<PAGE>1
As filed with the U.S. Securities and Exchange Commission
on December 28, 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. 4 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 5 [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
60530118
<PAGE>2
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on December 29, 1995 pursuant to paragraph (b)
[ ] 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 "1940 Act"),
and to the number or amount presently registered is added an indefinite number
or amount of such securities. The Rule 24f-2 Notice for Registrant's fiscal
year ended October 31, 1995 was filed on December 19, 1995.
<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;
Portfolio Investments; Risk
Factors and Special
Considerations; Certain
Investment Strategies; General
Information
5. Management of the Fund . Management of the Funds
6. Capital Stock and Other
Securities . . . . . . . General Information
7. Purchase of Securities
Being Offered . . . . . How to Open an Account; How to
Purchase Shares; Net Asset
Value
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
Part B Statement of Additional
Item No. Information Heading
-------- -----------------------------
10. Cover Page . . . . . . . Cover Page
11. Table of Contents . . . 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 . Investment Policies; See
Prospectuses -- "Portfolio
Transactions and Turnover
Rate"
18. Capital Stock and Other
Securities . . . . . . . Management of the Fund --
Organization of the Fund; See
Prospectuses--"General
Information"
19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . Additional Purchase and
Redemption Information; See
Prospectuses -- "How to Open
an Account," "How to Purchase
Shares," "How to Redeem and
Exchange Shares" and "Net
Asset Value"
<PAGE>5
Part B Statement of Additional
Item No. Information Heading
-------- -----------------------------
20. Tax Status . . . . . . . See Prospectuses--"Dividends,
Distributions and Taxes";
Additional Information
Concerning Taxes
21. Underwriters . . . . . . Investment Policies --
Portfolio Transactions -- 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>
PROSPECTUS
The Fund's Common Share Prospectus is incorporated by reference to
the Prospectus that forms part of Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Warburg, Pincus International Equity
Fund, Inc. (Securities Act File No. 33-27031; Investment Co. Act File No.
811-5765).
<PAGE>
[Logo]
PROSPECTUS
DECEMBER 29, 1995
[ ] WARBURG PINCUS JAPAN OTC FUND
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 27, 1995
WARBURG PINCUS ADVISOR FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
December 29, 1995
PROSPECTUS
Warburg Pincus Advisor Funds are a family of open-end mutual funds that are
offered to investors who wish to buy shares through an investment professional,
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 Advisor
Shares, is offered pursuant to this Prospectus. The Advisor Shares of the Fund,
as well as Advisor Shares of certain other Warburg Pincus-advised funds, are
sold under the name 'Warburg Pincus Advisor Funds.' Individual investors may
purchase Advisor Shares only through institutional shareholder of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries ('Institutions'). The Advisor Shares
impose a 12b-1 fee of up to .75% per annum, which is the economic equivalent of
a sales charge. The Fund's 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, as amended or supplemented from time to time, bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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.
<PAGE>
<PAGE>
THE FUND'S EXPENSES
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See 'General Information.' Because of the higher fees paid by
Advisor Shares, the total return on such shares can be expected to be lower than
the total return on Common Shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price).................................................................................... 0
Redemption Fee (as a percentage of the value of shares redeemed)..................................... 1.00%`D'
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees...................................................................................... .93%
12b-1 Fees........................................................................................... .75%*
Other Expenses....................................................................................... .57%
-----
Total Fund Operating Expenses (after fee waivers)**.................................................. 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
5 years.............................................................................................. $ 120
10 years............................................................................................. $ 258
</TABLE>
- ------------
`D' 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.'
* Current 12b-1 fees are .50% out of a maximum .75% authorized under the
Advisor Shares' Distribution Plan. At least a portion of these fees should be
considered by the investor to be the economic equivalent of a sales charge.
** Management Fees, Other Expenses and Total Fund Operating Expenses are based
on actual expenses for the fiscal year ended October 31, 1995, net of any fee
waivers or expense reimbursements. Without such waivers and/or
reimbursements, Management Fees would have equalled 1.25%, Other Expenses
would have equalled .60%, and Total Fund Operating Expenses would have
equalled 2.60%. The investment adviser and co-administrator are under no
obligation to continue these waivers.
------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an Advisor Shareholder of the Fund. Institutions also
may charge their clients fees in connection with investments in the Advisor
Shares, which fees are not reflected in the table. 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>
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR AN ADVISOR SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information regarding the Fund for the fiscal year ended
October 31, 1995 has been derived from information audited by Coopers & Lybrand
L.L.P., independent auditors, whose report dated December 14, 1995 appears in
the Fund's Statement of Additional Information. Further information about the
performance of the Fund is contained in the annual report, dated October 31,
1995, copies of which may be obtained without charge by calling Warburg Pincus
Advisor Funds at (800) 888-6878.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994
FOR THE YEAR (COMMENCEMENT OF
ENDED OPERATIONS) THROUGH
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- -------------------
<S> <C> <C>
Net Asset Value, Beginning of Period....................................... $ 9.85 $10.00
---------------- -------
Income from Investment Operations
Net Investment Income.................................................... (.02) .00
Net Gains (Losses) from Securities and Foreign Currency Related Items
(both realized and unrealized)........................................ (.75) (.15)
---------------- -------
Total from Investment Operations......................................... .77 (.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............................................. $ 9.08 $ 9.85
---------------- -------
---------------- -------
Total Return............................................................... (7.82%) (15.84%)*
Ratios/Supplemental Data
Net Assets, End of Period (000s)........................................... $ 1 $ 1
Ratios to average daily net assets:
Operating expenses....................................................... 1.31% 1.18%*
Net investment income (loss)............................................. (.19%) .12%*
Decrease reflected in above expense ratios due to waivers/
reimbursements........................................................ 1.83% 4.74%*
Portfolio Turnover Rate.................................................... 82.98% .00%
</TABLE>
- ------------
* Annualized.
3
<PAGE>
<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 'Portfolio Investments' and 'Certain Investment
Strategies' for descriptions of certain types of investments the Fund may make.
The Fund is a non-diversified management investment company that pursues
its investment objective by investing in a portfolio of 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 obligations. 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 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.
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 obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg,
Pincus Counsellors, Inc., the Fund's investment adviser ('Warburg'). Because the
market value of debt obligations can be expected to vary inversely to changes in
prevailing interest rates, investing in debt obligations may provide an
opportunity for capital appreciation when interest rates are expected to
decline. The success of such a strategy is dependent upon Warburg's ability to
accurately forecast changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's Investors Service, Inc. ('Moody's') or Standard &
Poor's Ratings Group ('S&P') or, if unrated, is determined to be of comparable
quality by Warburg. Bonds rated in the fourth highest grade 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
4
<PAGE>
<PAGE>
than is the case with higher grade bonds. Subsequent to its purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
sale of such securities, although Warburg will consider such event in its
determination of whether the Fund should continue to hold the securities. 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 Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in U.S. debt securities and in domestic and
foreign money market obligations, including repurchase agreements.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
circumstances, up to 20% of its total assets in domestic and foreign short-term
(one year or less to maturity) or medium-term (five years or less remaining to
maturity) money market obligations and for temporary defensive purposes may
invest in these securities without limit. These instruments consist of
obligations issued or guaranteed by the U.S. government or a foreign government,
their agencies or instrumentalities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic or foreign banks,
domestic savings and loans and similar institutions) that are high quality
investments or, if unrated, deemed by Warburg to be high quality investments;
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. The Fund may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement,
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. Warburg, acting under the supervision of the
Fund's Board of Directors (the 'Board'), monitors the creditworthiness of those
bank and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate this risk. A repurchase agreement is considered to be a loan under
the Investment Company Act of 1940, as amended (the '1940 Act').
Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, the Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund, Warburg, PFPC Inc.
('PFPC'), the Fund's co-administrator, or SPARX Investment & Research, USA,
Inc., the Fund's sub-investment adviser ('SPARX USA') (each of Warburg and SPARX
USA referred to individually as an 'Adviser'). As a shareholder in any mutual
5
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<PAGE>
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. Subsequent to purchase by the Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Fund should continue to hold the securities. 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
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to the Fund's investments, see 'Portfolio
Investments' beginning at page 4 and 'Certain Investment Strategies' beginning
at page 9.
JAPANESE INVESTMENTS. 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.
JASDAQ traded securities can be volatile, which may result in the Fund's
net asset value fluctuating in response. Trading of equity securities through
the JASDAQ market is conducted by securities firms in Japan, primarily through
an organization which acts as a 'matching agent,' as opposed to a recognized
stock exchange. Consequently, securities traded through JASDAQ may,
6
<PAGE>
<PAGE>
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.
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 December , 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 December , 1995) per share over the prior fiscal
year and net worth of 200 million yen (approximately [$1.92] million as of
December , 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 a recently developed second over-the-counter market
and is under the jurisdiction of JASDAQ, which is overseen by the Japanese
Securities and Exchange Commission. The Frontier Market has less stringent entry
requirements than those described above for JASDAQ and is designed to enable
early stage companies access to capital markets. Frontier Market companies need
not have a history of earnings, provided their spending on research and
development equals at least 3% of revenues. In addition, companies traded
through the Frontier Market are not required to have 2 million shares
outstanding at the time of registration. As a result, investments in companies
traded through the Frontier Market may involve a greater degree of risk than
companies traded through JASDAQ. As of the date of this Prospectus, there were
not yet any registrations on the Frontier Market.
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 is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest.
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 prospec-
7
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<PAGE>
tive 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 28 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.
EMERGING GROWTH AND SMALL COMPANIES. 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. 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. In addition, small-and medium-sized companies are typically
subject to a greater degree of changes in earnings and business prospects than
are larger, more established companies. There is typically less publicly
available information concerning 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.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the '1933 Act'), but that can be sold to 'qualified institutional buyers' in
accordance with Rule 144A under the 1933 Act ('Rule 144A Securities'). The Board
will carefully monitor any investments by the Fund in Rule 144A Securities,
which will be included within the Fund's limit on illiquid securities.
Non-publicly traded securities (including Rule 144A Securities) may involve
a high degree of business and financial risk and may result in substantial
losses. These securities may be less liquid than publicly traded securities, and
the Fund may take longer to liquidate these positions than would be the case for
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected.
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NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the 'Code'), for
qualification as a regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever 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. High portfolio
turnover rates (100% or more) may result in dealer mark ups or underwriting
commissions as well as other transaction costs, including correspondingly higher
brokerage commissions. In addition, short-term gains realized from portfolio
turnover may be taxable to shareholders as ordinary income. See 'Dividends,
Distributions and Taxes -- Taxes' below and 'Investment Policies -- Portfolio
Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by 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 Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, the Fund
is authorized to engage in the following investment strategies: (i) purchasing
securities on a when-issued basis and purchasing or selling securities for
delayed delivery, (ii) lending portfolio securities and (iii) entering into
reverse repurchase agreements and dollar rolls. The Fund may invest up to 5% of
its net assets in each of mortgage-backed securities and asset-backed
securities. The Fund may also invest in zero coupon securities, although the
Fund currently anticipates that during the coming year zero coupon securities
will not exceed 5% of net assets. Detailed information concerning the Fund's
strategies and related risks is contained below and in the Fund's Statement of
Additional Information.
FOREIGN SECURITIES. The Fund 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 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
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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.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of the Advisers,
the Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as 'derivatives,' may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. TRANSACTIONS THAT ARE
NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO
INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by securities and commodities exchanges
and the NASD and by the Code.
Securities and Stock Index Options. The Fund may write 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; the Fund may also utilize up to 10% of its
assets to purchase options on stocks and debt securities that are traded on U.S.
and foreign exchanges, as well as over-the-counter ('OTC') options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option has
the right to purchase the underlying security from the writer. In addition to
purchasing and writing options on securities, the Fund may utilize up to 10% of
its total assets to purchase exchange-listed and OTC put and call options on
stock indexes, and may also write such options. A stock index measures the
movement of a certain group of stocks by assigning relative values to the common
stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
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Futures Contracts and Related Options. The Fund may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the 'CFTC') or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts. Although the Fund is limited in the
amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
Currency Exchange Transactions. The Fund will conduct its currency exchange
transactions either (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on futures contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract. An option on a foreign currency operates
similarly to an option on a security. Risks associated with currency forward
contracts and purchasing currency options are similar to those described in this
Prospectus for futures contracts and securities and stock index options. In
addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events.
Hedging Considerations. The Fund may engage in options, futures and
currency transactions for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. The Fund will engage in hedging transactions only when deemed advisable
by an Adviser, and successful use of hedging transactions will depend on the
Adviser's ability to correctly predict movements in the hedge and the hedged
position and the correlation between them, which could prove to be inaccurate.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or trends.
Additional Considerations. To the extent that the Fund engages in the
strategies described above, the Fund may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the Fund
may be unable to close out an option or futures position without incurring
substantial losses, if at all. The Fund is also subject to the risk of a default
by a counterparty to an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect
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to options written by the Fund on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
and forward currency contracts. The use of these strategies may require that the
Fund maintain cash or certain liquid high-grade debt obligations or other assets
that are acceptable as collateral to the appropriate regulatory authority in a
segregated account with its custodian or a designated sub-custodian to the
extent the Fund's obligations with respect to these strategies are not otherwise
'covered' through ownership of the underlying security, financial instrument or
currency or by other portfolio positions or by other means consistent with
applicable regulatory policies. Segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
INVESTMENT GUIDELINES
The Fund may invest up to 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, and up to an additional 5% of its total assets may be invested in
warrants. The Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that borrowings by the
Fund may not exceed 30% of its total assets, and may pledge its assets to the
extent necessary to secure permitted borrowings. Whenever borrowings (including
reverse repurchase agreements) exceed 5% of the value of the Fund's net assets,
the Fund will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that the Fund has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISERS. The Fund employs Warburg as its investment adviser and
SPARX USA as its sub-investment adviser. Warburg 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. Warburg also employs a
support staff of management personnel to provide services to the Fund and
furnishes the Fund with office space, furnishings and equipment. SPARX USA, in
accordance with the investment objective and policies of the Fund and under the
supervision of Warburg 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 Warburg an advisory fee calculated at an annual rate of 1.25%
of the Fund's average daily net assets, out of which Warburg pays SPARX USA a
fee of .625%. Although this advisory fee is higher than that
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paid by most other investment companies, including money market and fixed income
funds, Warburg believes that it is comparable to fees charged by other mutual
funds with similar policies and strategies. The advisory agreement between the
Fund and Warburg provides that Warburg will reimburse the Fund to the extent
certain expenses that are described in the Statement of Additional Information
exceed applicable state expense limitations. Warburg, 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 paid by the Fund.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of November 30,
1995, Warburg managed approximately $11.9 billion of assets, including
approximately $6.2 billion of assets of twenty-six investment companies or
portfolios. Incorporated in 1970, Warburg is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Warburg through
its ownership of a class of voting preferred stock of Warburg. Warburg G.P. has
no business other than being a holding company of Warburg and its subsidiaries.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.
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 November 30, 1995 had approximately $764
million in assets under management.
PORTFOLIO MANAGERS. Richard H. King, Nicholas P.W. Horsley and Shuhei Abe of
SPARX USA are co-portfolio managers of the Fund, and Toshikatsu Kimura is an
associate portfolio manager. Mr. King, Mr. Horsley and Mr. Abe have been
co-portfolio managers since the Fund's inception.
Mr. King, president of the Fund, 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 Warburg and has been with Warburg since 1993, before which
time he was a director, portfolio manager and analyst at Barclays de Zoete Wedd
in New York City.
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 has been an associate portfolio manager of the Fund
since its inception. 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 Warburg, as a co-
administrator. As co-administrator, Counsellors
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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
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.
The Fund employs PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp., as a co-administrator. As a co-administrator, PFPC calculates the Fund's
net asset value, provides all accounting services for the Fund and assists in
related aspects of the Fund's operations. As compensation, the Fund pays 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.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company ('State
Street') serves as custodian for the Fund's assets and acts as shareholder
servicing agent, transfer agent and dividend disbursing agent for the Fund. It
has delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
('BFDS'), responsibility for most shareholder servicing functions. State
Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Fund. Counsellors Securities is a wholly owned subsidiary of Warburg and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No compensation
is payable by the Advisor Shares to Counsellors Securities for distribution
services.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to parties who support the sale of shares of the Fund, consisting of
securities dealers who have sold Fund shares or others, including banks and
other financial institutions, under special arrangements. In some instances,
these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Individual investors may only purchase Warburg Pincus Advisor Fund shares
through Institutions. The Fund reserves the right to make Advisor Shares
available to other investors in the future. References in this Prospectus to
shareholders or investors also include Institutions which may act 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
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investment requirements and the procedures to be followed to effect purchases,
redemptions and exchanges of Advisor Shares. There is no minimum amount of
initial or subsequent purchases of Advisor Shares imposed on Institutions,
although the Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 888-6878 for instructions, an
Institution should then wire federal funds to Counsellors Securities Inc. using
the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
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 or
Institutions 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 three business days following the day the order is effected. 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 or customers that
invest in the Fund, which are in addition to or different than those described
in this Prospectus, and may charge their clients or customers direct fees.
Certain features of the Fund, such as initial and subsequent investment
minimums, redemption fees and certain trading restrictions, may be modified or
waived in these programs, and administrative charges may be imposed for the
services rendered. Therefore, a client or customer should contact the
organization acting on his behalf concerning the fees (if any) charged in
connection with a purchase or redemption of Fund shares and should read this
Prospectus in
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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) 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. Except as noted above, 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 Warburg, immediate
payment would adversely affect the Fund, the Fund reserves the right to pay the
redemption proceeds within seven days after the redemption order is effected.
Furthermore, the Fund may suspend the right of redemption or postpone the date
of payment upon redemption (as well as suspend or postpone the recordation of an
exchange of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
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
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is currently being waived until 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.
The exchange privilege is available to shareholders residing in any state
in which the Advisor Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Advisor
Shares of the Fund for shares in another Warburg Pincus Advisor Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Advisor Fund, an investor should contact Warburg
Pincus Advisor Funds at (800) 888-6878.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
and net realized short-term and long-term capital gains annually and pays them
in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs the
Fund to pay dividends or distributions in cash, dividends and distributions will
automatically be reinvested in additional 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
additional Advisor Shares. As a general rule, an investor's gain or loss on a
sale or redemption of its Fund shares will be a long- term capital gain or loss
if it has held its shares
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for more than one year and will be a short-term capital gain or loss if it has
held its shares for one year or less. However, any loss realized upon the sale
or redemption of shares within six months from the date of their purchase will
be treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain during such six-month period with
respect to such shares. Investors may be proportionately liable for taxes on
income and gains of the Fund, but investors not subject to tax on their income
will not be required to pay tax on amounts distributed to them. The Fund's
investment activities will not result in unrelated business taxable income to a
tax-exempt investor. The Fund's dividends, to the extent not derived from
dividends attributable to certain types of stock issued by U.S. domestic
corporations, will not qualify for the dividends received deduction for
corporations.
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
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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' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Advisor Shares and then dividing the result by the
total number of outstanding Advisor Shares.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
or traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Debt obligations that mature in 60 days or
less from the valuation date are valued on the basis of amortized cost, unless
the Board determines that using this valuation method would not reflect the
investments' value. Securities, options and futures contracts for which market
quotations are not readily available and other assets will be valued at their
fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Fund quotes the performance of 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 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
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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, all of which are unmanaged indexes of common stocks; or
(iii) other appropriate indexes of investment securities or with data developed
by Warburg derived from such indexes. The Fund may also include evaluations of
the Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Mutual Fund Magazine, Morningstar, Inc. and Financial
Times.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, the Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings and analysis of holdings by industry, country credit quality
and other characteristics. The Fund may also discuss measures of risk, the
continuum of risk and return relating to different investments and the potential
impact of foreign stocks on a portfolio otherwise composed of domestic
securities. Morningstar, Inc. rates funds in broad categories based on
risk/reward analyses over various time periods. In addition, the Fund may from
time to time compare the expense ratio of 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 under the name 'Warburg, Pincus Japan OTC Fund, Inc.' The
Fund's charter authorizes the Board to issue three billion full and fractional
shares of capital stock, $.001 par value per share, of which one billion shares
are designated Advisor Shares. Under the Fund's charter documents, the Board has
the power to classify or reclassify any unissued shares of 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. 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,
except that Advisor Shares bear fees payable by the Fund to Institutions for
services they provide to the beneficial
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owners of such shares and enjoy certain exclusive voting rights on matters
relating to these fees. Because of the higher fees paid by the Advisor Shares,
the total return on such shares can be expected to be lower than the total
return on Common Shares. Investors may obtain information concerning the Common
Shares from their investment professional or by calling Counsellors Securities
at (800) 888-6878.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the governing Board
unless and until such time as less than a majority of the members holding office
have been elected by investors. Any Director 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
November 30, 1995 because they may be deemed to possess or share investment
power over shares owned by clients of Warburg and certain other entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
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 through
Institutions whose clients or customers (or participants in the case of
retirement plans) ('Customers') are owners of Advisor Shares. Either those
Institutions or companies providing certain services to Customers (together,
'Service Organizations') will enter into agreements ('Agreements') with the Fund
and/or Counsellors Securities pursuant to a Distribution Plan as described
below. Such entities may 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 necessary for sub-accounting. The Board
has approved a Distribution Plan (the 'Plan') pursuant to Rule 12b-1 under the
1940 Act under which each participating Service Organization will be paid, out
of the assets of the Fund (either directly or by Counsellors Securities on
behalf of the Fund), a negotiated fee on an annual basis
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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 current 12b-1 fee is .50% per annum. The Board
evaluates the appropriateness of the Plan on a continuing basis and in doing so
considers all relevant factors.
Warburg, Counsellors Securities and Counsellors Service or any of their
affiliates may, from time to time, at their own expense, provide compensation to
Service Organizations. To the extent they do so, such compensation does not
represent an additional expense to the Fund or its shareholders. In addition,
Warburg, Counsellors Securities or any of their affiliates may, from time to
time, at their own expense, pay certain Fund transfer agent fees and expenses
related to accounts of Customers. A Service Organization may use a portion of
the fees paid pursuant to the Plan to compensate the Fund's custodian or
transfer agent for costs related to accounts of Customers.
------------------------
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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TABLE OF CONTENTS
THE FUND'S EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ........................................ 4
PORTFOLIO INVESTMENTS .................................................... 4
RISK FACTORS AND SPECIAL
CONSIDERATIONS ........................................................ 6
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE .................................................................. 9
CERTAIN INVESTMENT STRATEGIES ............................................ 9
INVESTMENT GUIDELINES ................................................... 12
MANAGEMENT OF THE FUND .................................................. 12
HOW TO PURCHASE SHARES .................................................. 14
HOW TO REDEEM AND EXCHANGE
SHARES ............................................................... 16
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 17
NET ASSET VALUE ......................................................... 18
PERFORMANCE ............................................................. 19
GENERAL INFORMATION ..................................................... 20
SHAREHOLDER SERVICING ................................................... 21
ADOTC-1-1295
[LOGO]
[ ] WARBURG PINCUS
JAPAN OTC FUND
PROSPECTUS
DECEMBER 29, 1995
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol 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 December 27, 1995
STATEMENT OF ADDITIONAL INFORMATION
December 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 . . . . . . . . . . . . . . . . . . . . 28
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 39
Additional Purchase and Redemption Information . . . . . . . . . . . . . 47
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . 49
Determination of Performance . . . . . . . . . . . . . . . . . . . . . . 52
Auditors and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 56
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 Emerging Markets Fund and
Warburg Pincus International Equity Fund, and with the Prospectus for the
Advisor Shares of the Fund, each dated December 29, 1995, as amended or
supplemented from time to time, and is incorporated by reference in its
entirety into those Prospectuses. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of the Fund
should be made solely upon the information contained herein. Copies of the
Fund's Prospectuses and information regarding the Fund's current performance
may be obtained by calling the Fund at (800) 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, 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.
Options, Futures and Currency Exchange Transactions
Securities Options. The Fund may write covered put and call options
on stock and debt securities and may purchase such options that are traded on
foreign and U.S. exchanges, as well as over-the-counter ("OTC").
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
<PAGE>3
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.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at
a lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
In the case of options written by the Fund that are deemed covered
by virtue of the Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed
securities, but the Fund may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Fund may write covered call options. For example, if the Fund
writes covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Fund will compensate for the decline in the value of the cover by purchasing
an appropriate additional amount of mortgage-backed securities.
Options written by the Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money,"
<PAGE>4
"at-the-money" and "out-of-the-money," respectively. The Fund may write (i)
in-the-money call options when Warburg, Pincus Counsellors, Inc., the Fund's
investment adviser ("Warburg"), expects that the price of the underlying
security will remain flat or decline moderately during the option period,
(ii) at-the-money call options when Warburg expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (iii) out-of-the-money call options when Warburg expects that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. 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.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by the Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which the Fund may realize a profit or loss
from the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. When the Fund has purchased an
option and engages in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium the Fund initially paid for
the original option plus the related transaction costs. Similarly, in cases
where the Fund has written an option, it will realize a profit if the cost of
the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. The Fund may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security with respect to which it has written
an option from being called or put or, in the case of a call option, to
unfreeze an underlying security (thereby permitting its sale or the writing of
a new option on the security prior to the outstanding option's expiration).
The obligation of the Fund under an option it has written would be terminated
by a closing purchase transaction, but the Fund would not be deemed to own an
option as a result of the transaction. So long as the obligation of the Fund
as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a
closing purchase transaction. The Fund can no longer effect a closing
purchase transaction with respect to an option once it has been assigned an
exercise notice.
<PAGE>5
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary
market may exist. A liquid secondary market in an option may cease to exist
for a variety of reasons. In the past, for example, higher than anticipated
trading activity or order flow or other unforeseen events have at times
rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it
might not be possible to effect closing transactions in particular options.
Moreover, the Fund's ability to terminate options positions established in the
over-the-counter market may be more limited than for exchange-traded options
and may also involve the risk that securities dealers participating in
over-the-counter transactions would fail to meet their obligations to the
Fund. The Fund, however, intends to purchase over-the-counter options only
from dealers whose debt securities, as determined by Warburg, are considered
to be investment grade. If, as a covered call option writer, the Fund is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. In either case, the Fund
would continue to be at market risk on the security and could face higher
transaction costs, including brokerage commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group
of investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of Warburg and certain of its
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits
and it may impose certain other sanctions. These limits may restrict the
number of options the Fund will be able to purchase on a particular security.
Stock Index Options. The Fund may purchase and write
exchange-listed and OTC put and call options on stock indexes. A stock index
measures the movement of a certain group of stocks by assigning relative
values to the common stocks included in the index, fluctuating with changes in
the market values of the stocks included in the index. Some stock index
options are based on a broad market index, such as the NYSE Composite Index,
or a narrower market index such as the Standard & Poor's 100. Indexes may
also be based on a particular industry or market segment. 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
<PAGE>6
currently quarterly, and (ii) the delivery requirements are different.
Instead of giving the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the index and the exercise
price of the option times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. Stock index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. The Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the Fund
were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. Although the Fund will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until the Fund, as a covered OTC call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to
sell portfolio securities or, with respect to currency options, currencies at
a time when such sale might be advantageous. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option.
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
<PAGE>7
consistent with CFTC regulations on foreign exchanges. These transactions may
be entered into for "bona fide hedging" purposes as defined in CFTC
regulations and other permissible purposes including hedging against changes
in the value of portfolio securities due to anticipated changes in currency
values, interest rates and/or market conditions and increasing return.
The Fund will not enter into futures contracts and related options
for which the aggregate initial margin and premiums (discussed below) required
to establish positions other than those considered to be "bona fide hedging"
by the CFTC exceed 5% of the Fund's net asset value after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The Fund reserves the right to engage in transactions involving futures
contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may
be at risk with respect to futures activities. The ability of the Fund to
trade in futures contracts and options on futures contracts may be limited by
the requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between
the value of the index at the close of the last trading day on the contract
and the price at which the agreement is made.
No consideration is paid or received by the Fund upon entering into
a futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or cash equivalents, such as U.S.
government securities or other liquid high-grade debt obligations, equal to
approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange on which the contract is traded, and brokers may charge
a higher amount). This amount is known as "initial margin" and is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from
the broker, will be made daily as the currency, financial instrument or stock
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." The Fund will also incur brokerage costs in connection
with entering into futures transactions.
<PAGE>8
At any time prior to the expiration of a futures contract, the Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions
in futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although
the Fund intends to enter into futures contracts only if there is an active
market for such contracts, there is no assurance that an active market will
exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may
be made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at
an advantageous price and subjecting the Fund to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be required
to make daily cash payments of variation margin. In such situations, if the
fund had insufficient cash, it might have to sell securities to meet daily
variation margin requirements at a time when it would be disadvantageous to do
so. In addition, if the transaction is entered into for hedging purposes, in
such circumstances the Fund may realize a loss on a futures contract or option
that is not offset by an increase in the value of the hedged position. Losses
incurred in futures transactions and the costs of these transactions will
affect the Fund's performance.
Options on Futures Contracts. The Fund may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or stock index futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in a futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise
of an option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Fund.
<PAGE>9
Currency Exchange Transactions. The value in U.S. dollars of the
assets of the Fund that are invested in foreign securities may be affected
favorably or unfavorably by changes in exchange control regulations, and the
Fund may incur costs in connection with conversion between various currencies.
Currency exchange transactions may be from any non-U.S. currency into U.S.
dollars or into other appropriate currencies. The Fund will conduct its
currency exchange transactions (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on such contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract as agreed upon
by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are
standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Fund may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected
to be lower than the spot price of the currency at the time the option is
exercised.
Currency Hedging. The Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect
to specific receivables or payables of the Fund generally accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. The Fund may not position hedge to an extent greater than the
aggregate market value (at the time of entering into the hedge) of the hedged
securities.
A decline in the U.S. dollar value of a foreign currency in which
the Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their
<PAGE>10
value in the foreign currency remains constant. The use of currency hedges
does not eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in the future.
For example, in order to protect against diminutions in the U.S. dollar value
of securities it holds, the Fund may purchase currency put options. If the
value of the currency does decline, the Fund will have the right to sell the
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on the U.S. dollar value of its securities that
otherwise would have resulted. Conversely, if a rise in the U.S. dollar value
of a currency in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, the Fund may
purchase call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the adverse movements
in exchange rates. The benefit to the Fund derived from purchases of currency
options, like the benefit derived from other types of options, will be reduced
by premiums and other transaction costs. Because transactions in currency
exchange are generally conducted on a principal basis, no fees or commissions
are generally involved. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Although
currency hedges limit the risk of loss due to a decline in the value of a
hedged currency, at the same time, they also limit any potential gain that
might result should the value of the currency increase. If a devaluation is
generally anticipated, the Fund may not be able to contract to sell a currency
at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value
of the Fund's investments and a currency hedge may not be entirely successful
in mitigating changes in the value of the Fund's investments denominated in
that currency. A currency hedge, for example, should protect a Yen-
denominated bond against a decline in the Yen, but will not protect the Fund
against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency
exchange transactions for other purposes, including generating current income
to offset expenses or increase return, the Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A hedge is designed to offset a loss in a portfolio position with a gain in
the hedged position; at the same time, however, a properly correlated hedge
will result in a gain in the portfolio position being offset by a loss in the
hedged position. As a result, the use of options, futures, contracts and
currency exchange transactions for hedging purposes could limit any potential
gain from an increase in the value of the position hedged. In addition, the
movement in the portfolio position hedged may not be of the same magnitude as
movement in the hedge. With respect to futures contracts, since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's
assets.
<PAGE>11
In hedging transactions based on an index, whether the Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than movements in the price of a particular stock. The risk
of imperfect correlation increases as the composition of the Fund's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established. Stock index
futures transactions may be subject to additional correlation risks. First,
all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the stock
index and futures markets. Secondly, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary price distortions.
Because of the possibility of price distortions in the futures market and the
imperfect correlation between movements in the stock index and movements in
the price of stock index futures, a correct forecast of general market trends
by Warburg still may not result in a successful hedging transaction.
The Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to correctly predict
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate.
This requires different skills and techniques than predicting changes in the
price of individual securities, and there can be no assurance that the use of
these strategies will be successful. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Losses incurred in hedging transactions and the costs of these transactions
will affect the Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Fund on currencies, securities and indexes; and currency, interest rate
and index futures contracts and options on these futures contracts. These
guidelines may, in certain instances, require segregation by the Fund of cash
or liquid high-grade debt securities or other securities that are acceptable
as collateral to the appropriate regulatory authority.
For example, a call option written by the Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities
<PAGE>12
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.
Additional Information on Other 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 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
<PAGE>13
Its Securities Markets -- Economic Background -- Currency Fluctuation" below.
The Fund may use hedging techniques with the objective of protecting 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.
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 SEC. Accordingly, there may be less publicly available information
about the securities and about the foreign company or government issuing them
than is available about a domestic company or government entity. Foreign
companies are generally not subject to uniform financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the 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.
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
<PAGE>14
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
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 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.
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
<PAGE>15
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. govern-
ment 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, 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.
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 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
<PAGE>16
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
Warburg in evaluating the creditworthiness of an issuer. In this evaluation,
Warburg 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.
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 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
<PAGE>17
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 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
<PAGE>18
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 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."
<PAGE>19
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 non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of
a readily available market, repurchase agreements which have a maturity of
longer than seven days, 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 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.
<PAGE>20
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
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
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.
<PAGE>21
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 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.
<PAGE>22
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.
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.
<PAGE>23
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 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 Warburg 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.
<PAGE>24
16. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Certain non-fundamental investment limitations are currently
required by one or more states in which shares of the Fund are sold. These
may be more restrictive than the limitations set forth above. Should the Fund
determine that any such commitment is no longer in the best interest of the
Fund and its shareholders, the Fund will revoke the commitment by terminating
the sale of Fund shares in the state involved. In addition, the relevant
state may change or eliminate its policy regarding such investment
limitations.
If a percentage restriction (other than the percentage limitation
set forth in No. 1 above) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in
the values of portfolio securities or in the amount of the Fund's assets will
not constitute a violation of such restriction.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value of
the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the NASDAQ National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence
of sales, at the mean between the bid and asked quotations. If there are no
such quotations, the value of the securities will be taken to be the highest
bid quotation on the exchange or market. Options or futures contracts will be
valued similarly. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Short-term obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board. Amortized cost involves valuing a portfolio
instrument at its initial cost and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. The
amortized cost method of valuation may also be used with respect to other debt
obligations with 60 days or less remaining to maturity. In determining the
market value of portfolio investments, the Fund may employ outside
organizations (a "Pricing Service") which may use a matrix, formula or other
objective method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. The procedures of Pricing Services are
reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board, which may replace a Pricing
Service at any time. Securities, options and futures contracts for which
market quotations are not available and certain other assets of the Fund will
be valued at their fair value as determined in good faith pursuant to
consistently applied procedures established by the Board. In addition, the
Board
<PAGE>25
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.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the close of regular trading on the NYSE
will not be reflected in the Fund's calculation of net asset value unless the
Board or its delegates deems that the particular event would materially affect
net asset value, in which case an adjustment may be made. All assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the prevailing exchange rate as quoted by a Pricing
Service. If such quotations are not available, the rate of exchange will be
determined in good faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with
the issuer or with an underwriter acting as principal. Other purchases and
sales may be effected on a securities exchange or over-the-counter, depending
on where it appears that the best price or execution will be obtained. The
purchase price paid by the Fund to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of securities from dealers, acting as either principals or agents in
the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On
most foreign exchanges, commissions are generally fixed. There is generally
no stated commission in the case of securities traded in domestic or foreign
over-the-counter markets, but the price of securities traded in
over-the-counter markets includes an undisclosed commission or mark-up. U.S.
government securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. government securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
The Advisers will select specific portfolio investments and effect
transactions for the Fund and in doing so seek to obtain the overall best
execution of portfolio
<PAGE>26
transactions. In evaluating prices and executions, the Advisers will consider
the factors they deem 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. An Adviser may,
in its discretion, effect transactions in portfolio securities with dealers
who provide brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) to the Fund and/or other
accounts over which the Adviser exercises investment discretion. The Adviser
may place portfolio transactions with a broker or dealer with whom it has
negotiated a commission that is in excess of the commission another broker or
dealer would have charged for effecting the transaction if the Adviser
determines in good faith that such amount of commission was reasonable in
relation to the value of such brokerage and research services provided by such
broker or dealer viewed in terms of either that particular transaction or of
the overall responsibilities of the Adviser. Research and other services
received may be useful to the Adviser in serving 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 the Adviser in carrying out its
obligations to the Fund. Research may include furnishing advice, either
directly or through publications or writings, as to the value of securities,
the advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio strategy;
access to research analysts, corporate management personnel, industry experts,
economists and government officials; comparative performance evaluation and
technical measurement services and quotation services; and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information, including the research
described above) that assist the Adviser in carrying out its responsibilities.
For the fiscal year ended October 31, 1995, $ of total brokerage
commissions was paid to brokers and dealers who provided such research and
other services on portfolio transactions of $ . Research received from
brokers or dealers is supplemental to the Advisers' own research programs.
The fees to the Advisers under their advisory agreements with the Fund are not
reduced by reason of their receiving any brokerage and research services.
During the fiscal year ended October 31, 1995, the Fund paid an
aggregate of approximately $1,019,865 in commissions to broker-dealers for
execution of portfolio transactions.
As of October 31, 1995, the Fund owned $_________ worth of shares of
common stock of ____________, one of the Fund's regular broker-dealers.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg or SPARX USA. Such other investment clients may invest in the same
securities as the Fund. When purchases or
<PAGE>27
sales of the same security are made at substantially the same time on behalf
of such other clients, transactions are averaged as to price and available
investments allocated as to amount, in a manner which Warburg 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, Warburg 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.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities, Inc., the Fund's distributor ("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. No portfolio transactions have been executed
through Counsellors Securities since the commencement of the Fund's
operations.
In no instance will portfolio securities be purchased from or sold
to Warburg, 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 concerning the provision of distribution services or
support services. See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when the
Advisers, in their sole discretion, believe such practice to be otherwise in
the Fund's interest.
<PAGE>28
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
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
<PAGE>29
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 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 international trade
and industry, as its new leader. Mr. Hashimoto, who favors a stronger
Japanese role in world affairs, is considered the leading candidate for prime
minister in the next elections. A change of government in 1996 could result
in increased trade friction with the United States. 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. In the mid-1990's, 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. Because of the concentration of Japanese
<PAGE>30
exports in highly visible products such as automobiles, machine tools and
semiconductors, and the large trade surpluses resulting therefrom, Japan has
entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance
is the greatest. 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. 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>31
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
---- ---- ---- ---- ---- ---- ---- ----
(yen in billions)
<S> <C> <C> <C> <C> <C>
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
<PAGE>32
The following tables set forth certain economic indicators in Japan
for the years shown.
UNEMPLOYMENT
<TABLE>
<CAPTION>
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>33
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
On December , 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>34
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
damage to the region at approximately $120 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>
1,235 454 855 344 431 129 240 203 260 200 193
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
<PAGE>35
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
-------------------- ------------------- ------------------- -------------------
Year Volume Value Volume Value Volume Value Volume Value
---- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
<PAGE>36
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
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>37
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 Y 1,572,308 Y 195,711,396 Y 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>38
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>39
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 Circuit City Stores, Inc.
McClain, Virginia 22107 (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* (65) . . . . . 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; Director or officer of other
investment companies advised by Warburg.
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.
- ------------------------
* Indicates a Director who is an "interested person" of the Fund
as defined in the 1940 Act.
<PAGE>40
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 of other investment companies
advised by Warburg.
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; Officer of
other investment companies advised by Warburg.
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 officer of other
investment companies advised by Warburg.
<PAGE>41
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 other investment companies advised
by Warburg.
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 other
investment companies advised by Warburg.
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 other investment companies advised
by Warburg.
Karen Amato (32) . . . . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987; Assistant
New York, New York 10017-3147 Secretary of other investment companies
advised by Warburg.
No employee of Warburg, 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 Warburg, 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.
<PAGE>42
Directors' Compensation
(for the fiscal year ended October 31, 1995)
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Fund Managed by Warburg*
---------------- ----------------- ------------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $1,958 $41,083
Donald J. Donahue $2,208 $43,833
Jack W. Fritz $1,708 $35,333
Thomas A. Melfe $2,208 $43,583
Alexander B. Trowbridge $2,208 $43,833
</TABLE>
__________________
* Each Director also serves as a Director or Trustee of 15 other investment
companies advised by Warburg.
** Mr. Furth is considered to be an interested person of the Fund and
Warburg, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receives no compensation from the Fund or any other
investment company managed by Warburg.
As of November 30, 1995, Directors and officers of the Fund as a
group owned of record 41,641 of the Fund's outstanding Common Shares. As of
the same date, Mr. John L. Furth may be deemed to have beneficially owned
7.16% of the Fund's outstanding Common Shares, including shares owned by
clients for which Warburg has investment discretion. Mr. Furth disclaims
ownership of these shares and does not intend to exercise voting rights with
respect to these shares. No Directors or officers owned of record any Advisor
Shares.
<PAGE>43
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 & 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 Warburg
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.
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.
Investment Adviser, Sub-Investment Adviser and Co-Administrators
Warburg 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
<PAGE>44
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, Warburg 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.
See the Prospectuses, "Management of the Fund." Each class of shares of the
Fund bears its proportionate share of fees payable to Warburg, 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.
Warburg agrees that if, in any fiscal year, the expenses borne by
the Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of the Fund are registered or
qualified for sale to the public, it will reimburse the Fund to the extent
required by such regulations. Unless otherwise required by law, such
reimbursement would be accrued and paid on a monthly basis. At the date of
this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.5% of the first $30 million of the
average net assets of the Fund, 2% of the next $70 million of the average net
assets of the Fund and 1.5% of the remaining average net assets of the Fund.
During the fiscal period/year ended October 31, 1994 and October 31,
1995, Warburg earned, and voluntarily waived, $13,176 and $599,720,
respectively, under the Advisory Agreement. Warburg also reimbursed the Fund
$39,144 and $25,920, respectively, during such fiscal period/year. During
fiscal period/year ended October 31, 1994 and October 31, 1995, Counsellors
Service earned $1,054 and $47,978, respectively, in co-administration fees.
During the fiscal period/year ended October 31, 1994 and October 31, 1995,
PFPC earned $7,084 and $90,701, respectively, in co-administration fees and
voluntarily waived $26,746 for the fiscal year ended October 31, 1995.
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 and securities
depositories to serve as sub-custodian on behalf of the Fund.
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
<PAGE>45
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.
Organization of the Fund
The Fund's charter authorizes the Board to issue three billion full
and fractional shares of common stock, $.001 par value per share ("Common
Shares"), of which one billion shares are designated Common Stock - Series 1
and one billion shares are designated Common Stock - Series 2 (the "Advisor
Shares"). Only Common Shares and Advisor Shares have been issued by the Fund.
All shareholders of the Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
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
<PAGE>46
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 $119,941
in the year ending October 31, 1995, all of which was spent on advertising and
marketing communications.
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
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and
financial intermediaries ("Institutions") to provide certain distribution,
shareholder servicing, administrative and/or accounting services for their
clients or customers (or participants in the case of retirement plans) who are
beneficial owners of Advisor Shares. See the Advisor Prospectuses,
"Shareholder Servicing." Agreements will be governed by a distribution plan
(the "Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The
Distribution Plan requires the Board, at least quarterly, to receive and
review written reports of amounts expended under the Distribution Plan and the
purpose for which such expenditures were made.
An Institution with which the Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and 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.
General. The Distribution Plan and the 12b-1 Plan will continue in
effect for so long as their continuance is specifically approved at least
annually by the Board, including
<PAGE>47
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 same manner. Neither the
Distribution Plan nor the 12b-1 Plan may be amended to increase materially the
amount to be spent thereunder without shareholder approval of the relevant
class of shares. The Distribution Plan or 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.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other investment instruments which
may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or
other property, a shareholder would incur transaction costs in disposing of
the redemption proceeds. The Fund 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
<PAGE>48
dividends and distributions on shares in the Plan are automatically reinvested
at net asset value in additional shares of the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by Warburg is
available to investors in the Fund. The funds into which exchanges can be
made by holders of Common Shares currently are the Common Shares of Warburg
Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt Fund, Warburg
Pincus New York Intermediate Municipal Fund, Warburg Pincus Tax Free Fund,
Warburg Pincus Intermediate Maturity Government Fund, Warburg Pincus Fixed
Income Fund, Warburg Pincus Global Fixed Income Fund, Warburg Pincus Balanced
Fund, Warburg Pincus Growth & Income Fund, Warburg Pincus Capital Appreciation
Fund, Warburg Pincus Small Company Value Fund, Warburg Pincus Emerging Growth
Fund, Warburg Pincus Post-Venture Capital Fund, Warburg Pincus International
Equity Fund, Warburg Pincus Emerging Markets Fund and Warburg Pincus Japan
Growth Fund. Common Shareholders of the Fund may exchange all or part of
their shares for Common Shares of these or other mutual funds organized by
Warburg in the future on the basis of their relative net asset values per
share at the time of 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
prospectus of the relevant class of each fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the relevant class of the
fund into which they are contemplating an exchange from Counsellors
Securities.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same
day, at a price as described above, in shares of the relevant class of the
fund being acquired. Warburg reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
<PAGE>49
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 Prospectuses.
As a regulated investment company, the Fund will be subject to a 4%
non-deductible excise tax measured with respect to certain undistributed
amounts of ordinary income and capital gain required to be but not distributed
under a prescribed formula. The formula requires payment to shareholders
during a calendar year of distributions representing at least 98% of the
Fund's taxable ordinary income for the calendar year and at least 98% of the
excess of its capital gains over capital losses realized during the one-year
period ending October 31 during such year, together with any undistributed,
untaxed amounts of ordinary income and capital gains from the previous
calendar year. The Fund expects to pay the dividends and make the
distributions necessary to avoid the application of this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies)
<PAGE>50
will be subject to special provisions of the Code that, among other things,
may affect the character of gains and losses recognized by the Fund (i.e., may
affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses and cause the Fund to be
subject to hyperinflationary currency rules. These rules could therefore
affect the character, amount and timing of distributions to shareholders.
These provisions also (i) will require the Fund to mark-to-market certain
types of its positions (i.e., treat them as if they were closed out) and (ii)
may cause the Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract or hedged
investment so that (a) neither the Fund nor its shareholders will be treated
as receiving a materially greater amount of capital gains or distributions
than actually realized or received, (b) the Fund will be able to use
substantially all of its losses for the fiscal years in which the losses
actually occur and (c) the Fund will continue to qualify as a regulated
investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Upon the sale or exchange of
shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and the basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and, as described in the Prospectuses, will be long-term
or short-term depending upon the shareholder's holding period for the shares.
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the
reinvestment of dividends and capital gains distributions in the Fund, within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired
will be increased to reflect the disallowed loss.
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Fund for the
prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable
year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year.
<PAGE>51
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 provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear. If the Fund is not
able to make the foregoing election, it may be able to avoid the interest
charge (but not the ordinary income treatment) on disposition of the stock by
electing, under proposed regulations, each year to mark-to market the stock
(that is, treat it as if it were sold for fair market value). Such an
election could result in acceleration of income to the Fund.
<PAGE>52
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. With respect to the Fund's Common Shares, the
Fund's average annual total return for the one-year period ended October 31,
1995 was -7.72% (-8.02% without waivers), and the average annual total return
for the period commencing September 30, 1994 (commencement of operations) and
ended October 31, 1995 was -8.40 % (-8.77% 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] = ERV. For purposes of this
formula, "P" is a hypothetical investment of $1,000; "T" is average annual
total return; "n" is number of years; and "ERV" is the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the one-,
five- or ten-year periods (or fractional portion thereof). Total return or
"T" is computed by finding the average annual change in the value of an
initial $1,000 investment over the period and assumes that all dividends and
distributions are reinvested during the period. The Advisor Shares average
annual total return for the one-year period ended October 31, 1995 was -7.82%
(-9.44% without waivers) and the average annual total return for the period
commenced September 30, 1994 (commencement of operations) and ended October
31, 1994 was -8.49% (-10.35% 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. Investors should note that this performance may
not be representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, the Fund's performance will
fluctuate, unlike certain bank deposits or other investments which pay a fixed
yield for a stated period of time. Any fees charged by Institutions or other
institutional investors directly to their customers in connection with invest-
ments in Fund shares are not reflected in the Fund's total return, and such
fees, if charged, will reduce the actual return received by customers on their
investments.
- ------------------------
* - The expression (1 + T) is being raised to the nth power.
<PAGE>53
Warburg 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>54
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.
Advertising or supplemental sales literature relating to the Fund
may describe the percentage decline from all-time high levels for certain
foreign stock markets. It may also describe how the Fund differs from the MS-
EAFE Index in composition. 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
<PAGE>55
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 and year ended
October 31, 1994 and October 31, 1995 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 Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of November 30, 1995, the name, address and percentage of
ownership of each person (other than Mr. Furth, see "Management of the Fund")
that owns of record 5% or more of the Fund's outstanding shares were as
follows:
Common Shares
Charles Schwab & Co., Inc., Reinvest Accounts, Attn: Mutual Funds
Department, 101 Montgomery Street, San Francisco, CA 94104-4122 -- 33.64%;
Donaldson Lufkin & Jenrette, Securities Corp. Pershing Division, Mutual Fund
Balancing, Attn: R. Creegan, 1 Pershing Plaza, 5th Floor, Jersey City, NJ
07303 -- 6.46%; and Nat'l Financial Svs Corp., FBO Customers, P. O. Box 3908,
Church Street Station, New York, NY 10008-3908 --34.50%. The Fund believes
that these entities are 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 7.21% of the Common Shares
outstanding, including shares owned by clients for which Warburg has
investment discretion and by companies that EMW may be deemed to control. Mr.
Pincus disclaims ownership of these shares and does not intend to exercise
voting rights with respect to these shares.
<PAGE>56
Advisor Shares
Warburg, Pincus Counsellors, Inc., Attn: Stephen Distler, 466
Lexington Avenue, New York, NY 10017-3140 -- 87.00%. Warburg 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 Warburg has investment discretion and by companies
that EMW may be deemed to control. Mr. Pincus disclaims ownership of these
shares and does not intend to exercise voting rights with respect to these
shares.
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal period ended
October 31, 1995 follow the Report of Independent Auditors.
<PAGE>A-1
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although 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>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
- --------------------------------------------------------------------------------
December 8, 1995
Dear Shareholder:
The objective of Warburg Pincus Japan OTC Fund (the 'Fund') is long-term
capital appreciation. The Fund invests primarily in securities traded on the
Japanese over-the-counter (OTC) market. At all times, except during temporary
defensive periods, the Fund maintains at least 65% of its assets in these OTC
securities.
For the 12 months ended October 31, 1995, the Fund lost 7.72%, vs. a 15.58%
decline in the yen-denominated JASDAQ Index. In dollar terms, the JASDAQ Index
lost 19.93%.
Though the Japanese market finished the period with a net loss, its rebound
in recent months is encouraging. For example, the six-month total return of the
Fund (4/30/95-10/31/95) is 15.80%. We believe that there are additional,
significant grounds for optimism regarding Japan, and that the stock market's
rally reflects a secular change under way in the Japanese economy, one that will
provide excellent opportunities for smaller companies.
There are several reasons for optimism. First, the yen's reversal suggests
that Japanese finance officials are finally committed to taking the necessary
steps to reverse the country's protracted economic slide. Recent money-supply
data confirm the liquidity growth that we first suspected earlier this year,
while the Bank of Japan's increasing willingness to discuss the country's
troubled banking system is also encouraging and likely foreshadows a
taxpayer-financed bailout of the financial sector. This will have a significant
impact on the economy and the broad stock market.
Second, there is a strong earnings recovery taking place in the
manufacturing sector. The strongest growth in earnings is occurring in the
electronics area, especially among semiconductor- and personal-computer-related
companies, which are well-represented in the OTC market. Many other basic
industries (e.g., paper and petrochemicals) are seeing good earnings growth as
well, the result of aggressive restructuring efforts and strategic mergers.
Third, on a longer-term basis, opportunities continue to appear for
companies nimble enough to take advantage of inefficiencies within the Japanese
economy. Though deregulation of Japan's overregulated economy is likely to
remain slow, the rapidly expanding OTC market is presenting an increasing range
of smaller companies that benefit from these changes.
Our primary areas of focus in the portfolio currently are in
personal-computer-related and consumption-related companies (e.g., retailers),
which we believe have the best prospects over the coming months. We are also
looking at opportunities in the housing sector, which stands to benefit from the
current low level of interest rates and the reconstruction efforts necessitated
by the Kobe earthquake.
<TABLE>
<S> <C>
Shuhei Abe Nicholas P.W. Horsley
Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
8
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN COMMON SHARES OF WARBURG PINCUS JAPAN OTC FUND
SINCE INCEPTION AS OF OCTOBER 31, 1995
The graph below illustrates the hypothethical investment of $10,000 in
Common Shares of Warburg Pincus Japan OTC Fund (the 'Fund') from September 30,
1994 (inception) to October 31, 1995, assuming the reinvestment of dividends and
capital gains at net assets value, compared to the JASDAQ* for the same time
period.
[GRAPH]
<TABLE>
<CAPTION>
FUND
---------
<S> <C>
1 Year Total Return (9/30/94 - 9/30/95)..................................... - 9.20%
</TABLE>
All figures cited here represent past performance and do not guarantee
future results. Investment return and principal value of an investment will
fluctuate so that an investor's shares upon redemption may be worth more or less
than original cost. Without waivers or reimbursements of Fund expenses, average
annual total returns for the 1 year period ending 9/30/95 and the 1 year and
since inception periods ending 10/31/95, respectively, would have been - 9.60%,
- 8.02% and - 8.77%.
- ------------
* The JASDAQ Over-The-Counter Composite Index is an unmanaged index comprised
of stocks traded over-the-counter in Japan.
** Stated in Yen
*** Stated in U.S. dollars
+ Non-annualized
9
- --------------------------------------------------------------------------------
<PAGE>
<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 Warburg Pincus
Capital Appreciation Fund, Warburg Pincus Emerging Growth Fund and Warburg
Pincus International Equity Fund and the accompanying statements of assets and
liabilities including the schedules of investments of Warburg Pincus Japan OTC
Fund, Warburg Pincus Emerging Markets Fund and Warburg Pincus Post-Venture
Capital Fund (all Funds collectively referred to as the 'Warburg Pincus Equity
Funds') as of October 31, 1995, and the related statements of operations for the
year (or period) then ended, and the statements of changes in net assets for
each of the two years (or period) and the financial highlights for each of the
three 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 two years in the period ended
October 31, 1992, 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, 1995, 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, 1995, and the results of
their operations for the year (or period) then ended, and the changes in their
net assets for each of the two years (or period) and the financial highlights
for each of the three 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, PA
December 14, 1995
67
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (91.9%)
Agriculture (0.6%)
Kaneko Seeds Co. 100,000 $ 1,027,297
------------
Automobile (0.9%)
Aucnet Inc. 30,000 1,584,972
------------
Automotive Parts-Equipment (0.2%)
Harada Industry Co., Ltd. 16,000 328,735
------------
Broadcasting (0.7%)
Horipro Inc. 87,000 1,293,807
------------
Building Materials (0.6%)
Furusato Industries 131,000 1,095,832
------------
Clinical Examination (0.8%)
Kanto Biomedical Laboratory 100,000 1,311,026
------------
Computers (10.5%)
Daiwabo Information System Co. 50,000 1,433,324
I.O. Data Device Inc. 160,000 11,427,453
Melco Inc. 100,000 5,469,132
------------
18,329,909
------------
Construction (2.6%)
Kawasho Lease System Corp. 117,200 1,559,456
Onoken Co., Ltd. 44,000 1,003,033
Sacos Corp. 60,000 1,344,291
Yamazaki Construction Co., Ltd. 40,000 563,546
Yokogawa Construction Co., Ltd. 9,000 110,068
------------
4,580,394
------------
Electronics (13.7%)
Ado Electronic Industrial Co., Ltd. 108,000 2,430,291
Advantest Corp. 30,000 1,702,377
Apic Yamada Corp. 100,000 4,402,700
Easton Co., Ltd. 90,000 3,786,322
Katsuragawa Electric Co., Ltd. 123,000 2,033,754
New Japan Radio Co., Ltd. + 160,000 2,285,491
Satori Electric Co., Ltd. 40,000 1,858,918
USC Corp. 25,000 802,270
Yaesu Musen Co., Ltd. 58,000 618,530
Yamaichi Electronics Mfg. 135,000 4,094,511
------------
24,015,164
------------
Engineering & Construction (1.6%)
Sawako Corp. 100,000 2,788,377
------------
</TABLE>
See Accompanying Notes to Financial Statements.
27
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
Foods (1.2%)
Warabeya Nichiyo Co., Ltd. 41,000 $ 613,736
Yoshinoya D&C Co., Ltd. 92 1,458,174
------------
2,071,910
------------
Food Processing (2.5%)
Ariake Japan Co., Ltd. 50,000 1,687,702
Sato Foods Industries Co. Ltd. 64,000 1,076,998
Taiyo Kagaku Co., Ltd. 130,000 1,577,145
------------
4,341,845
------------
Healthcare (2.1%)
Nichii Gakkan Co. 83,000 3,621,759
------------
Home Appliances (5.3%)
Yamada Denki Co., Ltd. 433,000 9,362,391
------------
Home Furnishings/Housewares (0.9%)
Hikari Furniture Co., Ltd. 39,000 476,959
Sekichu Co., Ltd. 105,000 1,119,753
------------
1,596,712
------------
Lodging (0.1%)
Royal Hotel 26,000 178,065
------------
Machinery (Electric) (1.3%)
Nissei ASB Machine Co., Ltd. + 113,000 1,470,404
Sato Corp. 42,000 862,929
------------
2,333,333
------------
Manufacturing (18.6%)
Disco Corp. 152,000 5,725,467
Fujimi Inc. 100,000 6,868,213
Kadoya Sesame Mills Inc. 72,000 915,762
Maki Manufacturing Co., Ltd. 50,000 860,973
Nakakita Seisakusho Co., Ltd. 60,000 299,384
Nippon Steel Semiconductor Co. + 150 5,870,267
Nitta Industrial Corp. 392,000 6,481,558
Tokyo Electron Ltd. 50,000 2,171,999
Tokyo Seimitsu Co., Ltd. 175,000 3,424,322
------------
32,617,945
------------
Pharmaceuticals (3.8%)
Fuji Pharmaceutical Co., Ltd. + 140,000 2,328,539
Sawai Pharmaceutical Co., Ltd. + 50,000 1,707,269
Seikagaku Corp. 100,000 2,573,134
------------
6,608,942
------------
</TABLE>
See Accompanying Notes to Financial Statements.
28
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
Retail (18.5%)
Aoyama Trading Co., Ltd 100,000 $ 2,700,323
Circle K Japan Co., Ltd + 190,000 7,249,780
Fast Retailing Co., Ltd 60,000 2,929,263
Homac Corp. 16,000 286,469
Home Wide Corp. 226,000 2,675,472
Kuroganeya Co., Ltd. 201,000 3,048,136
Laox Co. 80,000 1,737,599
Ryohin Keikaku Co., Ltd. 110,000 7,232,169
Seven-Eleven Japan 40,000 2,669,015
Sundrug Co., Ltd. 50,000 1,917,621
------------
32,445,847
------------
Retail Merchandising (1.2%)
Jeans Mate Corp. 15,000 484,297
Kraft Inc. 44,000 774,875
Right On Co., Ltd. 48,000 915,762
------------
2,174,934
------------
Shipbuilding (1.6%)
Namura Shipbuilding 250,000 1,394,188
Sanoyas Hishino Meisho Corp. 300,000 1,467,567
------------
2,861,755
------------
Wholesale Distribution (2.6%)
Hakuto Co., Ltd. 100,000 2,582,918
Petrolub International Co. 63,000 1,090,989
Toyo Corp. 50,000 552,784
Yonkyu Co., Ltd. 9,000 233,343
------------
4,460,034
------------
TOTAL COMMON STOCK (Cost $161,928,196) 161,030,985
------------
CORPORATE BONDS (0.3%) PAR
----------
Switzerland
Ralse Co., Ltd. 1.00% 08/31/98 (Convertible; callable 2/29/96 @ 102 Sfr)
(Cost $416,917) 500,000 418,355
------------
UNITED STATES TREASURY OBLIGATIONS (4.6%)
U.S. Treasury Bill 4.90%, due 11/02/95
(Cost $7,998,911) $8,000,000 7,998,911
------------
SHORT-TERM INVESTMENTS (3.2%)
Repurchase agreement with State Street Bank & Trust Co. dated 10/31/95 at 5.83%
to be repurchased at $5,772,935 on 11/1/95 (Collateralized by $5,630,000 U.S.
Treasury Note 7.25% due 11/30/96 with a market value of $5,892,116)
(Cost $5,772,000) 5,772,000 5,772,000
------------
TOTAL INVESTMENTS (100.0%) (Cost $176,116,024*) $175,220,251
------------
------------
</TABLE>
+ Non-income producing security.
* Also cost for Federal income tax purposes.
See Accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at value (Cost $176,116,024) $175,220,251
Foreign currency (Cost $22,536,885) 22,505,366
Receivable for Fund shares sold 2,928,760
Receivable for unrealized gain on forward contracts (Note 4) 593,925
Receivable for investment securities sold 536,755
Deferred organizational costs (Note 1) 166,783
Dividends and interest receivable 88,944
Other assets 6,051
------------
Total assets 202,046,835
------------
LIABILITIES
Payable for investment securities purchased 22,476,211
Payable for Fund shares redeemed 717,610
Accrued expenses 283,532
------------
Total liabilities 23,477,353
------------
NET ASSETS applicable to 19,646,455 Common Shares outstanding and
115 Advisor Shares outstanding $178,569,482
------------
------------
NET ASSET VALUE, offering and redemption price per Common Share
($178,568,438[div]19,646,455) $9.09
-----
-----
NET ASSET VALUE, offering and redemption price per Advisor Share
($1,044[div]115) $9.08
-----
-----
</TABLE>
See Accompanying Notes to Financial Statements.
36
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Year or Period Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity
Fund Fund Fund
-------------------- --------------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 2,107,232 $ 772,834 $ 40,091,101
Interest 684,526 2,112,707 7,110,116
Foreign taxes withheld (2,423) 0 (5,031,072)
-------------------- --------------- --------------------
Total investment income 2,789,335 2,885,541 42,170,145
-------------------- --------------- --------------------
EXPENSES:
Investment advisory 1,367,729 3,824,061 20,225,631
Administrative services 390,780 849,790 3,408,846
Audit 27,208 27,469 69,286
Custodian/Sub-custodian 63,554 145,277 1,753,400
Directors/Trustees 10,500 10,500 11,500
Distribution/Shareholder servicing 45,989 531,359 1,274,343
Insurance 10,104 14,770 58,340
Legal 90,851 76,677 102,549
Organizational 0 0 0
Printing 27,954 41,914 172,129
Registration 62,918 159,555 428,595
Transfer agent 92,488 149,133 1,538,272
Miscellaneous 35,776 37,625 380,319
-------------------- --------------- --------------------
2,225,851 5,868,130 29,423,210
Less: fees waived and expenses reimbursed 0 0 0
-------------------- --------------- --------------------
Total expenses 2,225,851 5,868,130 29,423,210
-------------------- --------------- --------------------
Net investment income (loss) 563,484 (2,982,589) 12,746,935
-------------------- --------------- --------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
AND FOREIGN CURRENCY RELATED ITEMS:
Net realized gain (loss) from security transactions 31,649,453 49,113,782 (34,444,203)
Net realized gain (loss) from foreign currency
related items 0 0 16,792,905
Net change in unrealized appreciation (depreciation)
from investments and foreign currency related items 12,386,702 84,670,426 (4,675,049)
-------------------- --------------- --------------------
Net realized and unrealized gain (loss) from
investments and foreign currency related
items 44,036,155 133,784,208 (22,326,347)
-------------------- --------------- --------------------
Net increase (decrease) in net assets
resulting from operations $ 44,599,639 $ 130,801,619 $ (9,579,412)
-------------------- --------------- --------------------
-------------------- --------------- --------------------
</TABLE>
40
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus
Japan OTC Emerging Markets Post-Venture Capital
Fund Fund (1) Fund (2)
-------------- ---------------- --------------------
<S> <C> <C>
$ 221,577 $ 33,788 $ 0
412,522 22,711 2,675
(33,237) (3,250) 0
-------------- ---------------- -----------
600,862 53,249 2,675
-------------- ---------------- -----------
599,720 29,641 1,756
138,679 5,217 280
25,700 16,000 9,000
60,612 45,701 5,771
11,290 14,625 1,250
119,941 5,926 351
2,761 855 0
96,359 54,987 5,000
42,449 37,432 1,932
2,579 14,765 1,000
115,649 26,664 6,000
100,690 28,656 2,833
10,620 6,070 500
-------------- ---------------- -----------
1,327,049 286,539 35,673
(652,386) (262,824) (33,354)
-------------- ---------------- -----------
674,663 23,715 2,319
-------------- ---------------- -----------
(73,801) 29,534 356
-------------- ---------------- -----------
(4,629,196) 102,219 (26,884)
7,895,010 (4,992) 0
(195,368) (9,058) 164,441
-------------- ---------------- -----------
3,070,446 88,169 137,557
-------------- ---------------- -----------
$2,996,645 $117,703 $137,913
-------------- ---------------- -----------
-------------- ---------------- -----------
(1) For the period December 30, 1994 (Commencement of Operations) through October 31, 1995.
(2) For the period September 29, 1995 (Commencement of Operations) through October 31, 1995.
</TABLE>
See Accompanying Notes to Financial Statements.
41
- --------------------------------------------------------------------------------
<PAGE>
<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,
1995 1994 1995 1994
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 563,484 $ 384,246 $ (2,982,589) $ (1,678,646)
Net realized gain (loss) from
security transactions 31,649,453 11,173,174 49,113,782 (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 12,386,702 (9,106,613) 84,670,426 10,930,919
--------------- ---------------- --------------- ----------------
Net increase (decrease) in net
assets resulting from
operations 44,599,639 2,450,807 130,801,619 3,530,748
--------------- ---------------- --------------- ----------------
FROM DISTRIBUTIONS:
Dividends from net investment income:
Common Shares (563,484) (419,337) 0 0
Advisor Shares 0 (27,724) 0 0
Distributions in excess of net
investment income:
Common Shares 0 0 0 0
Distributions from capital gains:
Common Shares (10,419,627) (12,899,141) 0 (10,576,150)
Advisor Shares (575,892) (852,608) 0 (1,639,316)
--------------- ---------------- --------------- ----------------
Net decrease from distributions (11,559,003) (14,198,810) 0 (12,215,466)
--------------- ---------------- --------------- ----------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 88,963,455 45,617,531 335,569,078 180,813,270
Reinvested dividends 11,246,752 13,809,167 0 12,758,387
Net asset value of shares redeemed (53,459,471) (49,851,500) (116,280,844) (71,767,717)
--------------- ---------------- --------------- ----------------
Net increase in net assets from
capital share transactions 46,750,736 9,575,198 219,288,234 121,803,940
--------------- ---------------- --------------- ----------------
Net increase (decrease) in net
assets 79,791,372 (2,172,805) 350,089,853 113,119,222
NET ASSETS:
Beginning of period 167,514,493 169,687,298 304,672,758 191,553,536
--------------- ---------------- --------------- ----------------
End of period $ 247,305,865 $167,514,493 $ 654,762,611 $304,672,758
--------------- ---------------- --------------- ----------------
--------------- ---------------- --------------- ----------------
</TABLE>
42
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus
Japan OTC Emerging Markets Post-Venture
Warburg Pincus Fund Fund Capital Fund
International Equity --------------------------------------- ------------------- -------------------
Fund For the Period For the Period For the Period
----------------------------------- September 30, 1994 December 30, 1994 September 29, 1995
For the (Commencement of (Commencement of (Commencement of
For the Year Ended October 31, Year Ended Operations) through Operations) through Operations) through
1995 1994 October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1995
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 12,746,935 $ 1,310,933 $ (73,801) $ 5,115 $ 29,534 $ 356
(34,444,203 ) 48,091,665 (4,629,196) 0 102,219 (26,884)
16,792,905 (2,772,944) 7,895,010 (294,437) (4,992) 0
(4,675,049 ) 82,484,415 (195,368) (35,099) (9,058) 164,441
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
(9,579,412 ) 129,114,069 2,996,645 (324,421) 117,703 137,913
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
(11,671,023 ) (1,764,380) 0 0 (14,321) 0
(629,473 ) (218,961) 0 0 (3) 0
0 (223,659) 0 0 0 0
(42,332,078 ) (1,047,367) 0 0 0 0
(5,756,403 ) (129,979) 0 0 0 0
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
(60,388,977 ) (3,384,346) 0 0 (14,324) 0
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
1,383,361,959 1,430,739,923 200,565,875 20,287,158 7,753,908 2,792,403
54,872,977 2,950,772 0 0 13,802 0
(715,598,203 ) (249,050,078) (44,871,674) (185,101) (1,191,160) (4,887)
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
722,636,733 1,184,640,617 155,694,201 20,102,057 6,576,550 2,787,516
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
652,668,344 1,310,370,340 158,690,846 19,777,636 6,679,929 2,925,429
1,733,275,503 422,905,163 19,878,636 101,000 101,000 100,000
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
$2,385,943,847 $1,733,275,503 $178,569,482 $19,878,636 $ 6,780,929 $ 3,025,429
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
--------------- ---------------- ---------------- ------------------- ------------------- -------------------
</TABLE>
See Accompanying Notes to Financial Statements.
43
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
FINANCIAL HIGHLIGHTS
(For a Common Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
September 30, 1994
(Commencement of
For the Year Ended Operations) through
October 31, 1995 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 Loss on Securities and Foreign Currency
Related Items (both realized and unrealized) (.76) (.15)
----------- ----------
Total from Investment Operations (.76) (.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 $ 9.09 $ 9.85
----------- ----------
----------- ----------
Total Return (7.72%) (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 178,568 $ 19,878
Ratios to average daily net assets:
Operating expenses 1.41% 1.00%*
Net investment income (loss) (.15%) .49%*
Decrease reflected in above operating expense
ratios due to waivers/reimbursements 1.35% 4.96%*
Portfolio Turnover Rate 82.98% .00%
* Annualized
</TABLE>
See Accompanying Notes to Financial Statements.
47
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund'), Warburg Pincus
International Equity Fund (the 'International Equity Fund') and Warburg Pincus
Post-Venture Capital Fund (the 'Post-Venture Capital 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'), Warburg Pincus Japan OTC Fund
(the 'Japan OTC Fund') and Warburg Pincus Emerging Markets Fund (the 'Emerging
Markets Fund', together with the Capital Appreciation Fund, the International
Equity Fund, the Post-Venture Capital Fund, the Emerging Growth Fund and the
Japan OTC 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 Emerging Markets Fund seeks growth of capital; the
Post-Venture Capital Fund seeks long-term growth of capital.
Each Fund offers two classes of shares, one class being referred to as
Common Shares and one class being referred to as Advisor Shares. Common and
Advisor Shares in each Fund represent an equal pro rata interest in such Fund,
except that they bear different expenses which reflect the difference in the
range of services provided to them. Common Shares for the Japan OTC Fund, the
Emerging Markets Fund and the Post-Venture Capital Fund bear expenses paid
pursuant to a shareholder servicing and distribution plan adopted by each Fund
at an annual rate not to exceed .25% of the average daily net asset value of
each Fund's outstanding Common Shares. Advisor Shares for each Fund bear
expenses paid pursuant to a distribution plan adopted by each Fund at an annual
rate not to exceed .75% of the average daily net asset value of each Fund's
outstanding Advisor Shares. The Common and the Advisor Shares are currently
bearing expenses of .25% and .50% of average daily net assets, respectively.
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 generally 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 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
50
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
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. The Funds isolate that portion of
gains and losses on investments in debt securities which are due to changes in
the foreign exchange rate from that which are due to changes in market prices of
debt 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, principally distribution,
transfer agent and printing) 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. Income
and capital gain distributions are determined in accordance with Federal income
tax regulations which may differ from generally accepted accounting principles.
Certain amounts in the Financial Highlights have been reclassified to
conform with current year presentation.
No provision is made for Federal taxes as it is each Fund's intention to
continue to qualify for and elect the tax treatment applicable to regulated
investment companies under the Internal Revenue Code and make the requisite
distributions to its shareholders which will be sufficient to relieve it from
Federal income and excise taxes.
Costs incurred by the Japan OTC Fund, the Emerging Markets Fund and the
Post-Venture Capital Fund in connection with their organization have been
deferred and are being amortized over a period of five years from the date each
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. ('Warburg'), 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, Warburg receives the
following fees based on each Fund's average daily net assets:
51
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<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
Emerging Markets 1.25% of average daily net assets
Post-Venture Capital 1.25% of average daily net assets
</TABLE>
For the period or year ended October 31, 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 $ 1,367,729 $ 0 $ 1,367,729 $ 0
Emerging Growth 3,824,061 0 3,824,061 0
International Equity 20,225,631 0 20,225,631 0
Japan OTC 599,720 (599,720) 0 (25,920)
Emerging Markets 29,641 (29,641) 0 (230,338)
Post-Venture Capital 1,756 (1,756) 0 (31,458)
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Warburg 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 paid by the Japan OTC Fund to
SPARX USA for its sub-investment advisory services.
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Warburg, 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, 1995, administrative services fees earned by CFSI were as
follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 195,390
Emerging Growth 424,895
International Equity 2,022,563
Japan OTC 47,978
Emerging Markets 2,372
Post-Venture Capital 140
</TABLE>
For its administrative services, PFPC currently receives a fee calculated
at an annual rate of .10% of the average daily net assets of the Capital
Appreciation Fund, the Emerging Growth Fund and the Post-Venture Capital Fund.
For the International Equity Fund, the Japan OTC Fund and the Emerging Markets
Fund, PFPC currently receives a fee calculated at an annual rate of .12% on each
Fund's first $250 million in average daily net assets, .10% on the next $250
million in average daily net assets, .08%
52
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
on the next $250 million in average daily net assets, and .05% of the average
daily net assets over $750 million.
For the period or year ended October 31, 1995, administrative service fees
earned and waived by PFPC were as follows:
<TABLE>
<CAPTION>
NET
FUND CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
- ----------------------------------------- --------------------- -------- -------------------------
<S> <C> <C> <C>
Capital Appreciation $ 195,390 $ 0 $ 195,390
Emerging Growth 424,895 0 424,895
International Equity 1,386,283 0 1,386,283
Japan OTC 90,701 (26,746) 63,955
Emerging Markets 2,845 (2,845) 0
Post-Venture Capital 140 (140) 0
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Warburg, serves as each Fund's distributor. No compensation is paid by the
Capital Appreciation Fund, the Emerging Growth Fund or the International Equity
Fund to CSI for distribution services. For its shareholder servicing and
distribution services, CSI currently receives a fee calculated at an annual rate
of .25% of the average daily net assets of the Common Shares for the Japan OTC
Fund, the Emerging Markets Fund and the Post-Venture Capital Fund pursuant to a
shareholder servicing and distribution plan adopted by each Fund. For the period
or year ended October 31, 1995, distribution fees earned by CSI were as follows:
<TABLE>
<CAPTION>
FUND DISTRIBUTION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Japan OTC $119,941
Emerging Markets 5,926
Post-Venture Capital 351
</TABLE>
3. INVESTMENTS IN SECURITIES
For the period or year ended October 31, 1995, purchases and sales of
investment securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ----------------------------------------------------------- -------------- ------------
<S> <C> <C>
Capital Appreciation $ 299,741,274 $269,962,070
Emerging Growth 532,722,466 336,581,792
International Equity 1,457,609,458 735,613,078
Japan OTC 189,768,420 36,507,703
Emerging Markets 7,181,659 1,297,140
Post-Venture Capital 2,714,501 222,270
</TABLE>
53
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
At October 31, 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 $ 45,397,319 $ (3,203,157) $ 42,194,162
Emerging Growth 144,909,782 (9,681,675) 135,228,107
International Equity 260,125,513 (171,560,066) 88,565,447
Japan OTC 6,205,079 (7,100,852) (895,773)
Emerging Markets 341,944 (352,944) (11,000)
Post-Venture Capital 233,929 (69,488) 164,441
</TABLE>
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund, the Japan OTC Fund, the Emerging Markets
Fund and the Post-Venture Capital 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. The Funds 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.
54
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
At October 31, 1995, the International Equity Fund and the Japan OTC Fund had
the following open forward foreign currency contracts:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------
FOREIGN UNREALIZED
FORWARD CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE TO BE SOLD AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
French Francs 11/15/95 260,000,000 $ 52,170,074 $ 53,253,590 $ (1,083,516)
French Francs 11/16/95 122,216,250 25,050,833 25,032,515 18,318
German Marks 11/16/95 110,000,000 78,272,317 78,263,963 8,354
German Marks 05/17/96 78,928,380 55,400,000 56,652,584 (1,252,584)
Japanese Yen 03/21/96 5,547,240,000 57,000,000 55,475,507 1,524,493
Japanese Yen 03/21/96 4,764,377,500 47,298,496 47,646,443 (347,947)
Japanese Yen 03/21/96 4,764,377,500 47,276,203 47,646,443 (370,240)
Japanese Yen 03/21/96 1,385,445,000 13,761,286 13,855,226 (93,940)
Japanese Yen 05/13/96 8,731,990,000 109,000,000 88,008,212 20,991,788
Japanese Yen 05/16/96 9,247,700,000 110,000,000 93,246,752 16,753,248
Japanese Yen 05/16/96 4,586,012,000 55,400,000 46,241,847 9,158,153
Japanese Yen 09/18/96 4,660,000,000 50,000,000 47,860,895 2,139,105
------------ ------------ ----------------
$700,629,209 $653,183,977 $ 47,445,232
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY UNREALIZED
FORWARD CURRENCY EXPIRATION TO BE CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE PURCHASED AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
German Marks 11/16/95 34,500,000 $ 25,050,828 $ 24,546,425 $ (504,403)
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC FUND
- -----------------------------------------------------------------------------------------------------------
FOREIGN UNREALIZED
FORWARD CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE TO BE SOLD AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Japanese Yen 11/30/95 12,567,400,000 $124,000,000 $123,536,813 $ 463,187
Japanese Yen 11/30/95 2,027,000,000 20,000,000 19,925,293 74,707
Japanese Yen 11/30/95 1,520,250,000 15,000,000 14,943,969 56,031
------------ ------------ ----------------
$159,000,000 $158,406,075 $ 593,925
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
55
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
5. EQUITY SWAP TRANSACTIONS
The International Equity Fund (the 'Fund') entered into a Taiwanese equity
swap agreement (which represents approximately .005% of the Fund's net assets at
October 31, 1995) dated August 11, 1995, where the Fund receives a quarterly
payment, representing the total return (defined as market appreciation and
dividend income) on a basket of three Taiwanese common stocks ('Common Stocks').
In return, the Fund pays quarterly the Libor rate (London Interbank Offered
Rate), plus 1.25% per annum (7.125% on October 31, 1995) on the initial stock
purchase amount ('Notional amount') of $12,000,000. The Notional amount is
marked to market on each quarterly reset date. In the event that the Common
Stocks decline in value, the Fund will be required to pay quarterly, the amount
of any depreciation in value from the notional amount. The equity swap agreement
will terminate on August 11, 1996.
During the term of the equity swap transaction, changes in the value of the
Common Stocks as compared to the Notional amount is recognized as unrealized
gain or loss. Dividend income for the Common Stocks are recorded on the
ex-dividend date. Interest expense is accrued daily. At October 31, 1995, the
Fund has recorded an unrealized gain of $502,018 and interest payable of
$192,375 on the equity swap transaction.
56
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS
The Capital Appreciation Fund is authorized to issue three billion of full
and fractional shares of beneficial interest, $.001 par value per share, of
which one billion shares are classified as Series 2 Shares (the Advisor Shares).
The Emerging Growth Fund, the International Equity Fund, the Japan OTC Fund, the
Emerging Markets Fund and the Post-Venture Capital 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 of each Fund are designated as Series 2
Shares (the Advisor Shares).
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND
Common Shares Advisor Shares
----------------------------- ---------------------------
For the Year Ended October 31,
-------------------------------------------------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Shares sold 6,020,619 2,958,494 201,782 290,193
Shares issued to
shareholders on
reinvestment of
dividends 850,478 920,210 46,554 61,526
Shares redeemed (3,638,974) (3,126,497) (110,027) (460,020)
------------ ------------ ----------- -----------
Net increase
(decrease) in
shares outstanding 3,232,123 752,207 138,309 (108,301)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Proceeds from sale
of shares $ 85,992,655 $ 41,570,590 $ 2,970,800 $ 4,046,941
Reinvested dividends 10,670,876 12,945,690 575,876 863,477
Net asset value of
shares redeemed (51,907,650) (43,449,501) (1,551,821) (6,401,999)
------------ ------------ ----------- -----------
Net increase
(decrease) from
capital share
transactions $ 44,755,881 $ 11,066,779 $ 1,994,855 $(1,491,581)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
<CAPTION>
EMERGING GROWTH FUND
Common Shares Advisor Shares
----------------------------- ----------------------------
For the Year Ended October 31,
--------------------------------------------------------------
1995 1994 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 9,808,362 6,133,751 3,172,686 2,233,737
Shares issued to
shareholders on
reinvestment of
dividends 0 506,720 0 80,473
Shares redeemed (4,294,179) (2,859,413) (383,922) (517,898)
------------ ------------ ----------- ------------
Net increase
(decrease) in
shares outstanding 5,514,183 3,781,058 2,788,764 1,796,312
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Proceeds from sale
of shares $256,886,928 $132,922,995 $78,682,150 $ 47,890,275
Reinvested dividends 0 11,015,146 0 1,743,241
Net asset value of
shares redeemed (106,777,032) (61,126,667) (9,503,812) (10,641,050)
------------ ------------ ----------- ------------
Net increase
(decrease) from
capital share
transactions $150,109,896 $ 82,811,474 $69,178,338 $ 38,992,466
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
</TABLE>
57
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND EMERGING MARKETS FUND
Common Shares Advisor Shares
Common Shares Advisor Shares ------------- --------------
-------------------------------- ---------------------------- For the Period
For the Year Ended October 31, December 30, 1994
---------------------------------------------------------------- (Commencement of Operations)
1995 1994 1995 1994 through October 31, 1995
-------------- -------------- ------------ ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 68,096,606 64,218,907 7,225,150 7,956,088 694,008 22
Shares issued to
shareholders on
reinvestment of
dividends 2,623,005 147,031 346,377 6,879 1,267 0
Shares redeemed (38,317,625) (11,861,720) (770,753) (795,406) (104,480) 0
-------------- -------------- ------------ ------------ ------------- -----
Net increase (decrease)
in shares outstanding 32,401,986 52,504,218 6,800,774 7,167,561 590,795 22
-------------- -------------- ------------ ------------ ------------- -----
-------------- -------------- ------------ ------------ ------------- -----
Proceeds from sale of
shares $1,251,776,887 $1,275,306,263 $131,585,072 $155,433,660 $ 7,753,651 $257
Reinvested dividends 48,487,109 2,820,903 6,385,868 129,869 13,802 0
Net asset value of shares
redeemed (701,310,424) (233,614,600) (14,287,779) (15,435,478) (1,191,160) 0
-------------- -------------- ------------ ------------ ------------- -----
Net increase (decrease)
from capital share
transactions $ 598,953,572 $1,044,512,566 $123,683,161 $140,128,051 $ 6,576,293 $257
-------------- -------------- ------------ ------------ ------------- -----
-------------- -------------- ------------ ------------ ------------- -----
</TABLE>
7. NET ASSETS
Net Assets at October 31, 1995, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION FUND GROWTH FUND
----------------- ------------
<S> <C> <C>
Capital contributed, net $ 173,327,827 $479,035,241
Accumulated net investment income (loss) 0 0
Accumulated net realized gain (loss) from security transactions 31,648,355 40,302,640
Net unrealized appreciation (depreciation) from investments and
foreign currency related items 42,329,683 135,424,730
----------------- ------------
Net assets $ 247,305,865 $654,762,611
----------------- ------------
----------------- ------------
</TABLE>
58
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPAN OTC FUND
Common Shares Advisor Shares
------------------------------------- -------------------------------------
For the Period For the Period POST-VENTURE CAPITAL FUND
September 30, September 30, Advisor Shares
1994 1994 --------------
(Commencement (Commencement
Common Shares
-------------
For the Period
For the of Operations) For the of Operations) September 29, 1995
Year Ended through Year Ended through (Commencement of Operations)
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994 through October 31, 1995
---------------- ---------------- ---------------- ---------------- --------------------------------
<S> <C> <C> <C> <C> <C>
22,809,795 2,025,697 0 15 273,510 19
0 0 0 0 0 0
(5,180,432) (18,605) 0 0 (473) 0
---------------- ---------------- --- ----- ------------- -----
17,629,363 2,007,092 0 15 273,037 19
---------------- ---------------- --- ----- ------------- -----
---------------- ---------------- --- ----- ------------- -----
$200,565,875 $ 20,287,008 $0 $150 $ 2,792,203 $200
0 0 0 0 0 0
(44,871,674) (185,101) 0 0 (4,887) 0
---------------- ---------------- --- ----- ------------- -----
$155,694,201 $ 20,101,907 $0 $150 $ 2,787,316 $200
---------------- ---------------- --- ----- ------------- -----
---------------- ---------------- --- ----- ------------- -----
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING POST-VENTURE
EQUITY FUND MARKETS FUND JAPAN OTC FUND CAPITAL FUND
-------------- ------------ -------------- ------------
<S> <C> <C> <C>
$2,271,007,433 $6,677,550 $175,619,527 $2,887,516
19,124,669 10,218 7,821,209 356
(40,671,086) 102,219 (4,640,787) (26,884)
136,482,831 (9,058) (230,467) 164,441
-------------- ------------ -------------- ------------
$2,385,943,847 $6,780,929 $178,569,482 $3,025,429
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
</TABLE>
59
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
8. CAPITAL LOSS CARRYOVER
At October 31, 1995, the International Equity Fund, the Japan OTC Fund and
the Post-Venture Capital Fund had capital loss carryovers of $40,671,086,
$4,629,196 and $26,884, respectively, expiring in 2003 to offset possible future
capital gains of each Fund.
9. OTHER FINANCIAL HIGHLIGHTS
Each Fund currently offers one other class of shares, Advisor Shares,
representing equal prorata interests in each of the respective Warburg Pincus
Equity Funds. The financial highlights for an Advisor Share of each Fund are as
follows:
<TABLE>
<CAPTION>
Capital Appreciation Fund
----------------------------------------------------------------
Advisor Shares
----------------------------------------------------------------
April 4, 1991
(Initial
For the Year Ended October 31, Issuance)
------------------------------------------ through
1995 1994 1993 1992 October 31, 1991
------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.22 $15.28 $13.28 $12.16 $12.04
------ ------ ------ ------ -------
Income from Investment Operations:
Net Investment Income (Loss) .00 (.08) .00 (.01) .05
Net Gain on Securities (both realized and
unrealized) 3.02 .23 2.76 1.20 .13
------ ------ ------ ------ -------
Total from Investment Operations 3.02 .15 2.76 1.19 .18
------ ------ ------ ------ -------
Less Distributions:
Dividends from Net Investment Income .00 (.02) .00 (.02) (.06)
Distributions from Capital Gains (.98) (1.19) (.76) (.05) .00
------ ------ ------ ------ -------
Total Distributions (.98) (1.21) (.76) (.07) (.06)
------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $16.26 $14.22 $15.28 $13.28 $12.16
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Total Return 23.41% 1.23% 21.64% 9.83% 2.66%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $11,594 $8,169 $10,437 $1,655 $443
Ratios to average daily net assets:
Operating expenses 1.62% 1.55% 1.51% 1.56% 1.63%*
Net investment income (loss) (.18%) (.24%) (.25%) (.11%) .25%*
Decrease reflected in above operating expense
ratios due to waivers/reimbursements .00% .01% .00% .01% .01%*
Portfolio Turnover Rate 146.09% 51.87% 48.26% 55.83% 39.50%
* Annualized
</TABLE>
60
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.02
Long-term capital gain .96
</TABLE>
Ordinary income dividends qualifying for the dividends received deduction
available to corporate shareholders was 100.00%.
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
61
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Growth Fund
--------------------------------------------------------
Advisor Shares
--------------------------------------------------------
April 4, 1991
(Initial
For the Year Ended October 31, Issuance)
------------------------------------ through
1995 1994 1993 1992 October 31, 1991
------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.05 $23.51 $18.19 $16.99 $15.18
------ ------ ------ ------ -------
Income from Investment Operations:
Net Investment Loss (.09) (.08) (.08) (.06) .00
Net Gain (Loss) on Securities (both
realized and unrealized) 7.42 (.02) 5.77 1.62 1.82
------ ------ ------ ------ -------
Total from Investment Operations 7.33 (.10) 5.69 1.56 1.82
------ ------ ------ ------ -------
Less Distributions:
Dividends from Net Investment Income .00 .00 .00 .00 (.01)
Distributions from Capital Gains .00 (1.36) (.37) (.36) .00
------ ------ ------ ------ -------
Total Distributions .00 (1.36) (.37) (.36) (.01)
------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $29.38 $22.05 $23.51 $18.19 $16.99
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Total Return 33.24% (.29%) 31.67% 9.02% 23.43%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $167,225 $64,009 $26,029 $5,398 $275
Ratios to average daily net assets:
Operating expenses 1.76% 1.72% 1.73% 1.74% 1.74%*
Net investment loss (1.08%) (1.08%) (1.09%) (.87%) (.49%)*
Decrease reflected in above operating expense ratios
due to waivers/reimbursements .00% .04% .00% .06% .42%*
Portfolio Turnover Rate 84.82% 60.38% 68.35% 63.38% 97.69%
* Annualized
</TABLE>
62
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Fund
--------------------------------------------------------
Advisor Shares
--------------------------------------------------------
April 4, 1991
(Initial
For the Year Ended October 31, Issuance)
------------------------------------ through
1995 1994 1993 1992 October 31, 1991
------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $20.38 $16.91 $12.20 $13.66 $13.14
------ ------ ------ ------ -------
Income from Investment Operations:
Net Investment Income (Loss) .03 .16 (.01) .13 .00
Net Gain (Loss) on Securities and
Foreign Currency Related Items
(both realized and unrealized) (.67) 3.35 4.86 (1.32) .58
------ ------ ------ ------ -------
Total from Investment Operations (.64) 3.51 4.85 (1.19) .58
------ ------ ------ ------ -------
Less Distributions:
Dividends from Net Investment Income (.05) .00 (.01) (.12) (.06)
Distributions from Capital Gains (.53) (.04) (.13) (.15) .00
------ ------ ------ ------ -------
Total Distributions (.58) (.04) (.14) (.27) (.06)
------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $19.16 $20.38 $16.91 $12.20 $13.66
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Total Return (3.04%) 20.77% 40.06% (8.86%) 7.85%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $317,736 $199,404 $44,244 $1,472 $153
Ratios to average daily net assets:
Operating expenses 1.89% 1.94% 2.00% 2.00% 2.23%*
Net investment income (loss) .20% (.29%) (.36%) .54% .30%*
Decrease reflected in above operating expense ratios due to
waivers/reimbursements .00% .00% .00% .07% .17%*
Portfolio Turnover Rate 39.24% 17.02% 22.60% 53.29% 54.95%
* Annualized
</TABLE>
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.38
Long-term capital gain .20
</TABLE>
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
63
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Japan OTC Fund
----------------------------------------
Advisor Shares
----------------------------------------
For the Period
September 30, 1994
For the (Commencement of
Year Ended Operations) through
October 31, 1995 October 31, 1994
---------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.85 $10.00
------ -------
Income from Investment Operations:
Net Investment Income (Loss) (.02) .00
Net Loss on Securities and Foreign Currency Related Items (both
realized and unrealized) (.75) (.15)
------ -------
Total from Investment Operations (.77) (.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 $ 9.08 $ 9.85
------ -------
------ -------
Total Return (7.82%) (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $1 $1
Ratios to average daily net assets:
Operating expenses 1.31% 1.18%*
Net investment income (loss) (.19%) .12%*
Decrease reflected in above operating expense ratios due to
waivers/reimbursements 1.83% 4.74%*
Portfolio Turnover Rate 82.98% .00%
* Annualized
</TABLE>
64
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Fund
---------------------
Advisor Shares
---------------------
December 30, 1994
(Commencement of
Operations) through
October 31, 1995
---------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from Investment Operations:
Net Investment Income .14
Net Gain on Securities and Foreign Currency Related Items (both realized and unrealized) 1.19
-------
Total from Investment Operations 1.33
-------
Less Distributions:
Dividends from Net Investment Income (.03)
Distributions from Capital Gains .00
-------
Total Distributions (.03)
-------
NET ASSET VALUE, END OF PERIOD $ 11.30
-------
-------
Total Return 16.05%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $1
Ratios to average daily net assets:
Operating expenses 1.22%*
Net investment income 1.76%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 16.36%*
Portfolio Turnover Rate 69.12%*
* Annualized
</TABLE>
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.03
</TABLE>
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
65
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Post-Venture Capital Fund
-------------------------
Advisor Shares
-------------------------
For the Period
September 29, 1995
(Commencement of
Operations) through
October 31, 1995
-------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from Investment Operations:
Net Investment Income .00
Net Gain on Securities .68
-------
Total from Investment Operations .68
-------
Less Distributions:
Dividends from Net Investment Income .00
Distributions from Capital Gains .00
-------
Total Distributions .00
-------
NET ASSET VALUE, END OF PERIOD $ 10.68
-------
-------
Total Return 6.80%+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $1
Ratios to average daily net assets:
Operating expenses 2.15%*
Net investment income .09%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 9.25%*
Portfolio Turnover Rate 16.90%*
* Annualized
+ Non annualized
</TABLE>
66
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND -- ADVISOR SHARES
- --------------------------------------------------------------------------------
December 8, 1995
Dear Shareholder:
The objective of the Advisor Shares of Warburg Pincus Japan OTC Fund (the
'Fund') is long-term capital appreciation. The Fund invests primarily in
securities traded on the Japanese over-the-counter (OTC) market. At all times,
except during temporary defensive periods, the Fund maintains at least 65% of
its assets in these OTC securities.
For the 12 months ended October 31, 1995, the Fund lost 7.82%, vs. a 15.58%
decline in the yen-denominated JASDAQ Index. In dollar terms, the JASDAQ Index
lost 19.93%.
Though the Japanese market finished the period with a net loss, its rebound
in recent months is encouraging. For example, the six-month total return of the
Fund (4/30/95 - 10/31/95) is 15.82%. We believe that there are additional,
significant grounds for optimism regarding Japan, and that the stock market's
rally reflects a secular change under way in the Japanese economy, one that will
provide excellent opportunities for smaller companies.
There are several reasons for optimism. First, the yen's reversal suggests
that Japanese finance officials are finally committed to taking the necessary
steps to reverse the country's protracted economic slide. Recent money-supply
data confirm the liquidity growth that we first suspected earlier this year,
while the Bank of Japan's increasing willingness to discuss the country's
troubled banking system is also encouraging and likely foreshadows a
taxpayer-financed bailout of the financial sector. This will have a significant
impact on the economy and the broad stock market.
Second, there is a strong earnings recovery taking place in the
manufacturing sector. The strongest growth in earnings is occurring in the
electronics area, especially among semiconductor- and personal-computer-related
companies, which are well-represented in the OTC market. Many other basic
industries (e.g., paper and petrochemicals) are seeing good earnings growth as
well, the result of aggressive restructuring efforts and strategic mergers.
Third, on a longer-term basis, opportunities continue to appear for
companies nimble enough to take advantage of inefficiencies within the Japanese
economy. Though deregulation of Japan's overregulated economy is likely to
remain slow, the rapidly expanding OTC market is presenting an increasing range
of smaller companies that benefit from these changes.
Our primary areas of focus in the portfolio currently are in
personal-computer-related and consumption-related companies (e.g., retailers),
which we believe have the best prospects over the coming months. We are also
looking at opportunities in the housing sector, which stands to benefit from the
current low level of interest rates and the reconstruction efforts necessitated
by the Kobe earthquake.
<TABLE>
<S> <C>
Shuhei Abe Nicholas P.W. Horsley
Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND -- ADVISOR SHARES
- --------------------------------------------------------------------------------
GRAPH OF $10,000 INVESTED IN ADVISOR SHARES OF WARBURG PINCUS JAPAN OTC FUND
SINCE INCEPTION AS OF OCTOBER 31, 1995
The graph below illustrates the hypothetical investment of $10,000 in
Advisor Shares of Warburg Pincus Japan OTC Fund (the 'Fund') from September 30,
1994 (inception) to October 31, 1995, assuming the reinvestment of dividends and
capital gains at net asset value, compared to the JASDAQ* for the same time
period.
[ INSERT GRAPHIC HERE ]
<TABLE>
<CAPTION>
FUND
---------
<S> <C>
1 Year Total Return (09/30/94 - 09/30/95)............................................ - 9.20%
</TABLE>
All figures cited here represent past performance and do not guarantee
future results. Investment return and principal value of an investment will
fluctuate so that an investor's shares upon redemption may be worth more or less
than original cost. Without waivers or reimbursements of Fund expenses, average
annual total returns for the 1 year period ending 9/30/95 and the 1 year and
since inception periods ending 10/31/95, respectively, would have been
-11.20%, -9.44% and -10.35%.
- ------------
* The JASDAQ Over-The-Counter Composite Index is an unmanaged index comprised
of stocks traded over-the-counter in Japan.
** Stated in Yen
*** Stated in US dollars
+ Non-annualized
9
- --------------------------------------------------------------------------------
<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 Warburg Pincus
Capital Appreciation Fund, Warburg Pincus Emerging Growth Fund and Warburg
Pincus International Equity Fund and the accompanying statements of assets and
liabilities including the schedules of investments of Warburg Pincus Japan OTC
Fund, Warburg Pincus Emerging Markets Fund and Warburg Pincus Post-Venture
Capital Fund (all Funds collectively referred to as the 'Warburg Pincus Equity
Funds') as of October 31, 1995, and the related statements of operations for the
year (or period) then ended, and the statements of changes in net assets for
each of the two years (or period) and the financial highlights for each of the
three 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 two years in the period ended
October 31, 1992, 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, 1995, 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, 1995, and the results of
their operations for the year (or period) then ended, and the changes in their
net assets for each of the two years (or period) and the financial highlights
for each of the three 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, PA
December 14, 1995
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (91.9%)
Agriculture (0.6%)
Kaneko Seeds Co. 100,000 $ 1,027,297
------------
Automobile (0.9%)
Aucnet Inc. 30,000 1,584,972
------------
Automotive Parts-Equipment (0.2%)
Harada Industry Co., Ltd. 16,000 328,735
------------
Broadcasting (0.7%)
Horipro Inc. 87,000 1,293,807
------------
Building Materials (0.6%)
Furusato Industries 131,000 1,095,832
------------
Clinical Examination (0.8%)
Kanto Biomedical Laboratory 100,000 1,311,026
------------
Computers (10.5%)
Daiwabo Information System Co. 50,000 1,433,324
I.O. Data Device Inc. 160,000 11,427,453
Melco Inc. 100,000 5,469,132
------------
18,329,909
------------
Construction (2.6%)
Kawasho Lease System Corp. 117,200 1,559,456
Onoken Co., Ltd. 44,000 1,003,033
Sacos Corp. 60,000 1,344,291
Yamazaki Construction Co., Ltd. 40,000 563,546
Yokogawa Construction Co., Ltd. 9,000 110,068
------------
4,580,394
------------
Electronics (13.7%)
Ado Electronic Industrial Co., Ltd. 108,000 2,430,291
Advantest Corp. 30,000 1,702,377
Apic Yamada Corp. 100,000 4,402,700
Easton Co., Ltd. 90,000 3,786,322
Katsuragawa Electric Co., Ltd. 123,000 2,033,754
New Japan Radio Co., Ltd. + 160,000 2,285,491
Satori Electric Co., Ltd. 40,000 1,858,918
USC Corp. 25,000 802,270
Yaesu Musen Co., Ltd. 58,000 618,530
Yamaichi Electronics Mfg. 135,000 4,094,511
------------
24,015,164
------------
Engineering & Construction (1.6%)
Sawako Corp. 100,000 2,788,377
------------
</TABLE>
See Accompanying Notes to Financial Statements.
27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
Foods (1.2%)
Warabeya Nichiyo Co., Ltd. 41,000 $ 613,736
Yoshinoya D&C Co., Ltd. 92 1,458,174
------------
2,071,910
------------
Food Processing (2.5%)
Ariake Japan Co., Ltd. 50,000 1,687,702
Sato Foods Industries Co. Ltd. 64,000 1,076,998
Taiyo Kagaku Co., Ltd. 130,000 1,577,145
------------
4,341,845
------------
Healthcare (2.1%)
Nichii Gakkan Co. 83,000 3,621,759
------------
Home Appliances (5.3%)
Yamada Denki Co., Ltd. 433,000 9,362,391
------------
Home Furnishings/Housewares (0.9%)
Hikari Furniture Co., Ltd. 39,000 476,959
Sekichu Co., Ltd. 105,000 1,119,753
------------
1,596,712
------------
Lodging (0.1%)
Royal Hotel 26,000 178,065
------------
Machinery (Electric) (1.3%)
Nissei ASB Machine Co., Ltd. + 113,000 1,470,404
Sato Corp. 42,000 862,929
------------
2,333,333
------------
Manufacturing (18.6%)
Disco Corp. 152,000 5,725,467
Fujimi Inc. 100,000 6,868,213
Kadoya Sesame Mills Inc. 72,000 915,762
Maki Manufacturing Co., Ltd. 50,000 860,973
Nakakita Seisakusho Co., Ltd. 60,000 299,384
Nippon Steel Semiconductor Co. + 150 5,870,267
Nitta Industrial Corp. 392,000 6,481,558
Tokyo Electron Ltd. 50,000 2,171,999
Tokyo Seimitsu Co., Ltd. 175,000 3,424,322
------------
32,617,945
------------
Pharmaceuticals (3.8%)
Fuji Pharmaceutical Co., Ltd. + 140,000 2,328,539
Sawai Pharmaceutical Co., Ltd. + 50,000 1,707,269
Seikagaku Corp. 100,000 2,573,134
------------
6,608,942
------------
</TABLE>
See Accompanying Notes to Financial Statements.
28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
Retail (18.5%)
Aoyama Trading Co., Ltd 100,000 $ 2,700,323
Circle K Japan Co., Ltd + 190,000 7,249,780
Fast Retailing Co., Ltd 60,000 2,929,263
Homac Corp. 16,000 286,469
Home Wide Corp. 226,000 2,675,472
Kuroganeya Co., Ltd. 201,000 3,048,136
Laox Co. 80,000 1,737,599
Ryohin Keikaku Co., Ltd. 110,000 7,232,169
Seven-Eleven Japan 40,000 2,669,015
Sundrug Co., Ltd. 50,000 1,917,621
------------
32,445,847
------------
Retail Merchandising (1.2%)
Jeans Mate Corp. 15,000 484,297
Kraft Inc. 44,000 774,875
Right On Co., Ltd. 48,000 915,762
------------
2,174,934
------------
Shipbuilding (1.6%)
Namura Shipbuilding 250,000 1,394,188
Sanoyas Hishino Meisho Corp. 300,000 1,467,567
------------
2,861,755
------------
Wholesale Distribution (2.6%)
Hakuto Co., Ltd. 100,000 2,582,918
Petrolub International Co. 63,000 1,090,989
Toyo Corp. 50,000 552,784
Yonkyu Co., Ltd. 9,000 233,343
------------
4,460,034
------------
TOTAL COMMON STOCK (Cost $161,928,196) 161,030,985
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
----------
<S> <C> <C>
CORPORATE BONDS (0.3%)
Switzerland
Ralse Co., Ltd. 1.00% 08/31/98 (Convertible; callable 2/29/96 @ 102 Sfr)
(Cost $416,917) 500,000 418,355
------------
UNITED STATES TREASURY OBLIGATIONS (4.6%)
U.S. Treasury Bill 4.90%, due 11/02/95
(Cost $7,998,911) $8,000,000 7,998,911
------------
SHORT-TERM INVESTMENTS (3.2%)
Repurchase agreement with State Street Bank & Trust Co. dated 10/31/95 at 5.83%
to be repurchased at $5,772,935 on 11/1/95 (Collateralized by $5,630,000 U.S.
Treasury Note 7.25% due 11/30/96 with a market value of $5,892,116)
(Cost $5,772,000) 5,772,000 5,772,000
------------
TOTAL INVESTMENTS (100.0%) (Cost $176,116,024*) $175,220,251
------------
------------
</TABLE>
+ Non-income producing security.
* Also cost for Federal income tax purposes.
See Accompanying Notes to Financial Statements.
29
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at value (Cost $176,116,024) $175,220,251
Foreign currency (Cost $22,536,885) 22,505,366
Receivable for Fund shares sold 2,928,760
Receivable for unrealized gain on forward contracts (Note 4) 593,925
Receivable for investment securities sold 536,755
Deferred organizational costs (Note 1) 166,783
Dividends and interest receivable 88,944
Other assets 6,051
------------
Total assets 202,046,835
------------
LIABILITIES
Payable for investment securities purchased 22,476,211
Payable for Fund shares redeemed 717,610
Accrued expenses 283,532
------------
Total liabilities 23,477,353
------------
NET ASSETS applicable to 19,646,455 Common Shares outstanding and
115 Advisor Shares outstanding $178,569,482
------------
------------
NET ASSET VALUE, offering and redemption price per Common Share
($178,568,438[div]19,646,455) $9.09
-----
-----
NET ASSET VALUE, offering and redemption price per Advisor Share
($1,044[div]115) $9.08
-----
-----
</TABLE>
See Accompanying Notes to Financial Statements.
36
<PAGE>
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Year or Period Ended October 31, 1995
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity
Fund Fund Fund
-------------------- --------------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 2,107,232 $ 772,834 $ 40,091,101
Interest 684,526 2,112,707 7,110,116
Foreign taxes withheld (2,423) 0 (5,031,072)
-------------------- --------------- --------------------
Total investment income 2,789,335 2,885,541 42,170,145
-------------------- --------------- --------------------
EXPENSES:
Investment advisory 1,367,729 3,824,061 20,225,631
Administrative services 390,780 849,790 3,408,846
Audit 27,208 27,469 69,286
Custodian/Sub-custodian 63,554 145,277 1,753,400
Directors/Trustees 10,500 10,500 11,500
Distribution/Shareholder servicing 45,989 531,389 1,274,343
Insurance 10,104 14,770 58,340
Legal 90,851 76,677 102,549
Organizational 0 0 0
Printing 27,954 41,914 172,129
Registration 62,918 159,555 428,595
Transfer agent 92,488 149,133 1,538,272
Miscellaneous 35,776 37,625 380,319
-------------------- --------------- --------------------
2,225,851 5,868,130 29,423,210
Less: fees waived and expenses reimbursed 0 0 0
-------------------- --------------- --------------------
Total expenses 2,225,851 5,868,130 29,423,210
-------------------- --------------- --------------------
Net investment income (loss) 563,484 (2,982,589) 12,746,935
-------------------- --------------- --------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
AND FOREIGN CURRENCY RELATED ITEMS:
Net realized gain (loss) from security transactions 31,649,453 49,113,782 (34,444,203)
Net realized gain (loss) from foreign currency
related items 0 0 16,792,905
Net change in unrealized appreciation (depreciation)
from investments and foreign currency related items 12,386,702 84,670,426 (4,675,049)
-------------------- --------------- --------------------
Net realized and unrealized gain (loss) from
investments and foreign currency related
items 44,036,155 133,784,208 (22,326,347)
-------------------- --------------- --------------------
Net increase (decrease) in net assets
resulting from operations $ 44,599,639 $ 130,801,619 $ (9,579,412)
-------------------- --------------- --------------------
-------------------- --------------- --------------------
</TABLE>
40
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus
Japan OTC Emerging Markets Post-Venture Capital
Fund Fund (1) Fund (2)
-------------- ---------------- --------------------
<S> <C> <C> <C>
$ 221,577 $ 33,788 $ 0
412,522 22,711 2,675
(33,237) (3,250) 0
-------------- ---------------- -----------
600,862 53,249 2,675
-------------- ---------------- -----------
599,720 29,641 1,756
138,679 5,217 280
25,700 16,000 9,000
60,612 45,701 5,771
11,290 14,625 1,250
119,941 5,926 351
2,761 855 0
96,359 54,987 5,000
42,449 37,432 1,932
2,579 14,765 1,000
115,649 26,664 6,000
100,690 28,656 2,833
10,620 6,070 500
-------------- ---------------- -----------
1,327,049 286,539 35,673
(652,386) (262,824) (33,354)
-------------- ---------------- -----------
674,663 23,715 2,319
-------------- ---------------- -----------
(73,801) 29,534 356
-------------- ---------------- -----------
(4,629,196) 102,219 (26,884)
7,895,010 (4,992) 0
(195,368) (9,058) 164,441
-------------- ---------------- -----------
3,070,446 88,169 137,557
-------------- ---------------- -----------
$2,996,645 $117,703 $137,913
-------------- ---------------- -----------
-------------- ---------------- -----------
</TABLE>
(1) For the period December 30, 1994 (Commencement of Operations) through
October 31, 1995.
(2) For the period September 29, 1995 (Commencement of Operations) through
October 31, 1995.
See Accompanying Notes to Financial Statements.
41
- --------------------------------------------------------------------------------
<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,
1995 1994 1995 1994
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 563,484 $ 384,246 $ (2,982,589) $ (1,678,646)
Net realized gain (loss) from
security transactions 31,649,453 11,173,174 49,113,782 (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 12,386,702 (9,106,613) 84,670,426 10,930,919
--------------- ---------------- --------------- ----------------
Net increase (decrease) in net
assets resulting from
operations 44,599,639 2,450,807 130,801,619 3,530,748
--------------- ---------------- --------------- ----------------
FROM DISTRIBUTIONS:
Dividends from net investment income:
Common Shares (563,484) (419,337) 0 0
Advisor Shares 0 (27,724) 0 0
Distributions in excess of net
investment income:
Common Shares 0 0 0 0
Distributions from capital gains:
Common Shares (10,419,627) (12,899,141) 0 (10,576,150)
Advisor Shares (575,892) (852,608) 0 (1,639,316)
--------------- ---------------- --------------- ----------------
Net decrease from distributions (11,559,003) (14,198,810) 0 (12,215,466)
--------------- ---------------- --------------- ----------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 88,963,455 45,617,531 335,569,078 180,813,270
Reinvested dividends 11,246,752 13,809,167 0 12,758,387
Net asset value of shares redeemed (53,459,471) (49,851,500) (116,280,844) (71,767,717)
--------------- ---------------- --------------- ----------------
Net increase in net assets from
capital share transactions 46,750,736 9,575,198 219,288,234 121,803,940
--------------- ---------------- --------------- ----------------
Net increase (decrease) in net
assets 79,791,372 (2,172,805) 350,089,853 113,119,222
NET ASSETS:
Beginning of period 167,514,493 169,687,298 304,672,758 191,553,536
--------------- ---------------- --------------- ----------------
End of period $ 247,305,865 $167,514,493 $ 654,762,611 $304,672,758
--------------- ---------------- --------------- ----------------
--------------- ---------------- --------------- ----------------
</TABLE>
42
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Japan OTC Emerging Markets
Warburg Pincus Fund Fund
International Equity --------------------------------------- -------------------
Fund For the Period For the Period
----------------------------------- September 30, 1994 December 30, 1994
For the (Commencement of (Commencement of
For the Year Ended October 31, Year Ended Operations) through Operations) through
1995 1994 October 31, 1995 October 31, 1994 October 31, 1995
--------------- ---------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 12,746,935 $ 1,310,933 $ (73,801) $ 5,115 $ 29,534
(34,444,203 ) 48,091,665 (4,629,196) 0 102,219
16,792,905 (2,772,944) 7,895,010 (294,437) (4,992)
(4,675,049 ) 82,484,415 (195,368) (35,099) (9,058)
--------------- ---------------- ---------------- ------------------- -------------------
(9,579,412 ) 129,114,069 2,996,645 (324,421) 117,703
--------------- ---------------- ---------------- ------------------- -------------------
(11,671,023 ) (1,764,380) 0 0 (14,321)
(629,473 ) (218,961) 0 0 (3)
0 (223,659) 0 0 0
(42,332,078 ) (1,047,367) 0 0 0
(5,756,403 ) (129,979) 0 0 0
--------------- ---------------- ---------------- ------------------- -------------------
(60,388,977 ) (3,384,346) 0 0 (14,324)
--------------- ---------------- ---------------- ------------------- -------------------
1,383,361,959 1,430,739,923 200,565,875 20,287,158 7,753,908
54,872,977 2,950,772 0 0 13,802
(715,598,203 ) (249,050,078) (44,871,674) (185,101) (1,191,160)
--------------- ---------------- ---------------- ------------------- -------------------
722,636,733 1,184,640,617 155,694,201 20,102,057 6,576,550
--------------- ---------------- ---------------- ------------------- -------------------
652,668,344 1,310,370,340 158,690,846 19,777,636 6,679,929
1,733,275,503 422,905,163 19,878,636 101,000 101,000
--------------- ---------------- ---------------- ------------------- -------------------
$2,385,943,847 $1,733,275,503 $178,569,482 $19,878,636 $ 6,780,929
--------------- ---------------- ---------------- ------------------- -------------------
--------------- ---------------- ---------------- ------------------- -------------------
<CAPTION>
Warburg Pincus
Post-Venture
Capital Fund
-------------------
For the Period
September 29, 1995
(Commencement of
Operations) through
October 31, 1995
-------------------
<S> <C>
$ 356
(26,884)
0
164,441
-------------------
137,913
-------------------
0
0
0
0
0
-------------------
0
-------------------
2,792,403
0
(4,887)
-------------------
2,787,516
-------------------
2,925,429
100,000
-------------------
$ 3,025,429
-------------------
-------------------
</TABLE>
See Accompanying Notes to Financial Statements.
43
- --------------------------------------------------------------------------------
67
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS JAPAN OTC FUND
FINANCIAL HIGHLIGHTS
(For an Advisor Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
September 30, 1994
For the (Commencement of
Year Ended Operations) through
October 31, 1995 October 31, 1994
---------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.85 $10.00
------ -------
Income from Investment Operations:
Net Investment Income (Loss) (.02) .00
Net Loss on Securities and Foreign Currency Related Items (both
realized and unrealized) (.75) (.15)
------ -------
Total from Investment Operations (.77) (.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 $ 9.08 $ 9.85
------ -------
------ -------
Total Return (7.82%) (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $1 $1
Ratios to average daily net assets:
Operating expenses 1.31% 1.18%*
Net investment income (loss) (.19%) .12%*
Decrease reflected in above operating expense ratios due to
waivers/reimbursements 1.83% 4.74%*
Portfolio Turnover Rate 82.98% .00%
* Annualized
</TABLE>
See Accompanying Notes to Financial Statements.
47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund'), Warburg Pincus
International Equity Fund (the 'International Equity Fund') and Warburg Pincus
Post-Venture Capital Fund (the 'Post-Venture Capital 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'), Warburg Pincus Japan OTC Fund
(the 'Japan OTC Fund') and Warburg Pincus Emerging Markets Fund (the 'Emerging
Markets Fund', together with the Capital Appreciation Fund, the International
Equity Fund, the Post-Venture Capital Fund, the Emerging Growth Fund and the
Japan OTC 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 Emerging Markets Fund seeks growth of capital; the
Post-Venture Capital Fund seeks long-term growth of capital.
Each Fund offers two classes of shares, one class being referred to as
Common Shares and one class being referred to as Advisor Shares. Common and
Advisor Shares in each Fund represent an equal pro rata interest in such Fund,
except that they bear different expenses which reflect the difference in the
range of services provided to them. Common Shares for the Japan OTC Fund, the
Emerging Markets Fund and the Post-Venture Capital Fund bear expenses paid
pursuant to a shareholder servicing and distribution plan adopted by each Fund
at an annual rate not to exceed .25% of the average daily net asset value of
each Fund's outstanding Common Shares. Advisor Shares for each Fund bear
expenses paid pursuant to a distribution plan adopted by each Fund at an annual
rate not to exceed .75% of the average daily net asset value of each Fund's
outstanding Advisor Shares. The Common and the Advisor Shares are currently
bearing expenses of .25% and .50% of average daily net assets, respectively.
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 generally 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 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
50
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
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. The Funds isolate that portion of
gains and losses on investments in debt securities which are due to changes in
the foreign exchange rate from that which are due to changes in market prices of
debt 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, principally distribution,
transfer agent and printing) 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. Income
and capital gain distributions are determined in accordance with Federal income
tax regulations which may differ from generally accepted accounting principles.
Certain amounts in the Financial Highlights have been reclassified to
conform with current year presentation.
No provision is made for Federal taxes as it is each Fund's intention to
continue to qualify for and elect the tax treatment applicable to regulated
investment companies under the Internal Revenue Code and make the requisite
distributions to its shareholders which will be sufficient to relieve it from
Federal income and excise taxes.
Costs incurred by the Japan OTC Fund, the Emerging Markets Fund and the
Post-Venture Capital Fund in connection with their organization have been
deferred and are being amortized over a period of five years from the date each
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. ('Warburg'), 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, Warburg receives the
following fees based on each Fund's average daily net assets:
51
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<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
Emerging Markets 1.25% of average daily net assets
Post-Venture Capital 1.25% of average daily net assets
</TABLE>
For the period or year ended October 31, 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 $ 1,367,729 $ 0 $ 1,367,729 $ 0
Emerging Growth 3,824,061 0 3,824,061 0
International Equity 20,225,631 0 20,225,631 0
Japan OTC 599,720 (599,720) 0 (25,920)
Emerging Markets 29,641 (29,641) 0 (230,338)
Post-Venture Capital 1,756 (1,756) 0 (31,458)
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Warburg 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 paid by the Japan OTC Fund to
SPARX USA for its sub-investment advisory services.
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Warburg, 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, 1995, administrative services fees earned by CFSI were as
follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 195,390
Emerging Growth 424,895
International Equity 2,022,563
Japan OTC 47,978
Emerging Markets 2,372
Post-Venture Capital 140
</TABLE>
For its administrative services, PFPC currently receives a fee calculated
at an annual rate of .10% of the average daily net assets of the Capital
Appreciation Fund, the Emerging Growth Fund and the Post-Venture Capital Fund.
For the International Equity Fund, the Japan OTC Fund and the Emerging Markets
Fund, PFPC currently receives a fee calculated at an annual rate of .12% on each
Fund's first $250 million in average daily net assets, .10% on the next $250
million in average daily net assets, .08%
52
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
on the next $250 million in average daily net assets, and .05% of the average
daily net assets over $750 million.
For the period or year ended October 31, 1995, administrative service fees
earned and waived by PFPC were as follows:
<TABLE>
<CAPTION>
NET
FUND CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
- ----------------------------------------- --------------------- -------- -------------------------
<S> <C> <C> <C>
Capital Appreciation $ 195,390 $ 0 $ 195,390
Emerging Growth 424,895 0 424,895
International Equity 1,386,283 0 1,386,283
Japan OTC 90,701 (26,746) 63,955
Emerging Markets 2,845 (2,845) 0
Post-Venture Capital 140 (140) 0
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Warburg, serves as each Fund's distributor. No compensation is paid by the
Capital Appreciation Fund, the Emerging Growth Fund or the International Equity
Fund to CSI for distribution services. For its shareholder servicing and
distribution services, CSI currently receives a fee calculated at an annual rate
of .25% of the average daily net assets of the Common Shares for the Japan OTC
Fund, the Emerging Markets Fund and the Post-Venture Capital Fund pursuant to a
shareholder servicing and distribution plan adopted by each Fund. For the period
or year ended October 31, 1995, distribution fees earned by CSI were as follows:
<TABLE>
<CAPTION>
FUND DISTRIBUTION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Japan OTC $119,941
Emerging Markets 5,926
Post-Venture Capital 351
</TABLE>
3. INVESTMENTS IN SECURITIES
For the period or year ended October 31, 1995, purchases and sales of
investment securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ----------------------------------------------------------- -------------- ------------
<S> <C> <C>
Capital Appreciation $ 299,741,274 $269,962,070
Emerging Growth 532,722,466 336,581,792
International Equity 1,457,609,458 735,613,078
Japan OTC 189,768,420 36,507,703
Emerging Markets 7,181,659 1,297,140
Post-Venture Capital 2,714,501 222,270
</TABLE>
53
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
At October 31, 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 $ 45,397,319 $ (3,203,157) $ 42,194,162
Emerging Growth 144,909,782 (9,681,675) 135,228,107
International Equity 260,125,513 (171,560,066) 88,565,447
Japan OTC 6,205,079 (7,100,852) (895,773)
Emerging Markets 341,944 (352,944) (11,000)
Post-Venture Capital 233,929 (69,488) 164,441
</TABLE>
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund, the Japan OTC Fund, the Emerging Markets
Fund and the Post-Venture Capital 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. The Funds 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.
54
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
At October 31, 1995, the International Equity Fund and the Japan OTC Fund had
the following open forward foreign currency contracts:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------
FOREIGN UNREALIZED
FORWARD CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE TO BE SOLD AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
French Francs 11/15/95 260,000,000 $ 52,170,074 $ 53,253,590 $ (1,083,516)
French Francs 11/16/95 122,216,250 25,050,833 25,032,515 18,318
German Marks 11/16/95 110,000,000 78,272,317 78,263,963 8,354
German Marks 05/17/96 78,928,380 55,400,000 56,652,584 (1,252,584)
Japanese Yen 03/21/96 5,547,240,000 57,000,000 55,475,507 1,524,493
Japanese Yen 03/21/96 4,764,377,500 47,298,496 47,646,443 (347,947)
Japanese Yen 03/21/96 4,764,377,500 47,276,203 47,646,443 (370,240)
Japanese Yen 03/21/96 1,385,445,000 13,761,286 13,855,226 (93,940)
Japanese Yen 05/13/96 8,731,990,000 109,000,000 88,008,212 20,991,788
Japanese Yen 05/16/96 9,247,700,000 110,000,000 93,246,752 16,753,248
Japanese Yen 05/16/96 4,586,012,000 55,400,000 46,241,847 9,158,153
Japanese Yen 09/18/96 4,660,000,000 50,000,000 47,860,895 2,139,105
------------ ------------ ----------------
$700,629,209 $653,183,977 $ 47,445,232
------------ ------------ ----------------
------------ ------------ ----------------
<CAPTION>
FOREIGN
CURRENCY UNREALIZED
FORWARD CURRENCY EXPIRATION TO BE CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE PURCHASED AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
German Marks 11/16/95 34,500,000 $ 25,050,828 $ 24,546,425 $ (504,403)
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC FUND
- -----------------------------------------------------------------------------------------------------------
FOREIGN UNREALIZED
FORWARD CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
CONTRACT DATE TO BE SOLD AMOUNT VALUE GAIN (LOSS)
- ------------------- ----------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Japanese Yen 11/30/95 12,567,400,000 $124,000,000 $123,536,813 $ 463,187
Japanese Yen 11/30/95 2,027,000,000 20,000,000 19,925,293 74,707
Japanese Yen 11/30/95 1,520,250,000 15,000,000 14,943,969 56,031
------------ ------------ ----------------
$159,000,000 $158,406,075 $ 593,925
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
55
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
5. EQUITY SWAP TRANSACTIONS
The International Equity Fund (the 'Fund') entered into a Taiwanese equity
swap agreement (which represents approximately .005% of the Fund's net assets at
October 31, 1995) dated August 11, 1995, where the Fund receives a quarterly
payment, representing the total return (defined as market appreciation and
dividend income) on a basket of three Taiwanese common stocks ('Common Stocks').
In return, the Fund pays quarterly the Libor rate (London Interbank Offered
Rate), plus 1.25% per annum (7.125% on October 31, 1995) on the initial stock
purchase amount ('Notional amount') of $12,000,000. The Notional amount is
marked to market on each quarterly reset date. In the event that the Common
Stocks decline in value, the Fund will be required to pay quarterly, the amount
of any depreciation in value from the notional amount. The equity swap agreement
will terminate on August 11, 1996.
During the term of the equity swap transaction, changes in the value of the
Common Stocks as compared to the Notional amount is recognized as unrealized
gain or loss. Dividend income for the Common Stocks are recorded on the
ex-dividend date. Interest expense is accrued daily. At October 31, 1995, the
Fund has recorded an unrealized gain of $502,018 and interest payable of
$192,375 on the equity swap transaction.
56
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS
The Capital Appreciation Fund is authorized to issue three billion of full
and fractional shares of beneficial interest, $.001 par value per share, of
which one billion shares are classified as Series 2 Shares (the Advisor Shares).
The Emerging Growth Fund, the International Equity Fund, the Japan OTC Fund, the
Emerging Markets Fund and the Post-Venture Capital 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 of each Fund are designated as Series 2
Shares (the Advisor Shares).
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 Year Ended October 31, For the Year Ended October 31,
------------------------------------------------------------- ----------------------------------------------
1995 1994 1995 1994 1995 1994 1995
------------ ------------ ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares sold 6,020,619 2,958,494 201,782 290,193 9,808,362 6,133,751 3,172,686
Shares issued to
shareholders on
reinvestment of
dividends 850,478 920,210 46,554 61,526 0 506,720 0
Shares redeemed (3,638,974) (3,126,497) (110,027) (460,020) (4,294,179) (2,859,413) (383,922)
------------ ------------ ----------- ----------- ------------- ------------ -----------
Net increase
(decrease) in
shares
outstanding 3,232,123 752,207 138,309 (108,301) 5,514,183 3,781,058 2,788,764
------------ ------------ ----------- ----------- ------------- ------------ -----------
------------ ------------ ----------- ----------- ------------- ------------ -----------
Proceeds from sale
of shares $ 85,992,655 $ 41,570,590 $ 2,970,800 $ 4,046,941 $ 256,886,928 $132,922,995 $78,682,150
Reinvested
dividends 10,670,876 12,945,690 575,876 863,477 0 11,015,146 0
Net asset value of
shares redeemed (51,907,650) (43,449,501) (1,551,821) (6,401,999) (106,777,032) (61,126,667) (9,503,812)
------------ ------------ ----------- ----------- ------------- ------------ -----------
Net increase
(decrease) from
capital share
transactions $ 44,755,881 $ 11,066,779 $ 1,994,855 $(1,491,581) $ 150,109,896 $ 82,811,474 $69,178,338
------------ ------------ ----------- ----------- ------------- ------------ -----------
------------ ------------ ----------- ----------- ------------- ------------ -----------
<CAPTION>
1994
------------
<S> <C>
Shares sold 2,233,737
Shares issued to
shareholders on
reinvestment of
dividends 80,473
Shares redeemed (517,898)
------------
Net increase
(decrease) in
shares
outstanding 1,796,312
------------
------------
Proceeds from sale
of shares $ 47,890,275
Reinvested
dividends 1,743,241
Net asset value of
shares redeemed (10,641,050)
------------
Net increase
(decrease) from
capital share
transactions $ 38,992,466
------------
------------
</TABLE>
57
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS FUND
INTERNATIONAL EQUITY FUND Common Shares Advisor Shares
Common Shares Advisor Shares --------------- -----------------
-------------------------------- ---------------------------- For the Period
For the Year Ended October 31, December 30, 1994
---------------------------------------------------------------- (Commencement of Operations)
1995 1994 1995 1994 through October 31, 1995
-------------- -------------- ------------ ------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 68,096,606 64,218,907 7,225,150 7,956,088 694,008 22
Shares issued to
shareholders on
reinvestment of
dividends 2,623,005 147,031 346,377 6,879 1,267 0
Shares redeemed (38,317,625) (11,861,720) (770,753) (795,406) (104,480) 0
-------------- -------------- ------------ ------------ --------------- -----
Net increase
(decrease) in
shares outstanding 32,401,986 52,504,218 6,800,774 7,167,561 590,795 22
-------------- -------------- ------------ ------------ --------------- -----
-------------- -------------- ------------ ------------ --------------- -----
Proceeds from sale of
shares $1,251,776,887 $1,275,306,263 $131,585,072 $155,433,660 $ 7,753,651 $ 257
Reinvested dividends 48,487,109 2,820,903 6,385,868 129,869 13,802 0
Net asset value of
shares redeemed (701,310,424) (233,614,600) (14,287,779) (15,435,478) (1,191,160) 0
-------------- -------------- ------------ ------------ --------------- -----
Net increase
(decrease) from
capital share
transactions $ 598,953,572 $1,044,512,566 $123,683,161 $140,128,051 $ 6,576,293 $ 257
-------------- -------------- ------------ ------------ --------------- -----
-------------- -------------- ------------ ------------ --------------- -----
</TABLE>
7. NET ASSETS
Net Assets at October 31, 1995, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION FUND GROWTH FUND
----------------- ------------
<S> <C> <C>
Capital contributed, net $ 173,327,827 $479,035,241
Accumulated net investment income (loss) 0 0
Accumulated net realized gain (loss) from security transactions 31,648,355 40,302,640
Net unrealized appreciation (depreciation) from investments and
foreign currency related items 42,329,683 135,424,730
----------------- ------------
Net assets $ 247,305,865 $654,762,611
----------------- ------------
----------------- ------------
</TABLE>
58
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPAN OTC FUND
Common Shares Advisor Shares
------------------------------------- -------------------------------------
For the Period For the Period POST-VENTURE CAPITAL FUND
September 30, September 30, Common Shares
1994 1994 ------------------
(Commencement of (Commencement of For the Period
For the Operations) For the Operations) September 29, 1995
Year Ended through Year Ended through (Commencement of Operations)
October 31, 1995 October 31, 1994 October 31, 1995 October 31, 1994 through October 31, 1995
---------------- ---------------- ---------------- ---------------- --------------------------
<S> <C> <C> <C> <C> <C>
22,809,795 2,025,697 0 15 273,510
0 0 0 0 0
(5,180,432) (18,605) 0 0 (473)
--
---------------- ---------------- ----- ------------------
17,629,363 2,007,092 0 15 273,037
--
--
---------------- ---------------- ----- ------------------
---------------- ---------------- ----- ------------------
$200,565,875 $ 20,287,008 $0 $150 $2,792,203
0 0 0 0 0
(44,871,674) (185,101) 0 0 (4,887)
--
---------------- ---------------- ----- ------------------
$155,694,201 $ 20,101,907 $0 $150 $2,787,316
--
--
---------------- ---------------- ----- ------------------
---------------- ---------------- ----- ------------------
<CAPTION>
Advisor Shares
---------------------
<S> <C>
19
0
0
-----
19
-----
-----
$ 200
0
0
-----
$ 200
-----
-----
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING POST-VENTURE
EQUITY FUND MARKETS FUND JAPAN OTC FUND CAPITAL FUND
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
$2,271,007,433 $6,677,550 $175,619,527 $2,887,516
19,124,669 10,218 7,821,209 356
(40,671,086 ) 102,219 (4,640,787) (26,884)
136,482,831 (9,058) (230,467) 164,441
-------------- ------------ -------------- ------------
$2,385,943,847 $6,780,929 $178,569,482 $3,025,429
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
</TABLE>
59
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
8. CAPITAL LOSS CARRYOVER
At October 31, 1995, the International Equity Fund, the Japan OTC Fund and
the Post-Venture Capital Fund had capital loss carryovers of $40,671,086,
$4,629,196 and $26,884, respectively, expiring in 2003 to offset possible future
capital gains of each Fund.
9. OTHER FINANCIAL HIGHLIGHTS
Each Fund currently offers one other class of shares, Common Shares,
representing equal prorata interests in each of the respective Warburg Pincus
Equity Funds. The financial highlights for a Common Share of each Fund are as
follows:
<TABLE>
<CAPTION>
Capital Appreciation Fund
------------------------------------------------------
Common Shares
------------------------------------------------------
For the Year Ended October 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.29 $15.32 $13.30 $12.16 $ 9.78
------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income .04 .04 .05 .04 .15
Net Gain on Securities (both
realized and unrealized) 3.08 .17 2.78 1.21 2.41
------ ------ ------ ------ ------
Total from Investment Operations 3.12 .21 2.83 1.25 2.56
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income (.04) (.05) (.05) (.06) (.18)
Distributions from Capital Gains (.98) (1.19) (.76) (.05) .00
------ ------ ------ ------ ------
Total Distributions (1.02) (1.24) (.81) (.11) (.18)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $16.39 $14.29 $15.32 $13.30 $12.16
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 24.05% 1.65% 22.19% 10.40% 26.39%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (000s) $235,712 $159,346 $159,251 $117,900 $115,191
Ratios to average daily net assets:
Operating expenses 1.12% 1.05% 1.01% 1.06% 1.08%
Net investment income .31% .26% .30% .41% 1.27%
Decrease reflected in above operating expense
ratios due to waivers/reimbursements .00% .01% .00% .01% .00%
Portfolio Turnover Rate 146.09% 51.87% 48.26% 55.83% 39.50%
</TABLE>
60
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.06
Long-term capital gain .96
</TABLE>
Ordinary income dividends qualifying for the dividends received deduction
available to corporate shareholders was 100.00%.
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
61
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Growth Fund
------------------------------------------------------
Common Shares
------------------------------------------------------
For the Year Ended October 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.38 $23.74 $18.28 $16.97 $10.83
------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income (Loss) (.05) (.06) (.10) (.03) .05
Net Gain on Securities (both
realized and unrealized) 7.64 .06 5.93 1.71 6.16
------ ------ ------ ------ ------
Total from Investment Operations 7.59 .00 5.83 1.68 6.21
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income .00 .00 .00 (.01) (.07)
Distributions from Capital Gains .00 (1.36) (.37) (.36) .00
------ ------ ------ ------ ------
Total Distributions .00 (1.36) (.37) (.37) (.07)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $29.97 $22.38 $23.74 $18.28 $16.97
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 33.91% .16% 32.28% 9.87% 57.57%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (000s) $487,537 $240,664 $165,525 $99,562 $42,061
Ratios to average daily net assets:
Operating expenses 1.26% 1.22% 1.23% 1.24% 1.25%
Net investment income (loss) (.58%) (.58%) (.60%) (.25%) .32%
Decrease reflected in above operating expense
ratios due to waivers/reimbursements .00% .04% .00% .08% .47%
Portfolio Turnover Rate 84.82% 60.38% 68.35% 63.35% 97.69%
</TABLE>
62
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Fund
------------------------------------------------------
Common Shares
------------------------------------------------------
For the Year Ended October 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $20.51 $17.00 $12.22 $13.66 $11.81
------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income .12 .09 .09 .15 .19
Net Gain (Loss) on Securities and
Foreign Currency Related Items (both
realized and unrealized) (.67) 3.51 4.84 (1.28) 2.03
------ ------ ------ ------ ------
Total from Investment Operations (.55) 3.60 4.93 (1.13) 2.22
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income (.13) (.04) (.02) (.16) (.33)
Distributions in Excess of
Net Investment Income .00 (.01) .00 .00 .00
Distributions from Capital Gains (.53) (.04) (.13) (.15) (.04)
------ ------ ------ ------ ------
Total Distributions (.66) (.09) (.15) (.31) (.37)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $19.30 $20.51 $17.00 $12.22 $13.66
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return (2.55%) 21.22% 40.68% (8.44%) 19.42%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year (000s) $2,068,207 $1,533,872 $378,661 $101,763 $72,553
Ratios to average daily net assets:
Operating expenses 1.39% 1.44% 1.48% 1.49% 1.50%
Net investment income .69% .19% .38% .88% 1.19%
Decrease reflected in above operating expense
ratios due to waivers/reimbursements .00% .00% .00% .07% .17%
Portfolio Turnover Rate 39.24% 17.02% 22.60% 53.29% 54.95%
</TABLE>
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.46
Long-term capital gain .20
</TABLE>
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
63
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Japan OTC Fund
---------------------------------------------------------
Common Shares
---------------------------------------------------------
For the Period
September 30, 1994
(Commencement of
For the Year Ended Operations) through
October 31, 1995 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 Loss on Securities and Foreign Currency
Related Items (both realized and unrealized) (.76) (.15)
----------- ----------
Total from Investment Operations (.76) (.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 $ 9.09 $ 9.85
----------- ----------
----------- ----------
Total Return (7.72%) (15.84%)*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 178,568 $ 19,878
Ratios to average daily net assets:
Operating expenses 1.41% 1.00%*
Net investment income (loss) (.15%) .49%*
Decrease reflected in above operating expense
ratios due to waivers/reimbursements 1.35% 4.96%*
Portfolio Turnover Rate 82.98% .00%
* Annualized
</TABLE>
64
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Fund
---------------------------
Common Shares
---------------------------
For the Period
December 30, 1994
(Commencement of
Operations) through
October 31, 1995
---------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from Investment Operations:
Net Investment Income .08
Net Gain on Securities and Foreign Currency Related Items (both
realized and unrealized) 1.25
-------
Total from Investment Operations 1.33
-------
Less Distributions:
Dividends from Net Investment Income (.05)
Distributions from Capital Gains .00
-------
Total Distributions (.05)
-------
NET ASSET VALUE, END OF PERIOD $ 11.28
-------
-------
Total Return 16.09%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 6,780
Ratios to average daily net assets:
Operating expenses 1.00%*
Net investment income 1.25%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 11.08%*
Portfolio Turnover Rate 69.12%*
* Annualized
</TABLE>
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Taxable dividends paid by the Fund on per share basis were as follows:
<TABLE>
<S> <C>
Ordinary income $.05
</TABLE>
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1996.
65
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Post-Venture Capital Fund
---------------------------
Common Shares
---------------------------
For the Period
September 29, 1995
(Commencement of
Operations) through
October 31, 1995
---------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from Investment Operations:
Net Investment Income .00
Net Gain on Securities (both realized and unrealized) .69
-------
Total from Investment Operations .69
-------
Less Distributions:
Dividends from Net Investment Income .00
Distributions from Capital Gains .00
-------
Total Distributions .00
-------
NET ASSET VALUE, END OF PERIOD $ 10.69
-------
-------
Total Return 6.90%+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 3,024
Ratios to average daily net assets:
Operating expenses 1.65%*
Net investment income .25%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 23.76%*
Portfolio Turnover Rate 16.90%*
* Annualized
+ Non-annualized
</TABLE>
66
- --------------------------------------------------------------------------------
<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) Financial Statements included in Part B:
(a) Report of Coopers & Lybrand L.L.P., Independent
Auditors
(b) Schedule of Investments
(c) Statement of Assets and Liabilities
(d) Statement of Operations
(e) Statement of Changes in Net Assets
(f) Financial Highlights
(g) Notes to Financial Statements
(b) Exhibits:
Exhibit No. Description of Exhibit
- ----------- ----------------------
1(a) Articles of Incorporation.(1)
(b) Articles Supplementary.(1)
2(a) By-Laws.(1)
(b) Amendment to By-Laws.(1)
3 Not applicable.
4 Forms of Share Certificates.(2)
______________________
(1) Incorporated by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, filed on September 22,
1995.
(2) 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 25, 1995
(Securities Act File No. 33-61225).
<PAGE>C-2
Exhibit No. Description of Exhibit
5(a) Form of Investment Advisory Agreement.(1)
(b) Form of Sub-Investment Advisory Agreement.(1)
6 Distribution Agreement.(3)
7 Not applicable.
8 Form of Custodian Agreement, as amended.
9(a) Form of Transfer Agency Agreement.(4)
(b) Form of Counsellors Service Co-Administration
Agreement.(4)
(c) Form of PFPC Co-Administration Agreement.(5)
(d) Forms of Services Agreements.(6)
10(a) Opinion of Willkie Farr & Gallagher, counsel to the
Fund.(7)
(b) Consent of Willkie Farr & Gallagher, counsel to the Fund.
__________________
(3) Contained in Exhibit No. 15 hereto.
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A of
Warburg, Pincus Trust filed on June 14, 1995 (Securities Act File No.
33-58125).
(5) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Post-
Effective Amendment No. 10 to the Registration Statement on Form N-1A of
Warburg, Pincus International Equity Fund, Inc. filed on September 22,
1995 (Securities Act File No. 33-27031).
<PAGE>C-3
Exhibit No. Description of Exhibit
11(a) Consent of Coopers & Lybrand L.L.P., Independent Auditors.
(b) Consent of Hamada & Matsumoto, Japanese counsel to the
Fund.
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Retirement Plans.(8)
15(a) Form of Shareholder Servicing and Distribution Plan.(1)
(b) Form of Shareholder Services Plan.(5)
(c) Form of Distribution Agreement.(2)
(d) Form of Amended and Restated Distribution Plan.(6)
(e) Form of Rule 18f-3 Plan.(9)
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to Common Shares.
(b) Financial Data Schedule relating to Advisor Shares.
_______________
(6) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A of
Warburg, Pincus Japan Growth Fund, Inc., filed on December 18, 1995
(Securities Act File No. 33-63655).
(7) Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 19, 1995.
<PAGE>C-4
(8) 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).
(9) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Post-
Effective Amendment No. 13 to the Registration Statement on Form N-1A of
Warburg, Pincus International Equity Fund, Inc. filed on December 27,
1995 (Securities Act File No. 33-27031).
<PAGE>C-5
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of November 30, 1995
-------------- ------------------------
Shares of beneficial interest,
par value $.001 per share 2,862
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 Warburg, 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.
Item 28. Business and Other Connections of Investment Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus Counsellors
G.P., acts as investment adviser to Registrant. Warburg renders investment
advice to a wide variety of individual and institutional clients. The list
required by this Item 28 of officers and directors of Warburg, 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 Warburg (SEC File No. 801-07321).
<PAGE>C-6
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 The RBB Fund, Inc.;
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; 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.
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)
<PAGE>C-7
(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.
Item 32. Undertakings
(a) 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.
(b) 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 1940 Act 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, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State
of New York, on the 22nd day of December, 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>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John L. Furth Chairman of the Board and December 22, 1995
John L. Furth Director
/s/ Richard H. King President December 22, 1995
Richard H. King
/s/ Stephen Distler Vice President and Chief December 22, 1995
Stephen Distler Financial Officer
/s/ Howard Conroy Vice President, Treasurer December 22, 1995
Howard Conroy and Chief Accounting
Officer
/s/ Richard N. Cooper Director December 22, 1995
Richard N. Cooper
/s/ Donald J. Donahue Director December 22, 1995
Donald J. Donahue
/s/ Jack W. Fritz Director December 22, 1995
Jack W. Fritz
</TABLE>
<PAGE>C-9
<TABLE>
<S> <C> <C>
/s/ Thomas A. Melfe
Thomas A. Melfe Director December 22, 1995
/s/ Alexander B. Trowbridge Director December 22, 1995
Alexander B. Trowbridge
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
1(a) Articles of Incorporation.(1)
(b) Articles Supplementary.(1)
2(a) By-Laws.(1)
(b) Amendment to By-Laws.(1)
3 Not applicable.
4 Forms of Share Certificates.(2)
5(a) Form of Investment Advisory Agreement.(1)
(b) Form of Sub-Investment Advisory Agreement.(1)
6 Distribution Agreement.(3)
7 Not applicable.
8 Form of Custodian Agreement, as amended.
9(a) Form of Transfer Agency Agreement.(4)
(b) Form of Counsellors Service Co-Administration
Agreement.(4)
(c) Form of PFPC
Co-Administration Agreement.(5)
(d) Forms of Services Agreements. (6)
______________________
(1) Incorporated by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, filed on September
22, 1995.
(2) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding 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
25, 1995 (Securities Act File No. 33-61225).
(3) Contained in Exhibit No. 15 hereto.
<PAGE>
10(a) Opinion of Willkie Farr & Gallagher, counsel to the
Fund.(7)
(b) Consent of Willkie Farr & Gallagher, counsel to the
Fund.
11(a) Consent of Coopers & Lybrand L.L.P., Independent
Auditors.
(b) Consent of Hamada & Matsumoto, Japanese counsel to the
Fund.
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Retirement Plans.(8)
______________________
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
of Warburg, Pincus Trust filed on June 14, 1995 (Securities Act File
No. 33-58125).
(5) 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
Warburg, Pincus International Equity Fund, Inc. filed on September 22,
1995 (Securities Act File No. 33-27031).
(6) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
of Warburg, Pincus Japan Growth Fund Inc., filed on December 18, 1995
(Securities Act File No. 33-63655).
(7) Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 19, 1995.
(8) 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>
Exhibit No. Description of Exhibit
15(a) Form of Shareholder Servicing and Distribution Plan.(2)
(b) Form of Shareholders Services Plan.(5)
(c) Form of Distribution Agreement.(2)
(d) Form of Amended and Restated Distribution Plan.(6)
(e) Form of Rule 18f-3 Plan.(9)
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to Common
Shares.
17(b) Financial Data Schedule relating to Advisor
Shares.
______________
(9) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in Post-
Effective Amendment No. 13 to the Registration Statement on Form N-1A of
Warburg, Pincus International Equity Fund, Inc. filed on December 27,
1995 (Securities Act File No. 33-27031).
<PAGE>1
CUSTODIAN CONTRACT
Between
WARBURG, PINCUS JAPAN OTC FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>2
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to Be Held by It . . . . . . . . 1
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States . . . . . . . . . . . . . . . . . . 2
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . . . . 3
2.3 Registration of Securities . . . . . . . . . . . . . . . . . . . 8
2.4 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Availability of Federal Funds . . . . . . . . . . . . . . . . . 10
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Payment of Fund Monies . . . . . . . . . . . . . . . . . . . . . 11
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.9 Appointment of Agents . . . . . . . . . . . . . . . . . . . . . 15
2.10 Deposit of Securities in Securities Systems . . . . . . . . . . 15
2.10A Fund Assets Held in the Custodian's Direct Paper System . . . . 19
2.11 Segregated Account . . . . . . . . . . . . . . . . . . . . . . . 20
2.12 Ownership Certificates for Tax Purposes . . . . . . . . . . . . 22
2.13 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.14 Communications Relating to Fund Portfolio Securities . . . . . . 22
2.15 Reports to Fund by Independent Public Accountants . . . . . . . 23
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States . . . . . . . . . . . . . . . . . . . . . 24
3.1 Appointment of Foreign Sub-Custodians . . . . . . . . . . . . . 24
3.2 Assets to Be Held . . . . . . . . . . . . . . . . . . . . . . . 25
3.3 Foreign Securities Depositories . . . . . . . . . . . . . . . . 25
3.4 Agreements with Foreign Banking Institutions . . . . . . . . . . 25
3.5 Access of Independent Accountants of the Fund . . . . . . . . . 26
3.6 Reports by Custodian . . . . . . . . . . . . . . . . . . . . . . 27
3.7 Transactions in Foreign Custody Account . . . . . . . . . . . . 27
3.8 Liability of Foreign Sub-Custodians . . . . . . . . . . . . . . 28
3.9 Liability of Custodian . . . . . . . . . . . . . . . . . . . . . 29
3.10 Reimbursement for Advances . . . . . . . . . . . . . . . . . . . 30
3.11 Monitoring Responsibilities . . . . . . . . . . . . . . . . . . 31
3.12 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . . . . 32
3.13 Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 34
<PAGE>3
6. Actions Permitted Without Express Authority . . . . . . . . . . . . . 35
7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . . . 36
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income . . . . . . . . . . . . 36
9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10. Opinion of Fund's Independent Accountant . . . . . . . . . . . . . . . 38
11. Reports to Fund by Independent Public Accountants . . . . . . . . . . 38
12. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . . . 38
13. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . . . 39
14. Effective Period, Termination and Amendment . . . . . . . . . . . . . 40
15. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . . . 42
16. Interpretive and Additional Provisions . . . . . . . . . . . . . . . . 44
17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . . . 44
19. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
20. Shareholder Communications Election . . . . . . . . . . . . . . . . . 45
<PAGE>4
CUSTODIAN CONTRACT
This Contract between Warburg, Pincus Japan OTC Fund, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at 466 Lexington Avenue, New York, New York 10017-
3147, hereinafter called the "Fund", and State Street Bank and Trust Company,
a Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to Be Held by It
The Fund hereby employs the Custodian as the custodian of the Fund's
assets, including securities the Fund desires to be held in places within the
United States ("domestic securities") and securities it desires to be held
outside the United States ("foreign securities") pursuant to the provisions of
the Articles of Incorporation. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all
securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, $.001 par
value ("Shares"), of the Fund as may be issued or sold from time to time. The
<PAGE>5
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote
by the Board of Directors of the Fund, and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian. The Custodian may employ as sub-custodians
for the Fund's foreign securities and other assets the foreign banking
institutions and foreign securities depositories designated in Schedule "A"
hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all noncash property, to be
held by it in the United States, including all domestic securities
owned by the Fund, other than (a) securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury, collectively referred to herein as
<PAGE>6
"Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's
Direct Paper book-entry system account ("Direct Paper System
Account") only upon receipt of Proper Instructions from the Fund,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Fund;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.10 hereof;
4) To the depository agent in connection with tender or
other similar offers for portfolio securities of the
Fund;
<PAGE>7
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any subcustodian appointed
pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities
are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall have no
<PAGE>8
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities;
provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
<PAGE>9
10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Fund, which may be in the form of cash
or obligations issued by the United States government, its
agencies or instru-mentalities, except that in connection
with any loans for which collateral is to be credited to
the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Fund prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but
only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-
dealer registered under the Securities Exchange Act of
1934 (the "Exchange Act") and a member of The National
Association of Securities Dealers,
<PAGE>10
Inc. ("NASD"), relating to compliance with the rules of
The Options Clearing Corporation and of any registered
national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations,
regarding account deposits in connection with transactions
by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in connection
with distributions in kind, as may be described from time
to time in the Fund's currently effective prospectus and
statement of additional information ("prospectus"), in
<PAGE>11
satisfaction of requests by holders of Shares for
repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from the
Fund, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the Fund
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons
to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the
name of the Fund or in the name of any nominee of the Fund or of any
nominee of the Custodian which nominee shall be assigned exclusively
to the Fund, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund,
or in the name or
<PAGE>12
nominee name of any agent appointed pursuant to Section 2.9 or in
the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of
the Fund under the terms of this Contract shall be in "street name"
or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian
shall utilize its best efforts only to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts
basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of the
Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of the Fund, other than cash
maintained by the Fund in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940.
Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the
<PAGE>13
Custodian or in such other banks or trust companies as it may in
its discretion deem necessary or desirable; provided, however, that
every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each
such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved by vote of a majority
of the Board of Directors of the Fund. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall, upon the receipt of
Proper Instructions from the Fund, make federal funds available as
of specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to United States registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and
<PAGE>14
shall collect on a timely basis all income and other payments
with respect to United States bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or
its agent thereof and shall credit such income, as collected, to the
Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when
they become due and shall collect interest when due on securities
held hereunder. Income due the Fund on United States securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the
Fund with such information or data as may be necessary to assist the
Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from
the Fund, which may be continuing instructions when deemed
appropriate by the parties, the Custodian shall pay out monies of
the Fund in the following cases only:
<PAGE>15
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the
Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in
the name of the Fund or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper
form for transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the
case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.10A;
(d) in the case of repurchase agreements entered into
between the Fund and the Custodian, or another bank, or a
broker-dealer which is a
<PAGE>16
member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund
or (e) for transfer to a time deposit account of the Fund
in any bank, whether domestic or foreign; such transfer
may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Fund as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by
the Fund, including but not
<PAGE>17
limited to the following payments for the account of the
Fund: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect
of securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board of Directors or of the
Executive Committee of the Fund signed by an officer of
the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming
the person or persons to whom such payment is to be made.
<PAGE>18
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank
or trust company which is itself qualified under the Investment
Company Act of 1940, as amended, to act as a custodian, as its agent
to carry out such of the provisions of this Article 2 as the
Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange
Commission
<PAGE>19
under Section 17A of the Securities Exchange Act of 1934, which acts
as a securities depository, or in the book-entry system authorized
by the U.S. Department of the Treasury and certain federal
agencies, collectively referred to herein as "Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to
the following provisions:
1) The Custodian may keep domestic securities of the Fund in
a Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased
for the account of the Fund upon (i) receipt of advice
from the Securities System that such securities have
<PAGE>20
been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The
Custodian shall transfer domestic securities sold for the
account of the Fund upon (i) receipt of advice from the
Securities System that payment for such securities has
been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies
of all advices from the Securities System of transfers of
domestic securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice and
shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the
Securities System for the account of the Fund.
<PAGE>21
4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding domestic securities deposited
in the Securities System;
5) The Custodian shall have received from the Fund the
initial or annual certificate, as the case may be,
required by Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities
System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it
may have against the Securities System; at the election of
the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against
the Securities System or any other person which the
Custodian may have as a
<PAGE>22
consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by the Fund
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions from the Fund;
2) The Custodian may keep securities of the Fund in the
Direct Paper System only if such securities are
represented in an account ("Account") of the Custodian in
the Direct Paper System which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of
the Fund which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon
<PAGE>23
the making of an entry on the records of the Custodian to
reflect such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer
securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to
reflect such transfer and receipt of payment for the
account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form
of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to
the Fund copies of daily transaction sheets reflecting
each day's transaction in the Securities System for the
account of the Fund;
6) The Custodian shall provide the Fund with any report on
its system of internal accounting control as the Fund may
reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated
account or accounts for and on
<PAGE>24
behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities
maintained in an account by the Custodian pursuant to Section 2.10
hereof, (i) in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for
purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only,
<PAGE>25
in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of income
or other payments with respect to domestic securities of the Fund
held by it and in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian
<PAGE>26
shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of
domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by
the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund
all written information received by the Custodian from issuers of
the domestic securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If
the Fund desires to take action with respect to any tender offer,
exchange offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days prior to the date
on which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants.
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants
on the accounting system, internal accounting control and procedures
for safeguarding securities, futures contracts and options
<PAGE>27
on futures contracts, including domestic securities deposited and/or
maintained in a Securities System, relating to the services provided
by the Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably be
required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and,
if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and
foreign securities depositories designated on Schedule A hereto
("foreign sub-custodians"). Upon receipt of "Proper Instructions",
as defined in Section 5 of this Contract, together with a certified
resolution of the Fund's Board of Directors, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the
<PAGE>28
Fund may instruct the Custodian to cease the employment of any one
or more such sub-custodians for maintaining custody of the Fund's
assets.
3.2 Assets to Be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians
to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule
17f-5 under the Investment Company Act of 1940, and (b) cash and
cash equivalents in such amounts as the Custodian or the Fund may
determine to be reasonably necessary to effect the Fund's foreign
securities transactions. The Custodian shall identify on its books
as belonging to the Fund, the foreign securities of the Fund held by
each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund
shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving
as sub-custodians pursuant to the terms hereof. Such arrangements
shall include entry into agreements containing the provisions set
forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be
<PAGE>29
substantially in the form set forth in Exhibit 1 hereto and shall
provide that: (a) the Fund will be adequately indemnified and its
assets adequately insured in the event of loss; (b) the Fund's
assets will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking
institution or its creditors or agents, except a claim of payment
for their safe custody or administration; (c) beneficial ownership
of the Fund's assets will be freely transferable without the payment
of money or value other than for safe custody or administration; (d)
adequate records will be maintained identifying the assets as
belonging to the Fund; (e) officers of or auditors employed by, or
other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its
agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of
the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of
<PAGE>30
the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-
custodians, including but not limited to an identification of
entities having possession of the Fund's securities and other assets
and advices or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity
having physical possession of such securities.
3.7 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section
3.7, the provision of Sections 2.2, 2.3, 2.6 and 2.7 of this
Contract shall apply, mutatis mutandis to the foreign
securities of the Fund held outside the United States by
foreign sub-custodians.
<PAGE>31
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account
of the Fund and delivery of securities maintained for the
account of the Fund may be effected in accordance with the
customary established securities trading or securities
processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without
limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign subcustodian
may be maintained in the name of such entity's nominee to the
same extent as set forth in Section 2.3 of this Contract, and
the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such securities unless such
liability is the result of the nominee's negligence.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall
<PAGE>32
require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of
the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has
not been made whole for any such loss, damage, cost, expense,
liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent as
set forth with respect to sub-custodians generally in this Contract
and, regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-
<PAGE>33
custodian has otherwise exercised reasonable care. Notwithstanding
the foregoing provisions of this paragraph 3.9, in delegating
custody duties to State Street London Ltd., the Custodian shall not
be relieved of any responsibility to the Fund for any loss due to
such delegation, except such loss as may result from (a) political
risk (including, but not limited to, exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil
strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses
under circumstances where the Custodian and State Street London Ltd.
have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property
at any time
<PAGE>34
held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the
Fund's assets to the extent necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund in
connection with the initial approval of this Contract. In addition,
the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted
U.S. accounting principles).
<PAGE>35
3.12 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions
hereof shall not apply where the custody of the Fund's assets
are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set
forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1
of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London
Ltd. or both.
3.13 Tax Law
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America
or any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as
<PAGE>36
custodian of the Fund by the tax law of jurisdictions other than
those mentioned in the above sentence, including responsibility for
withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be
to use reasonable efforts to assist the Fund with respect to any
claim for exemption or refund under the tax law of jurisdictions for
which the Fund has provided such information.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to
the limitations of the Articles of Incorporation and any applicable votes of
the Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian is authorized
upon receipt of instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder
<PAGE>37
of Shares, which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the Fund and
the Custodian.
The Custodian shall receive from the distributor for the Fund's
Shares or from the Transfer Agent of the Fund and deposit into the Fund's
account such payments as are received for Shares of the Fund issued or sold
from time to time by the Fund. The Custodian will provide timely notification
to the Fund and the Transfer Agent of any receipt by it of payments for Shares
of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the Board of Directors shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the Custodian
reasonably believes them to have been given by a person authorized to give
such instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or an Assistant Secretary as to the authorization
by the Board of Directors of the Fund accompanied by a detailed
<PAGE>38
description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electromechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted Without Express Authority
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors of the Fund.
<PAGE>39
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Directors of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do
so by the Fund, shall itself keep such books of account and/or compute such
net asset value per share. If so directed, the Custodian shall also calculate
daily the net income of the Fund as described in the Fund's currently
effective prospectus and shall advise the Fund and the Transfer Agent daily of
the total amounts of such net income and, if instructed in writing by an
officer of the
<PAGE>40
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net
asset value per share and the daily income of the Fund shall be made at the
time or times described from time to time in the Fund's currently effective
prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 3la-1 and 3la-2
thereunder. All such records shall be the property of the Fund and shall at
all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by the Fund and held by the Custodian and shall, when requested to do so
by the Fund and for such compensation as shall be agreed upon between the Fund
and the Custodian, include certificate numbers in such tabulations.
<PAGE>41
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would
be disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
<PAGE>42
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the title,
validity or genuineness of any property or evidence of title thereto received
by it or delivered by it pursuant to this Contract and shall be held harmless
in acting upon any notice, request, consent, certificate or other instrument
reasonably believed by it to be genuine and to be signed by the proper party
or parties, including any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The Custodian shall be
held to the exercise of reasonable care in carrying out the provisions of this
Contract, but shall be kept indemnified by and shall be without liability to
the Fund for any action taken or omitted by it in good faith without
negligence. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9).
If the Fund requires the Custodian to take any action with respect
to securities, which action involves the payment of
<PAGE>43
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund being liable for the payment of
money or incurring liability of some other form, the Fund, as a prerequisite
to requiring the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, the purchase or sale of foreign exchange or
of contracts for foreign exchange and assumed settlement) or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of
the Fund's assets to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided,
may be amended at any time by
<PAGE>44
mutual agreement of the parties hereto and may be terminated by either party
by an instrument in writing delivered or mailed, postage prepaid to the other
party, such termination to take effect not sooner than thirty (30) days after
the date of such delivery or mailing; provided, however that the Custodian
shall not act under Section 2.10 hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the Board
of Directors of the Fund has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors has reviewed the use by the
Fund of such Securities System, as required in each case by Rule 17f-4 under
the Investment Company Act of 1940, as amended and that the Custodian shall
not act under Section 2.10A hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors has approved the initial use of the Direct Paper System and the
receipt of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Directors has reviewed the use by the Fund of the Direct
Paper System; provided further, however, that the Fund shall not amend or
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of Incorporation, and further
provided, that the Fund may at any time by action of its Board of Directors
(i) substitute another bank or trust company for the Custodian by
<PAGE>45
giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or upon the
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such termination
and shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
15. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in the
form for transfer, all securities then held by it hereunder and shall transfer
to an account of the successor custodian all of the Fund's securities held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Directors of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of
<PAGE>46
Directors shall have been delivered to the Custodian on or before the date
when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined
in the Investment Company Act of 1940, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract and to transfer to an account of such
successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or
of the Board of Directors to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
<PAGE>47
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series
of Shares shall be serviced under the terms hereof.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of the Commonwealth of
Massachusetts.
<PAGE>48
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
20. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to
requesting companies whose securities the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Fund
as consenting to disclosure of this information for all securities owned by
the Fund or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's
name and address for any purpose other than corporate communications. Please
indicate
<PAGE>49
below whether the Fund consents or objects by checking one of the alternatives
below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's
name, address, and share positions.
<PAGE>50
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed as of the day of
, 1994.
ATTEST WARBURG, PINCUS JAPAN OTC FUND, INC.
_____________________ By____________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
_____________________ By____________________________
Executive Vice President
<PAGE>51
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of WARBURG, PINCUS
JAPAN OTC FUND, INC. for use as subcustodians for the Fund's securities and
other assets:
Country Bank
Bangladesh Standard Chartered Bank
China The Hongkong and Shanghai Banking Corp. Ltd.
Cyprus Barclays Bank plc
Hong Kong Standard Chartered Bank
India The Hongkong and Shanghai Banking Corp. Ltd.
Indonesia Standard Chartered Bank
Israel Bank of Hapoalim B.M.
Japan Sumitomo Trust & Banking Co., Ltd.
Jordan The British Bank of the Middle East
Korea Bank of Seoul
Malaysia Standard Chartered Bank
Pakistan Deutsche Bank AG
Philippines Standard Chartered Bank
Singapore The Development Bank of Singapore Ltd.
Sri Lanka The Hongkong and Shanghai Banking Corp. Ltd.
Taiwan Central Trust of China
Thailand Standard Chartered Bank
Turkey Citibank, N.A.
Certified:
_______________________________
Fund's Authorized Officer
Date: September 27, 1994
<PAGE>52
COUNTRY DEPOSITORY
Bangladesh None
China Shanghai Securities Central Clearing and
Registration Corporation (SSCCRC)
Cyprus None
Hong Kong The Central Clearing and Settlement System
(CCASS)
India None
Indonesia None
Israel The Clearing House of the Tel Aviv Stock
Exchange
Japan None
Jordan None
Korea Korea Securities Depository (KSD)
Malaysia None
Pakistan None
Philippines None
Singapore The Central Depository (Pte) Limited (CDP)
Sri Lanka The Central Depository System (Pvt) Limited
Taiwan The Taiwan Securities Central Depository
Company, Ltd. (TSCD)
Thailand The Share Depository Center (SDC)
Turkey Istanbul Stock Exchange Settlement and Custody
Co., Inc. (I.M.K.B. Takas ve Saklama A.S.)
<PAGE>53
EXHIBIT I
SUBCUSTODIAN AGREEMENT
AGREEMENT made this day of , 19 , between State Street
Bank and Trust Company, a Massachusetts trust company (hereinafter referred to
as the "Custodian"), having its principal place of business at 225 Franklin
Street, Boston, MA, and (hereinafter referred to as the
"Subcustodian"), a organized under the laws of
and having an office at .
WHEREAS, Custodian has been appointed to act as Trustee, Custodian or
Subcustodian of securities and monies on behalf of certain of its customers
including, without limitation, collective investment undertakings, investment
companies subject to the U.S. Investment Company Act of 1940, as amended, and
employee benefit plans subject to the U.S. Employee Retirement Income Security
Act of 1974, as amended;
WHEREAS, Custodian wishes to establish Account (the "Account") with the
Subcustodian to hold and maintain certain property for which Custodian is
responsible as custodian; and
WHEREAS, Subcustodian agrees to establish the Account and to hold and
maintain all Property in the Account in accordance with the terms and
conditions herein set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the Custodian and the Subcustodian agree as follows:
I. The Account
A. Establishment of the Account. Custodian hereby requests that
Subcustodian establish for each client of the Custodian an Account which shall
be composed of:
1. A Custody Account for any and all Securities (as hereinafter
defined) from time to time received by Subcustodian therefor, and
2. A Deposit Account for any and all Cash (as hereinafter defined)
from time to time received by Subcustodian therefore.
B. Use of the Account. The Account shall be used exclusively to hold,
acquire, transfer or otherwise care for, on behalf of Custodian as custodian
and the customers of Custodian and
<PAGE>54
not for Custodian's own interest, Securities and such Cash or cash equivalents
as are transferred to Subcustodian or as are received in payment of any
transfer of, or as payment on, or interest on, or dividend from, any such
Securities (herein collectively called "Cash").
C. Transfer of Property in the Account. Beneficial ownership of the
Securities and Cash in the Account shall be freely transferable without
payment of money or value other than for safe custody and administration.
D. Ownership and Segregation of Property in the Account. The ownership
of the property in the Account, whether Securities, Cash or both, and whether
any such property is held by Subcustodian in an Eligible Depository, shall be
clearly recorded on Subcustodian's books as belonging to Custodian on behalf
of Custodian's customers, and not for Custodian's own interest and, to the
extent that Securities are physically held in the Account, such Securities
shall also be physically segregated from the general assets of Subcustodian,
the assets of Custodian in its individual capacity and the assets of
Subcustodian's other customers. In addition, Subcustodian shall maintain such
other records as may be necessary to identify the property hereunder as
belonging to each Account.
E. Registration of Securities in the Account. Securities which are
eligible for deposit in a depository as provided for in Paragraph III may be
maintained with the depository in an account for Subcustodian's customers.
Securities which are not held in a depository and that are ordinarily held in
registered form will be registered in the name of Subcustodian or in the name
of Subcustodian's nominee, unless alternate Instructions are furnished by
Custodian.
II. Services to Be Provided By the Subcustodian
The services Subcustodian will provide to Custodian and the manner in which
such services will be performed will be as set forth below in this Agreement.
A. Services Performed Pursuant to Instructions. All transactions
involving the Securities and Cash in the Account shall be executed solely in
accordance with Custodian's Instructions as that term is defined in Paragraph
IV hereof, except those described in paragraph B below.
B. Services to Be Performed Without Instructions. Subcustodian will,
unless it receives Instructions from Custodian to the contrary:
<PAGE>55
1. Collect Cash. Promptly collect and receive all dividends,
income, principal, proceeds from transfer and other payments with respect to
property held in the Account, and present for payment all Securities held in
the Account which are called, redeemed or retired or otherwise become payable
and all coupons and other income items which call for payment upon
presentation, and credit Cash receipts therefrom to the Deposit Account.
2. Exchange Securities. Promptly exchange Securities where the
exchange is purely ministerial including, without limitation, the exchange of
temporary Securities for those in definitive form and the exchange of
warrants, or other documents of entitlement to Securities, for the Securities
themselves.
3. Sale of Rights and Fractional Interests. Whenever notification
of a rights entitlement or a fractional interest resulting from a rights
issue, stock dividend or stock split is received for the Account and such
rights entitlement or fractional interest bears an expiration date,
Subcustodian will promptly endeavor to obtain Custodian's Instructions, but
should these not be received in time for Subcustodian to take timely action,
Subcustodian is authorized to sell such rights entitlement or fractional
interest and to credit the Account.
4. Execute Certificates. Execute in Custodian's name for the
Account, whenever Subcustodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income from the
Securities held in the account.
5. Pay Taxes and Receive Refunds. To pay or cause to be paid from
the Account any and all taxes and levies in the nature of taxes imposed on the
property in the Account by any governmental authority, and to take all steps
necessary to obtain all tax exemptions, privileges or other benefits,
including reclaiming and recovering any foreign withholding tax, relating to
the Account and to execute any declaration, affidavits, or certificates of
ownership which may be necessary in connection therewith.
6. Prevent Losses. Take such steps as may be reasonably necessary
to secure or otherwise prevent the loss of, entitlements attached to or
otherwise relating to property held in the Account.
C. Additional Services.
1. Transmission of Notices of Corporate Action. By such means as
will permit Custodian to take timely action with respect thereto, Subcustodian
will promptly notify Custodian upon receiving notices or reports, or otherwise
becoming aware, of
<PAGE>56
corporate action affecting Securities held in the Account (including, but not
limited to, calls for redemption, mergers, consolidations, reorganizations,
recapitalizations, tender offers, rights offerings, exchanges, subscriptions
and other offerings) and dividend, interest and other income payments relating
to such Securities.
2. Communications Regarding the Exercise of Entitlements. Upon
request by Custodian, Subcustodian will promptly deliver, or cause any
Eligible Depository authorized and acting hereunder to deliver, to Custodian
all notices, proxies, proxy soliciting materials and other communications that
call for voting or the exercise of rights or other specific action (including
material relative to legal proceedings intended to be transmitted to security
holders) relating to Securities held in the Account to the extent received by
Subcustodian or said Eligible Depository, such proxies or any voting
instruments to be executed by the registered holder of the Securities, but
without indicating the manner in which such Securities are to be voted.
3. Monitor Financial Service. In furtherance of its obligations
under this Agreement, Subcustodian will monitor a leading financial service
with respect to announcements and other information respecting property held
in the Account, including announcements and other information with respect to
corporate actions and dividend, interest and other income payments.
III. Use of Securities Depository
Subcustodian may, with the prior written approval of Custodian, maintain all
or any part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the laws of a country
other than the United States of America and is supervised or regulated by a
government agency or regulatory authority in the foreign jurisdiction having
authority over such depositories or agencies, and which operates (a) the
central system for handling of designated securities or equivalent book
entries in
, or (b) a transnational system for the central handling of
securities or equivalent book entries (herein called "Eligible Depository"),
provided however, that, while so maintained, such Securities shall be subject
only to the directions of Subcustodian, and that Subcustodian duties,
obligations and responsibilities with regard to such Securities shall be the
same as if such Securities were held by Subcustodian on its premises.
<PAGE>57
IV. Claims Against Property in the Account
The property in the account shall not be subject to any right, charge,
security interest, lien or claim of any kind (collectively "Charges") in favor
of Subcustodian or any Eligible Depository or any creditor of Subcustodian or
of any Eligible Depository except a claim for payment for such property's safe
custody or administration in accordance with the terms of this Agreement.
Subcustodian will immediately notify Custodian of any attempt by any party to
assert any Charge against the property held in the Account and shall take all
lawful actions to protect such property from such Charges until Custodian has
had a reasonable time to respond to such notice.
V. Subcustodian's Warranty
Subcustodian represents and warrants that:
(A) It is a branch of a "qualified U.S. bank" or an "eligible foreign
custodian" as those terms are defined in Rule 17f-5 of the Investment Company
Act of 1940, a copy of which is attached hereto as Attachment A (the "Rule"),
and Subcustodian shall immediately notify Custodian, in writing or by other
authorized means, in the event that there appears to be a substantial
likelihood that Subcustodian will cease to qualify under the Rule as currently
in effect or as hereafter amended, or
(B) It is the subject of an exemptive order issued by the United States
Securities and Exchange Commission which order permits Custodian to employ
Subcustodian notwithstanding the fact that Subcustodian fails to qualify under
the terms of the Rule, and Subcustodian shall immediately notify Custodian, in
writing or by other authorized means, if for any reason it is no longer
covered by such exemptive order.
Upon receipt of any such notification required under (A) or (B) of this
section, Custodian may terminate this Agreement immediately without prior
notice to Subcustodian.
VI. Definitions
A. Instructions. The term "Instructions" means:
1. instructions in writing signed by authorized individuals
designated as such by Custodian;
2. telex or tested telex instructions of Custodian;
<PAGE>58
3. other forms of instructions in computer readable form as shall
customarily be used for the transmission of like information, and
4. such other forms of communication as from time to time may be
agreed upon by Custodian and Subcustodian, which Subcustodian believes in good
faith to have been given by Custodian or which are transmitted with proper
testing or authentication pursuant to terms and conditions which Custodian may
specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded. Subcustodian shall act in
accordance with Instructions and shall not be liable for any act or omission
in respect of any Instruction except in the case of willful default,
negligence, fraud, bad faith, willful misconduct, or reckless disregard of
duties on the part of Subcustodian. Subcustodian in executing all
Instructions will take relevant action in accordance with accepted industry
practice and local settlement practice.
B. Account. The term "Account" means collectively the Custody Account,
and the Deposit Account.
C. Securities. The term "Securities" includes, without limitation,
stocks, shares, bonds, debentures, debt securities (convertible or non-
convertible), notes, or other obligations or securities and any certificates,
receipts, futures contracts, foreign exchange contracts, options, warrants,
scrip, or other instruments representing rights to receive, purchase or
subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets.
VII. Miscellaneous Provisions
A. Statements Regarding the Account. Subcustodian will supply
Custodian with such statements regarding the Account as Custodian may request,
including the identity and location of any Eligible Depository authorized and
acting hereunder. In addition, Subcustodian will supply Custodian an advice
or notification of any transfers of Securities to or from the Account
indicating, as to Securities acquired for the Account, if applicable, the
Eligible Depository having physical possession of such Securities.
B. Examination of Books and Records. Subcustodian agrees that its
books and records relating to the Account and Subcustodian's actions under
this Agreement shall be open to the physical, on-premises inspection and audit
at reasonable times by officers of, auditors employed by or other
representatives of Custodian including (to the extent permitted under the law
<PAGE>59
of ) the independent public accountants for any customer of Custodian
whose property is being held hereunder and such books and records shall be
retained for such period as shall be agreed upon by Custodian and
Subcustodian.
As Custodian may reasonably request from time to time, Subcustodian will
furnish its auditor's reports an its system of internal controls, and
Subcustodian will use its best efforts to obtain and furnish similar reports
of any Eligible Depository authorized and acting hereunder.
C. Standard of Care. In holding, maintaining, servicing and disposing
of Property under this Agreement, and in fulfilling any other obligations
hereunder, Subcustodian shall exercise the same standard of care that it
exercises over its own assets, provided that Subcustodian shall exercise at
least the degree of care and maintain adequate insurance as expected of a
prudent professional Subcustodian for hire and shall assume the burden of
proving that it has exercised such care in its maintenance of Property held by
Subcustodian in its Account. The maintenance of the Property in an Eligible
Depository shall not affect Subcustodian's standard of care, and Subcustodian
will remain as fully responsible for any loss or damage to such securities as
if it had itself retained physical possession of them. Subcustodian shall
also indemnify and hold harmless Custodian and each of Custodian's customers
from and against any loss, damage, cost, expense, liability or claim
(including reasonable attorney's fees) arising out of or in connection with
the improper or negligent performance or the nonperformance of the duties of
Subcustodian.
Subcustodian shall be responsible for complying with all provisions of the law
of , or any other law, applicable to Subcustodian
in connection with its duties hereunder, including (but not limited to) the
payment of all transfer taxes or other taxes and compliance with any currency
restrictions and securities laws in connection with its duties as
Subcustodian.
D. Loss of Cash or Securities. Subcustodian agrees that, in the event
of any loss of Securities or Cash in the Account, Subcustodian will use its
best efforts to ascertain the circumstances relating to such loss and will
promptly report the same to Custodian and shall use every legal means
available to it to effect the quickest possible recovery.
E. Compensation of Subcustodian. Custodian agrees to pay to
Subcustodian from time to time such compensation for its services and such
out-of-pocket or incidental expenses of Subcustodian pursuant to this
Agreement as may be mutually agreed upon in writing from time to time.
<PAGE>60
F. Operating Requirements. The Subcustodian agrees to follow such
Operating Requirements as the Custodian may establish from time to time. A
copy of the current Operating Requirements is attached as Attachment B to this
Agreement.
G. Termination. This Agreement may be terminated by Subcustodian or
Custodian on 60 days' written notice to the other party, sent by registered
mail, provided that any such notice, whether given by Subcustodian or
Custodian, shall be followed within 60 days by Instructions specifying the
names of the persons to whom Subcustodian shall deliver the Securities in the
Account and to whom the Cash in the account shall be paid. If within 60 days
following the giving of such notice of termination, Subcustodian does not
receive such Instructions, Subcustodian shall continue to hold such Securities
and Cash subject to this Agreement until such Instructions are given. The
obligations of the parties under this Agreement shall survive the termination
of this Agreement.
H. Notices. Unless otherwise specified in this Agreement, all notices
and communications with respect to matters contemplated by this Agreement
shall be in writing, and delivered by mail, postage prepaid, telex, SWIFT, or
other mutually agreed telecommunication methods to the following addresses (or
to such other address as either party hereto may from time to time designate
by notice duly given in accordance with this paragraph):
To Subcustodian:
To Custodian: State Street Bank and Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, MA 02105
I. Confidentiality. Subcustodian and Custodian shall each use its best
efforts to maintain the confidentiality of the property in the Account and the
beneficial owners thereof, subject, however, to the provisions of any laws,
requiring disclosure. In addition, Subcustodian shall safeguard any test
keys, identification codes or other security devices which Custodian shall
make available to it. The Subcustodian further agrees it will not disclose
the existence of this Agreement or any current business relationship unless
compelled by applicable law or regulation or unless it has secured the
Custodian's written consent.
<PAGE>61
J. Assignment. This Agreement shall not be assignable by either party
but shall bind any successor in interest of Custodian and Subcustodian
respectively.
K. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of . To the extent
inconsistent with this Agreement or Custodian's Operating Requirements as
attached hereto, Subcustodian's rules and conditions regarding accounts
generally or custody accounts specifically shall not apply.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By:___________________________
Date:_________________________
AGREED TO BY SUBCUSTODIAN
______________________________
By:___________________________
Date:_________________________
<PAGE>1
AMENDMENT TO CUSTODIAN CONTRACTS
This Amendment is made as of _____________, 1995 by and between STATE
STREET BANK AND TRUST COMPANY, a Massachusetts trust company ("State Street"),
and each of WARBURG, PINCUS JAPAN OTC FUND, INC. and WARBURG, PINCUS EMERGING
MARKETS FUND, INC. (together the "Funds" and each a "Fund") to amend the
Custodian Contract between State Street and each Fund dated September 27, 1994
and December 30, 1994, respectively (each a "Custodian Contract").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, State Street serves as custodian of each Fund's assets pursuant
to a Custodian Contract;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. The first sentence of Section 5 of each Custodian Contract is hereby
replaced with the following:
Proper Instructions as used herein means a writing signed or
initialled by two or more persons as the Board of Directors shall have
from time to time authorized.
2. Except as specifically modified herein, the terms of each Custodian
Contract remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be executed in its name and on its behalf by its duly authorized
representative as of the date first above written.
WARBURG, PINCUS JAPAN OTC
FUND, INC.
WARBURG, PINCUS EMERGING MARKETS
FUND, INC.
By:
Name:
Title:
<PAGE>2
STATE STREET BANK AND TRUST
COMPANY
By:
Name:
Title:
<PAGE>
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. 4 (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.
/s/ Willkie Farr & Gallagher
Willkie Farr & Gallagher
December 22, 1995
New York, New York
<PAGE>1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 4 to
the Registration Statement under the Securities Act of 1933 on Form N-1A
(File No. 33-82362) of our report dated December 14, 1995 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."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 26, 1995
<PAGE>1
[LETTERHEAD OF HAMADA & MATSUMOTO]
December 13, 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 Growth Fund and 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
By: /s/ Yogo Kimura
----------------
Yogo Kimura
YK:kyo
<PAGE>1
Warburg Pincus Funds
Schedule 16 Calculations
Warburg Pincus Japan OTC Fund
For the Period November 1, 1994 to October 31, 1995
Common Shares
-------------
Aggregate Total Return With Waivers:
((9,228-10,000)/10,000) = -7.72%
Aggregate Total Return Without Waivers:
((9,198-10,000)/10,000) = -8.02%
Annualized Total Return With Waivers:
((9,228/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE] -1) = -7.72%
Annualized Total Return Without Waivers:
((9,198/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE] -1) = -8.02%
Series 2 Shares
---------------
Aggregate Total Return With Waivers:
((9,218-10,000)/10,000) = -7.82%
Aggregate Total Return Without Waivers:
((9,056-10,000)/10,000) = -9.44%
Annualized Total Return With Waivers:
((9,218/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE] -1) = -7.82%
Annualized Total Return Without Waivers:
((9,056/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE] -1) = -9.44%
- ------------------------
* - The preceding expression is being raised to the power of 1/1
<PAGE>7
Warburg Pincus Japan OTC Fund
For the Period September 30, 1994 to October 31, 1995
Common Shares
-------------
Aggregate Total Return With Waivers:
((9,090-10,000)/10,000) = -9.10%
Aggregate Total Return Without Waivers:
((9,050-10,000)/10,000) = -9.50%
Annualized Total Return With Waivers:
((9,090/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE]-1) = -8.40%
Annualized Total Return Without Waivers:
((9,050/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE]-1) = -8.77%
Series 2 Shares
---------------
Aggregate Total Return With Waivers:
((9,080-10,000)/10,000) = -9.20%
Aggregate Total Return Without Waivers:
((8,880-10,000)/10,000) = -11.20%
Annualized Total Return With Waivers:
((9,080/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE]-1) = -8.49%
Annualized Total Return Without Waivers:
((8,880/10,000)[*GRAPHIC OMITTED-SEE FOOTNOTE]-1) = -10.35%
- ------------------------
* - The preceding expression is being raised to the power of 1/1.08767
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