
/s/ Jack W. Fritz Director September 20, 1995
Jack W. Fritz
</TABLE>
<PAGE>C-9
/s/ Thomas A. Melfe Director September 20, 1995
Thomas A. Melfe
/s/ Alexander B. Trowbridge Director September 20, 1995
Alexander B. Trowbridge
<PAGE>
INDEX TO EXHIBITS
1(a) Articles of Incorporation.
(b) Articles Supplementary.
2(a) By-Laws.
(b) Amendment to By-Laws.
3 Not applicable.
4 Forms of Share Certificates.*
5(a) Form of Investment Advisory Agreement.
(b) Form of Sub-Investment Advisory Agreement.
6 Distribution Agreement.**
7 Not applicable.
8 Form of Custodian Agreement, as amended.***
9(a) Form of Transfer Agency Agreement.***
(b) Form of Counsellors Service Co-Administration Agreement.***
(c) Form of PFPC Co-Administration Agreement.****
______________________
* Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-1A of
Warburg, Pincus Post-Venture Capital Fund, Inc. filed on
September 22, 1995 (Securities Act File No. 33-61225).
** Contained in Exhibit No. 15 hereto.
*** Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A of Warburg,
Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125;
EDGAR Accession No. 950117-95-221).
**** Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A of
Counsellors International Equity Fund, Inc. filed on September 22, 1995
(Securities Act File No. 33-27031).
<PAGE>
10(a) Opinion of Willkie Farr & Gallagher.*****
(b) Consent of Willkie Farr & Gallagher.
(c) Consent of Hamada & Matsumoto.
11(a) Consent of Coopers & Lybrand L.L.P.
12 Not applicable.
13 Form of Purchase Agreement.
14 Retirement Plans.******
15(a) Form of Shareholder Services and Distribution Plan.*
(b) Form of Shareholder Services Plan.****
(c) Form of Distribution Agreement.*
(d) Form of Distribution Plan.****
(e) Form of Rule 18f-3 Plan.*
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to
semiannual financials (Common Shares).
(b) Financial Data Schedule relating to
semiannual financials (Advisor Shares).
_______________
***** Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 29, 1994.
****** Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A for Warburg, Pincus Managed Bond
Trust, filed on February 28, 1995 (Securities Act File No. 33-73672).
<PAGE>1
ARTICLES OF INCORPORATION
OF
WARBURG, PINCUS JAPAN OTC FUND, INC.
ARTICLE I
The undersigned, Janna Manes, whose post office address is c/o
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022, being at least 18 years of age, does hereby act as an
incorporator and forms a corporation under the Corporations and Associations
Article of the Annotated Code of Maryland ("Maryland Corporation Law").
ARTICLE II
NAME
The name of the corporation is Warburg, Pincus Japan OTC Fund, Inc.
(the "Corporation").
ARTICLE III
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts,
on such terms and conditions, for such purposes and for such amount or kind of
consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold,
dispose of, resell, transfer, reissue or cancel (all without the vote or
consent of the stockholders of the Corporation) shares of its capital stock,
in any manner and to the extent now or hereafter permitted by law and by these
Articles of Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary,
<PAGE>2
incidental, appropriate or desirable for the accomplishment of all or any of
the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by
Maryland Corporation Law now or hereafter in force, and the enumeration of
the foregoing shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation
in the State of Maryland is c/o The Corporation Trust Company Incorporated, 32
South Street, Baltimore Maryland 21202. The name and address of the resident
agent of the Corporation in the State of Maryland is The Corporation Trust
Company Incorporated, a Maryland corporation, 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) (A) The total number of shares of capital stock that the
Corporation shall have authority to issue is three billion (3,000,000,000)
shares, of the par value of one tenth of one cent ($.001) per share and of the
aggregate par value of three million dollars ($3,000,000), all of which three
billion (3,000,000,000) shares are designated Common Stock.
(B) One billion ($1,000,000,000) shares of Common Stock have been
divided into and classified initially as a series of Common Stock, designated
Common Stock - Series 2 ("Series 2 Shares").
(C) Each Series 2 Share will have the same preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as every other share of
Common Stock, except that, subject to the provisions of any governing order,
rule or regulation issued pursuant to the Investment Company Act of 1940, as
amended (the "1940 Act"):
(i) Series 2 Shares will share equally with Common Stock
other than Series 2 Shares ("Other Shares") in the income, earnings
and profits derived from investment and reinvestment of the assets
belonging to the Corporation and will be charged equally with Other
Shares with the liabilities and
<PAGE>3
expenses of the Corporation, except that Series 2 Shares will bear
the expense of payments made pursuant to any shareholder services
plan and/or distribution plan adopted by the Corporation, to
institutions or other entities under any agreements entered into
between the Corporation and institutions or other entities
providing for services by the institutions or other entities to
their customers who beneficially own Series 2 Shares;
(ii) On any matter submitted to a vote of shareholders of
the Corporation that pertains to the agreements or expenses
described in clause (i) above (or to any plan adopted by the
Corporation relating to said agreements or expenses), only Series 2
Shares will be entitled to vote, except that if said matter affects
Other Shares, Other Shares will also be entitled to vote, and in
such case Series 2 Shares will be voted in the aggregate together
with such Other Shares and not by series except where otherwise
required by law. Series 2 Shares will not be entitled to vote on
any matter that does not affect Series 2 Shares (except where
otherwise required by law) even though the matter is submitted to a
vote of the holders of Other Shares; and
(iii) The Board of Directors of the Corporation in its
sole discretion may determine whether a matter affects a particular
class or series of Corporation shares.
(2) Any fractional share shall carry proportionately the rights of
a whole share including, without limitation, the right to vote and the right
to receive dividends. A fractional share shall not, however, have the right
to receive a certificate evidencing it.
(3) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation
and the By-Laws of the Corporation.
(4) No holder of stock of the Corporation by virtue of being such a
holder shall have any right to purchase or subscribe for any shares of the
Corporation's capital stock or any other security that the Corporation may
issue or sell (whether out of the number of shares authorized by these
Articles of Incorporation or out of any shares of the Corporation's capital
stock that the Corporation may acquire) other than a right that the Board of
Directors in its discretion may determine to grant.
<PAGE>4
(5) The Board of Directors shall have authority by resolution to
classify and reclassify any authorized but unissued shares of capital stock
from time to time by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of the capital stock.
(6) Notwithstanding any provision of law requiring any action to be
taken or authorized by the affirmative vote of a greater proportion of the
votes of all classes or of any class of stock of the Corporation, such action
shall be effective and valid if taken or authorized by the affirmative vote of
a majority of the total number of votes entitled to be cast thereon, except as
otherwise provided in these Articles of Incorporation.
(7) The presence in person or by proxy of the holders of one-third
of the shares of stock of the Corporation entitled to vote (without regard to
class) shall constitute a quorum at any meeting of the stockholders, except
with respect to any matter which, under applicable statutes or regulatory
requirements, requires approval by a separate vote of one or more classes of
stock, in which case the presence in person or by proxy of the holders of one-
third of the shares of stock of each class required to vote as a class on the
matter shall constitute a quorum.
ARTICLE VI
REDEMPTION
Each holder of shares of the Corporation's capital stock shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of the holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of the shares as in effect from time to time as may be
determined by or pursuant to the direction of the Board of Directors of the
Corporation in accordance with the provisions of Article VII, subject to the
right of the Board of Directors of the Corporation to suspend the right of
redemption or postpone the date of payment of the redemption price in
accordance with provisions of applicable law. Without limiting the generality
of the foregoing, the Corporation shall, to the extent permitted by applicable
law, have the right at any time to redeem the shares owned by any holder of
capital stock of the Corporation (i) if the redemption is, in the opinion of
the Board of Directors of the Corporation, desirable in order to prevent the
Corporation from being deemed a "personal holding company" within the meaning
<PAGE>5
of the Internal Revenue Code of 1986 or (ii) if the value of the shares in the
account maintained by the Corporation or its transfer agent for any class of
stock for the stockholder is below an amount determined from time to time by
the Board of Directors of the Corporation and the stockholder has been given
at least 60 (sixty) days' written notice of the redemption and has failed to
make additional purchases of shares in an amount sufficient to bring the value
in his account to $2,000 (two thousand dollars) or more before the redemption
is effected by the Corporation. Payment of the redemption price shall be
made in cash by the Corporation at the time and in the manner as may be
determined from time to time by the Board of Directors of the Corporation
unless, in the opinion of the Board of Directors, which shall be conclusive,
conditions exist that make payment wholly in cash unwise or undesirable; in
such event the Corporation may make payment wholly or partly by securities or
other property included in the assets belonging or allocable to the class of
the shares for which redemption is being sought, the value of which shall be
determined as provided herein. The Board of Directors may establish
procedures for redemption of shares.
ARTICLE VII
BOARD OF DIRECTORS
(1) The number of directors constituting the Board of Directors
shall be one or such other number as may be set forth in the By-laws or
determined by the Board of Directors pursuant to the By-laws. The number of
Directors shall at no time be less than the minimum number required under
Maryland Corporation Law. Arnold M. Reichman has been appointed director of
the Corporation to hold office until the first annual meeting of stockholders
or until his successor is elected and qualified.
(2) In furtherance, and not in limitation, of the powers conferred
by the laws of the State of Maryland, the Board of Directors is expressly
authorized:
(i) To make, alter or repeal the By-Laws of the Corporation,
except where such power is reserved by the By-Laws to the stockholders, and
except as otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations the
books and accounts of the Corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or document of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
<PAGE>6
(iii) Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares of the stock of any class
of the Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or classes,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to
authorize and issue obligations of the Corporation, secured and unsecured, as
the Board of Directors may determine, and to authorize and cause to be
executed mortgages and liens upon the real or personal property of the
Corporation.
(v) Notwithstanding anything in these Articles of
Incorporation to the contrary, to establish in its absolute discretion the
basis or method for determining the value of the assets belonging to any
class, the value of the liabilities belonging to any class and the net asset
value of each share of any class of the Corporation's stock.
(vi) To determine in accordance with generally accepted
accounting principles and practices what constitutes net profits, earnings,
surplus or net assets in excess of capital, and to determine what accounting
periods shall be used by the Corporation for any purpose; to set apart out of
any funds of the Corporation's reserves for such purposes as it shall
determine and to abolish the same; to declare and pay any dividends and
distributions in cash, securities or other property from surplus or any funds
legally available therefor, at such intervals as it shall determine; to
declare dividends or distributions by means of a formula or other method of
determination, at meetings held less frequently than the frequency of the
effectiveness of such declarations; and to establish payment dates for
dividends or any other distributions on any basis, including dates occurring
less frequently than the effectiveness of declarations thereof.
(vii) In addition to the powers and authorities granted herein
and by statute expressly conferred upon it, the Board of Directors is
authorized to exercise all powers and do all acts that may be exercised or
done by the Corporation pursuant to the provisions of the laws of the State of
Maryland, these Articles of Incorporation and the By-Laws of the Corporation.
(3) Any determination made in good faith, and in accordance with
generally accepted accounting principles and practices, if applicable, by or
pursuant to the direction of the Board of Directors, with respect to the
amount of assets, obligations or liabilities of the Corporation, as to the
amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the
<PAGE>7
payment of dividends, as to the amount of any reserves or charges set up and
the propriety thereof, as to the time of or purpose for creating reserves or
as to the use, alteration or cancellation of any reserves or charges (whether
or not any obligation or liability for which the reserves or charges have been
created has been paid or discharged or is then or thereafter required to be
paid or discharged), as to the value of any security owned by the Corporation,
the determination of the net asset value of shares of any class of the
Corporation's capital stock, or as to any other matters relating to the
issuance, sale or other acquisition or disposition of securities or shares of
capital stock of the Corporation, and any reasonable determination made in
good faith by the Board of Directors regarding whether any transaction
constitutes a purchase of securities on "margin," a sale of securities
"short," or an underwriting of the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of,
any securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future,
and shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of these Articles
of Incorporation shall be effective to (i) require a waiver of compliance with
any provision of the Securities Act of 1933, as amended, or the 1940 Act, or
of any valid rule, regulation or order of the Securities and Exchange
Commission under those Acts or (ii) protect or purport to protect any director
or officer of the Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE VIII
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by Maryland Corporation Law, no director
or officer of the Corporation shall have any liability to the Corporation or
its stockholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
(2) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by
<PAGE>8
Maryland Corporation Law. The Corporation shall indemnify and advance
expenses to its officers to the same extent as its directors and to such
further extent as is consistent with such law. The board of directors may,
through a by-law, resolution or agreement, make further provisions for
indemnification of directors, officers, employees and agents to the fullest
extent permitted by Maryland Corporation Law.
(3) No provision of this Article VIII shall be effective to protect
or purport to protect any director or officer of the Corporation against any
liability to the Corporation or its stockholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
(4) References to Maryland Corporation Law in this Article VIII are
to the law as from time to time amended. No amendment to the Articles of
Incorporation of the Corporation shall affect any right of any person under
this Article VIII based on any event, omission or proceeding prior to such
amendment.
ARTICLE IX
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its Charter (as defined by Maryland Corporation Law), now or
hereafter authorized by law, including
<PAGE>9
any amendment that alters the contract rights, as expressly set forth in this
Charter, of any outstanding stock.
* * *
IN WITNESS WHEREOF, I have adopted and signed these Articles of
Incorporation and do hereby acknowledge that the adoption and signing are my
act.
By: /s/ Janna Manes
Incorporator
Dated the 25th day of July, 1994
<PAGE>1
ARTICLES SUPPLEMENTARY
OF
WARBURG, PINCUS JAPAN OTC FUND, INC.
WARBURG, PINCUS JAPAN OTC FUND, INC. (the "Fund"), a Maryland
corporation with its principal corporate offices in the State of Maryland in
Baltimore, Maryland, DOES HEREBY CERTIFY:
1. Pursuant to Article V of the Fund's Articles of Incorporation
(the "Articles"), one billion (1,000,000,000) shares of the Fund's authorized
but unissued Common Stock, par value $.001 per share ("Common Stock"), have
been divided into and classified as a series of Common Stock, designated
Common Stock - Series 1 ("Series 1 Shares").
2. Each Series 1 Share will have the same preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as every other share of
Common Stock, irrespective of series, except that, subject to the provisions
of any governing order, rule or regulation issued pursuant to the Investment
Company Act of 1940, as amended:
(i) Series 1 Shares will share equally with Common Stock other
than Series 1 Shares ("Non-Series 1 Shares") in the income, earnings
and profits derived from investment and reinvestment of the assets
belonging to the Fund and will be charged equally with Non-Series 1
Shares with the liabilities and expenses of the Fund, except that
Series 1 Shares will bear the expense of payments made pursuant to
any shareholder services plan and/or distribution plan adopted by
the Fund to institutions or other entities under any agreements
entered into between the Fund and institutions or other entities
providing for services by the institutions or other entities to
their customers who beneficially own Series 1 Shares;
(ii) On any matter submitted to a vote of shareholders of the
Fund that pertains to the agreements or expenses described in clause
(i) above (or to any plan adopted by the Fund relating to said
agreements or expenses), only Series 1 Shares will be entitled to
vote, except that if said matter affects Non-Series 1 Shares, Non-
Series 1 Shares will also be entitled to vote, and in such case
Series 1 Shares will be voted in the aggregate together with such
Non-Series 1 Shares and not by series except where otherwise
required by law. Series 1 Shares will not be entitled to vote on
any matter that does not affect Series 1 Shares (except where
otherwise required by law) even
<PAGE>2
though the matter is submitted to a vote of the holders of Non-Series 1
Shares; and
(iii) The Board of Directors of the Fund in its sole discretion
may determine whether a matter affects a particular class or series
of Fund shares.
3. Series 1 Shares have been classified by the Fund's Board of
Directors under the authority contained in the Articles.
IN WITNESS WHEREOF, the undersigned have executed these Articles
Supplementary on behalf of Warburg, Pincus Japan OTC Fund, Inc. and
acknowledge that it is the act and deed of the Fund and state, under penalty
of perjury, to the best of the knowledge, information and belief of each of
them, the matters contained herein with respect to the approval thereof are
true in all material respects.
Dated: August 16 , 1995 WARBURG, PINCUS JAPAN OTC
FUND, INC.
By:/s/Howard Conroy
Name: Howard Conroy
Title: Vice-President
ATTEST:
/s/ Eugene P. Grace
Name:Eugene P. Grace
Title: Secretary
<PAGE>1
BY-LAWS
OF
WARBURG, PINCUS JAPAN OTC FUND, INC.
A Maryland Corporation
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings. No annual meeting of the stockholders of
the Warburg, Pincus Japan OTC Fund, Inc. (the "Corporation") shall be held in
any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "1940 Act") unless
otherwise determined by the Board of Directors. An annual meeting may be held
at any place within the United States as may be determined by the Board of
Directors and as shall be designated in the notice of the meeting, at the time
specified by the Board of Directors. Any business of the Corporation may be
transacted at an annual meeting without being specifically designated in the
notice unless otherwise provided by statute, the Corporation's Articles of
Incorporation or these By-Laws.
SECTION 2. Special Meetings. Special meetings of the stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Articles of Incorporation, may be held at any place within the
United States, and may be called at any time by the Board of Directors or by
the President, and shall be called by the President or Secretary at the
request in writing of a majority of the Board of Directors or at the request
in writing of stockholders entitled to cast at least 10% (ten percent) of the
votes entitled to be cast at the meeting upon payment by such stockholders to
the Corporation of the reasonably estimated cost of preparing and mailing a
notice of the meeting (which estimated cost shall be provided to such
stockholders by the Secretary of the Corporation). Notwithstanding the
foregoing, unless requested by stockholders entitled to cast a majority of the
votes entitled to be cast at the meeting, a special meeting of the
stockholders need not be called at the request of stockholders to consider any
matter which is substantially the same as a matter voted on at any special
meeting of the stockholders held during the preceding 12 (twelve) months. A
written request shall state the purpose or purposes of the proposed meeting.
SECTION 3. Notice of Meetings. Written or printed notice of the
purpose or purposes and of the time and place of every meeting of the
stockholders shall be given by the Secretary of the Corporation to each
stockholder of record entitled to vote at
<PAGE>2
the meeting, by placing the notice in the mail at least ten days, but not more
than 90 (ninety) days, prior to the date designated for the meeting addressed
to each stockholder at his address appearing on the books of the Corporation
or supplied by the stockholder to the Corporation for the purpose of notice.
The notice of any meeting of stockholders may be accompanied by a form of
proxy approved by the Board of Directors in favor of the actions or persons as
the Board of Directors may select. Notice of any meeting of stockholders
shall be deemed waived by any stockholder who attends the meeting in person or
by proxy, or who before or after the meeting submits a signed waiver of notice
that is filed with the records of the meeting.
SECTION 4. Quorum. Except as otherwise provided by statute or by the
Corporation's Articles of Incorporation, the presence in person or by proxy of
stockholders of the Corporation entitled to cast at least one-third of the
votes to be cast shall constitute a quorum at each meeting of the stockholders
and all questions shall be decided by majority of the votes cast (except with
respect to the election of directors, which shall be by a plurality of votes
cast). In the absence of a quorum, the stockholders present in person or by
proxy, by majority vote and without notice other than by announcement, may
adjourn the meeting from time to time as provided in Section 5 of this Article
I until a quorum shall attend. The stockholders present at any duly organized
meeting may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum. The absence
from any meeting in person or by proxy of holders of the number of shares of
stock of the Corporation in excess of a majority that may be required by
Maryland law, the 1940 Act, or any other applicable statute, the Corporation's
Articles of Incorporation or these By-Laws, for action upon any given matter
shall not prevent action at the meeting on any other matter or matters that
may properly come before the meeting, so long as there are present, in person
or by proxy, holders of the number of shares of stock of the Corporation
required for action upon the other matter or matters.
SECTION 5. Adjournment. Any meeting of the stockholders may be
adjourned from time to time, without notice other than by announcement at the
meeting at which the adjournment is taken. At any adjourned meeting at which
a quorum shall be present any action may be taken that could have been taken
at the meeting originally called. A meeting of the stockholders may not be
adjourned without further notice to a date more than 120 (one hundred twenty)
days after the original record date determined pursuant to Section 9 of this
Article I.
SECTION 6. Organization. At every meeting of the stockholders, the
Chairman of the Board, or in his absence or inability to act, the President,
or in his absence or inability
<PAGE>3
to act, a Vice President, or in the absence or inability to act of the
Chairman of the Board, the President and all the Vice Presidents, a chairman
chosen by the stockholders, shall act as Chairman of the meeting. The
Secretary, or in his absence or inability to act, a person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes of the meeting.
SECTION 7. Order of Business. The order of business at all meetings
of the stockholders shall be as determined by the chairman of the meeting.
SECTION 8. Voting. Except as otherwise provided by statute or the
Corporation's Articles of Incorporation, each holder of record of shares of
stock of the Corporation having voting power shall be entitled at each meeting
of the stockholders to one vote for every share of stock standing in his name
on the records of the Corporation as of the record date determined pursuant to
Section 9 of this Article I.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by the
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of 11 (eleven) months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases in which the proxy states that
it is irrevocable and in which an irrevocable proxy is permitted by law.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute
or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, and shall
state the number of shares voted.
SECTION 9. Fixing of Record Date. The Board of Directors may set a
record date for the purpose of determining stockholders entitled to vote at
any meeting of the stockholders. The record date for a particular meeting
shall be not more than 90 (ninety) nor fewer than ten days before the date of
the meeting. All persons who were holders of record of shares as of the
record date of a meeting, and no others, shall be entitled to vote at such
meeting and any adjournment thereof.
SECTION 10. Inspectors. The Board of Directors may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at the meeting
or at any adjournment of the meeting. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
meeting
<PAGE>4
may, and on the request of any stockholder entitled to vote at the meeting
shall, appoint inspectors. Each inspector, before entering upon the discharge
of his duties, shall take and sign an oath to execute faithfully the duties of
inspector at the meeting with strict impartiality and according to the best of
his ability. The inspectors shall determine the number of shares outstanding
and the voting power of each share, the number of shares represented at the
meeting, the existence of a quorum and the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the result, and do those acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting or any stockholder entitled to vote at
the meeting, the inspectors shall make a report in writing of any challenge,
request or matter determined by them and shall execute a certificate of any
fact found by them. No director or candidate for the office of director shall
act as inspector of an election of directors. Inspectors need not be
stockholders of the Corporation.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Corporation's Articles of Incorporation,
any action required to be taken at any meeting of stockholders, or any action
that may be taken at any meeting of the stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (a) a unanimous written consent
that sets forth the action and is signed by each stockholder entitled to vote
on the matter and (b) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote at the
meeting.
SECTION 12. Notice of Stockholder Business.
(a) At any annual or special meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual or special meeting business
must be (i) (A) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (B) otherwise properly
brought before the meeting by or at the direction of the Board of Directors,
or (iii) subject to the provisions of Section 13 of this Article I, otherwise
properly brought before the meeting by a stockholder and (B) a proper subject
under applicable law for stockholder action.
(b) For business to be properly brought before an annual or special
meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the
<PAGE>5
Corporation. To be timely, any such notice must be delivered to or mailed and
received at the principal executive offices of the Corporation not later than
60 (sixty) days prior to the date of the meeting; provided, however, that if
less than 70 (seventy) days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, any such notice by a stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which notice of the date of the annual or
special meeting was given or such public disclosure was made.
(c) Any such notice by a stockholder shall set forth as to each matter
the stockholder proposes to bring before the annual or special meeting (i) a
brief description of the business desired to be brought before the annual or
special meeting and the reasons for conducting such business at the annual or
special meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (iii) the
class and number of shares of the capital stock of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
(d) Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at any annual or special meeting except in
accordance with the procedures set forth in this Section 12. The chairman of
the annual or special meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Section 12, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be considered or transacted.
SECTION 13. Stockholder Business not Eligible for Consideration.
(a) Notwithstanding anything in these By-Laws to the contrary, any
proposal that is otherwise properly brought before an annual or special
meeting by a stockholder will not be eligible for consideration by the
stockholders at such annual or special meeting if such proposal is
substantially the same as a matter properly brought before such annual or
special meeting by or at the direction of the Board of Directors of the
Corporation. The chairman of such annual or special meeting shall, if the
facts warrant, determine and declare that a stockholder proposal is
substantially the same as a matter properly brought before the meeting by or
at the direction of the Board of Directors, and, if he should so determine, he
shall so declare to the meeting and any such stockholder proposal shall not be
considered at the meeting.
<PAGE>6
(b) This Section 13 shall not be construed or applied to make
ineligible for consideration by the stockholders at any annual or special
meeting any stockholder proposal required to be included in the Corporation's
proxy statement relating to such meeting pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule
thereto.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. Except as otherwise provided in the
Corporation's Articles of Incorporation, the business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
All powers of the Corporation may be exercised by or under authority of the
Board of Directors except as conferred on or reserved to the stockholders by
law, by the Corporation's Articles of Incorporation or by these By-Laws.
SECTION 2. Number of Directors. The number of directors shall be
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number
of directors shall in no event be fewer than one nor more than 15 (fifteen).
Any vacancy created by an increase in directors may be filled in accordance
with Section 6 of this Article II. No reduction in the number of directors
shall have the effect of removing any director from office prior to the
expiration of his term unless the director is specifically removed pursuant to
Section 5 of this Article II at the time of the decrease. A director need not
be a stockholder of the Corporation, a citizen of the United States or a
resident of the State of Maryland.
SECTION 3. Election and Term of Directors. The term of office of each
director shall be from the time of his election and qualification until his
successor shall have been elected and shall have qualified, or until his
death, or until his resignation or removal as provided in these By-laws, or as
otherwise provided by statute or the Corporation's Articles of Incorporation.
SECTION 3.1 Director Nominations.
(a) Only persons who are nominated in accordance with the procedures
set forth in this Section 3.1 shall be eligible for election or re-election as
directors. Nominations of persons for election or re-election to the Board of
Directors of the Corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors or by any stockholder of the
Corporation who is entitled to vote for the election of such
<PAGE>7
nominee at the meeting and who complies with the notice procedures set forth
in this Section 3.1.
(b) Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice delivered in
writing to the Secretary of the Corporation. To be timely, any such notice by
a stockholder must be delivered to or mailed and received at the principal
executive offices of the Corporation not later than 60 (sixty) days prior to
the meeting; provided, however, that if less than 70 (seventy) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, any such notice by a stockholder to be timely must be so
received not later than the close of business on the 10th (tenth) day
following the day on which notice of the date of the meeting was given or such
public disclosure was made.
(c) Any such notice by a stockholder shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or re-election
as a director, (A) the name, age, business address and residence address of
such person, (B) the principal occupation or employment of such person, (C)
the class and number of shares of the capital stock of the Corporation which
are beneficially owned by such person and (D) any other information relating
to such person that is required to be disclosed in solicitations of proxies
for the election of directors pursuant to Regulation 14A under the Exchange
Act or any successor regulation thereto (including without limitation such
persons' written consent to being named in the proxy statement as a nominee
and to serving as a director if elected and whether any person intends to seek
reimbursement from the Corporation of the expenses of any solicitation of
proxies should such person be elected a director of the Corporation); and (ii)
as to the stockholder giving the notice (A) the name and address, as they
appear on the Corporation's books, of such stockholder and (B) the class and
number of shares of the capital stock of the Corporation which are
beneficially owned by such stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which
pertains to the nominee.
(d) If a notice by a stockholder is required to be given pursuant to
this Section 3.1, no person shall be entitled to receive reimbursement from
the Corporation of the expenses of a solicitation of proxies for the election
as a director of a person named in such notice unless such notice states that
such reimbursement will be sought from the Corporation. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 3.1. The chairman of
the meeting shall, if the
<PAGE>8
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the procedures prescribed by the By-Laws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded for all purposes.
SECTION 4. Resignation. A director of the Corporation may resign at
any time by giving written notice of his resignation to the Board of Directors
or the Chairman of the Board or to the President or the Secretary of the
Corporation. Any resignation shall take effect at the time specified in it
or, should the time when it is to become effective not be specified in it,
immediately upon its receipt. Acceptance of a resignation shall not be
necessary to make it effective unless the resignation states otherwise.
SECTION 5. Removal of Directors. Any director of the Corporation may
be removed by the stockholders with or without cause at any time by a vote of
a majority of the votes entitled to be cast for the election of directors.
SECTION 6. Vacancies. Subject to the provisions of the 1940 Act, any
vacancies in the Board of Directors, whether arising from death, resignation,
removal or any other cause except an increase in the number of directors,
shall be filled by a vote of the majority of the Board of Directors then in
office even though that majority is less than a quorum, provided that no
vacancy or vacancies shall be filled by action of the remaining directors if,
after the filling of the vacancy or vacancies, fewer than two-thirds of the
directors then holding office shall have been elected by the stockholders of
the Corporation. A majority of the entire Board then in office may fill a
vacancy which results from an increase in the number of directors. In the
event that at any time a vacancy exists in any office of a director that may
not be filled by the remaining directors, a special meeting of the
stockholders shall be held as promptly as possible and in any event within 60
(sixty) days, for the purpose of filling the vacancy or vacancies. Any
director elected or appointed to fill a vacancy shall hold office until a
successor has been chosen and qualifies or until his earlier resignation or
removal.
SECTION 7. Place of Meetings. Meetings of the Board may be held at
any place that the Board of Directors may from time to time determine or that
is specified in the notice of the meeting.
SECTION 8. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at the time and place determined by the
Board of Directors.
<PAGE>9
SECTION 9. Special Meetings. Special meetings of the Board of
Directors may be called by two or more directors of the Corporation or by the
Chairman of the Board or the President.
SECTION 10. Notice of Special Meetings. Notice of each special
meeting of the Board of Directors shall be given by the Secretary as
hereinafter provided. Each notice shall state the time and place of the
meeting and shall be delivered to each director, either personally or by
telephone or other standard form of telecommunication, at least 24
(twenty-four) hours before the time at which the meeting is to be held, or by
first-class mail, postage prepaid, addressed to the director at his residence
or usual place of business, and mailed at least three days before the day on
which the meeting is to be held.
SECTION 11. Waiver of Notice of Meetings. Notice of any special
meeting need not be given to any director who shall, either before or after
the meeting, sign a written waiver of notice that is filed with the records of
the meeting or who shall attend the meeting.
SECTION 12. Quorum and Voting. One-third (but not fewer than two
unless there be only one director) of the members of the entire Board of
Directors shall be present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at the meeting, and except
as otherwise expressly required by statute, the Corporation's Articles of
Incorporation, these By-Laws, the 1940 Act, or any other applicable statute,
the act of a majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board. In the absence of a quorum
at any meeting of the Board, a majority of the directors present may adjourn
the meeting to another time and place until a quorum shall be present. Notice
of the time and place of any adjourned meeting shall be given to the directors
who were not present at the time of the adjournment and, unless the time and
place were announced at the meeting at which the adjournment was taken, to the
other directors. At any adjourned meeting at which a quorum is present, any
business may be transacted that might have been transacted at the meeting as
originally called.
SECTION 13. Organization. The Board of Directors may, by resolution
adopted by a majority of the entire Board, designate a Chairman of the Board,
who shall preside at each meeting of the Board. In the absence or inability
of the Chairman of the Board to act, the President, or, in his absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside at the meeting. The
Secretary, or, in his absence or inability to act, any person appointed by the
chairman, shall act as secretary of the meeting and keep the minutes thereof.
<PAGE>10
SECTION 14. Committees. The Board of Directors may designate one or
more committees of the Board of Directors, each consisting of two or more
directors. To the extent provided in the resolution, and permitted by law,
the committee or committees shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it. Any committee or committees shall have the name
or names determined from time to time by resolution adopted by the Board of
Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required. The members of a
committee present at any meeting, whether or not they constitute a quorum, may
appoint a director to act in the place of an absent member.
SECTION 15. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions of the 1940 Act, any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee of the
Board may be taken without a meeting if all members of the Board or committee,
as the case may be, consent thereto in writing, and the writing or writings
are filed with the records of the Board's or such committee's meetings.
SECTION 16. Telephone Conference. Members of the Board of Directors
or any committee of the Board may participate in any Board or committee
meeting by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time. Participation by such means shall constitute presence in
person at the meeting.
SECTION 17. Compensation. Each director shall be entitled to receive
compensation, if any, as may from time to time be fixed by the Board of
Directors, including a fee for each meeting of the Board or any committee
thereof, regular or special, he attends. Directors may also be reimbursed by
the Corporation for all reasonable expenses incurred in traveling to and from
the place of a Board or committee meeting.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 1. Number and Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents and may also appoint any other officers,
agents and employees it deems necessary or proper. Any two or more offices
may be held by the same person, except the offices
<PAGE>11
of President and Vice President, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity. Officers shall be elected by
the Board of Directors, each to hold office until his successor shall have
been duly elected and shall have qualified, or until his death, or until his
resignation or removal as provided in these By-Laws. The Board of Directors
may from time to time elect, or designate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one
or more Assistant Treasurers and one or more Assistant Secretaries) and such
agents as may be necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
SECTION 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Board of
Directors, the Chairman of the Board, the President or the Secretary. Any
resignation shall take effect at the time specified therein or, if the time
when it shall become effective is not specified therein, immediately upon its
receipt. Acceptance of a resignation shall not be necessary to make it
effective unless the resignation states otherwise.
SECTION 3. Removal of Officer, Agent or Employee. Any officer, agent
or employee of the Corporation may be removed by the Board of Directors with
or without cause at any time, and the Board may delegate the power of removal
as to agents and employees not elected or appointed by the Board of Directors.
Removal shall be without prejudice to the person's contract rights, if any,
but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
SECTION 4. Vacancies. A vacancy in any office whether arising from
death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office that shall be vacant, in the
manner prescribed in these By-Laws for the regular election or appointment to
the office.
SECTION 5 Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer with respect to other officers under his control.
SECTION 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in an amount and with any
surety or sureties as the Board may require.
<PAGE>12
SECTION 7. President. The President shall be the chief executive
officer of the Corporation. In the absence or inability of the Chairman of
the Board to act (or if there is none), the President shall preside at all
meetings of the stockholders and of the Board of Directors. The President
shall have, subject to the control of the Board of Directors, general charge
of the business and affairs of the Corporation, and may employ and discharge
employees and agents of the Corporation, except those elected or appointed by
the Board, and he may delegate these powers.
SECTION 8. Vice President. Each Vice President shall have the powers
and perform the duties that the Board of Directors or the President may from
time to time prescribe.
SECTION 9. Treasurer. Subject to the provisions of any contract that
may be entered into with any custodian pursuant to authority granted by the
Board of Directors, the Treasurer shall have charge of all receipts and
disbursements of the Corporation and shall have or provide for the custody of
the Corporation's funds and securities; he shall have full authority to
receive and give receipts for all money due and payable to the Corporation,
and to endorse checks, drafts and warrants, in its name and on its behalf and
to give full discharge for the same; he shall deposit all funds of the
Corporation, except those that may be required for current use, in such banks
or other places of deposit as the Board of Directors may from time to time
designate; and, in general, he shall perform all duties incident to the office
of Treasurer and such other duties as may from time to time be assigned to him
by the Board of Directors or the President.
SECTION 10. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board of Directors, the committees
of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to
be executed on behalf of the Corporation under its seal;
<PAGE>13
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board of Directors or the President.
SECTION 11. Delegation of Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board may confer for the time being the
powers or duties, or any of them, of such officer upon any other officer or
upon any director.
ARTICLE IV
STOCK
SECTION 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon specific written request to such person as
may be designated by the Corporation to have a certificate or certificates, in
a form approved by the Board, representing the number of shares of stock of
the Corporation owned by him; provided, however, that certificates for
fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of the
Corporation by the Chairman of the Board, President or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer and sealed with the seal of the Corporation. Any or all of the
signatures or the seal on the certificate may be facsimiles. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate shall be issued,
it may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar were still in office at the date of issue.
SECTION 2. Books of Account and Record of Stockholders. There shall
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. There shall be made available upon request of any
stockholder, in accordance with Maryland law, a record containing the number
of shares of stock issued during a specified period not to exceed 12 (twelve)
months and the consideration received by the Corporation for each such share.
SECTION 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of
<PAGE>14
the Corporation only by the registered holder thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary or with a transfer agent or transfer clerk, and on surrender of the
certificate or certificates, if issued, for the shares properly endorsed or
accompanied by a duly executed stock transfer power and the payment of all
taxes thereon. Except as otherwise provided by law, the Corporation shall be
entitled to recognize the exclusive right of a person in whose name any share
or shares stand on the record of stockholders as the owner of the share or
shares for all purposes, including, without limitation, the rights to receive
dividends or other distributions and to vote as the owner, and the Corporation
shall not be bound to recognize any equitable or legal claim to or interest in
any such share or shares on the part of any other person.
SECTION 4. Regulations. The Board of Directors may make any
additional rules and regulations, not inconsistent with these By-Laws, as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation. It may appoint, or
authorize any officer or officers to appoint, one or more transfer agents or
one or more transfer clerks and one or more registrars and may require all
certificates for shares of stock to bear the signature or signatures of any of
them.
SECTION 5. Stolen, Lost, Destroyed or Mutilated Certificates. The
holder of any certificate representing shares of stock of the Corporation
shall immediately notify the Corporation of its theft, loss, destruction or
mutilation and the Corporation may issue a new certificate of stock in the
place of any certificate issued by it that has been alleged to have been
stolen, lost or destroyed or that shall have been mutilated. The Board may,
in its discretion, require the owner (or his legal representative) of a
stolen, lost, destroyed or mutilated certificate: to give to the Corporation
a bond in a sum, limited or unlimited, and in a form and with any surety or
sureties, as the Board in its absolute discretion shall determine, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged theft, loss or destruction or the mutilation of any
such certificate, or issuance of a new certificate. Anything herein to the
contrary notwithstanding, the Board of Directors, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under Maryland law.
SECTION 6. Fixing of Record Date for Dividends, Distributions, etc.
The Board may fix, in advance, a date not more than 90 (ninety) days preceding
the date fixed for the payment of any dividend or the making of any
distribution or the allotment of rights to subscribe for securities of the
Corporation, or for the delivery of evidences of rights or
<PAGE>15
evidences of interests arising out of any change, conversion or exchange of
common stock or other securities, as the record date for the determination of
the stockholders entitled to receive any such dividend, distribution,
allotment, rights or interests, and in such case only the stockholders of
record at the time so fixed shall be entitled to receive such dividend,
distribution, allotment, rights or interests.
SECTION 7. Information to Stockholders and Others. Any stockholder of
the Corporation or his agent may inspect and copy during the Corporation's
usual business hours the Corporation's By-Laws, minutes of the proceedings of
its stockholders, annual statements of its affairs and voting trust agreements
on file at its principal office.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification of Directors and Officers. Any person who
was or is a party or is threatened to be made a party in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is a
current or former director or officer of the Corporation, or is or was serving
while a director or officer of the Corporation at the request of the
Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the full extent permissible
under the Corporations and Associations Articles of the Annotated Code of
Maryland ("Maryland Corporation Law"), the Securities Act of 1933 (the
"Securities Act") and the 1940 Act, as such statutes are now or hereafter in
force, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such
person would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office ("disabling conduct").
SECTION 2. Advances. Any current or former director or officer of the
Corporation claiming indemnification within the scope of this Article V shall
be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with proceedings to which he is a party
in the manner and to the full extent permissible under Maryland Corporation
Law, the Securities Act and the 1940 Act, as such
<PAGE>16
statutes are now or hereafter in force; provided however, that the person
seeking indemnification shall provide to the Corporation a written affirmation
of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written undertaking to
repay any such advance unless it is ultimately determined that he is entitled
to indemnification, and provided further that at least one of the following
additional conditions is met: (a) the person seeking indemnification shall
provide a security in form and amount acceptable to the Corporation for his
undertaking; (b) the Corporation is insured against losses arising by reason
of the advance; or (c) a majority of a quorum of directors of the Corporation
who are neither "interested persons" as defined in Section 2(a)(19) of the
1940 Act, nor parties to the proceeding ("disinterested non-party directors"),
or independent legal counsel, in a written opinion, shall determine, based on
a review of facts readily available to the Corporation at the time the advance
is proposed to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
SECTION 3. Procedure. At the request of any current or former
director or officer, or any employee or agent whom the Corporation proposes to
indemnify, the Board of Directors shall determine, or cause to be determined,
in a manner consistent with Maryland Corporation Law, the Securities Act and
the 1940 Act, as such statutes are now or hereafter in force, whether the
standards required by this Article V have been met; provided, however, that
indemnification shall be made only following: (a) a final decision on the
merits by a court or other body before whom the proceeding was brought that
the person to be indemnified was not liable by reason of disabling conduct or
(b) in the absence of such a decision, a reasonable determination, based upon
a review of the facts, that the person to be indemnified was not liable by
reason of disabling conduct, by (i) the vote of a majority of a quorum of
disinterested non-party directors or (ii) an independent legal counsel in a
written opinion.
SECTION 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or directors of the Corporation may be
indemnified, and reasonable expenses may be advanced to such employees or
agents, in accordance with the procedures set forth in this Article V to the
extent permissible under the 1940 Act, the Securities Act and Maryland
Corporation Law, as such statutes are now or hereafter in force, and to such
further extent, consistent with the foregoing, as may be provided by action of
the Board of Directors or by contract.
SECTION 5. Other Rights. The indemnification provided by this Article
V shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may
be entitled under any insurance
<PAGE>17
or other agreement, vote of stockholders or disinterested directors or
otherwise, both as to action by a director or officer of the Corporation in
his official capacity and as to action by such person in another capacity
while holding such office or position, and shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 6. Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or who, while a
director, officer, employee or agent of the Corporation, is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, enterprise or employee benefit plan, against any liability
asserted against and incurred by him in any such capacity, or arising out of
his status as such, provided that no insurance may be obtained by the
Corporation for liabilities against which it would not have the power to
indemnify him under this Article V or applicable law.
SECTION 7. Constituent, Resulting or Surviving Corporations. For the
purposes of this Article V, references to the "Corporation" shall include all
constituent corporations absorbed in a consolidation or merger as well the
resulting or surviving corporation so that any person who is or was a
director, officer, employee or agent of a constituent corporation or is or was
serving at the request of a constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under this Article V with
respect to the resulting or surviving corporation as he would if he had served
the resulting or surviving corporation in the same capacity.
ARTICLE VI
SEAL
The seal of the Corporation shall be circular in form and shall bear
the name of the Corporation, the year of its incorporation, the words
"Corporate Seal" and "Maryland" and any emblem or device approved by the Board
of Directors. The seal may be used by causing it or a facsimile to be
impressed or affixed or in any other manner reproduced, or by placing the word
"(seal)" adjacent to the signature of the authorized officer of the
Corporation.
<PAGE>18
ARTICLE VII
FISCAL YEAR
The Corporation's fiscal year shall be fixed by the Board of Directors.
ARTICLE VIII
AMENDMENTS
These By-Laws may be amended or repealed by the affirmative vote of a
majority of the Board of Directors at any regular or special meeting of the
Board of Directors, subject to the requirements of the 1940 Act.
As adopted, July 27, 1994
<PAGE>1
ACTION TAKEN BY UNANIMOUS WRITTEN CONSENT OF THE
BOARD OF DIRECTORS OF
WARBURG, PINCUS JAPAN OTC FUND, INC.
The undersigned, being all of the Directors of WARBURG, PINCUS JAPAN OTC
FUND, INC., a Maryland corporation (the "Corporation"), hereby consent to the
adoption of the following resolutions:
RESOLVED, that Article I, Section 2 of the By-Laws of the Corporation be
amended to read in its entirety:
SECTION 2. Special Meetings. Special meetings of the
stockholders for any purpose or purposes, unless otherwise
prescribed by statute or by the Corporation's Articles of
Incorporation, may be held at any place within the United
States, and may be called at any time by the Board of
Directors or by the President, and shall be called by the
President or Secretary at the request in writing of a
majority of the Board of Directors or at the request in
writing of stockholders entitled to cast at least 10% (ten
percent) of the votes entitled to be cast at the meeting.
A written request shall state the purpose or purposes of
the proposed meeting.
This written consent is being executed in accordance with Section 2-408
of the Maryland General Corporation Law and will be filed with the minutes of
the proceedings of the Corporation.
Dated as of October 3, 1994
/s/ Lionel I. Pincus
Lionel I. Pincus
/s/ Richard N. Cooper
Richard N. Cooper
/s/ Donald J. Donahue
Donald J. Donahue
<PAGE>2
/s/ Jack W. Fritz
Jack W. Fritz
/s/ John L. Furth
John L. Furth
/s/ Thomas A. Melfe
Thomas A. Melfe
/s/ Alexander B. Trowbridge
Alexander B. Trowbridge
<PAGE>1
INVESTMENT ADVISORY AGREEMENT
September 27, 1994
Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Dear Sirs:
Warburg, Pincus Japan OTC Fund, Inc. (the "Fund"), a corporation
organized under the laws of the State of Maryland, herewith confirms its
agreement with Warburg, Pincus Counsellors, Inc. (the "Adviser") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and reinvesting
in investments of the kind and in accordance with the limitations specified in
its Articles of Incorporation, as may be amended from time to time, and in its
Prospectus and Statement of Additional Information as from time to time in
effect, and in such manner and to such extent as may from time to time be
approved by the Board of Directors of the Fund. Copies of the Fund's
Prospectus, Statement of Additional Information and Articles of Incorporation,
as may be amended from time to time, have been or will be submitted to the
Adviser. The Fund desires to employ and hereby appoints the Adviser to act as
its investment adviser. The Adviser accepts the appointment and agrees to
furnish the services for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision and direction of the Board of Directors
of the Fund, the Adviser will act in strict conformity with the Fund's
Articles of Incorporation, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, as the same may from time to time be amended,
to provide the services to the Fund described herein in accordance with the
Fund's investment objective and policies as stated in the Fund's Prospectus
and Statement of Additional Information as from time to time in effect. In
connection therewith, the Adviser will be responsible for:
(i) supervising, monitoring and evaluating the services provided by
the Fund's sub-investment adviser (the "Sub-Adviser") under the sub-
investment advisory agreement between the Fund, the Adviser and the
Sub-Adviser (the "Sub-Investment Advisory Agreement");
<PAGE>2
(ii) determining the portion of the Fund's assets to be invested
from time to time in debt securities and managing the investment of
those assets;
(iii) determining the portion of the Fund's assets to be invested
from time to time in short-term money market instruments and
managing the investment of those assets;
(iv) in consultation with the Sub-Adviser, determining the portion
of the Fund's assets to be invested outside Japan and the
percentages to be invested in particular countries and industries;
(v) placing purchase and sale orders in connection with debt
securities and money market investments;
(vi) unless delegated to the Sub-Adviser, effect spot and forward
currency transactions on behalf of the Fund;
(vii) monitoring the Fund's expenses;
(viii) exercising voting rights in respect of U.S. portfolio
securities held by the Fund;
(ix) monitoring compliance with all applicable investment policies
and restrictions of the Securities and Exchange Commission (the
"SEC") and other regulatory authorities;
(x) maintaining a list of approved brokers and dealers through which
the Adviser and the Sub-Adviser may execute the Fund's portfolio
transactions;
(xi) employing a support staff of management personnel to provide
the services to the Fund as described herein; and
(xii) providing the Fund with office space, furnishings and
equipment.
In addition to the provision of the foregoing services, the Adviser will
furnish the Fund with whatever statistical information the Fund may reasonably
request with respect to U.S. securities that the Fund may hold or contemplate
purchasing.
3. Brokerage
In executing transactions for the Fund and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any portfolio
transaction, the Adviser will consider all factors it deems relevant
including, but not limited to, breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
<PAGE>3
broker or dealer and the reasonableness of any commission for the specific
transaction and for transactions executed through the broker or dealer in the
aggregate. In selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, the Adviser
may consider the brokerage and research services (as those terms are defined
in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.
4. Information Provided to the Fund
The Adviser will keep the Fund informed of developments materially
affecting the Fund, and will, on its own initiative, furnish the Fund from
time to time with whatever information the Adviser believes is appropriate for
this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2, 3 and 4 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to protect
the Adviser against any liability to the Fund or to shareholders of the Fund
to which the Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or by reason of the Adviser's reckless disregard of its obligations
and duties under this Agreement.
6. Compensation
(a) In consideration of the services rendered pursuant to this
Agreement, the Fund will pay the Adviser a monthly fee calculated at an annual
rate of 1.25% of the Fund's average daily net assets. The fee for the period
from the date (the "Closing Date") the Fund's initial registration statement
is declared effective by the SEC to the end of the month during which the
Closing Date occurs shall be prorated according to the proportion that such
period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that year shall
be prorated according to the proportion that such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to the Adviser, the
value of the Fund's net assets shall be computed at the times and in the
manner specified in the Fund's Prospectus or Statement of Additional
Information as from time to time in effect.
(b) The Adviser shall pay to the Sub-Adviser the fees payable under
the Sub-Investment Advisory Agreement. In the event
<PAGE>4
that the Sub-Investment Advisory Agreement is terminated, the Adviser shall be
responsible for furnishing to the Fund the services required to be performed
by the Sub-Adviser under the Investment Advisory Agreement or arranging for a
successor sub-investment adviser with respect to such investments on terms and
conditions acceptable to the Fund and subject to the requirements of the
Investment Company Act of 1940, as amended.
7. Expenses
The Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear certain
other expenses to be incurred in its operation, including: investment
advisory and administration fees; taxes, interest, brokerage fees and
commissions, if any; fees of Directors of the Fund who are not officers,
directors, or employees of the Adviser, the Sub-Adviser or any of their
respective affiliates; fees of any pricing service employed to value shares of
the Fund; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's
proportionate share of insurance premiums; outside auditing, pricing and legal
expenses; organizational expenses; costs of maintenance of the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of the shareholders of the Fund and of the officers or Board of
Directors of the Fund; and any extraordinary expenses.
The Fund will be responsible for nonrecurring expenses which may
arise, including costs of litigation to which the Fund is a party and of
indemnifying officers and Directors of the Fund with respect to such
litigation and other expenses as determined by the Directors.
8. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's administration agreements, but
excluding interest, taxes, brokerage and, if permitted by state securities
commissions, extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, the Adviser will reimburse the Fund
for such excess expense. The Adviser's expense reimbursement obligation will
be limited to the amount of its fees received pursuant to this Agreement.
Such expense reimbursement, if any, will be estimated, reconciled and paid on
an annual basis.
9. Services to Other Companies or Accounts
The Fund understands that the Adviser now acts, will continue to act
and may act in the future as investment adviser to
<PAGE>5
fiduciary and other managed accounts and to one or more other investment
companies or series of investment companies, and the Fund has no objection to
the Adviser so acting, provided that whenever the Fund and one or more other
accounts or investment companies or portfolios advised by the Adviser have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a formula believed to be equitable to
each entity. The Fund recognizes that in some cases this procedure may
adversely affect the size of the position obtainable for the Fund. In
addition, the Fund understands that the persons employed by the Adviser to
assist in the performance of the Adviser's duties hereunder will not devote
their full time to such service and nothing contained herein shall be deemed
to limit or restrict the right of the Adviser or any affiliate of the Adviser
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
10. Term of Agreement
This Agreement shall continue until April 17, 1995 and thereafter
shall continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually by (a) the Board of
Directors of the Fund or (b) a vote of a "majority" (as defined in the
Investment Company Act of 1940) of the Fund's outstanding voting securities,
provided that in either event the continuance is also approved by a majority
of the Board of Directors who are not "interested persons" (as defined in said
Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is
terminable, without penalty, on sixty (60) days' written notice, by the Board
of Directors of the Fund or by vote of holders of a majority of the Fund's
shares, or upon ninety (90) days' written notice, by the Adviser. This
Agreement will also terminate automatically in the event of its assignment (as
defined in said Act).
11. Representation by the Fund
The Fund represents that a copy of its Articles of Incorporation,
filed on July 26, 1994, together with all amendments thereto, is on file in
the Department of Assessments and Taxation of the State of Maryland.
12. Miscellaneous
The Fund recognizes that directors, officers and employees of the
Adviser may from time to time serve as directors, trustees, officers and
employees of corporations and business trusts (including other investment
companies) and that such other corporations and trusts may include the name
"Warburg, Pincus" as part of their names, and that the Adviser or its
affiliates may enter into advisory or other agreements with such other
corporations and trusts. If the Adviser ceases to act as the
<PAGE>6
investment adviser of the Fund's shares, the Fund agrees that, at the
Adviser's request, the Fund's license to use the words "Warburg, Pincus" will
terminate and that the Fund will take all necessary action to change the name
of the Fund to a name not including the words "Warburg, Pincus."
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS JAPAN OTC FUND,
INC.
By: /s/ Richard H. King
President
Accepted:
WARBURG, PINCUS COUNSELLORS, INC.
By: /s/ Arnold M. Reichman
<PAGE>1
SUB-INVESTMENT ADVISORY AGREEMENT
September 27, 1994
SPARX Investment & Research, USA, Inc.
413 Seaside Avenue
Honolulu, Hawaii 96815
Dear Sirs:
Warburg, Pincus Japan OTC Fund, Inc., a Maryland corporation
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, management investment company (the "Fund"), and
Warburg, Pincus Counsellors, Inc., as investment adviser to the Fund
("Counsellors"), herewith confirms their agreement with SPARX Investment &
Research, USA, Inc. (the "Sub-Adviser") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and reinvesting
in securities of the kind and in accordance with the limitations specified in
its Articles of Incorporation, as may be amended from time to time (the
"Articles"), and in its Prospectus and Statement of Additional Information as
from time to time in effect (the "Prospectus" and "SAI," respectively), and in
such manner and to such extent as may from time to time be approved by the
Board of Directors of the Fund. Copies of the Prospectus, SAI and Articles
have been or will be submitted to the Sub-Adviser. The Fund employs
Counsellors as its investment adviser. Counsellors desires to employ and
hereby appoints the Sub-Adviser to act as its sub-investment adviser with
respect to the Fund's investments in Japan and other Asian countries upon the
terms set forth in this Agreement. The Sub-Adviser accepts the appointment
and agrees to furnish the services set forth below for the compensation
provided for herein.
2. Services as Sub-Investment Adviser
(a) Subject to the supervision and direction of Counsellors, the
Sub-Adviser will provide investment advisory assistance and portfolio
management advice with respect to the Fund's equity investments in Japan and
other Asian countries in accordance with (a) the Articles, (b) the 1940 Act
and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
all applicable Rules and Regulations of the Securities and
<PAGE>2
Exchange Commission (the "SEC") and all other applicable laws and regulations
and (c) the Fund's investment objective and policies as stated in the
Prospectus and SAI. In connection therewith, the Sub-Adviser will:
(i) provide a continuous investment program for the Fund's equity
investments in Japan and other Asian countries, determine the composition
of the equity assets of the Fund's portfolio other than securities of
U.S. issuers, including determination of the purchase, retention or sale
of such equity securities, cash and other equity investments contained in
the portfolio. The Sub-Adviser is hereby authorized to execute, or place
orders for the execution of, all transactions on behalf of the Fund with
respect to its equity investments in Japan and other Asian countries;
(ii) assist the custodian and accounting agent for the Fund in
determining or confirming, consistent with the procedures and policies
stated in the Prospectus and SAI, the value of any non-U.S. portfolio
securities or other assets of the Fund for which the custodian and
accounting agent seek assistance from or identify for review by the Sub-
Adviser;
(iii) identify Japanese regulatory and other Japanese governmental
requirements applicable to the Fund in connection with the Fund's
securities investment program in Japan of which it actually becomes aware
or should reasonably become aware in the course of its activities
hereunder;
(iv) recommend to Counsellors brokers and dealers through which non-
U.S. portfolio transactions may be effected and monitor the execution of
transactions and the settlement and clearance of the Fund's Japanese
securities transactions to the extent practicable;
(v) consult with Counsellors concerning the portion of the Fund's
assets to be invested outside Japan and the percentages to be invested in
particular countries and industries;
(vi) on occasion at the request of Counsellors, effect spot and
forward currency transactions on behalf of the Fund;
(vii) exercise voting rights in respect of non-U.S. portfolio
securities held by the Fund; and
(viii) provide reports to the Fund's Board of Directors for
consideration at quarterly meetings of the Board on the investment
program for the Fund and the issuers and
<PAGE>3
securities represented in the Fund's portfolio, and furnish Counsellors and
the Fund's Board of Directors with such periodic and special reports as the
Fund or Counsellors may reasonably request.
The Sub-Adviser will also provide investment research and credit analysis
concerning the Fund's investments in Japan and other Asian countries. In
addition, the Sub-Adviser will keep the Fund informed of developments
materially affecting the Fund's portfolio investments in Japan and other Asian
countries and shall furnish to Counsellors and the Fund from time to time, on
its own initiative, not less frequently than semiannually, and as Counsellors
or the Fund may request, whatever information Counsellors or the Fund may
request with respect to (A) relevant current conditions in Japan and Asia and
(B) Japanese securities or the securities of issuers located in other Asian
countries that the Fund may hold or contemplate purchasing.
(b) In connection with the performance of the services of the Sub-
Adviser provided for herein, the Sub-Adviser may contract at its own expense
with third parties for the acquisition of research, clerical services and
other administrative services that would not require such parties to be
required to register as an investment adviser under the Advisers Act; provided
that the Sub-Adviser shall remain liable for the performance of its duties
hereunder.
3. Execution of Transactions
(a) The Sub-Adviser will execute transactions for the Fund only
through brokers or dealers appearing on a list of brokers and dealers approved
by Counsellors. In executing transactions for the Fund, selecting brokers or
dealers and negotiating any brokerage commission rates, the Sub-Adviser will
use its best efforts to seek the best overall terms available. In assessing
the best overall terms available for any portfolio transaction, the Sub-
Adviser will consider all factors it deems relevant including, but not limited
to, the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of any commission for the specific transaction and for
transactions executed through the broker or dealer in the aggregate. In
selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, to the extent that the execution
and price offered by more than one broker or dealer are comparable the Sub-
Adviser may consider any brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to
the Sub-Adviser or to Counsellors for use on behalf of Fund or other clients
of the Sub-Adviser or Counsellors.
<PAGE>4
(b) On occasions when the Sub-Adviser deems the purchase or sale of
a security to be in the best interest of the Fund as well as of other
investment advisory clients of the Sub-Adviser, the Sub-Adviser may, to the
extent permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be so sold or purchased with those
of its other clients where such aggregation is not inconsistent with the
policies set forth in the Prospectus and SAI. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in a manner that is fair and
equitable, in the judgment of the Sub-Adviser, in the exercise of its
fiduciary obligations to the Fund and to such other clients, subject to review
by Counsellors and the Fund.
(c) In connection with the purchase and sale of securities for the
Fund, the Sub-Adviser will arrange for the transmission to the Fund's
custodian and co-administrators on a daily basis such confirmation, trade
tickets, and other documents and information, including, but not limited to,
Cusip, Sedol, or other numbers that identify securities to be purchased or
sold on behalf of the Fund, as may be reasonably necessary to enable the
custodian and co-administrators to perform their administrative and
recordkeeping responsibilities with respect to the Fund. With respect to
portfolio securities to be purchased or sold through the Depository Trust
Company or the Philadelphia Depository Trust Company, if any, the Sub-Adviser
will arrange for the automatic transmission of the confirmation of such trades
to the Fund's custodian and co-administrators.
4. Disclosure Regarding the Sub-Adviser
(a) The Sub-Adviser has reviewed the disclosure about the Sub-
Adviser contained in the Fund's registration statement and represents and
warrants that, with respect to such disclosure about the Sub-Adviser or
information related, directly or indirectly, to the Sub-Adviser, such
registration statement contains, as of the date hereof, no untrue statement of
any material fact and does not omit any statement of a material fact which is
required to be stated therein or necessary to make the statements contained
therein not misleading.
(b) The Sub-Adviser agrees to notify Counsellors and the Fund
immediately of any (i) statement contained in the Fund's registration
statement that becomes untrue in any material respect or (ii) omission of a
material fact in the Fund's registration statement which is required to be
stated therein or necessary to make the statements contained therein not
misleading or (iii) any reorganization or change in the Sub-Adviser, including
any change in its ownership or employees.
<PAGE>5
(c) Prior to the Fund or Counsellors or any affiliated person (as
defined in the 1940 Act, an "Affiliate") of either using or distributing sales
literature or other promotional material referring to the Sub-Adviser, the
Sub-Adviser shall have the right to approve the general advertising or
promotional plan pursuant to which such literature or material is being
utilized or distributed; provided that the Sub-Adviser shall be deemed to have
approved such advertising or plan if it has not commented within ten (10)
business days after such material has been sent to it.
(d) The Sub-Adviser has supplied Counsellors and the Fund copies of
its Form ADV with all exhibits and attachments thereto and will hereinafter
supply Counsellors, promptly upon preparation thereof, copies of all
amendments or restatements of such document.
5. Certain Representations and Warranties of the
Sub-Adviser
(a) The Sub-Adviser represents and warrants that it is a duly
registered investment adviser under the Advisers Act, a duly registered
investment adviser in any and all states of the United States in which the
Sub-Adviser is required to be so registered and has obtained all necessary
licenses and approvals in order to perform the services provided in this
Agreement. The Sub-Adviser covenants to maintain all necessary registrations,
licenses and approvals in effect during the term of this Agreement.
(b) The Sub-Adviser represents that it has read and understands the
Prospectus and SAI and warrants that in investing the Fund's assets it will
strictly adhere to the Fund's investment objectives, policies and restrictions
contained therein.
6. Compliance
(a) The Sub-Adviser agrees that it shall immediately notify
Counsellors and the Fund (i) in the event that the SEC or any other regulatory
authority has censured its activities, functions or operations; suspended or
revoked its registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these actions, (ii)
in the event that there is a change in the Sub-Adviser, financial or
otherwise, that adversely affects its ability to perform services under this
Agreement or (iii) upon having a reasonable basis for believing that the
Fund's investment portfolio has ceased to adhere to the Fund's investment
objectives, policies and restrictions as stated in the Prospectus or SAI or is
otherwise in violation of applicable law.
<PAGE>6
(b) Counsellors agrees that it shall immediately notify the Sub-
Adviser in the event that the SEC has censured Counsellors or the Fund; placed
limitations upon either of their activities, functions or operations;
suspended or revoked Counsellor's registration as an investment adviser; or
has commenced proceedings or an investigation that may result in any of these
actions.
(c) The Fund and Counsellors shall be given access to the records
of the Sub-Adviser at reasonable times in order to monitor compliance with the
terms of this Agreement and the rules and regulations applicable to the Sub-
Adviser relating to its providing investment advisory services to the Fund,
including without limitation records relating to trading by employees of the
Sub-Adviser for their own accounts and on behalf of other clients. The Sub-
Adviser agrees to cooperate with the Fund and Counsellors and their
representatives in connection with any such monitoring efforts.
7. Books and Records
(a) In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Sub-Adviser hereby agrees that all records which it maintains
for the Fund are the property of the Fund and further agrees to surrender
promptly to either Counsellors or the Fund any of such records upon the
request of either of them. The Sub-Adviser further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act and to preserve the records
required by Rule 204-2 under the Advisers Act for the period specified
therein.
(b) The Sub-Adviser hereby agrees to furnish to regulatory
authorities having the requisite authority any information or reports in
connection with services that the Sub-Adviser renders pursuant to this
Agreement which may be requested in order to ascertain whether the operations
of the Fund are being conducted in a manner consistent with applicable laws
and regulations.
8. Provision of Information; Proprietary and Confidential Information
(a) Counsellors agrees that it will furnish to the Sub-Adviser
information related to or concerning the Fund that the Sub-Adviser may
reasonably request.
(b) The Sub-Adviser agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Fund all records
and other information relative to the Fund, Counsellors and prior, present or
potential shareholders and not to use such records and information for any
purpose other
<PAGE>7
than performance of its responsibilities and duties hereunder except after
prior notification to and approval in writing of the Fund, which approval
shall not be unreasonably withheld and may not be withheld where the Sub-
Adviser may be exposed to civil or criminal contempt proceedings for failure
to comply or when requested to divulge such information by duly constituted
authorities.
(c) The Sub-Adviser represents and warrants that neither it nor any
affiliate will use the name of the Fund, Counsellors or any of their
affiliates in any prospectus, sales literature or other material in any manner
without the prior written approval of the Fund or Counsellors, as applicable.
(d) Each of the Fund and Counsellors agrees on behalf of itself and
each of its respective employees to take reasonable steps to restrict use of
information and research provided by the Sub-Adviser in the performance of its
duties hereunder to the attainment of the Fund's investment objectives, unless
otherwise agreed in writing by the Sub-Adviser.
9. Standard of Care
The Sub-Adviser (which term, as used in this paragraph shall
include, in addition to the Sub-Adviser itself, directors, officers and
employees of the Sub-Adviser) shall exercise its best judgment in rendering
the services described herein. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund or
Counsellors in connection with the matters to which this Agreement relates,
except for a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services; provided that nothing herein shall
be deemed to protect or purport to protect the Sub-Adviser against any
liability to the Fund, Counsellors or to shareholders of the Fund to which the
Sub-Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or by
reason of the Sub-Adviser's reckless disregard of its obligations and duties
under this Agreement. The Fund and Counsellors understand and agree that the
Sub-Adviser may rely upon information furnished to it reasonably believed by
the Sub-Adviser to be accurate and reliable and, except as herein provided,
the Sub-Adviser shall not be accountable for loss suffered by the Fund by
reason of such reliance of the Sub-Adviser.
10. Indemnification
(a) The Sub-Adviser agrees to indemnify and hold harmless the Fund,
Counsellors, any affiliate of either, and each person, if any, who, within the
meaning of Section 15 of the Securities Act of 1933, as amended (the "1933
Act"), controls
<PAGE>8
("controlling person") either or both of the Fund and Counsellors (all of such
persons being referred to as "Indemnified Persons") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which any Indemnified Person may become subject under the 1933
Act, the 1940 Act, the Advisers Act, the Internal Revenue Code or under any
other statute, at common law or otherwise, arising out of the Sub-Adviser's
responsibilities as Sub-Adviser to the Fund which (i) may be based upon any
misfeasance, malfeasance or nonfeasance by the Sub-Adviser, or any of its
employees or representatives, or any affiliate of or any person acting on
behalf of the Sub-Adviser, (ii) may be based upon a failure to comply with
paragraph 5(b) of this Agreement, or (iii) may be based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement covering the shares of the Fund, or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact known or which should have been known to the Sub-Adviser and was
required to be stated therein or necessary to make the statements therein not
misleading, if such a statement or omission was made in reliance upon
information furnished to Counsellors, the Fund or any affiliate of either by
the Sub-Adviser or any affiliate of the Sub-Adviser; provided that in no case
shall the indemnity in favor of any Indemnified Person be deemed to protect
such persons against any liability to which any such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under this Agreement.
(b) The Sub-Adviser shall not be liable under paragraph 10(a)
herein with respect to any claim made against any Indemnified Person unless
such Indemnified Person shall have notified the Sub-Adviser in writing within
a reasonable time after the summons, notice or other first legal process or
notice giving information of the nature of the claim shall have been served
upon such Indemnified Person (or after such Indemnified Person shall have
received notice of such service on any designated agent), but failure to
notify the Sub-Adviser of any such claim shall not relieve the Sub-Adviser
from any liability which it may have to any Indemnified Person against whom
such action is brought otherwise than on account of this paragraph 10. In
case any such action is brought against any Indemnified Person, the Sub-
Adviser will be entitled to participate, at its own expense, in the defense
thereof or, after notice to the Indemnified Person, to assume the defense
thereof, with counsel satisfactory to the Indemnified Person. If the Sub-
Adviser assumes the defense of any such action and the selection of counsel by
the Sub-Adviser to represent the Sub-Adviser and the Indemnified Person would
result in a conflict of interests and therefore would not, in the reasonable
judgment of the Indemnified Person, adequately represent the interests of the
<PAGE>9
Indemnified Person, the Sub-Adviser will, at its own expense, assume the
defense with counsel to the Sub-Adviser and, also at its own expense, with
separate counsel to the Indemnified Person which counsel shall be satisfactory
to the Sub-Adviser and to the Indemnified Person. The Indemnified Person
shall bear the fees and expenses of any additional counsel retained by it, and
the Sub-Adviser shall not be liable to the Indemnified Person under this
Agreement for any legal or other expenses subsequently incurred by the
Indemnified Person independently in connection with the defense thereof other
than reasonable costs of investigation. The Sub-Adviser shall not have the
right to compromise on or settle the litigation without the prior written
consent of the Indemnified Person if such compromise or settlement results, or
may result, in a finding of wrongdoing on the part of the Indemnified Person.
11. Compensation
In consideration of the services rendered pursuant to this
Agreement, Counsellors will pay the Sub-Adviser a monthly fee calculated at an
annual rate of .625% of the Fund's average daily net assets. The fee for the
period from the date the Fund's initial registration statement is declared
effective by the SEC to the end of the month during which such initial
registration statement is declared effective shall be prorated according to
the proportion that such period bears to the full monthly period. Such fee
shall be paid by Counsellors to the Sub-Adviser within ten (10) business days
after the last day of each month or, upon termination of this Agreement before
the end of a month, within ten (10) business days after the effective date of
such termination. Upon any termination of this Agreement before the end of a
month, the fee for such part of that month shall be prorated according to the
proportion that such period bears to the full monthly period. For the purpose
of determining fees payable to the Sub-Adviser, the value of the Fund's net
assets shall be computed at the times and in the manner specified in the
Prospectus or SAI. The Sub-Adviser shall have no right to obtain compensation
directly from the Fund for services provided hereunder and agrees to look
solely to Counsellors for payment of fees due.
12. Expenses
(a) The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement; provided that the Fund shall
bear all expenses incurred by the Sub-Adviser in connection with the
attendance in person by any employee of the Sub-Adviser, at the request of
Counsellors or the Fund, at any meeting of the Board of Directors of the Fund
to discuss the Fund's investments in Japan and other Asian countries; and
provided further that if attendance at such a meeting is part of a trip to the
United States during which any
<PAGE>10
such employee of the Sub-Adviser transacts business unrelated to the Fund, the
Fund's obligation to pay such expenses shall be prorated according to the
proportion that such Fund-related business bears to the total of the business
transacted during such trip.
(b) The Fund will bear certain other expenses to be incurred in its
operation, including: investment advisory and administration fees; taxes,
interest, brokerage fees and commissions, if any; fees of Directors of the
Fund who are not officers, directors, or employees of the Fund, Counsellors or
the Sub-Adviser or affiliates of any of them; fees of any pricing service
employed to value shares of the Fund; SEC fees, state Blue Sky qualification
fees and any foreign qualification fees; charges of custodians and transfer
and dividend disbursing agents; the Fund's proportionate share of insurance
premiums; outside auditing and legal expenses; costs of maintenance of the
Fund's existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of the shareholders of the Fund and of the officers or Board of
Directors of the Fund; and any extraordinary expenses.
13. Exclusivity
During the term of this Agreement and for a period of one (1) year
commencing on the date of termination of this Agreement, the Sub-Adviser shall
not act as an investment adviser, portfolio manager or in any other capacity
which entails the Sub-Adviser's performing services similar to those provided
in connection with this Agreement for any investment company (as such term is
defined in the 1940 Act) that is publicly offered in the United States other
than the Fund, except as mutually agreed by the parties; provided that if this
Agreement is terminated by either of Counsellors or the Fund, as provided in
paragraph 14 hereof, the restrictions on the Sub-Adviser contained in this
paragraph 13 shall only apply during the term of this Agreement.
14. Term of Agreement
This Agreement shall continue until April 17, 1995 and thereafter
shall continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually by (a) the Board of
Directors of the Fund or (b) a vote of a "majority" (as defined in the 1940
Act) of the Fund's outstanding voting securities, provided that in either
event the continuance is also approved by a majority of the Board of Directors
who are not "interested persons" (as defined the 1940 Act) of any party to
this Agreement, by vote cast in person at a
<PAGE>11
meeting called for the purpose of voting on such approval. This Agreement is
terminable, without penalty, (i) by Counsellors on 60 (sixty) days' written
notice to the Fund and the Sub-Adviser, (ii) by the Board of Directors of the
Fund or by vote of holders of a majority of the Fund's shares on 60 (sixty)
days' written notice to Counsellors and the Sub-Adviser, or (iii) by the Sub-
Adviser upon 90 (ninety) days' written notice to the Fund and Counsellors.
This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act) by any party hereto. In the event of
termination of this Agreement for any reason, all records relating to the Fund
kept by the Sub-Adviser shall promptly be returned to Counsellors or the Fund,
free from any claim or retention of rights in such records by the Sub-Adviser.
In the event this Agreement is terminated or is not approved in the foregoing
manner, the provisions contained in paragraph numbers 4(c), 7, 8, 9, 10 and 13
shall remain in effect.
15. Amendments
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved
by an affirmative vote of (a) the holders of a majority of the outstanding
voting securities of the Fund and (b) the Board of Directors of the Fund,
including a majority of Directors who are not "interested persons" (as defined
in the 1940 Act) of the Fund or of either party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval,
if such approval is required by applicable law.
16. Notices
All communications hereunder shall be given (a) if to the Sub-
Adviser, to the address as set forth on the first page of this Agreement,
telephone: (808) 923-0557, telecopy: (808) 923-0720, (b) if to Counsellors, to
Warburg, Pincus Counsellors, Inc., 466 Lexington Avenue, New York, New York
10017-3147, telephone: (212) 878-0600, telecopy: (212) 878-9351, and (c) if
to the Fund, to Warburg, Pincus Japan OTC Fund, Inc., c/o Warburg Pincus
Funds, 466 Lexington Avenue, New York, New York 10017-3147, telephone: (212)
878-0600, telecopy: (212) 878-9351.
17. Choice of Law
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York in the United States, including choice
of law principles; provided that nothing herein shall be construed in a manner
inconsistent with the 1940
<PAGE>12
Act, the Advisers Act or any applicable rules, regulations or orders of the
SEC.
18. Miscellaneous
(a) The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions herein or otherwise
affect their construction or effect.
(b) If any provision of this Agreement shall be held or made
invalid by a court decision, by statute or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
(c) Nothing herein shall be construed to make the Sub-Adviser an
agent of Counsellors or the Fund.
(d) This Agreement may be executed in counterparts, with the same
effect as if the signatures were upon the same instrument.
<PAGE>13
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS COUNSELLORS, INC.
By: /s/ Eugene P. Grace
WARBURG, PINCUS JAPAN OTC FUND, INC.
By: /s/ Richard H. King
President
Accepted:
SPARX INVESTMENT & RESEARCH, USA, INC.
By: /s/
Authorized Officer
<PAGE>1
CONSENT OF COUNSEL
Warburg, Pincus Japan OTC Fund, Inc.
We hereby consent to being named in the Statement of Additional
Information included in Post-Effective Amendment No. 2 (the "Amendment") to
the Registration Statement on Form N-1A (Securities Act File No. 33-82362,
Investment Company Act File No. 811-8686) of Warburg, Pincus Japan OTC Fund,
Inc. (the "Fund") under the caption "Auditors and Counsel" and to the Fund's
filing a copy of this Consent as an exhibit to the Amendment.
Willkie Farr & Gallagher
September 20, 1995
New York, New York
<PAGE>1
[LETTERHEAD OF HAMADA & MATSUMOTO]
September 18, 1995
Warburg, Pincus Japan OTC Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
We have acted as counsel to Warburg, Pincus Japan OTC Fund, Inc. (the "Fund"),
a corporation organized under the laws of the State of Maryland, as to matters
of Japanese law.
We hereby confirm that the information set forth under the caption "Dividends,
Distributions and Taxes - Special Matters Relating to the Japan OTC Fund" in
the Prospectuses contained in the Fund's Registration Statement on Form N-1A,
as amended (the "Registration Statement"), has been reviewed by us and in our
opinion is correct. In addition, we hereby consent to the reference to us in
the Prospectuses and to the filing of this opinion with the U.S. Securities
and Exchange Commission as an exhibit to the Registration Statement.
Very truly yours,
HAMADA & MATSUMOTO
<PAGE>1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 2 to the
Registration Statement under the Securities Act of 1933 on Form N-1A (File No.
33-82362) of our report dated December 12, 1994 on our audit of the financial
statements and financial highlights of Warburg, Pincus Japan OTC Fund, Inc. We
also consent to the reference to our Firm under the captions "Financial
Highlights" and "Auditors and Counsel."
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 22, 1995
<PAGE>1
PURCHASE AGREEMENT
Warburg, Pincus Japan OTC Fund, Inc. (the "Fund"), a corporation
organized under the laws of the State of Maryland, and Warburg, Pincus
Counsellors, Inc. ("Counsellors") hereby agree as follows:
1. The Fund offers Counsellors and Counsellors hereby purchases
10,000 shares of common stock and 100 shares of Series 2 shares of the Fund
each having a par value of $.001 per share (the "Shares") at a price of $10.00
per Share (these 10,100 shares being the "Initial Shares"). Counsellors
hereby acknowledges receipt of certificates representing the Initial Shares
and the Fund hereby acknowledges receipt from Counsellors of $101,000.00 in
full payment for the Initial Shares.
2. Counsellors represents and warrants to the Fund that the
Initial Shares are being acquired for investment purposes and not for the
purpose of distributing them.
3. Counsellors agrees that if any holder of the Initial Shares
redeems any Initial Share in the Fund before five years after the date upon
which the Fund commences its investment activities, the redemption proceeds
will be reduced by the amount of unamortized organizational expenses, in the
same proportion as the number of Initial Shares being redeemed bears to the
number of Initial Shares outstanding at the time of redemption. The parties
hereby acknowledge that any Shares acquired by Counsellors other than the
Initial Shares have not been acquired to fulfill the requirements of Section
14 of the Investment Company Act of 1940
<PAGE>2
and, if redeemed, their redemption proceeds will not be subject to reduction
based on the unamortized organizational expenses of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day of ______________, 1994.
WARBURG, PINCUS JAPAN OTC FUND, INC.
By:
ATTEST:
WARBURG, PINCUS COUNSELLORS, INC.
By:
ATTEST:
<PAGE>1
Warburg Pincus Funds
Schedule 16 Calculations
Warburg Pincus Japan OTC Fund
For the Period November 1, 1995 to April 30, 1995
Common Shares
Annualized Total Return With Waivers:
((7,970/10,000)[*OMITTED GRAPHIC-SEE FOOTNOTE BELOW] -1) = -36.72%
Annualized Total Return Without Waivers:
((7,888/10,000)[*OMITTED GRAPHIC-SEE FOOTNOTE BELOW] -1) = -38.02%
Series 2 Shares
Annualized Total Return With Waivers:
((7,959/10,000)[*OMITTED GRAPHIC-SEE FOOTNOTE BELOW] -1) = -36.89%
Annualized Total Return Without Waivers:
((7,858/10,000)[*OMITTED GRAPHIC-SEE FOOTNOTE BELOW] -1) = -38.50%
The Schedule for Calculation of Performance Quotations for the
periods ended 10/31/94 is incorporated herein by reference to
Post-Effective Amendment No. 1 to Registrant's Registration Statement.
- --------------------------
* - The graphic omitted above is the exponent 1/.49589
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<NUMBER> 002
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 26070489
<INVESTMENTS-AT-VALUE> 26086413
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<ASSETS-OTHER> 208985
<OTHER-ITEMS-ASSETS> 0
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<OTHER-ITEMS-LIABILITIES> 36528
<TOTAL-LIABILITIES> 329715
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<NET-CHANGE-FROM-OPS> (5250744)
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<DISTRIBUTIONS-OF-INCOME> 0
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<AVERAGE-NET-ASSETS> 1017
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0
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