<PAGE>1
As filed with the U.S. Securities and Exchange Commission
on October 30, 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. 3 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 4 [x]
(Check appropriate box or boxes)
Warburg, Pincus Japan OTC Fund, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................ .....................
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus Japan OTC Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
.........................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
<PAGE>2
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
_________________________________
DECLARATION PURSUANT TO RULE 24f-2
Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933, as amended, pursuant to Section (a)(1) of Rule
24f-2 under the Investment Company Act of 1940, as amended. The Rule 24f-2
Notice for Registrant's fiscal year ending on October 31, 1994 was filed on
December 29, 1994.
<PAGE>3
WARBURG, PINCUS JAPAN OTC FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
Heading for the Common Shares
Part A and the Advisor Shares
Item No. Prospectuses*
-------- -----------------------------
1. Cover Page . . . . . . . Cover Page
2. Synopsis . . . . . . . . The Funds' Expenses
3. Condensed Financial Financial Highlights
Information . . . . . .
4. General Description of
Registrant . . . . . . . Cover Page; Investment
Objectives and Policies;
General Information
5. Management of the Fund . Management of the Funds
6. Capital Stock and Other
Securities . . . . . . . Dividends, Distributions and
Taxes; Management of the
Funds; General Information
7. Purchase of Securities
Being Offered . . . . . How to Purchase Shares;
Management of the Funds
8. Redemption or Repurchase How to Redeem and Exchange
Shares
9. Legal Proceedings . . . Not applicable
- ------------------------
* With respect to the Advisor Prospectus, all references to "the Funds" in
this cross-reference sheet should be read as "the Fund."
<PAGE>4
Part B Statement of Additional
Item No. Information Heading
-------- -----------------------
10. Cover Page . . . . . . . Cover Page
11. Table of Contents . . . Table of Contents
12. General Information and
History . . . . . . . . Management of the Fund; Notes
to Financial Statements; See
Prospectuses--"General
Information"
13. Investment Objectives and
Policies . . . . . . . . Investment Objective;
Investment Policies
14. Management of the
Registrant . . . . . . . Management of the Fund
15. Control Persons and
Principal Holders of
Securities . . . . . . . Management of the Fund;
Miscellaneous; See
Prospectuses--"General
Information"
16. Investment Advisory and
Other Services . . . . . Management of the Fund; See
Prospectuses--"Management of
the Funds"
17. Brokerage Allocation and
Other Practices . . . . Investment Objective;
Investment Policies
18. Capital Stock and Other
Securities . . . . . . . Management of the Fund; See
Prospectuses--"Dividends,
Distributions and Taxes" and
"General Information"
19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . Additional Purchase and
Redemption Information
20. Tax Status . . . . . . . See Prospectuses--"Dividends,
Distributions and Taxes";
Additional Information
Concerning Taxes
<PAGE>5
Part B Statement of Additional
Item No. Information Heading
-------- -----------------------
21. Underwriters . . . . . . Management of the Fund;
Additional Purchase and
Redemption Information; See
Prospectuses--"Management of
the Funds" and "Shareholder
Servicing"
22. Calculation of
Performance Data . . . . Determination of Performance
23. Financial Statements . . Report of Independent
Auditors; Financial Statements
Part C
Information required to be included in Part C is set forth after the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
[LOGO]
PROSPECTUS
DECEMBER 29, 1995
[ ] WARBURG PINCUS EMERGING MARKETS FUND
[ ] WARBURG PINCUS INTERNATIONAL EQUITY FUND
[ ] WARBURG PINCUS JAPAN OTC FUND
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1995
WARBURG PINCUS FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
December 29, 1995
PROSPECTUS
Warburg Pincus Funds are a family of open-end mutual funds that offer investors
a variety of investment opportunities. Three funds are described in this
Prospectus:
WARBURG, PINCUS EMERGING MARKETS FUND seeks growth of capital by investing
primarily in equity securities of non-United States issuers consisting of
companies in emerging securities markets.
WARBURG, PINCUS INTERNATIONAL EQUITY FUND seeks long-term capital appreciation
by investing in international equity securities that are considered by the
Fund's investment adviser to have above-average potential for appreciation.
WARBURG, PINCUS JAPAN OTC FUND seeks long-term capital appreciation by investing
in a portfolio of securities traded in the Japanese over-the-counter market.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
NO LOAD CLASS OF COMMON SHARES
Each Fund offers two classes of shares. A class of Common Shares that is 'no
load' is offered by this Prospectus (i) directly from the Funds' distributor,
Counsellors Securities Inc., and (ii) through various brokerage firms including
Charles Schwab & Company, Inc. Mutual Fund OneSource'tm' Program; Fidelity
Brokerage Services, Inc. FundsNetwork'tm' Program; Jack White & Company, Inc.;
and Waterhouse Securities, Inc. The availability of the Japan OTC Fund through
these brokerage firms may vary. Common Shares of the Emerging Markets Fund and
the Japan OTC Fund are subject to a 12b-1 fee of .25% per annum.
LOW MINIMUM INVESTMENT
The minimum initial investment in each Fund is $2,500 ($500 for an IRA or
Uniform Gifts to Minors Act account) and the minimum subsequent investment is
$100. Through the Automatic Monthly Investment Plan, subsequent investment
minimums may be as low as $50. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about each
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Funds at (800) 257-5614. Information
regarding the status of shareholder accounts may be obtained by calling Warburg
Pincus Funds at (800) 888-6878. The Statements of Additional Information bear
the same date as this Prospectus and are incorporated by reference in their
entirety into this Prospectus.
- --------------------------------------------------------------------------------
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>
THE FUNDS' EXPENSES
Each of Warburg, Pincus Emerging Markets Fund, International Equity Fund
and Japan OTC Fund (the 'Funds') currently offers two separate classes of
shares: Common Shares and Advisor Shares. For a description of Advisor Shares
see 'General Information' and 'Shareholder Servicing.' In addition, Common
Shares of the Emerging Markets Fund and the Japan OTC Fund pay the Fund's
distributor a 12b-1 fee. See 'Management of the Funds -- Distributor.'
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL JAPAN
MARKETS EQUITY OTC
FUND FUND FUND
-------- ------------- -----
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)... 0 0 0
Redemption Fee (as a percentage of the value of shares redeemed).............. 0 0 1.00%*
Annual Fund Operating Expenses (after fee waivers) (as a percentage of average net
assets)
Management Fees............................................................... 0'D' 1.00% .97%'D'
12b-1 Fees.................................................................... .25% .25% .25%
Other Expenses................................................................ .75%'D' .44% .53%'D'
-------- ------ -----
Total Fund Operating Expenses................................................. 1.00% 1.44% 1.75%
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........................................................................ $ 10 $ 15 $ 18
3 years....................................................................... $ 32 $ 46 $ 55
5 years....................................................................... $ $ 79 $
10 years...................................................................... $ $ 172 $
</TABLE>
- ------------
* Redemption fees are charged to shareholders redeeming their shares of the
Japan OTC Fund within six months after the date of purchase and are paid to
the Fund. The redemption fee is currently being waived until such later date
as the Japan OTC Fund may determine. See 'How to Redeem and Exchange Shares.'
'D' Estimated amounts to be charged in the current fiscal year after the
anticipated waiver of fees by the Funds' investment adviser and
co-administrator; the investment adviser and co-administrator are under no
obligation to continue these waivers.
2
<PAGE>
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a Common Shareholder of each Fund. Absent the
anticipated waiver of fees by the Funds' investment adviser and
co-administrator, Management Fees for the Emerging Markets and Japan OTC Funds
would each have equalled 1.25%, Other Expenses would have equalled 20.63% and
.56%, respectively, and Total Fund Operating Expenses would have equalled 22.13%
and 2.06%, respectively; the investment adviser and co-administrator are under
no obligation to continue these waivers. Certain broker-dealers and financial
institutions also may charge their clients fees in connection with investments
in a Fund's Common Shares, which fees are not reflected in the table. No fees
were waived in the case of the International Equity Fund. The Example should not
be considered a representation of past or future expenses; actual Fund expenses
may be greater or less than those shown. Moreover, while the Example assumes a
5% annual return, each Fund's actual performance will vary and may result in a
return greater or less than 5%. Long-term shareholders of the Emerging Markets
Fund or the Japan OTC Fund may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers, Inc. (the 'NASD').
FINANCIAL HIGHLIGHTS
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The information regarding each Fund for the three fiscal years/period ended
October 31, 1995 has been derived from information audited by Coopers & Lybrand
L.L.P., independent auditors, whose report dated December , 1995 appears in
the relevant Fund's Statement of Additional Information. For the International
Equity Fund, the information for the prior fiscal years/period ended October 31,
1992 (up to two such years/period) has been audited by Ernst & Young LLP, whose
report was unqualified. Further information about the performance of the Funds
is contained in the Funds' annual report, dated October 31, 1995, copies of
which may be obtained without charge by calling Warburg Pincus Funds at
(800) 257-5614.
3
<PAGE>
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 30, 1994
(INCEPTION) THROUGH
OCTOBER 31, 1995
-------------------
<S> <C>
Net Asset Value,
Beginning of Period....
------
Income from Investment
Operations
Net Investment
Income...............
Net Gains (Losses) from
Securities and
Foreign Currency
Related Items
(both realized and
unrealized)..........
------
Total from Investment
Operations...........
------
Less Distributions
Dividends (from net
investment income)...
Distributions (from
capital gains).......
------
Total Distributions....
------
Net Asset Value, End of
Period.................
------
------
Total Return.............
Ratios/Supplemental Data
Net Assets, End of Period
(000s).................
Ratios to Average Daily
Net Assets:
Operating expenses.....
Net investment
income...............
Decrease reflected in
above expense ratios
due to
waivers/reimbursements...
Portfolio Turnover
Rate...................
</TABLE>
- ------------
* Annualized.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FOR THE
PERIOD
MAY 2, 1989
(COMMENCEMENT
OF
OPERATIONS)
FOR THE YEAR ENDED OCTOBER 31, THROUGH
----------------------------------------------------------------------- OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989
---------- ---------- -------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $17.00 $12.22 $13.66 $11.81 $11.35 $10.00
---------- ---------- -------- -------- ------- ------- -------------
Income from Investment
Operations
Net Investment Income
(Loss)............... .09 .09 .15 .19 .13 .05
Net Gains (Losses) from
Securities and
Foreign Currency
Related Items (both
realized and
unrealized).......... 3.51 4.84 (1.28) 2.03 .55 1.30
---------- ---------- -------- -------- ------- ------- -------------
Total from Investment
Operations........... 3.60 4.93 (1.13) 2.22 .68 1.35
---------- ---------- -------- -------- ------- ------- -------------
Less Distributions
Dividends (from net
investment income)... (.04) (.02) (.16) (.33) (.10) .00
Distributions in excess
of net investment
income............... (.01) .00 .00 .00 .00 .00
Distributions (from
capital gains)....... (.04) (.13) (.15) (.04) (.12) .00
---------- ---------- -------- -------- ------- ------- -------------
Total Distributions.... (.09) (.15) (.31) (.37) (.22) .00
---------- ---------- -------- -------- ------- ------- -------------
Net Asset Value, End of
Period................. $20.51 $17.00 $12.22 $13.66 $11.81 $11.35
---------- ---------- -------- -------- ------- ------- -------------
---------- ---------- -------- -------- ------- ------- -------------
Total Return............. 21.22% 40.68% (8.44%) 19.42% 5.92% 28.73%*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $1,533,872 $378,661 $101,763 $72,553 $38,946 $13,260
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.44% 1.48% 1.49% 1.50% 1.46% 1.50%*
Net investment income
(loss)............... .19% .38% .88% 1.19% 1.58% 1.33%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements... .00% .00% .07% .17% .38% .89%*
Portfolio Turnover
Rate................... 17.02% 22.60% 53.29% 54.95% 66.12% 27.32%
</TABLE>
- ------------
* Annualized.
4
<PAGE>
JAPAN OTC FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994
FOR THE (COMMENCEMENT
YEAR ENDED OF OPERATIONS) THROUGH
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- ----------------------
<S> <C> <C>
Net Asset Value,
Beginning of Period.... $10.00
------- -------
Income from Investment
Operations
Net Investment
Income............... .00
Net Gains (Losses) from
Securities and
Foreign Currency
Related Items (both
realized and
unrealized).......... (.15)
------- -------
Total from Investment
Operations........... (.15)
------- -------
Less Distributions
Dividends (from net
investment income)... .00
Distributions (from
capital gains)....... .00
------- -------
Total Distributions.... .00
------- -------
Net Asset Value, End of
Period................. $9.85
------- -------
------- -------
Total Return............. (15.84%)*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $ 19,878
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.00%*
Net investment
income............... .49%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements 4.96%*
Portfolio Turnover
Rate................... .00%
</TABLE>
- ------------
* Annualized.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Fund. Any investment involves risk and, therefore, there can be no
assurance that any Fund will achieve its investment objective. See 'Certain
Investment Strategies' for descriptions of certain types of investments the
Funds may make.
EMERGING MARKETS FUND
The Fund's investment objective is growth of capital. The Fund is a
non-diversified management investment company that pursues its investment
objective by investing primarily in equity securities on non-United States
issuers consisting of companies in emerging securities markets. An investment in
the Fund may involve a greater degree of risk than investment in other mutual
funds that seek capital appreciation by investing in larger, more developed
markets.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in equity securities of issuers in Emerging Markets (as defined
below), and the Fund intends to acquire securities of many issuers located in a
number of foreign countries. The Fund will not necessarily seek to diversify
investments on a geographical basis or on the basis of the level of economic
development of any particular country. However, the Fund will at all times,
except during defensive periods, maintain investments in at least three
countries outside the United States. An equity security of an issuer in an
Emerging Market is defined as common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts of an issuer: (i) the
principal securities trading market for which is in an Emerging Market; (ii)
which derives at least 50% of its revenues or earnings, either alone or on a
consolidated basis, from goods produced or sold, investments made or services
performed in an Emerging Market, or which has at least 50% of its total or net
assets situated in one or more Emerging Markets; or (iii) that is organized
under the laws of, and with a principal office in, an Emerging Market.
Determinations as to whether in issuer is an Emerging Markets issuer will be
made by the Fund's investment adviser based on publicly available information
and inquiries made to the issuers.
As used in this Prospectus, an Emerging Market is any country (i) which is
generally considered to be an emerging or developing country by the World Bank
and the International Finance Corporation (the 'IFC') or by the United Nations
Development Programme or (ii) which is included in the IFC Investable Index or
the Morgan Stanley Capital International Emerging Markets Index or (iii) which
as a gross national product ('GNP') per capita of $2,000 or less, in each case
at the time of the Fund's investment. Among the countries which Warburg
currently considers to be Emerging Markets are the following: Algeria, Angola,
Antigua, Argentina, Armenia, Azerbaijan, Bangladesh, Barbuda, Barbados, Belarus,
Belize, Bhutan, Bolivia, Botswana, Brazil, Bulgaria, Cambodia, Chile, People's
Republic of China, Republic of China (Taiwan), Colombia, Cyprus, Czech Republic,
Dominica, Ecuador, Egypt, Estonia, Georgia, Ghana, Greece, Grenada, Guyana, Hong
Kong, Hungary, India, Indonesia, Ivory Coast, Jamaica, Jordan, Kazakhstan,
Kenya, Republic of Korea (South Korea), Latvia, Lebanon, Lithuania, Malawi,
Malaysia, Mauritius, Mexico, Moldova, Mongolia, Montserrat, Morocco, Mozambique,
Myanmar (Burma), Namibia, Nepal, Nigeria, Pakistan, Panama, Papua New Guinea,
Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia,
Singapore, Slovakia, Slovenia, South Africa, Sri Lanka, St. Kitts and Nevis, St.
Lucia, St. Vincent and the Grenadines, Swaziland, Tanzania, Thailand, Trinidad
and Tobago, Tuni-
6
<PAGE>
sia, Turkey, Turkmenistan, Uganda, Ukraine, Uruguay, Uzbekistan, Venezuela,
Vietnam, Yugoslavia, Zambia and Zimbabwe. Among the countries that will not be
considered Emerging Markets are: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland, United Kingdom and the United
States.
The Fund may invest in securities of companies of any size, whether traded
on or off a national securities exchange. Fund holdings may include emerging
growth companies, which are small- or medium-sized companies that have passed
their start-up phase and that show positive earnings and prospects for achieving
profit and gain in a relatively short period of time.
In appropriate circumstances, such as when a direct investment by the Fund
in the securities of a particular country cannot be made or when the securities
of an investment company are more liquid than the underlying portfolio
securities, the Fund may, consistent with the provisions of the Investment
Company Act of 1940, as amended (the '1940 Act'), invest in the securities of
closed-end investment companies that invest in foreign securities.
INTERNATIONAL EQUITY FUND
The International Equity Fund seeks long-term capital appreciation. The
Fund is a diversified management investment company that pursues its investment
objective by investing primarily in a broadly diversified portfolio of equity
securities of companies, wherever organized, that in Warburg's judgment have
their principal business activities and interests outside the United States. The
Fund will ordinarily invest substantially all of its assets -- but no less than
65% of its total assets -- in common stocks, warrants and securities convertible
into or exchangeable for common stocks. Ordinarily the Fund will hold no less
than 65% of its total assets in at least three countries other than the United
States. The Fund intends to be widely diversified across securities of many
corporations located in a number of foreign countries. Warburg anticipates,
however, that the Fund may from time to time invest a significant portion of its
assets in a single country such as Japan, which may involve special risks. See
'Risk Factors and Special Considerations -- Japanese Investments' below. In
appropriate circumstances, such as when a direct investment by the International
Equity Fund in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Fund may, consistent with the provisions of the 1940
Act, invest in the securities of closed-end investment companies that invest in
foreign securities.
The Fund intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
JAPAN OTC FUND
The Japan OTC Fund seeks long-term capital appreciation. The Fund is a
non-diversified management investment company that pursues its investment
objective by investing in a portfolio of securities traded in the Japanese
over-the-counter market. The Fund is designed to provide an opportunity to
participate in the dynamic structural changes in the Japanese industrial system
through investment in less-established, higher growth companies that can be
expected to benefit from these changes. At all times, except during temporary
defensive periods, the Fund will maintain at least 65% of its total assets in
securities of companies traded through JASDAQ, the primary Japanese over-the-
counter market, or the Japanese Second Section OTC Market (the 'Frontier
Market'). The por-
7
<PAGE>
tion 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 Japan OTC Fund may also invest up to 5% of the Fund's net
assets in each of the following: mortgage-backed securities, asset-backed
securities and zero coupon securities. The Japan OTC Fund may involve a greater
degree of risk than an investment in other mutual funds that seek capital
appreciation by investing in better-known, larger companies. From time to time,
the Japan OTC Fund may hedge part or all of its exposure to the Japanese yen,
thereby reducing or substantially eliminating any favorable or unfavorable
impact of changes in the value of the yen in relation to the U.S. dollar.
At December 31, 1994, 581 issues were traded through JASDAQ, having an
aggregate market capitalization in excess of 14 trillion yen (approximately
$[134] billion as of 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 under the jurisdiction of JASDAQ, which is overseen
by the Japanese Securities and Exchange Commission. The Frontier Market has less
stringent entry requirements than those described above for JASDAQ and is
designed to enable early stage companies access to capital markets. Frontier
Market companies need not have a history of earnings, provided their spending on
research and development equals at least 3% of revenues. In addition, companies
traded through the Frontier Market are not required to have 2 million shares
outstanding at the time of registration. As a result, investments in companies
traded through the Frontier Market may involve a greater degree of risk than
investments in companies traded through JASDAQ. As of the date of this
Prospectus, there were not yet any registrations on the Frontier Market, but the
first registrations are expected to be effective in November 1995.
PORTFOLIO INVESTMENTS
DEBT. The International Equity Fund and the Japan OTC Fund may each 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 Emerging Markets Fund
may invest up to 35% of its total assets in debt securities (other than money
market obligations) for the purpose of seeking growth of capital. The interest
income to be derived may be considered as one factor in selecting debt
securities for investment by 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
8
<PAGE>
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 may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. Subsequent to its purchase by
a Fund, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require sale of such securities. Warburg will consider such event in its
determination of whether the Fund should continue to hold the securities. The
Japan OTC Fund does not currently intend during the coming year to hold more
than 5% of its net assets in securities that have been downgraded below
investment grade.
When Warburg believes that a defensive posture is warranted, each Fund may
invest temporarily without limit in U.S. and foreign investment grade debt
obligations, other securities of U.S. companies and in domestic and foreign
money market obligations, including repurchase agreements as discussed below.
Emerging Markets Fund. The Fund may invest or hold up to 35% of its net assets
in fixed-income securities (including convertible bonds) rated below investment
grade (commonly referred to as 'junk bonds'), and as low as C by Moody's
Investors Service, Inc. ('Moody's') or D by Standard & Poor's Ratings Group
('S&P'), or in unrated securities considered to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt rated D by S&P is in default or is expected to default
upon maturity or payment date.
Among the types of debt securities in which the Emerging Markets Fund may
invest are Brady Bonds, loan participations and assignments, asset-backed
securities, mortgage-backed securities and zero coupon securities that are not
covertible into common or preferred stock:
Brady Bonds are collateralized or uncollateralized securities created
through the exchange of existing commercial bank loans to public and private
Latin American entities for new bonds in connection with certain debt
restructurings. Brady Bonds have been issued only recently and therefore do not
have a long payment history. However, in light of the history of commercial bank
loan defaults by Latin American public and private entities, investments in
Brady Bonds may be viewed as speculative.
Loan Participations and Assignments of fixed and floating rate loans
arranged through private negotiations between a foreign government as borrower
and one or more financial institutions as lenders will typically result in the
Fund having a contractual relationship only with the lender, in the case of a
participation, or the borrower, in the case of an assignment. The Fund may not
directly benefit from any collateral supporting a participation, and in the
event of the insolvency of a lender will be treated as a general creditor of the
lender. As a result, the Fund assumes the risk of both the borrower and the
lender of a participation. The Fund's rights and obligations as the purchaser of
an assignment may differ from, and be more limited than, those held by the
assigning lender. The lack of a liquid secondary market for both participations
and assignments will have an adverse impact on the value of such securities and
on the Fund's ability to dispose of participations or assignments.
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Asset-backed securities are collateralized by interests in pools of
consumer loans, with interest and principal payments ultimately depending on
payments in respect of the underlying loans by individuals (or a financial
institution providing credit enhancement). Because market experience in these
securities is limited, the market's ability to sustain liquidity through all
phases of the market cycle had not been tested. In addition, there is no
assurance that the security interest in the collateral can be realized. The Fund
may purchase asset-backed securities that are unrated.
Mortgage-backed securities are collateralized by mortgages or interests in
mortgages and may be issued by government or non-government entities.
Non-government issued mortgage-backed securities may offer higher yields than
those issued by government entities, but may be subject to greater price
fluctuations. The value of mortgage-backed securities may change due to market
shifts in the perceptions of issuers, and regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Prepayment, which
occurs when unscheduled or early payments are made on the underlying mortgages,
may shorten the effective maturities of these securities and may lower their
returns.
MONEY MARKET OBLIGATIONS. Each Fund is authorized to invest, under normal market
conditions, up to 20% of its total assets in domestic and foreign short-term
(one year or less remaining to maturity) and medium-term (five years or less
remaining to maturity) money market obligations and for temporary defensive
purposes may invest in these securities without limit. These instruments consist
of obligations issued or guaranteed by the U.S. government or a foreign
government, their agencies or instrumentalities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loans and similar institutions) that are
high quality investments or, if unrated, deemed by Warburg to be high quality
investments; commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Funds may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and 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 ('governing Board' or 'Board'), monitors the
creditworthiness of those bank and non-bank dealers with which each Fund enters
into repurchase agreements to evaluate this risk. A repurchase agreement is
considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to the Fund and appropriate considering the factors
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of return and liquidity, each Fund may invest up to 5% of its assets in
securities of money market mutual funds that are unaffiliated with the Fund,
Warburg or, in the case of the Japan OTC Fund, the sub-investment adviser (each
investment adviser and sub-investment adviser referred to individually as an
'Adviser'). As a shareholder in any mutual fund, a Fund will bear its ratable
share of the mutual fund's expenses, including management fees, and will remain
subject to payment of the Fund's administration fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Fund may
invest include: direct obligations of the U.S. Treasury, and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. The Japan OTC Fund will invest only in convertible
securities rated investment grade at the time of purchase or deemed to be of
equivalent quality. The Japan OTC Fund does not currently intend during the
coming year to hold more than 5% of its net assets in the aggregate of
investment grade convertible securities and investment grade debt downgraded
below investment grade subsequent to acquisition by the Fund.
ZERO COUPON SECURITIES. The Emerging Markets Fund may invest in zero coupon
securities. Zero coupon securities pay no cash income to their holders until
they mature and are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return comes from the difference
between their purchase price and their maturity value. Because interest on zero
coupon securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than are the values of securities
that distribute income regularly and may be more speculative than such other
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. Redemption of shares of the Fund that require it
to sell zero coupon securities prior to maturity may result in capital gains or
losses that may be substantial. In addition, the Fund's investments in zero
coupon securities will result in special tax consequences, which are described
below under 'Dividends, Distributions and Taxes -- Taxes'.
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 each Fund's investments, see 'Portfolio
Investments' beginning at page 8 and 'Certain Investment Strategies' beginning
at page 15.
JAPANESE INVESTMENTS. Investing in Japanese securities may involve the risks
described below associated with investing in foreign securities generally. In
addition, because the Japan OTC Fund invests primarily in Japan and the
International Equity Fund may from time to time have a large position in
Japanese securities, these Funds will be subject to general economic and
political conditions in Japan. The Japan OTC Fund
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should be considered a vehicle for diversification, but the Fund itself is not
diversified.
A significant portion of the Japan OTC Fund's assets will be invested in
securities traded through JASDAQ. Trading of equity securities through the
JASDAQ market is conducted by securities firms in Japan, primarily through an
organization which acts as a 'matching agent,' as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, from time to time,
and especially in falling markets, become illiquid and experience short-term
price volatility and wide spreads between bid and offer prices. This combination
of limited liquidity and price volatility may have an adverse effect on the
investment performance of the Fund. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts the Fund's ability to adjust its portfolio
quickly in order to take full advantage of a significant market increase, and
conversely, during periods of rapid price declines, it restricts the ability of
the Fund to dispose of securities quickly in order to realize gains previously
made or to limit losses on securities held in its portfolio. In addition,
although JASDAQ has generally experienced sustained growth in aggregate market
capitalization and trading volume, there have been periods in which aggregate
market capitalization and trading volume have declined. The Frontier Market is
expected to present greater liquidity, volatility and trading considerations
than JASDAQ.
JASDAQ-traded securities can be volatile, which would result in the Japan
OTC Fund's net asset value fluctuating in response. The decline in the Japanese
securities markets since 1989 has contributed to a weakness in the Japanese
economy, and the impact of a further decline cannot be ascertained. The common
stocks of many Japanese companies continue to trade at high price-earnings
ratios in comparison with those in the United States, even after the recent
market decline. Differences in accounting methods make it difficult to compare
the earnings of Japanese companies with those of companies in other countries,
especially the United States.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of each
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of each Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in the value of Japanese yen relative
to the U.S. dollar.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult 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 prospective regulatory reforms on the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Funds
investing there. For additional information, see 'Japan and its Securities
Markets,' beginning at page 28 of the Statement of Additional Information for
the
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Japan OTC Fund, and 'Investment Policies -- Japanese Investments,' beginning at
page 3 of the Statement of Additional Information for the International Equity
Fund.
EMERGING MARKETS. The Funds may invest in securities of issuers located in less
developed countries considered to be 'emerging markets.' Investing in securities
of issuers located in emerging markets involves not only the risks described
below, with respect to investing in foreign securities, but also other risks,
including exposure to economic structures that are generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of emerging
markets that may affect investment there include certain national policies that
may restrict investment by foreigners in issuers or industries deemed sensitive
to relevant national interests and the absence of developed legal structures
governing private and foreign investments and private property. The typically
small size of the markets for securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
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. In addition, small- and medium-sized companies are
typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. Because small- and
medium-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. There
is typically less publicly available information concerning small- and
medium-sized companies than for larger, more established ones. Securities of
issuers in 'special situations' also may be more volatile, since the market
value of these securities may decline in value if the anticipated benefits do
not materialize. Companies in 'special situations' include, but are not limited
to, companies involved in an acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer, a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the companies' securities. Although investing in securities of emerging growth
companies or 'special situations' offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in a 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.
INVESTMENTS IN NON-PUBLICLY TRADED SECURITIES. Although the Funds expect to
invest primarily in publicly traded equity securities, the Emerging Markets Fund
and the Japan OTC Fund may each invest up to 15% of its net assets and the
International Equity Fund may invest up to 10% of its total assets, in
non-publicly traded equity securities, which may involve a high degree of
business and financial risk and may result in substantial losses. Because of the
absence of any liquid trading market currently for these investments, a Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
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traded. A Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected. Except in the case
of the Japan OTC Fund, each Fund's limitation on illiquid securities excludes
Rule 144A Securities determined by the Fund's Board to be liquid.
NON-DIVERSIFIED STATUS. The Emerging Markets Fund and the Japan OTC Fund are
classified as non-diversified investment companies under the 1940 Act, which
means that each Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. Each Fund will,
however, comply with diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the 'Code'), for qualification as a regulated
investment company. As a non-diversified investment company, each Fund may
invest a greater proportion of its assets in the obligations of a small number
of issuers and, as a result, may be subject to greater risk with respect to
portfolio securities. To the extent that a Fund assumes large positions in the
securities of a small number of issuers, its return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
LOWER-RATED SECURITIES. The Emerging Markets Fund may invest in lower-rated and
comparable unrated securities (commonly referred to as 'junk bonds'), which (i)
will likely have some quality and protective characteristics that, in the
judgment of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. 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. 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 value of securities in lower rating categories is more volatile than that
of higher quality securities. In addition, the Fund may have difficulty
disposing of certain of these securities because there may be a thin trading
market. The lack of a liquid secondary market for certain securities may have an
adverse impace on the Fund's ability to dispose of particular issues and 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.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
A Fund will attempt to purchase securities with the intent of holding them
for investment but may purchase and sell portfolio securities whenever an
Adviser believes it to be in the best interests of the relevant Fund. A Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. High portfolio
turnover rates (100% or more) may result in dealer mark ups or underwriting
commissions as well as other transaction costs, including correspondingly higher
brokerage commissions. In addition, short-term gains realized from portfolio
turnover may be taxable to shareholders as ordinary income. See 'Dividends,
Distributions and Taxes -- Taxes' below and 'Investment Policies -- Portfolio
Transactions' in each Fund's Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Fund are
placed by an Adviser with broker-dealers that it selects, including Counsellors
Securities Inc., the Funds'
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distributor ('Counsellors Securities'). A 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, each
Fund is authorized to engage in the following investment strategies: (i)
purchasing securities on a when-issued basis and purchasing or selling
securities for delayed delivery, (ii) lending portfolio securities and (iii) in
the case of the Post-Venture Capital Fund, entering into reverse repurchase
agreements and dollar rolls. Detailed information concerning each Fund's
strategies and related risks is contained below and in the Fund's Statement of
Additional Information.
STRATEGIES AVAILABLE TO ALL FUNDS
FOREIGN SECURITIES. Each 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 United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Funds,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians. The risks associated with investing in securities of non-U.S.
issuers are generally hightened for investments in securities of issuers in
emerging markets.
RULE 144A SECURITIES. The Funds may purchase securities that are not registered
under the Securities Act of 1933, as amended (the '1933 Act'), but that can be
sold to 'qualified institutional buyers' in accordance with Rule 144A under the
1933 Act ('Rule 144A Securities'). An investment in Rule 144A Securities will be
considered illiquid and therefore subject to each Fund's limitation on the
purchase of illiquid securities, unless the Fund's governing Board determines on
an ongoing basis that an adequate trading market exists for the security. In the
case of the Japan OTC Fund, Rule 144A Securities will be limited to 10% of the
Fund's net assets, included within the Fund's 15% limit on illiquid securities.
In addition to an adequate trading
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market, the Board will also consider factors such as trading activity,
availability of reliable price information and other relevant information in
determining whether a Rule 144A Security is liquid. This investment practice
could have the effect of increasing the level of illiquidity in the Funds to the
extent that qualified institutional buyers become uninterested for a time in
purchasing Rule 144A Securities. The governing Board of each Fund will carefully
monitor any investments by the Fund in Rule 144A Securities. The governing Board
may adopt guidelines and delegate to an Adviser the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although each
Board will retain ultimate responsibility for any determination regarding
liquidity.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg, each
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 Funds' use of these strategies may be limited by
position and exercise limits established by securities exchanges and the NASD
and by the Code.
Securities and Stock Index Options. The International Equity and Japan OTC
Funds may each write covered call options, and the Japan OTC Fund may write put
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 Emerging Markets, International Equity and
Japan OTC Funds may each 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 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,
each 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.
Futures Contracts and Related Options. Each 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
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foreign currency, 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.
Currency Exchange Transactions. The Funds will conduct their 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) in the case
of the Emerging Markets and Japan OTC Funds, by purchasing exchange-traded
currency options. A forward currency contract involves an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract. An option on a foreign currency operates similarly to an option on a
security. Risks associated with currency forward contracts and purchasing
currency options are similar to those described in this Prospectus for futures
contracts and securities and stock index options. In addition, the use of
currency transactions could result in losses from the imposition of foreign
exchange controls, suspension of settlement or other governmental actions or
unexpected events. The International Equity Fund may only enter into forward
currency contracts for hedging purposes.
Hedging Considerations. The Funds may engage in options, futures and
currency transactions for, among other things, 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. A Fund will engage in hedging transactions only when deemed advisable by
Warburg, and successful use of hedging transactions will depend on Warburg's
ability to correctly predict movements in the directions of 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 a 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 a transaction.
Asset Coverage. Each Fund will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Fund on securities and indexes; currency, interest rate
and stock index futures contracts and options on these futures contracts; and
forward currency contracts. The use of these strategies may require that the
Fund maintain cash or certain liquid high-grade debt securities or other assets
that are acceptable as collateral to the appropriate regulatory authority in a
segregated account with its custodian or a designated sub-custodian to the
extent the Fund's obligations with respect to these strategies are
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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.
STRATEGY AVAILABLE TO THE EMERGING MARKETS FUNDS
SHORT SALES AGAINST THE BOX. The Fund may make short sales of its portfolio
holdings if, at all times when a short position is open, the Fund owns the
security sold short or owns debt securities convertible or exchangeable, without
payment of further consideration, into the security sold short. Short sales of
this kind are referred to as short sales 'against the box.' The broker-dealer
that executes a short sale generally invests cash proceeds of the sale until
they are paid to the Fund. Arrangements may be made with the broker-dealer to
obtain a portion of the interest earned by the broker on the investment of short
sale proceeds. The Fund will segregate the security sold short or convertible or
exchangeable debt securities in a special account with its custodian. Not more
than 10% of the Fund's net assets (taken at current value) may be held as
collateral for such sales at any one time. The extent to which the Fund may make
short sales may be limited by the Code.
INVESTMENT GUIDELINES
The Emerging Markets Fund and the Japan OTC Fund may each invest up to 15%
of its net assets, and the International Equity Fund may invest up to 10% of its
total assets, in securities with contractual or other restrictions on resale and
other instruments that are not readily marketable ('illiquid securities'),
including (i) securities issued as part of a privately negotiated transaction
between an issuer and one or more purchasers; (ii) repurchase agreements with
maturities greater than seven days; (iii) time deposits maturing in more than
seven calendar days; and (iv) in the case of the Japan OTC Fund, Rule 144A
Securities. In addition, up to 5% of each Fund's total assets may be invested in
the securities of issuers which have been in continuous operation for less than
three years, and up to an additional 5% of its assets may be invested in
warrants. Each Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that reverse
repurchase agreements and any other borrowing by the Fund may not exceed 30% of
total assets, and may pledge its assets to the extent necessary to secure
permitted borrowings (up to 10% of its assets in the case of the International
Equity Fund). Whenever borrowings (including reverse repurchase agreements)
exceed 5% of the value of the Fund's total assets, the Fund will not make any
investments (including roll-overs). Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the governing Board of each Fund, subject
to the limitations contained in the 1940 Act. A complete list of investment
restrictions that each Fund has adopted identifying additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in each Fund's Statement of Additional Information.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISERS. Each Fund employs Warburg as investment adviser to the
Fund. The Japan OTC Fund employs SPARX Investment & Research, USA, Inc. ('SPARX
USA') as its sub-investment adviser. With respect to the Emerging Markets and
International Equity Funds, Warburg, subject to the control of each Fund's
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officers and the Board, manages the investment and reinvestment of the assets of
the Funds in accordance with each Fund's investment objective and stated
investment policies. Warburg makes investment decisions for each such Fund and
places orders to purchase or sell securities on behalf of each such Fund. With
respect to the Japan OTC Fund, 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 Funds and furnishes each Fund
with office space, furnishings and equipment. SPARX USA, in accordance with the
investment objective and policies of the Japan OTC Fund and under the
supervision of Warburg and the Fund's governing Board, makes investment
decisions for the Fund involving Japanese and other Asian equity securities,
places orders to buy and sell such securities on behalf of the Fund and provides
research to the Fund relating to Japanese and other Asian companies and
securities markets.
For the services provided by Warburg, the Emerging Markets Fund and the
Japan OTC Fund each pay Warburg a fee calculated at an annual rate of 1.25% of
the Fund's average daily net assets, and the International Equity Fund pays
Warburg an advisory fee calculated at an annual rate of 1.00% of the Fund's
average daily net assets. Warburg pays SPARX USA a fee of .625% out of Warburg's
advisory fee. Although these advisory fees are higher than those paid by most
other investment companies, including money market and fixed income funds,
Warburg believes that they are comparable to fees charged by other mutual funds
with similar policies and strategies. The advisory agreement between each 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 each Fund's
co-administrators may voluntarily waive a portion of their fees from time to
time and temporarily limit the expenses to be borne by the Fund.
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 $ billion of assets, including
approximately $ billion of assets of twenty-three investment companies or
portfolios. Incorporated in 1970, Warburg is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Warburg through
its ownership of a class of voting preferred stock of Warburg. Warburg G.P. has
no business other than being a holding company of Warburg and its subsidiaries.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.
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 $
million in assets under management. SPARX USA's address is 413 Seaside Avenue,
Honolulu, Hawaii 96815.
PORTFOLIO MANAGERS. Emerging Markets Fund. Richard H. King and Nicholas P.W.
Horsley are co-portfolio managers of the Fund, and Harold
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W. Ehrlich and Vincent J. McBride are associate portfolio managers and research
analysts.
International Equity Fund. Richard H. King is portfolio manager of the
Fund, and Nicholas P.W. Horsley, Nicholas P. Edwards, Harold W. Ehrlich and
Vincent J. McBride are associate portfolio managers and research analysts.
Japan OTC Fund. Richard H. King, Nicholas P.W. Horsley, Nicholas P. Edwards
and Shuhei Abe are co-portfolio managers of the Fund, and Toshikatsu Kimura is
an associate portfolio manager.
Mr. King, a managing director of EMW since 1989, has been a portfolio
manager of the Funds since their inception. 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. Edwards has been with Warburg since August 1995, before which time he
was a director at Jardine Fleming Investment Advisers, Tokyo. He was a vice
president of Robert Fleming Inc. in New York City from 1988 to 1991. Mr. Horsley
has been a co-portfolio manager of the Emerging Markets and Japan OTC Funds
since their inception. 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 deZoete Wedd in New York City. Mr. Ehrlich is a
senior vice president of Warburg and has been with Warburg and the Funds since
February 1995, before which time he was a senior vice president, portfolio
manager and analyst at Templeton Investment Counsel Inc. Mr. McBride has been
with Warburg and the Funds since 1994. Prior to joining Warburg, Mr. McBride was
an international equity analyst at Smith Barney Inc. from 1993 to 1994 and at
General Electric Investment Corporation from 1992 to 1993. From 1989 to 1992 he
was a portfolio manager/analyst at United Jersey Bank.
Shuhei Abe of SPARX USA, a co-portfolio manager of the Japan OTC Fund since
its inception, 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 Japan OTC 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 Funds employ Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Funds including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Funds and their various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual, semiannual and quarterly reports, assisting in other regulatory filings
as necessary and monitoring and developing compliance procedures for the Funds.
As compensation, each Fund pays Counsellors Service a fee calculated at an
annual rate of .10% of the Fund's average daily net assets.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to qualified recipients who support the sale of shares of
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the Funds. Qualified recipients are securities dealers who have sold Fund shares
or others, including banks and other financial institutions, under special
arrangements. In some instances, these incentives may be offered only to certain
institutions whose representatives provide services in connection with the sale
or expected sale of significant amounts of Fund shares.
Each Fund employs PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary
of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation the Funds
each pay PFPC a fee calculated at an annual rate of .12% of each Fund's first
$250 million in average daily net assets, .10% of the next $250 million in
average daily net assets, .08% of the next $250 million in average daily net
assets, and .05% of average daily net assets over $750 million, subject in each
case to a minimum annual fee and exclusive of out-of-pocket expenses. PFPC has
its principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIAN. State Street Bank and Trust Company ('State Street') serves as
custodian of the Emerging Markets Fund's and the Japan OTC Fund's assets.
Fiduciary Trust Company International ('Fiduciary') serves as custodian of the
International Equity Fund's assets. State Street's principal business address is
225 Franklin Street, Boston, Massachusetts 02110. Fiduciary's principal business
address is Two World Trade Center, New York, New York 10048.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Funds. It has delegated to
Boston Financial Data Services, Inc., a 50% owned subsidiary ('BFDS'),
responsibility for most shareholder servicing functions. BFDS's principal
business address is 2 Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Funds. Counsellors Securities is a wholly owned subsidiary of Warburg and is
located at 466 Lexington Avenue, New York, New York 10017-3147. Counsellors
Securities receives a fee at an annual rate equal to .25% of the average daily
net assets of each of the Emerging Markets and Japan OTC Fund's Common Shares
for distribution services, pursuant to a shareholder servicing and distribution
plan (the '12b-1 Plan') adopted by each Fund pursuant to Rule 12b-1 under the
1940 Act. Amounts paid to Counsellors Securities under a 12b-1 Plan may be used
by Counsellors Securities to cover expenses that are primarily intended to
result in, or that are primarily attributable to, (i) the sale of the Common
Shares, (ii) ongoing servicing and/or maintenance of the accounts of Common
Shareholders of the Fund and (iii) sub-transfer agency services, subaccounting
services or administrative services related to the sale of the Common Shares,
all as set forth in the 12b-1 Plans. Payments under the 12b-1 Plans are not tied
exclusively to the distribution expenses actually incurred by Counsellors
Securities and the payments may exceed distribution expenses actually incurred.
The Boards of the Emerging Markets Fund and the Japan OTC Fund evaluate the
appropriateness of the 12b-1 Plans on a continuing basis and in doing so
consider all relevant factors, including expenses borne by Counsellors
Securities and amounts received under the 12b-1 Plans. No compensation is
payable by the International Equity Fund to Counsellors Securities for
distribution services.
DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to the Board. The Boards set broad
policies for each Fund and choose its officers. A list of the Directors and
officers of each Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information of each Fund.
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HOW TO OPEN AN ACCOUNT
In order to invest in a Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone Warburg
Pincus Funds at (800) 257-5614. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
Completed and signed account applications should be mailed to Warburg
Pincus Funds at the above address.
RETIREMENT PLANS AND UGMA ACCOUNTS. For information about investing in the Funds
through a tax-deferred retirement plan, such as an Individual Retirement Account
('IRA') or a Simplified Employee Pension IRA ('SEP-IRA'), or about opening a
Uniform Gifts to Minors Act or Uniform Transfers to Minors Act ('UGMA') account,
an investor should telephone Warburg Pincus Funds at (800) 888-6878 or write to
Warburg Pincus Funds at the address set forth above. Investors should consult
their own tax advisers about the establishment of retirement plans and UGMA
accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account, an
investor should telephone Warburg Pincus Funds at (800) 888-6878.
HOW TO PURCHASE SHARES
Common Shares of each Fund may be purchased either by mail or, with special
advance instructions, by wire.
BY MAIL. If the investor desires to purchase Common Shares by mail, a check or
money order made payable to the Fund or Warburg Pincus Funds (in U.S. currency)
should be sent along with the completed account application to Warburg Pincus
Funds through its distributor, Counsellors Securities Inc., at the address set
forth above. Checks payable to the investor and endorsed to the order of the
Fund or Warburg Pincus Funds will not be accepted as payment and will be
returned to the sender. If payment is received in proper form before 4:00 p.m.
(Eastern time) on a day that the Fund calculates its net asset value (a
'business day'), the purchase will be made at the Fund's net asset value
calculated at the end of that day. If payment is received after 4:00 p.m., the
purchase will be effected at the Fund's net asset value determined for the next
business day after payment has been received. Checks or money orders that are
not in proper form or that are not accompanied or preceded by a complete account
application will be returned to the sender. Shares purchased by check or money
order are entitled to receive dividends and distributions beginning on the day
after payment has been received. Checks or money orders in payment for shares of
more than one Warburg Pincus Fund should be made payable to Warburg Pincus Funds
and should be accompanied by a breakdown of amounts to be invested in each fund.
If a check used for purchase does not clear, the Fund will cancel the purchase
and the investor may be liable for losses or fees incurred. For a description of
the manner of calculating the Fund's net asset value, see 'Net Asset Value'
below.
BY WIRE. Investors may also purchase Common Shares in a Fund by wiring funds
from their banks. Telephone orders by wire will not be accepted until a
completed account application in proper form has been received and an account
number has been established. Investors should place an order with the Fund prior
to wiring funds by telephoning (800) 888-6878. Federal
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funds may be wired to Counsellors Securities Inc. using the following wire
address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Insert Warburg Pincus fund name(s) here]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
If a telephone order is received by the close of regular trading on the New
York Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment
by wire is received on the same day in proper form in accordance with
instructions set forth above, the shares will be priced according to the net
asset value of the Fund on that day and are entitled to dividends and
distributions beginning on that day. If payment by wire is received in proper
form by the close of the NYSE without a prior telephone order, the purchase will
be priced according to the net asset value of the Fund on that day and is
entitled to dividends and distributions beginning on that day. However, if a
wire in proper form that is not preceded by a telephone order is received after
the close of regular trading on the NYSE, the payment will be held uninvested
until the order is effected at the close of business on the next business day.
Payment for orders that are not accepted will be returned to the prospective
investor after prompt inquiry. If a telephone order is placed and payment by
wire is not received on the same day, the Fund will cancel the purchase and the
investor may be liable for losses or fees incurred.
The minimum initial investment in each Fund is $2,500 and the minimum
subsequent investment is $100, except that subsequent minimum investments can be
as low as $50 under the Automatic Monthly Investment Plan described in the next
section. For a tax-deferred retirement plan, such as an IRA or an UGMA account,
the minimum initial investment is $500. The Fund reserves the right to change
the initial and subsequent investment minimum requirements at any time. In
addition, the Fund may, in its sole discretion, waive the initial and subsequent
investment minimum requirements with respect to investors who are employees of
EMW or its affiliates or persons with whom Warburg has entered into an
investment advisory agreement. Existing investors will be given 15 days' notice
by mail of any increase in investment minimum requirements.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. In the interest of
economy and convenience, physical certificates representing shares in the Funds
are not normally issued.
The Funds understand that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients that invest in the
Funds, which are in addition to or different than those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority, may
charge their clients direct fees. Certain features of the Funds, such as the
initial and subsequent investment minimums, may be modified in these programs,
and administrative charges may be imposed for the services rendered. Therefore,
a client or customer should contact the organization acting on his behalf
concerning the fees (if any) charged in connection with a purchase or redemption
of Fund shares and should read this Prospectus in light of the terms governing
his accounts with the organization. These organizations will be responsible for
promptly transmitting client or customer purchase and redemption orders to the
Funds in
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accordance with their agreements with clients or customers.
Common Shares of each Fund are available through the Charles Schwab &
Company, Inc. Mutual Fund OneSource'tm' Program; Fidelity Brokerage Services,
Inc. Funds-Network'tm' Program; Jack White & Company, Inc.; and Waterhouse
Securities, Inc. The availability of the Japan OTC Fund through these brokerage
firms may vary. Generally, these programs do not require customers to pay a
transaction fee in connection with purchases. These and other organizations
that have entered into agreements with a Fund or its agent may enter confirmed
purchase orders on behalf of customers, with payment to follow no later than the
Funds' pricing on the following business day. If payment is not received by such
time, the organization could be held liable for resulting fees or losses.
AUTOMATIC MONTHLY INVESTING. Automatic monthly investing allows shareholders to
authorize a Fund to debit their bank account monthly ($50 minimum) for the
purchase of Fund shares on or about either the tenth or twentieth calendar day
of each month. To establish the automatic monthly investing option, obtain a
separate application or complete the 'Automatic Investment Program' section of
the account applications and include a voided, unsigned check from the bank
account to be debited. Only an account maintained at a domestic financial
institution which is an automated clearing house member may be used.
Shareholders using this service must satisfy the initial investment minimum for
the Fund prior to or concurrent with the start of any Automatic Investment
Program. Please refer to an account application for further information, or
contact Warburg Pincus Funds at (800) 888-6878 for information or to modify or
terminate the program. Investors should allow a period of up to 30 days in order
to implement an automatic investment program. The failure to provide complete
information could result in further delays.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor in a Fund may redeem (sell) his shares on any
day that the Fund's net asset value is calculated (see 'Net Asset Value' below).
Proceeds from the redemption of shares of the Japan OTC Fund will be reduced by
the amount of any applicable redemption fee (see below).
Common Shares of the Funds may either be redeemed by mail or by telephone.
Investors should realize that in using the telephone redemption and exchange
option, you may be giving up a measure of security that you may have if you were
to redeem or exchange your shares in writing. If an investor desires to redeem
his shares by mail, a written request for redemption should be sent to Warburg
Pincus Funds at the address indicated above under 'How to Open an Account.' An
investor should be sure that the redemption request identifies the Fund, the
number of shares to be redeemed and the investor's account number. In order to
change the bank account or address designated to receive the redemption
proceeds, the investor must send a written request (with signature guarantee of
all investors listed on the account when such a change is made in conjunction
with a redemption request) to Warburg Pincus Funds. Each mail redemption request
must be signed by the registered owner(s) (or his legal representative(s))
exactly as the shares are registered. If an investor has applied for the
telephone redemption feature on his account application, he may redeem his
shares by calling Warburg Pincus Funds at (800) 888-6878 between 9:00 a.m. and
4:00 p.m. (Eastern time) on any business day. An investor making a telephone
withdrawal should state (i) the name of the Fund, (ii) the account number of the
Fund, (iii) the name of the investor(s) appearing on the Fund's records, (iv)
the amount to be withdrawn and (v) the name of the person requesting the
redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds
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will, at the option of the investor, be paid by check and mailed to the investor
of record or be wired to the investor's bank as indicated in the account
application previously filled out by the investor. No Fund currently imposes a
service charge for effecting wire transfers but each Fund reserves the right to
do so in the future. During periods of significant economic or market change,
telephone redemptions may be difficult to implement. If an investor is unable to
contact Warburg Pincus Funds by telephone, an investor may deliver the
redemption request to Warburg Pincus Funds by mail at the address shown above
under 'How to Open an Account.' Although each Fund will redeem shares purchased
by check before the check clears, payments of the redemption proceeds will be
delayed until such check has cleared, which may take up to 15 days from the
purchase date. Investors should consider purchasing shares using a certified or
bank check or money order if they anticipate an immediate need for a redemption.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Redemption proceeds will normally be mailed or
wired to an investor on the next business day following the date a redemption
order is effected. If, however, in the judgment of Warburg, immediate payment
would adversely affect a Fund, each Fund reserves the right to pay the
redemption proceeds within seven days after the redemption order is effected.
Furthermore, each Fund may suspend the right of redemption or postpone the date
of payment upon redemption (as well as suspend or postpone the recordation of an
exchange of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account drops to less
than $2,000 ($250 in the case of an IRA or UGMA account), each Fund reserves the
right to redeem the shares in that account at net asset value. Prior to any
redemption, the Fund will notify an investor in writing that this account has a
value of less than the minimum. The investor will then have 60 days to make an
additional investment before a redemption will be processed by the Fund.
The Japan OTC Fund imposes a redemption charge on any redemption of shares
(which includes an exchange of shares of the Japan OTC Fund into another Warburg
Pincus Fund) made within six months from the date of purchase. The charge, which
is deducted from the redemption proceeds and retained by the Fund, is equal to
1.00% of the current value of shares redeemed that were held for less than six
months, including any appreciation in value of the redeemed shares. If shares
being redeemed were not all held for the same length of time, those shares held
longest will be redeemed first for purposes of determining whether the charge
applies. The redemption charge will not be imposed on redemptions (or exchanges)
of shares acquired through the reinvestment of dividends, and these shares will
be redeemed before any shares to which the redemption charge applies. The
redemption fee is currently being waived until such later date as the Fund may
determine.
TELEPHONE TRANSACTIONS. In order to request redemptions by telephone, investors
must have completed and returned to Warburg Pincus Funds an account application
containing a telephone election. Unless contrary instructions are elected, an
investor will be entitled to make exchanges by telephone. Neither a Fund nor its
agents will be liable for following instructions communicated by telephone that
it reasonably believes to be genuine. Reasonable procedures
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<PAGE>
will be employed on behalf of each Fund to confirm that instructions
communicated by telephone are genuine. Such procedures include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific personal information prior to acting upon telephone
instructions.
AUTOMATIC CASH WITHDRAWAL PLAN. Each Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the 'Automatic Withdrawal Plan' section of the account application and
attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the Plan, investors should contact Warburg Pincus Funds at (800)
888-6878.
EXCHANGE OF SHARES. An investor may exchange Common Shares of a Fund for Common
Shares of another Fund or for Common Shares of another Warburg Pincus Fund at
their respective net asset values. Exchanges may be effected by mail or by
telephone in the manner described under 'Redemption of Shares' above. If an
exchange request is received by Warburg Pincus Funds prior to 4:00 p.m. (Eastern
time), the exchange will be made at each fund's net asset value determined at
the end of that business day. Exchanges may be effected without a sales charge
but must satisfy the minimum dollar amount necessary for new purchases and may,
in the case of exchanges from the Japan OTC Fund, be subject to a redemption
fee. Due to the costs involved in effecting exchanges, each Fund reserves the
right to refuse to honor more than three exchange requests by a shareholder in
any 30-day period. The exchange privilege may be modified or terminated at any
time upon 60 days' notice to shareholders. Currently, exchanges may be made
among the Funds and with the following other funds:
WARBURG PINCUS CASH RESERVE FUND -- a money market fund investing in
short-term, high quality money market instruments;
WARBURG PINCUS NEW YORK TAX EXEMPT FUND -- a money market fund investing
in short-term, high quality municipal obligations designed for New York
investors seeking income exempt from federal, New York State and New York
City income tax;
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND -- an
intermediate-term municipal bond fund designed for New York investors
seeking income exempt from federal, New York State and New York City
income tax;
WARBURG PINCUS TAX FREE FUND -- a bond fund seeking maximum current income
exempt from federal income taxes, consistent with preservation of capital;
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND -- an
intermediate-term bond fund investing in obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities;
WARBURG PINCUS FIXED INCOME FUND -- a bond fund seeking current income
and, secondarily, capital appreciation by investing in a diversified
portfolio of fixed-income securities;
WARBURG PINCUS SHORT-TERM TAX-ADVANTAGED BOND FUND -- a bond fund seeking
maximum income after the effect of federal income taxes as a primary
objective and capital appreciation as a secondary objective through
investments in taxable and tax-exempt debt instruments;
WARBURG PINCUS GLOBAL FIXED INCOME FUND -- a bond fund investing in a
portfo lio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return
through a
26
<PAGE>
combination of long-term growth of capital and current income consistent
with preservation of capital through diversified investments in equity and
debt securities;
WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term
growth of capital and income and a reasonable current return;
WARBURG PINCUS CAPITAL APPRECIATION FUND -- an equity fund seeking
long-term capital appreciation by investing principally in equity
securities of medium-sized domestic companies;
WARBURG PINCUS SMALL COMPANY VALUE -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of small
companies;
WARBURG PINCUS POST-VENTURE CAPITAL FUND -- an equity fund seeking
long-term growth of capital by investing principally in equity securities
of issuers in their post-venture capital stage of development; and
WARBURG PINCUS EMERGING GROWTH FUND -- an equity fund seeking maximum
capital appreciation by investing in emerging growth companies.
The exchange privilege is available to shareholders residing in any state
in which the Common Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Common
Shares of a Fund for Common Shares in another Warburg Pincus Fund should review
the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at (800) 257-5614.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Each Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. Each Fund declares dividends from its net investment income
annually and pays them in the calendar year in which they are declared. Net
investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of net realized long-term
and short-term capital gains are declared annually and, as a general rule, will
be distributed or paid in November or December of each calendar year. Unless an
investor instructs a Fund to pay dividends or distributions in cash, dividends
and distributions will automatically be reinvested in additional Common Shares
of the relevant Fund at net asset value. The election to receive dividends in
cash may be made on the account application or, subsequently, by writing to
Warburg Pincus Funds at the address set forth under 'How to Open an Account' or
by calling Warburg Pincus Funds at (800) 888-6878.
A Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. Each Fund intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. Each Fund, if it qualifies as a
regulated investment company, will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain. Each Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
27
<PAGE>
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains are taxable to
investors as long-term capital gains, in each case regardless of how long the
shareholder has held Fund shares and whether received in cash or reinvested in
additional Fund shares. As a general rule, an investor's gain or loss on a sale
or redemption of his Fund shares will be a long-term capital gain or loss if he
has held his shares for more than one year and will be a short-term capital gain
or loss if he has held his shares for one year or less. However, any loss
realized upon the sale or redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares. Investors may be proportionately
liable for taxes on income and gains of the Funds, but investors not subject to
tax on their income will not be required to pay tax on amounts distributed to
them. The Fund's investment activities, including short sales of securities,
will not result in unrelated business taxable income to a tax-exempt investor. A
Fund's dividends, to the extent not derived from dividends attributable to
certain types of stock issued by U.S. domestic corporations, will not qualify
for the dividends received deduction for corporations.
Special Tax Matters Relating to the Emerging Markets Fund. The investments
by the Emerging Markets Fund in zero coupon securities may create special tax
consequences. Zero coupon securities do not make interest payments, although a
portion of the difference between a zero coupon security's face value and its
purchase price is imputed as income to the Fund each year even though the Fund
receives no cash distribution until maturity. Under the U.S. federal tax laws,
the Fund will not be subject to tax on this income if it pays dividends to its
shareholders substantially equal to all the income received from, or imputed
with respect to, its investments during the year, including its zero coupon
securities. These dividends ordinarily will constitute taxable income to the
shareholders of the Fund.
Special Tax Matters Relating to the International Equity Fund and the Japan
OTC Fund. Dividends and interest received by the International Equity Fund and
the Japan OTC Fund may be subject to withholding and other taxes imposed by
foreign countries. However, tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If the International Equity
Fund or the Japan OTC Fund qualifies as a regulated investment company, if
certain asset and distribution requirements are satisfied and if more than 50%
of the Fund's total assets at the close of its fiscal year consist of stock or
securities of foreign corporations, the International Equity Fund or the Japan
OTC Fund, as the case may be, may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders. A Fund may qualify
for and make this election in some, but not necessarily all, of its taxable
years. If a Fund were to make an election, shareholders of the Fund would be
required to take into account an amount equal to their pro rata portions of such
foreign taxes in computing their taxable income and then treat an amount equal
to those foreign taxes as a U.S. federal income tax deduction or as a foreign
tax credit against their U.S. federal income taxes. Shortly after any year for
which it makes such an election, the International Equity Fund or the Japan OTC
Fund will report to its shareholders the amount per share of such foreign income
tax that must be included in each shareholder's gross income and the amount
which will be available for the deduction or credit. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Certain
limitations will be imposed on the extent to which the credit (but not the
deduction) for foreign taxes may be claimed.
28
<PAGE>
Special Tax Matters Relating to the Japan OTC Fund. In the opinion of
Japanese counsel for the Fund, the operations of the Fund will not subject the
Fund to any Japanese income, capital gains or other taxes except for withholding
taxes on interest and dividends paid to the Fund by Japanese corporations and
securities transaction taxes payable in the event of sales of portfolio
securities in Japan. In the opinion of such counsel, under the tax convention
between the United States and Japan (the 'Convention') as currently in force, a
Japanese withholding tax at a rate of 15% is, with certain exceptions, imposed
upon dividends paid by Japanese corporations to the Fund. Pursuant to the
present terms of the Convention, interest received by the Fund from sources
within Japan is subject to a Japanese withholding tax at a rate of 10%.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of a Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities.
NET ASSET VALUE
Each Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of each Fund generally changes each day.
The net asset value per Common Share of each Fund is computed by adding the
Common Shares' pro rata share of the value of the Fund's assets, deducting the
Common Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Common Shares and then dividing the result by the
total number of outstanding Common Shares. Generally, the Funds' investments are
valued at market value or, in the absence of a quoted market value with respect
to any portfolio securities, at fair value as determined by or under the
direction of the governing Board.
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 closing value on
the date on which the valuation is made or, in the absence of sales, the mean
between the highest 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. Option or futures contracts will be valued similarly. 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.
Trading in securities in certain foreign countries may be completed prior
to the close of regular trading on the NYSE. When an occurrence subsequent to
the time a value was so established is likely to have materially changed such
value, then the fair market value of the securities will be determined by or
under the direction of the Board. In addition, trading may take place in various
foreign markets on days on which the Fund's net asset value is not calculated.
Further information regarding valuation
29
<PAGE>
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Funds quote the performance of Common Shares separately from Advisor
Shares. The net asset value of Common Shares is listed in The Wall Street
Journal each business day under the heading 'Warburg Pincus Funds.' From time to
time, each Fund may advertise the average annual total return of its Common
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Common Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Common Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Common Shares of the Fund. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Fund's operations or on a
year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that each Fund seeks long-term appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. Each Fund may also advertise aggregate total return figures of its
Common Shares for various periods, representing the cumulative change in value
of an investment in the Common Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. Each Fund's
Statement of Additional Information describes the method used to determine the
total return. Current total return figures may be obtained by calling Warburg
Pincus Funds at (800) 257-5614.
In reports or other communications to investors or in advertising material,
a Fund may describe general economic and market conditions affecting the Fund.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) in the case of the Emerging Markets Fund,
with the IFC Emerging Market Free Index, the IFC Investible Index or the Morgan
Stanley Capital International Emerging Markets Index; in the case of the
International Equity Fund, the Morgan Stanley Capital International Europe,
Australia and Far East ('EAFE') Index, the Salomon Russell Global Equity Index,
the FT-Actuaries World Indices (jointly compiled by The Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500 Index; and in
the case of the Japan OTC Fund, the indexes noted above for the International
Equity Fund, as well as the Nikkei over-the-counter average, the JASDAQ Index,
the Nikkei 225 and 300 Stock Indexes and the Topix Index; 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. A Fund may include evaluations of the Fund published by nationally
recognized ranking services and by financial publications that are nationally
recognized, such as The Wall Street Journal, Investor's Daily, Money, Inc.,
Institu-
30
<PAGE>
tional Investor, Barron's, Fortune, Forbes, Business Week, Mutual Fund Magazine,
Morningstar, Inc. and Financial Times.
In reports or other communications to investors or in advertising, each
Fund may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. Each Fund may also discuss the continuum of risk and return relating
to different investments and the potential impact of foreign stocks on a
portfolio otherwise composed of domestic securities. In addition, each Fund may
from time to time compare the expense ratio of its Common Shares to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Emerging Markets Fund was incorporated on December 23, 1993
under the laws of the State of Maryland. The International Equity Fund was
incorporated on February 9, 1989 under the laws of the State of Maryland under
the name 'Counsellors International Equity Fund, Inc.' On October 27, 1995 it
amended its charter to change its name to 'Warburg, Pincus International Equity
Fund, Inc.' The Japan OTC Fund was incorporated on July 26, 1994 under the laws
of the State of Maryland.
The charter of each of the Funds authorizes the Board to issue three
billion full and fractional shares of capital stock, $.001 par value per share,
of which one billion shares are designated Series 2 Shares (the Advisor Shares).
Under each 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 of a Fund may similarly classify or
reclassify any class of its shares into one or more series and, without
shareholder approval, may increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. Each Fund offers a separate class of shares, the Advisor
Shares, pursuant to a separate prospectus. Advisor Shares may not be purchased
by individuals directly but institutions, broker-dealers, financial
institutions, depository institutions, retirement plans and financial
intermediaries may purchase Advisor Shares for individuals. Advisor Shares of
each class represent equal pro rata interests in the respective Fund and accrue
dividends and calculate net asset value and performance quotations in the same
manner, as described elsewhere in this Prospectus. Because of the higher fees
paid by the Advisor Shares, the total return on such shares can be expected to
be lower than the total return on Common Shares. Investors may obtain
information concerning the Advisor Shares by calling Counsellors Securities at
(800) 888-6878.
VOTING RIGHTS. Investors in a Fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Shareholders of a Fund
will vote in the aggregate except where otherwise required by law and except
that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of a Fund may be removed from office
upon the vote of shareholders holding at least a majority of the relevant Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of a Fund. John L. Furth, a
31
<PAGE>
Director and Trustee of the Funds, and Lionel I. Pincus, Chairman of the Board
and Chief Executive Officer of EMW, may be deemed to be controlling persons of
each Fund as of November 30, 1995 because they may be deemed to possess or share
investment power over shares owned by clients of Warburg and certain other
entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions). Each Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund.
The prospectuses of the Funds are combined in this Prospectus. Each Fund
offers only its own shares, yet it is possible that a Fund might become liable
for a misstatement, inaccuracy or omission in this Prospectus with regard to
another Fund.
SHAREHOLDER SERVICING
Common Shares may be sold to or through institutions, including insurance
companies, that will not be paid a distribution fee by the Fund pursuant to Rule
12b-1 under the 1940 Act for services to their clients or customers who may be
deemed to be beneficial owners of Common Shares. These institutions may be paid
a fee by the Fund for transfer agency, administrative or other services provided
to their customers that invest in the Funds' Common Shares. These services
include maintaining account records, processing orders to purchase, redeem and
exchange Common Shares and responding to certain customer inquiries.
Organizations that provide recordkeeping or other services to certain employee
benefit plans and qualified and other retirement plans that include a Fund as an
investment alternative may also be paid a fee by the Fund for these services.
Each Fund is authorized to offer Advisor Shares exclusively to Institutions
that enter into agreements ('Agreements') with the Fund and/or Counsellors
Securities pursuant to a distribution plan approved by each Fund's governing
Board pursuant to Rule 12b-1 under the 1940 Act. Pursuant to the terms of an
Agreement, the Institution may provide certain distribution, shareholder
servicing, accounting services and/or shareholder servicing for its clients and
customers who may be deemed to be beneficial owners of Advisor Shares.
Warburg, Counsellors Securities and Counsellors Service or any of their
affiliates may, from time to time, at their own expense, also provide
compensation to these institutions and organizations. To the extent they do so,
such compensation does not represent an additional expense to a Fund or its
shareholders, since it will be paid from the assets of Warburg, Counsellors
Securities, Counsellors Service or their affiliates. Warburg, Counsellors
Securities or any of their affiliates may, from time to time, at their own
expense, pay certain Fund transfer agency fees and expenses in connection with
Agreements with Service Organizations. Counsellors Securities currently receives
a fee equal to an annual rate of .25% of the average daily net assets of each of
the Emerging Markets and Japan OTC Fund's Common Shares. See 'Management of the
Funds -- Distributor.'
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, EACH FUNDS'
STATEMENT OF ADDITIONAL INFORMATION OR THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUNDS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EACH FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
COMMON SHARES OF THE FUNDS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
32
<PAGE>
TABLE OF CONTENTS
THE FUNDS' EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVES AND POLICIES ....................................... 6
PORTFOLIO INVESTMENTS .................................................... 8
RISK FACTORS AND SPECIAL
CONSIDERATIONS ....................................................... 11
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE ................................................................. 14
CERTAIN INVESTMENT STRATEGIES ........................................... 15
INVESTMENT GUIDELINES ................................................... 18
MANAGEMENT OF THE FUNDS ................................................. 18
HOW TO OPEN AN ACCOUNT .................................................. 22
HOW TO PURCHASE SHARES .................................................. 22
HOW TO REDEEM AND EXCHANGE
SHARES ............................................................... 24
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 27
NET ASSET VALUE ......................................................... 29
PERFORMANCE ............................................................. 30
GENERAL INFORMATION ..................................................... 31
SHAREHOLDER SERVICING ................................................... 32
[LOGO]
[ ] WARBURG PINCUS
EMERGING MARKETS FUND
[ ] WARBURG PINCUS
INTERNATIONAL EQUITY FUND
[ ] WARBURG PINCUS
JAPAN OTC FUND
PROSPECTUS
DECEMBER 29, 1995
WPIEQ-1-1295
STATEMENT OF DIFFERENCES
The dagger symbol will be expressed as .................. 'D'
The trademark symbol will be expressed as ............... 'tm'
<PAGE>
[LOGO]
PROSPECTUS
DECEMBER 29, 1995
[ ] WARBURG PINCUS JAPAN OTC FUND
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 30, 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,
financial institutions investing on behalf of their customers and to retirement
plans that elect to make one or more Advisor Funds an investment option for
participants in the plans. One Advisor Fund is described in this Prospectus:
WARBURG, PINCUS JAPAN OTC FUND seeks long-term capital appreciation by investing
in a portfolio of securities traded in the Japanese over-the-counter market.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
The Fund currently offers two classes of shares, one of which, the Series 2
Shares (referred to as the Advisor Shares), is offered pursuant to this
Prospectus. The Advisor Shares of the Fund, as well as Series 2 (Advisor) Shares
of certain other Warburg Pincus-advised funds, are sold under the name 'Warburg
Pincus Advisor Funds.' The Advisor Shares may not be purchased by individuals
directly from the Fund's distributor but institutions, broker-dealers, financial
institutions, depository institutions, retirement plans and other financial
intermediaries ('Institutions') may purchase Advisor Shares for individuals. The
Advisor Shares impose a 12b-1 fee of up to .75% per annum, which is the economic
equivalent of a sales charge. Common Shares are available for purchase by
individuals directly and are offered by a separate prospectus.
NO MINIMUM INVESTMENT
There is no minimum amount of initial or subsequent purchases of shares imposed
on Institutions. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Advisor Funds at (800) 888-6878.
Information regarding the status of shareholder accounts may also be obtained by
calling Warburg Pincus Advisor Funds at (800) 888-6878. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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>
THE FUND'S EXPENSES
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See 'General Information' and 'Shareholder Servicing.' Because
of the higher fees 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 (after fee waivers) (as a percentage of average net assets)
Management Fees....................................................................................... .97%**
12b-1 Fees............................................................................................ .75%*
Other Expenses........................................................................................ .53%**
----
Total Fund Operating Expenses......................................................................... 2.25%
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 year................................................................................................ $23
3 years............................................................................................... $70
5 years............................................................................................... $
10 years.............................................................................................. $
</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.
** Estimated amounts to be charged in the current fiscal year after the
anticipated waiver of fees by the Fund's investment adviser and
co-administrator; 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. 'Other Expenses'
are based on estimated amounts to be charged in the current fiscal year.
Institutions also may charge their clients fees in connection with investments
in the Advisor Shares, which fees are not reflected in the table. Absent the
voluntary waiver of fees payable to the Fund's investment adviser and
co-administrator, Management Fees would have equalled 1.25%, Other Expenses
would have equalled .75% and Total Fund Operating Expenses would have equalled
2.75%; the investment adviser and co-administrator are under no obligation to
continue these waivers. The Example should not be considered a representation of
past or future expenses; actual Fund expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, the Fund's actual
performance will vary and may result in a return greater or less than 5%.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by the National Association of Securities
Dealers, Inc. (the 'NASD').
2
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR AN ADVISOR SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The information regarding the Fund for the fiscal period/year ended October
31, 1995 has been derived from information audited by Coopers & Lybrand L.L.P.,
independent auditors, whose report dated December , 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....................................... $10.00
---------------- -------
Income from Investment Operations
Net Investment Income.................................................... .00
Net Gains (Losses) from Securities and Foreign Currency Related Items
(both realized and unrealized)........................................ (.15)
---------------- -------
Total from Investment Operations......................................... (.15)
---------------- -------
Less Distributions
Dividends (from net investment income)................................... .00
Distributions (from capital gains)....................................... .00
---------------- -------
Total Distributions...................................................... .00
---------------- -------
Net Asset Value, End of Period............................................. $ 9.85
---------------- -------
---------------- -------
Total Return............................................................... (15.84%)*
Ratios/Supplemental Data
Net Assets, End of Period (000s)........................................... $ 1
Ratios to average daily net assets:
Operating expenses....................................................... 1.18%*
Net investment income.................................................... .12%*
Decrease reflected in above expense ratios due to waivers/
reimbursements........................................................ 4.74%*
Portfolio Turnover Rate.................................................... .00%
</TABLE>
- ------------
* Annualized.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks long-term capital appreciation. This objective is a
fundamental policy and may not be amended without first obtaining the approval
of a majority of the outstanding shares of the Fund. Any investment involves
risk and, therefore, there can be no assurance that the Fund will achieve its
investment objective. See 'Certain Investment Strategies' for descriptions of
certain types of investments the Fund may make.
The Fund is a non-diversified management investment company that pursues
its investment objective by investing in a portfolio of securities traded in the
Japanese over-the-counter market. The Fund is designed to provide an opportunity
to participate in the dynamic structural changes in the Japanese industrial
system through investment in less-established, higher growth companies that can
be expected to benefit from these changes. At all times, except during temporary
defensive periods, the Fund will maintain at least 65% of its total assets in
securities of companies traded through JASDAQ, the primary Japanese
over-the-counter market, or the Japanese Second Section OTC Market (the
'Frontier Market'). The portion of the Fund's assets that is not invested
through JASDAQ or the Frontier Market may be invested in securities of Japanese
issuers that are not traded through JASDAQ or the Frontier Market or
exchange-traded and over-the-counter securities of issuers in other Asian
markets, in addition to the other instruments described below. The Fund may
invest up to 35% of its total assets in securities of other Asian issuers, with
no more than 10% invested in any one country. The Fund will not invest in
securities of non-Asian issuers, except that the Fund may, for defensive
purposes, invest in U.S. debt securities and money market 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 also invest
up to 5% of the Fund's net assets in each of the following: mortgage-backed
securities, asset-backed securities and zero coupon securities. The Fund may
involve a greater degree of risk than an investment in other mutual funds that
seek capital appreciation by investing in better-known, larger companies. From
time to time, the Fund may hedge part or all of its exposure to the Japanese
yen, thereby reducing or substantially eliminating any favorable or unfavorable
impact of changes in the value of the yen in relation to the U.S. dollar.
At December 31, 1994, 581 issues were traded through JASDAQ, having an
aggregate market capitalization of approximately 14 trillion yen (approximately
[$134] billion as of 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 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
4
<PAGE>
date of this Prospectus, there were not yet any registrations on the Frontier
Market, but the first registrations are expected to be effective in November
1995.
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The Fund may invest up to 35% of its total assets in
investment grade debt securities (other than money market 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 may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. Subsequent to its purchase by
the Fund, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require sale of such securities. 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. and foreign investment grade debt
obligations, other securities of U.S. companies and in domestic and foreign
money market obligations, including repurchase agreements as discussed below.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
circumstances, up to 20% of its total assets in domestic and foreign 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
5
<PAGE>
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 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 fund, the Fund will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Fund's administration fees and other expenses with respect to
assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. The Fund will invest only in convertible securities
rated investment grade at the time of purchase or deemed to be of equivalent
quality. The Fund does not currently intend during the coming year to hold more
than 5% of its net assets in the aggregate of investment grade convertible
securities and investment grade debt downgraded below investment grade
subsequent to acquisition by the Fund.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
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
Invest-
6
<PAGE>
ments' beginning at page 5 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.
Trading of equity securities through the JASDAQ market is conducted by
securities firms in Japan, primarily through an organization which acts as a
'matching agent,' as opposed to a recognized stock exchange. Consequently,
securities traded through JASDAQ may, from time to time, and especially in
falling markets, become illiquid and experience short-term price volatility and
wide spreads between bid and offer prices. This combination of limited liquidity
and price volatility may have an adverse effect on the investment performance of
the Fund. In periods of rapid price increases, the limited liquidity of JASDAQ
restricts the Fund's ability to adjust its portfolio quickly in order to take
full advantage of a significant market increase, and conversely, during periods
of rapid price declines, it restricts the ability of the Fund to dispose of
securities quickly in order to realize gains previously made or to limit losses
on securities held in its portfolio. In addition, although JASDAQ has generally
experienced sustained growth in aggregate market capitalization and trading
volume, there have been periods in which aggregate market capitalization and
trading volume have declined. The Frontier Market is expected to present greater
liquidity, volatility and trading considerations than JASDAQ.
JASDAQ-traded securities can be volatile, which would result in the Fund's
net asset value fluctuating in response. The decline in the Japanese securities
markets since 1989 has contributed to a weakness in the Japanese economy, and
the impact of a further decline cannot be ascertained. The common stocks of many
Japanese companies continue to trade at high price-earnings ratios in comparison
with those in the United States, even after the recent market decline.
Differences in accounting methods make it difficult to compare the earnings of
Japanese companies with those of companies in other countries, especially the
United States.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by fluctuations in the value of Japanese yen relative to the U.S.
dollar.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible 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 prospective regulatory reforms on the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries
7
<PAGE>
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. In addition, small- and medium-sized companies are
typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. Because smaller companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for the Fund to buy or sell significant amounts of such shares without
an unfavorable impact on prevailing prices. There is typically less publicly
available information concerning smaller companies than for larger, more
established ones. Although investing in securities of emerging growth companies
offers potential for above-average returns if the companies are successful, the
risk exists that the companies will not succeed and the prices of the companies'
shares could significantly decline in value. Therefore, an investment in the
Fund may involve a greater degree of risk than an investment in other mutual
funds that seek capital appreciation by investing in better-known, larger
companies.
INVESTMENTS IN NON-PUBLICLY TRADED SECURITIES. Although the Fund expects to
invest primarily in publicly traded equity securities, it may invest up to 15%
of its assets in non-publicly traded equity securities, which may involve a high
degree of business and financial risk and may result in substantial losses.
Because of the absence of any liquid trading market currently for these
investments, the Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose securities
are not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose, securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the 'Code'), for
qualification as a regulated invest-
8
<PAGE>
ment 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. Higher
portfolio turnover rates (100% or more) may result in dealer mark ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See 'Dividends, Distributions and Taxes -- Taxes' below and 'Investment
Policies -- Portfolio Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by an Adviser with broker-dealers that it selects, including
Counsellors Securities Inc., the Fund's distributor ('Counsellors Securities').
The Fund may utilize Counsellors Securities in connection with a purchase or
sale of securities when 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. 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 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
9
<PAGE>
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
RULE 144A SECURITIES. The Fund may purchase securities that are not registered
under the Securities Act of 1933, as amended (the '1933 Act'), but that can be
sold to 'qualified institutional buyers' in accordance with Rule 144A under the
1933 Act ('Rule 144A Securities'). An investment in Rule 144A Securities will be
considered illiquid and will be limited to 10% of the Fund's net assets,
included within the Fund's 15% limit on illiquid securities. See 'Investments in
Non-Publicly Traded Securities' above. The Board will carefully monitor any
investments by the Fund in Rule 144A Securities.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg, the
Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as 'derivatives,' may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. TRANSACTIONS THAT ARE
NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO
INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by securities 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 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.
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 Com-
10
<PAGE>
modity 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, 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.
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 things, 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 Warburg, and successful use of hedging transactions will depend on Warburg's
ability to correctly predict movements in the directions of 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 a transaction.
Asset Coverage. The Fund will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Fund on securities and indexes; currency, interest rate
and stock index futures contracts and options on these futures contracts; and
forward currency contracts. The use of these strategies may require that the
Fund maintain cash or certain liquid high-grade debt securities or other assets
that are acceptable as collateral to the appropriate regulatory authority in a
segregated account with its custodian or a designated sub-custodian to the
extent the Fund's
11
<PAGE>
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 total
assets, the Fund will not make any investments (including roll-overs). Except
for the limitations on borrowing, the investment guidelines set forth in this
paragraph may be changed at any time without shareholder consent by vote of the
Board, subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that the Fund has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT 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 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
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USA and the Fund's co-administrators may voluntarily waive a portion of their
fees from time to time and temporarily limit the expenses to be borne by the
Fund.
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 $ billion of assets, including
approximately $ billion of assets of twenty-three investment companies or
portfolios. Incorporated in 1970, Warburg is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Warburg through
its ownership of a class of voting preferred stock of Warburg. Warburg G.P. has
no business other than being a holding company of Warburg and its subsidiaries.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.
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 $
million in assets under management.
PORTFOLIO MANAGERS. Richard H. King, Nicholas P.W. Horsley, Nicholas P. Edwards
and Shuhei Abe of SPARX USA are co-portfolio managers of the Fund, 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, and Mr.
Edwards has been a co-portfolio manager since October 1995.
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. Mr. Edwards has been with Warburg since August 1995, before
which time he was a director at Jardine Fleming Investment Advisers, Tokyo. He
was a vice president of Robert Fleming, Inc. in New York City from 1988 to 1991.
Shuhei Abe of SPARX USA is the founder and president of SPARX Asset
Management Company Ltd. ('SPARX'), the parent company of SPARX USA. Prior to
founding SPARX in 1989 (by assuming control of a predecessor company), Mr. Abe
worked for Soros Fund Management and Credit Suisse Trust Bank as an independent
adviser. Toshikatsu Kimura 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 Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on share-
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holder 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.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to qualified recipients who support the sale of shares of the Funds.
Qualified recipients are securities dealers who have sold Fund shares or others,
including banks and other financial institutions, under special arrangements. In
some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of significant amounts of Fund shares.
The Fund employs PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary
of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation, the Fund
pays to PFPC a fee calculated at an annual rate of .12% of the Fund's first $250
million in average daily net assets, .10% of the next $250 million in average
daily net assets, .08% of the next $250 million in average daily net assets, and
.05% of average daily net assets over $750 million, subject to a minimum annual
fee and exclusive of out-of-pocket expenses. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
TRANSFER AGENT AND CUSTODIAN. State Street Bank and Trust Company ('State
Street') serves as custodian for the Fund's assets and 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.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Warburg Pincus Advisor Fund shares are only available for investment by
Institutions on behalf of their customers and through retirement plans that
elect to make one or more Advisor Funds an option for participants in the plans.
Individuals, including participants in retirement plans, cannot invest directly
in Advisor Shares of the Fund, but may do so only through a participating
Institution. The Fund reserves the right to make Advisor Shares available to
other investors in the future. References in this Prospectus to shareholders or
investors 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
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<PAGE>
Fund, including minimum initial and subsequent investment requirements and the
procedures to be followed to effect purchases, redemptions and exchanges of
Advisor Shares. There is no minimum amount of initial or subsequent purchases of
Advisor Shares imposed on Institutions, although the Fund reserves the right to
impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 888-6878 for instructions, an
Institution should then wire federal funds to Counsellors Securities Inc. using
the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
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 that invest in the
Fund, which are in addition to or different than those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority, may
charge their clients direct fees. Certain features of the Fund, such as initial
and subsequent investment minimums, may be modified in these programs, and
administrative charges may be imposed for the services rendered. Therefore, a
client or customer should contact the organization acting on his behalf
concerning the fees (if any) charged in connection with a purchase or redemption
of Fund shares and should read this
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<PAGE>
Prospectus in light of the terms governing his accounts with the organization.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor may redeem (sell) shares on any day that the
Fund's net asset value is calculated (see 'Net Asset Value' below). Requests for
the redemption (or exchange) of Advisor Shares are placed with an Institution by
its customers, which is then responsible for the prompt transmission of the
request to the Fund or its agent.
Institutions may redeem Advisor Shares by calling Warburg Pincus Advisor
Funds at (800) 888-6878 between 9:00 a.m. and 4:00 p.m. (Eastern time) on any
day on which the Fund's net asset value is calculated. An investor making a
telephone withdrawal should state (i) the name of the Fund, (ii) the account
number of the Fund, (iii) the name of the investor(s) appearing on the Fund's
records, (iv) the amount to be withdrawn and (v) the name of the person
requesting the redemption.
After receipt of the redemption request, the redemption proceeds will be
wired to the investor's bank as indicated in the account application previously
filled out by the investor. The Fund does not currently impose a service charge
for effecting wire transfers but reserves the right to do so in the future.
During periods of significant economic or market change, telephone redemptions
may be difficult to implement. If an investor is unable to contact Warburg
Pincus Advisor Funds by telephone, an investor may deliver the redemption
request to Warburg Pincus Advisor Funds by mail at Warburg Pincus Advisor Funds,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Redemption proceeds will normally be wired to an
investor on the next business day following the date a redemption order is
effected. If, however, in the judgment of 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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<PAGE>
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
annually and pays them in the calendar year in which they are declared. Net
investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of net realized long-term
and short-term capital gains are declared annually and, as a general rule, will
be distributed or paid in November or December of each calendar year. Unless an
investor instructs the Fund to pay dividends or distributions in cash, dividends
and distributions will automatically be reinvested in additional Advisor Shares
of the Fund at net asset value. The election to receive dividends in cash may be
made on the account application or, subsequently, by writing to Warburg Pincus
Advisor Funds at the address set forth under 'How to Redeem and Exchange Shares'
or by calling Warburg Pincus Advisor Funds at (800) 888-6878.
The Fund may be required to withhold for U.S. federal income taxes 31% of
all distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. The Fund intends to continue to qualify each year as a 'regulated
investment company' within the meaning of the Code. The Fund, if it qualifies as
a regulated investment company, will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, in each case regardless of how long
investors have held Advisor Shares or whether received in cash or reinvested in
additional Advisor Shares. As a general rule, an investor's gain or loss on a
sale
17
<PAGE>
or redemption of its Fund shares will be a long-term capital gain or loss if it
has held its shares for more than one year and will be a short-term capital gain
or loss if it has held its shares for one year or less. However, any loss
realized upon the sale or redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares. Investors may be proportionately
liable for taxes on income and gains of the Fund, but investors not subject to
tax on their income will not be required to pay tax on amounts distributed to
them. The Fund's investment activities will not result in unrelated business
taxable income to a tax-exempt investor. The Fund's dividends, to the extent not
derived from dividends attributable to certain types of stock issued by U.S.
domestic corporations, will not qualify for the dividends received deduction for
corporations.
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.
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<PAGE>
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Series 2 Shares and then dividing the result by the
total number of outstanding Advisor Shares. Generally, the Fund's investments
are valued at market value or, in the absence of a quoted market value with
respect to any portfolio securities, at fair value as determined by or under the
direction of the Board.
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 closing value on
the date on which the valuation is made or, in the absence of sales, the mean
between the highest 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. Option or futures contracts will be valued similarly. 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.
Trading in securities in certain foreign countries may be completed prior
to the close of regular trading on the NYSE. When an occurrence subsequent to
the time a value was so established is likely to have materially changed such
value, then the fair market value of the securities will be determined by or
under the direction of the Board. In addition, trading may take place in various
foreign markets on days on which the Fund's net asset value is not calculated.
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
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<PAGE>
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 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. The Fund may also discuss the continuum of risk and return relating
to different investments and the potential impact of foreign stocks on a
portfolio otherwise composed of domestic securities. In addition, the Fund may
from time to time compare the expense ratio of Advisor Shares to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated on July 26, 1994 under the laws of the
State of Maryland. The charter of the Fund authorizes the Board to issue three
billion full and fractional shares of capital stock, $.001 par value per
share, of which one billion shares are designated Series 2 Shares (the Advisor
Shares). Under the Fund's charter documents, the Board has the power to classify
or reclassify any unissued shares of the Fund into one or more additional
classes by setting or changing in any one or more
20
<PAGE>
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, as
described elsewhere in this Prospectus, except that Advisor Shares bear fees
payable by the Fund to service organizations for services they provide to the
beneficial owners of such shares and enjoy certain exclusive voting rights on
matters relating to these fees. Because of the higher fees 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 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 to 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.
Pursuant to the terms of an Agreement, the Service Organization agrees to
provide certain distribution, shareholder servicing, administrative and/or
accounting services for its Customers. Distribution services would be marketing
or other services in connection with the promotion and sale of Advisor Shares.
Shareholder services that may be provided include responding to Customer
inquiries, providing information on Customer
21
<PAGE>
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 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 not to exceed .75% (up to a .25% annual
service fee and a .50% annual distribution fee) of the value of the average
daily net assets of its Customers invested in Advisor Shares. The Board
evaluates the appropriateness of the Plan on a continuing basis and in doing so
considers all relevant factors.
Warburg, Counsellors Securities and Counsellors Service or any of their
affiliates may, from time to time, at their own expense, provide compensation to
these institutions. To the extent they do so, such compensation does not
represent an additional expense to the Fund or its shareholders since it will be
paid from the assets of Warburg, Counsellors Securities, Counsellors Service or
their affiliates. 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 of Service
Organizations that have entered into Agreements. 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 of the
Service Organization holding Advisor Shares).
------------------------
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.
22
<PAGE>
TABLE OF CONTENTS
THE FUND'S EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ........................................ 4
PORTFOLIO INVESTMENTS .................................................... 5
RISK FACTORS AND SPECIAL
CONSIDERATIONS ........................................................ 6
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE .................................................................. 9
CERTAIN INVESTMENT STRATEGIES ............................................ 9
INVESTMENT GUIDELINES ................................................... 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 ......................................................... 19
PERFORMANCE ............................................................. 19
GENERAL INFORMATION ..................................................... 20
SHAREHOLDER SERVICING ................................................... 21
[LOGO]
[ ] WARBURG PINCUS
JAPAN OTC FUND
PROSPECTUS
DECEMBER 29, 1995
ADOTC-1-0995
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 October 30, 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, and is incorporated
by reference in its entirety into those Prospectuses. Because this Statement
of Additional Information is not itself a prospectus, no investment in shares
of the Fund should be made solely upon the information contained herein.
Copies of the Fund's Prospectuses and information regarding the Fund's current
performance may be obtained by calling the Fund at (800) 257-5614.
Information regarding the status of shareholder accounts may be obtained by
calling the Fund at (800) 888-6878 or by writing to the Fund, P.O. Box 9030,
Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term capital
appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectuses.
As described in the Prospectuses, the Fund will maintain at least
65% of its total assets in securities of companies traded in the Japanese
over-the-counter market ("JASDAQ"), including the Frontier Market. In
addition, the Fund may invest up to 35% of its total assets in securities of
other Asian issuers, with no more than 10% invested in any one country. Asian
issuers are (i) companies (A) organized under the laws of an Asian country or
its predecessors, or (B) whose principal business activities are conducted in
one or more Asian countries, and which derive at least 50% of their revenues
or profits from goods produced or sold, investments made, or services
performed in one or more Asian countries, or have at least 50% of their assets
in one or more such countries, or (C) which have issued securities which are
traded principally in an Asian country, and (ii) governments, governmental
entities or political subdivisions of Asian countries. Determinations as to
the eligibility of issuers under the foregoing definition will be made by the
investment advisers based on publicly available information and inquiries made
to the companies. The Fund considers Asia to be comprised of the contiguous
eastern Eurasian land mass and adjacent islands, including the countries of
Taiwan, Korea, Indonesia, China, Hong Kong, Israel, Turkey, India, Malaysia,
Pakistan, the Philippines, Sri Lanka, Singapore and Thailand. For purposes of
applying the foregoing limitations, if a company meets the definition of an
Asian issuer as a result of relationships with respect to more than one Asian
country, the Fund may consider the company to be associated with any of such
countries. Due to the rapidly evolving nature of Asian markets, the Fund
reserves the ability to modify its limitation on investments relating to any
one Asian country (other than Japan) and to consider additional countries to
be included in Asia if market conditions should develop so as to warrant such
a change in investment policy.
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 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 Options Clearing Corporation (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 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 Commision (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 guarding against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Transactions" and "Futures Activities" below.
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.
U.S. Government Securities. The Fund may invest in debt obligations
of varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ
in their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. The Fund may also invest in
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury and instruments that are supported by the credit of the
instrumentality. Because the U.S. government is not obligated by law to
provide support to an instrumentality it sponsors, the Fund will invest in
obligations issued by such an instrumentality only if Warburg, sometimes
referred to herein either together or alternatively with SPARX Investment &
Research, USA, Inc. ("SPARX USA"), the Fund's sub-investment adviser, as the
"Advisers"), determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by the
Fund.
Convertible Securities. Convertible securities in which the Fund
may invest, including both convertible debt and convertible preferred stock,
may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities
enable an investor to benefit from increases in the market price of the
underlying common stock. Convertible securities provide higher yields than
the underlying equity securities, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, also fluctuates in relation to the underlying common stock.
Downgraded Debt and Convertible Securities. Although the Fund may
invest only in investment grade securities (as described in the Prospectuses),
it is not required to dispose of debt and convertible securities that are
downgraded below investment grade subsequent to acquisition by the Fund.
However, it is the Fund's current intention during the coming year to restrict
its holding of such downgraded debt and convertible securities to no more than
5% of its net assets. While the market values of medium and lower-rated
securities and unrated securities of comparable quality tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-quality bonds. In addition, medium and lower-rated
securities and comparable unrated securities generally present a higher degree
of credit
<PAGE>15
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 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.
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
<PAGE>16
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.
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
<PAGE>17
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 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
<PAGE>18
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 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,
<PAGE>19
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. From time to time, the Fund may return
a part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral. Although
the generation of income is not an investment objective of the Fund, income
received could be used to pay the Fund's expenses and would increase an
investor's total return. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Fund must receive at
least 100% cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (iii) the Fund must be able to terminate the loan at
any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the Board must terminate the
loan and regain the right to vote the securities. Loan agreements involve
certain risks in the event 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
<PAGE>20
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
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
<PAGE>21
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets
aside cash. When the Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure
of the seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Securities of Smaller Companies and Emerging Growth Companies. The
Fund's investment in OTC securities involves considerations that are not
applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent accounting standards, illiquidity of securities and
markets, higher brokerage commissions and fees and greater market risk in
general. Investors should expect some volatility due to the risks involved
and should regard their investment as long term. In addition, securities of
emerging growth and smaller companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices.
American, European and Continental Depositary Receipts. The assets
of the Fund may be invested in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe typically by non-U.S. banks and trust companies
that evidence ownership of either foreign or domestic securities. Generally,
ADRs in registered form are designed for use in U.S. securities markets and
EDRs and CDRs in bearer form are designed for use in European securities
markets.
Warrants. The Fund may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase).
Because a warrant does not carry with it the 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
<PAGE>22
orderly disposition of portfolio securities or to facilitate settlement
transactions on portfolio securities. Investments (including roll-overs) will
not be made when borrowings exceed 5% of the Fund's net assets. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. The Fund expects that
some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Other Investment Limitations
The investment limitations numbered 1 through 7 may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 10 through 16
may be changed by a vote of the Board at any time.
The Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
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
<PAGE>23
estate, mortgages or interests therein and (b) securities of companies that
invest in or sponsor oil, gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase and
sell futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis.
9. Issue any senior security except as permitted in these
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in connection with the writing of covered
put and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale
or securities for which there are 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").
<PAGE>24
14. Purchase or retain securities of any company if, to the
knowledge of the Fund, any of the Fund's officers or Directors or any officer
or director of 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.
16. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that any such commitment is no longer in the best
interest of the Fund and its shareholders, the Fund will revoke the commitment
by terminating the sale of Fund shares in the state involved. If a percentage
restriction (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, options and futures contracts for which market
quotations are available will be valued as described in the Prospectuses. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such
security. In determining the market value of portfolio investments, the Fund
may employ outside organizations (a "Pricing Service") which may use a matrix,
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. 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. Securities, option
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
<PAGE>25
consistently applied procedures established by the Board. In addition, the
Board or its delegates may value a security at fair value if it determines
that such security's value determined by the methodology set forth above does
not reflect its fair value.
Trading in securities in Japan and other Asian countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which the New York Stock Exchange (the "NYSE") is
open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not
calculated. As a result, calculation of the Fund's net asset value does not
take place contemporaneously with the determination of the prices of the
majority of the portfolio securities used in such calculation. All assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the prevailing rate as quoted by a Pricing Service.
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.
<PAGE>26
SPARX USA will select specific portfolio investments and effect
transactions for the Fund for the Fund's equity investments in Japan and other
Asian countries. SPARX USA seeks to obtain the best net price and the most
favorable execution of orders, effecting transactions only through brokers and
dealers approved by Warburg. In evaluating prices and executions, SPARX USA
will consider the factors it deems relevant, which may include the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of a broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, to the extent that the execution and price offered by more than
one broker or dealer are comparable, SPARX USA may, in its discretion, effect
transactions in portfolio securities with dealers who provide brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) to SPARX USA, the Fund or Warburg and/or
other accounts over which Warburg or SPARX USA exercise investment discretion.
Research and other services received may be useful to Warburg or SPARX USA in
serving both the Fund and its other clients and, conversely, research or other
services obtained by the placement of business of other clients may be useful
to Warburg or SPARX USA in carrying out its obligations to the Fund. The fees
to Warburg under its advisory agreement with the Fund and SPARX USA under its
sub-investment advisory agreement with Warburg and the Fund are not reduced by
reason of its receiving any brokerage and research services.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg or SPARX USA. Such other investment clients may invest in the same
securities as the Fund. When purchases or sales of the same security are made
at substantially the same time on behalf of such other clients, transactions
are averaged as to price and available investments allocated as to amount, in
a manner which 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.
During the fiscal year ended October 31, 1995, the Fund paid an
aggregate of approximately $ in commissions to broker-dealers for
execution of portfolio transactions. No portfolio transactions have been
executed through Counsellors Securities, Inc., the Fund's distributor
("Counsellors Securities"), since the commencement of the Fund's operations.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities if, in the Advisers' judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
<PAGE>27
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to 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 ("Agreements") concerning the provision of distribution
services or support services to customers ("Customers") who beneficially own
the Fund's Common Stock, par value $.001 per share, designated Common Stock -
Series 1 (the "Series 1 Shares") or Common Stock - Series 2 (the "Advisor
Shares"). See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when the
Advisers, in their sole discretion, believe such practice to be otherwise in
the Fund's interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or 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.
<PAGE>28
JAPAN AND ITS SECURITIES MARKETS
The Fund will be subject to general economic and political
conditions in Japan. In addition to the considerations discussed above, these
include future political and economic developments, the possible imposition
of, or changes in, exchange controls or other Japanese governmental laws or
restrictions applicable to such investments, diplomatic developments,
political or social unrest and natural disasters.
The information set forth in this section has been extracted from
various governmental publications and other sources. The Fund makes no
representation as to the accuracy of the information, nor has the Fund
attempted to verify it. Furthermore, no representation is made that any
correlation exists between Japan or its economy in general and the performance
of the Fund.
Domestic Politics
Japan has a parliamentary form of government. The legislative power
is vested in the Japanese Diet, which consists of a House of Representatives
and a House of Councillors. Members of the House of Representatives are
elected for terms of four years unless the House of Representatives is
dissolved prior to the expiration of their full elected terms. Members of the
House of Councillors are elected for terms of six years with one-half of the
membership being elected every three years. Various political parties are
represented in the Diet, including the conservative Liberal Democratic Party
("LDP"), which until August 1993 had been in power nationally since its
formation in 1955. The LDP ceased to have a majority of the House of
Representatives in June 1993, when certain members of the House of
Representatives left the LDP and formed two new political parties. After an
election for the House of Representatives was held on July 18, 1993 and the
LDP failed to secure a majority, seven parties formed a coalition to control
the House of Representatives and chose Morihiro Hosokawa, the Representative
of the Japan New Party, to head their coalition. In April 1994, amid
accusations of financial improprieties, Prime Minister Hosokawa announced that
he would resign. Tsutomu Hata succeeded Mr. Hosokawa as prime minister and
formed a new cabinet as a minority coalition government. In June 1994 Mr.
Hata yielded to political pressure from opposition parties and resigned. He
was succeeded by Social Democratic Party leader Tomiichi Murayama, Japan's
first Socialist prime minister since 1948, who was chosen by a new and
unstable alliance between left-wing and conservative parties, including the
LDP. On September 18, 1994, 187 opposition politicians founded a new party,
the Reform Party led by Ichiro Ozawa, to oppose the government of Prime
Minister Murayama in the next elections. Political realignment has continued
in 1995 as the Social Democrats incurred significant losses in the July
elections. On August 28, 1995, the LDP elected Ryutaro Hashimoto, the
minister for trade and industry, as its new leader. Mr. Hashimoto, who favors
a stronger Japanese role in world affairs, is considered a leading candidate
for prime minister in the next elections. This political instability may
hamper Japan's ability to establish and maintain effective economic
<PAGE>29
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 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.
<PAGE>30
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
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change from Change from Current
Year Exports Preceding Year Imports Preceding Year Trade Balance Services Transfers Balance
---- ------- -------------- ------- -------------- ------------- -------- --------- -------
(U.S. dollars in millions)
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
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(yen in billions)
Consumption
Expenditures
Private Y 277,676.8 Y 270,919.4 Y 264,824.1 Y 255,084.2 Y 243,628.1 Y 228,483.2 Y 215,122.0 Y 204,585.3
Government 46,108.0 44,666.4 43,257.9 41,232.0 38,806.6 36,274.8 34,184.3 32,974.5
Capital Formation
(incl. inventories)
Private 93,111.4 99,180.1 108,727.6 116,638.0 110,871.9 100,130.8 89,043.7 76,176.5
Government 42,227.3 40,295.8 35,110.1 30,062.3 28,182.6 25,724.5 24,660.9 23,673.8
Exports of Goods
and Services 44,449.2 44,243.8 47,409.4 46,809.7 45,919.9 42,351.8 37,483.2 36,209.6
Imports of Goods
and Services 34,424.0 33,333.1 36,183.8 38,529.3 42,871.8 36,768.1 29,065.1 25,194.9
GDP
(Expenditures) 469,148.7 465,972.4 463,145.3 451,296.9 24,537.2 396,197.0 371,429.0 348,425.0
Change in GDP
from Preceding
Year
Nominal terms 0.7% 0.6% 2.6% 6.3% 7.2% 6.7% 6.6% 4.1%
Real Terms 0.5% -0.2% 1.1% 4.3% 4.8% 4.7% 6.2% 4.1%
</TABLE>
- ------------------------
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
<PAGE>32
The following tables set forth certain economic indicators in Japan
for the years shown.
<TABLE>
<CAPTION>
UNEMPLOYMENT
Labor Productivity
Index
Year Number Unemployed Percent Unemployed (Manufacturing)
---- ----------------- ------------------ ------------------
(in millions) (Base Year: 1990)
<S> <C> <C> <C>
1984 1.61 2.7 72.4
1985 1.56 2.6 75.6
1986 1.67 2.8 77.0
1987 1.73 2.8 81.4
1988 1.55 2.5 90.8
1989 1.42 2.3 96.2
1990 1.34 2.1 100.0
1991 1.36 2.1 102.5
1992 1.42 2.2 97.0
1993 1.66 2.5 95.4
1994 1.92 2.9 98.3
</TABLE>
- ------------------------
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
WHOLESALE PRICE INDEX
(Base Year: 1990)
<TABLE>
<CAPTION>
Change from
All Preceding
Year Commodities Year
---- ----------- -----------
<S> <C> <C>
1985 110.4 (1.1)%
1986 100.3 (9.1)
1987 96.5 (3.8)
1988 95.6 (0.9)
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 (2.1)
</TABLE>
- ------------------------
Source: Financial Statistics of Japan (1993 ed. and June 1994
supp.), Institute of Fiscal and Monetary Policy,
Ministry of Finance of Japan; International Monetary
Fund
<PAGE>33
CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
Change from
Year General Preceding Year
---- ------- --------------
<S> <C> <C>
(Base Year: 1990)
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 $96 billion. However, the long-term
economic effects of the earthquake on the Japanese economy as a whole and on
the Fund's investments cannot be predicted.
Securities Markets
There are eight stock exchanges in Japan. Of these, the Tokyo Stock
Exchange is by far the largest, followed by the Osaka Stock Exchange and the
Nagoya Stock Exchange. These exchanges divide the market for domestic stocks
into two sections, with newly listed companies and smaller companies assigned
to the Second Section and larger companies assigned to the First Section.
The following table sets forth the number of Japanese companies
listed on each of the eight Japanese stock exchanges as of the end of 1994.
<TABLE>
<CAPTION>
NUMBER OF DOMESTIC COMPANIES LISTED ON ALL STOCK EXCHANGES
Tokyo Osaka Nagoya
-------------- ------------ -------------
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec. Kyoto Hiroshima Fukuoka Nigata Sapporo
---- ---- ---- ---- ---- ---- ----- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,235 454 855 344 431 129 240 203 260 200 193
</TABLE>
- ------------------------
Source: Tokyo Stock Exchange, Fact Book 1995
<PAGE>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
-------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Volume Value Volume Value Volume Value Volume Value
---- ------ ----- ------ ----- ------ ----- ------ -----
1989 . . . . . 256,296 Y 386,395 222,599 Y 332,617 25,096 Y 41,679 7,263 Y 10,395
1990 . . . . . 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991 . . . . . 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992 . . . . . 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993 . . . . . 101,172 106,123 86,934 86,889 10,439 14,635 2,779 3,459
1994 . . . . . 105,936 114,622 84,514 87,356 14,903 19,349 4,719 5,780
</TABLE>
<TABLE>
<CAPTION>
Kyoto Hiroshima Fukuoka Niigata Sapporo
------------------ ------------------ ------------------ ----------------- -----------------
Volume Value Volume Value Volume Value Volume Value Volume Value
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 . . . 331 Y 443 190 Y 235 268 Y 330 398 Y 475 151 Y 221
1990 . . . 416 770 169 261 203 405 245 334 195 286
1991 . . . 220 300 125 149 122 174 181 208 113 123
1992 . . . 225 322 110 136 139 129 163 178 149 129
1993 . . . 222 340 185 178 229 225 206 226 173 170
1994 . . . 447 562 255 312 578 669 249 299 267 296
</TABLE>
- ------------------------
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange
New York
<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* (64) . . . Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of E.M. Warburg,
New York, New York 10017-3147 Pincus & Co., Inc. ("EMW"); Associated with
EMW since 1970; 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
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.
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.
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 (31) . . . . . 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 $1,500 $
Donald J. Donahue $1,500 $
Jack W. Fritz $1,500 $
Thomas A. Melfe $1,500 $
Alexander B. Trowbridge $1,500 $
</TABLE>
__________________
* Each Director also serves as a Director or Trustee of 17 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.
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.
<PAGE>43
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. Nicholas P. Edwards, co-portfolio manager of the Fund, is also
portfolio manager of Warburg Pincus Japan Growth 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. Prior to joining Warburg in August 1995,
Mr. Edwards was a director at Jardine Fleming Investment Advisors, Tokyo. He
was a vice president of Robert Fleming Inc. in New York City from 1988 to
1991. Mr. Edwards earned M.A. degrees from Oxford University and Hiroshima
University in Japan.
Mr. Shuhei Abe of SPARX USA is also a Co-Portfolio Manager of the
Fund. Mr. Abe is the founder and president of SPARX Asset Management Company,
Ltd. ("SPARX"). Prior to founding SPARX in 1988, Mr. Abe worked for Soros
Fund Management and Credit Suisse Trust Bank as an independent adviser. Mr.
Abe began his career as an analyst at Nomura Research Institute in 1982 and
worked in institutional equity sales at Nomura Securities International (New
York).
Mr. Toshikatsu Kimura is an associate portfolio manager of the Fund.
Mr. Kimura has been a portfolio manager and analyst at SPARX since 1992,
before which time he was a warrant trader and portfolio manager, respectively,
at Sanyo Securities and Sanyo Investment Management from 1986 to 1990, and at
Funai Capital from 1990 to 1992.
As of November 30, 1995, Directors and officers of the Fund as a
group owned of record of the Fund's outstanding Common Shares. As of
the same date, Mr. John L. Furth may be deemed to have beneficially owned
% 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>44
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 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.
For the fiscal period or year ended October 31, 1994 and October 31,
1995, PFPC received $ and $ , respectively, under the PFPC Co-
Administration Agreement. During the fiscal period or year ended October 31,
1994 and October 31, 1995, Counsellors Service received $ and $ ,
respectively, under the Counsellors Service Co-Administration Agreement.
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
Stock ("Common Shares"), Common Stock - Series 1 and Advisor Shares have been
authorized by the Fund's charter, although only Common Shares and Advisor
Shares have been issued by the Fund. When matters are submitted for
shareholder vote, each shareholder will have one vote for each share owned and
proportionate, fractional votes for fractional shares held. Shareholders
generally vote in the aggregate, except with respect to (i) matters affecting
only the shares of a particular class, in which case only the shares of the
affected class would be entitled to vote, or (ii) when the 1940 Act requires
that shares of the classes be voted separately. There will normally be no
meetings of shareholders for the purpose of electing Directors unless and
<PAGE>45
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any
purpose when requested to do so in writing by shareholders of record of not
less than 10% of the Fund's outstanding shares.
All shareholders of the Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's assets pursuant to a custodian agreement (the
"Custodian Agreement"). Under the Custodian Agreement, State Street (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds
and transfers portfolio securities on account of the Fund, (iii) makes
receipts and disbursements of money on behalf of the Fund, (iv) collects and
receives all income and other payments and distributions on account of the
Fund's portfolio securities and (v) makes periodic reports to the Board
concerning the Fund's custodial arrangements. State Street is authorized to
select one or more foreign or domestic banks or trust companies 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 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.
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,
<PAGE>46
subaccounting services or administrative services related to the sale of the
Common Shares, as set forth in the 12b-1 Plan ("Administrative Services" and
collectively with Selling Services and Administrative Services, "Services")
including, without limitation, (a) payments reflecting an allocation of
overhead and other office expenses of Counsellors Securities related to
providing Services; (b) payments made to, and reimbursement of expenses of,
persons who provide support services in connection with the distribution of
the Common Shares including, but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Fund, and
providing any other Shareholder Services; (c) payments made to compensate
selected dealers or other authorized persons for providing any Services; (d)
costs relating to the formulation and implementation of marketing and
promotional activities for the Common Shares, including, but not limited to,
direct mail promotions and television, radio, newspaper, magazine and other
mass media advertising, and related travel and entertainment expenses; (e)
costs of printing and distributing prospectuses, statements of additional
information and reports of the Fund to prospective shareholders of the Fund;
and (f) costs involved in obtaining whatever information, analyses and reports
with respect to marketing and promotional activities that the Fund may, from
time to time, deem advisable. The Fund's Common Shares paid Counsellors
Securities $ in the year ending October 31, 1995, [all of which was
spent on advertising].
Pursuant to the 12b-1 Plan, Counsellors Securities provides the
Board with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
Advisor Shares. The Fund may, in the future, enter into Agreements
with institutions ("Institutions") to perform certain distribution,
shareholder servicing, administrative and accounting services for their
Customers who are owners of Advisor Shares. See the Prospectuses,
"Shareholder Servicing." The Fund's Agreements with Institutions with respect
to Advisor Shares will be governed by a distribution plan (the "Distribution
Plan"). The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purpose for which such expenditures were made.
General. An Institution with which the Fund has entered into an
Agreement with respect to either its Common Shares or Advisor Shares may
charge a Customer one or 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
<PAGE>47
Agreement and other literature describing the services and related fees that
would be provided by the Institution to its Customers prior to any purchase of
Fund shares. Prospectuses are available from the Fund's distributor upon
request. No preference will be shown in the selection of Fund portfolio
investments for the instruments of Institutions.
The Distribution Plan and the 12b-1 Plan will continue in effect for
so long as their continuance is specifically approved at least annually by the
Board, including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan or the 12b-1 Plan, as the case may be
("Independent Directors"). Any material amendment of the Distribution Plan or
the 12b-1 Plan would require the approval of the Board in the manner described
above. Neither the 12b-1 Plan nor the Distribution Plan may be amended to
increase materially the amount to be spent thereunder without shareholder
approval of the relevant class of shares. The Distribution Plan or the 12b-1
Plan may be terminated at any time, without penalty, by vote of a majority of
the Independent Directors or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on
how to purchase and redeem Fund shares and how such shares are priced is
included in the Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other property. If a redemption is
paid wholly or partly in securities or other property, a shareholder would
incur transaction costs in disposing of the redemption proceeds. The Fund
intends to comply with Rule 18f-1 promulgated under the 1940 Act with respect
to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the
<PAGE>48
Fund as may be necessary to cover the stipulated withdrawal payment. To the
extent that withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the value
of the shareholder's investment and continued withdrawal payments may reduce
the shareholder's investment and ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in the Fund. All dividends
and distributions on shares in the Plan are automatically reinvested at net
asset value in additional shares of the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by Warburg is
available to investors in the Fund. The funds into which exchanges can be
made by holders of Common Shares currently are the Common Shares of Warburg
Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt Fund, Warburg
Pincus New York Intermediate Municipal Fund, Warburg Pincus Tax Free Fund,
Warburg Pincus Intermediate Maturity Government Fund, Warburg Pincus Fixed
Income Fund, Warburg Pincus Short-Term Tax-Advantaged Bond Fund, Warburg
Pincus Global Fixed Income Fund, Warburg Pincus Balanced Fund, Warburg Pincus
Growth & Income Fund, Warburg Pincus Capital Appreciation Fund, Warburg Pincus
Small Company Value Fund, Warburg Pincus Post-Venture Capital Fund, Warburg
Pincus Emerging Growth Fund, Warburg Pincus International Equity Fund and
Warburg Pincus Emerging Markets Fund. Common Shareholders of the Fund may
exchange all or part of their shares for Common Shares of these or other
mutual funds organized by 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
<PAGE>49
than three exchange requests by a shareholder in any 30-day period. The
exchange privilege may be modified or terminated at any time upon 60 days'
notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and
is not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
The Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, the Fund will pay no federal income taxes on its taxable
net investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to
shareholders. To qualify under Subchapter M, the Fund must, among other
things: (i) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment
income and net realized short-term capital gains); (ii) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to the Fund's business of investing in
securities; (iii) derive less than 30% of its annual gross income from the
sale or other disposition of securities, options, futures or forward contracts
held for less than three months; and (iv) diversify its holdings so that, at
the end of each fiscal quarter of the Fund (a) at least 50% of the market
value of the Fund's assets is represented by cash, U.S. government securities
and other securities, with those other securities limited, with respect to any
one issuer, to an amount no greater in value than 5% of the Fund's total
assets and to not more than 10% of the outstanding voting securities of the
issuer, and (b) not more than 25% of the market value of the Fund's assets is
invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or of two or
more issuers that the Fund controls and that are determined to be in the same
or similar trades or businesses or related trades or businesses. In meeting
these requirements, the Fund may be restricted in the selling of securities
held by the Fund for less than three months and in the utilization of certain
of the investment techniques described above and in the Fund's 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
<PAGE>50
income and capital gains from the previous calendar year. The Fund expects to
pay the dividends and make the distributions necessary to avoid the
application of this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (i) will require the Fund to mark-to-
market certain types of its positions (i.e., treat them as if they were closed
out) and (ii) may cause the Fund to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it acquires any foreign currency, forward contract, option, futures contract
or hedged investment so that (a) neither the Fund nor its shareholders will be
treated as receiving a materially greater amount of capital gains or
distributions than actually realized or received, (b) the Fund will be able to
use substantially all of its losses for the fiscal years in which the losses
actually occur and (c) the Fund will continue to qualify as a regulated
investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Upon the sale or exchange of
shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and the basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and, as described 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.
<PAGE>51
Furthermore, shareholders will also receive, if appropriate, various written
notices after the close of the Fund's taxable year regarding the federal
income tax status of certain dividends and distributions that were paid (or
that are treated as having been paid) by the Fund to its shareholders during
the preceding year.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is
not subject to "backup withholding," the shareholder may be subject to a 31%
"backup withholding" tax with respect to (i) taxable dividends and dis-
tributions and (ii) the proceeds of any sales or repurchases of shares of the
Fund. An individual's taxpayer identification number is his social security
number. Corporate shareholders and other shareholders specified in the Code
are or may be exempt from backup withholding. The backup withholding tax is
not an additional tax and may be credited against a taxpayer's federal income
tax liability. Dividends and distributions also may be subject to state and
local taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will 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 %, and the average annual return for the period commencing
September 30, 1994 (commencement of operations) and ended October 31, 1995 was
% ( 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 % and the average annual total return
for the period commenced September 30, 1994 (commencement of operations) and
ended October 31, 1994 was % ( % without waivers).
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be. [With respect to the Fund's Common Shares, the
Fund's actual total return for the calendar year and the three-month period
ended on December 31, 1995 was % and %, respectively ( % and %,
respectively without waivers). With respect to the Advisor Shares, the Fund's
actual total return for the calendar year and the three-month period ended on
December 31, 1995 was % and %, respectively ( % and %,
respectively, without waivers). 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
- ------------------------
* - The expression (1 + T) is being raised to the nth power.
<PAGE>53
deposits or other investments which pay a fixed yield for a stated period of
time. Any fees charged by Institutions or other institutional investors
directly to their customers in connection with investments in Fund shares are
not reflected in the Fund's total return, and such fees, if charged, will
reduce the actual return received by customers on their investments.
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. [UPDATE]
<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.
From time to time, the Fund may advertise evaluations of a class of
Fund shares published by nationally recognized financial publications, such as
Morningstar, Inc. or Lipper Analytical Services, Inc. Morningstar, Inc. rates
funds in broad categories based on risk/reward analyses over various time
periods. In addition, advertising or supplemental sales literature relating
to the Fund may describe the percentage decline from all-time high levels for
certain foreign stock markets. It may also describe how the Fund differs from
the
<PAGE>55
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 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. ("Schwab") Reinvest Accounts, Attn:
Mutual Funds Department, 101 Montgomery Street, San Francisco, CA 94104-4122 -
- - 28.90%.] The Fund believes that Schwab is not the beneficial owner of
shares held of record by it. Mr. Lionel I. Pincus, Chairman of the Board and
Chief Executive Officer of EMW, may be deemed to have beneficially owned
% 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%. Counsellors holds these
shares as a result of limited distribution activities of the Advisor Shares
since commencement of the Fund's operations. Mr. Pincus may be deemed to have
beneficially owned 86.96% of the Advisor Shares outstanding, including shares
owned by clients for which Counsellors has investment discretion and by
companies that EMW may be deemed to control. Mr. Pincus disclaims ownership
of these shares and does not intend to exercise voting rights with respect to
these shares.]
FINANCIAL STATEMENTS
The Fund's 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>
STATEMENT OF DIFFERENCES BETWEEN EDGAR VERSION AND PAPER DOCUMENT
-----------------------------------------------------------------
Difference Page
---------- ----
Yen symbol appears in 31,33,35,36,37
EDGAR document as Y
Missing exponent (explained 52
by footnote)
<PAGE>C-1
PART C
OTHER INFORMATION
WARBURG, PINCUS JAPAN OTC FUND, INC.
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part B:
(1) Financial Statements included in Part A*:
(a) Financial Highlights
(2) Audited Financial Statements included in Part B*:
(a) Report of Coopers & Lybrand L.L.P., Independent
Auditors
(b) Schedule of Investments at October 31, 1995
(c) Statement of Assets and Liabilities at
October 31, 1995
(d) Statement of Operations
(e) Statement of Changes in Net Assets
(f) Financial Highlights
(g) Notes to Financial Statements
- ------------------------
* To be filed by amendment.
(b) Exhibits:
Index 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
Index 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.(4)
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.(7)
10(a) Opinion of Willkie Farr & Gallagher.(6)
(b) Consent of Willkie Farr & Gallagher.(7)
(c) Consent of Hamada & Matsumoto.(7)
__________________
(3) Contained in Exhibit No. 15 hereto.
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A of Warburg,
Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125;
EDGAR Accession No. 950117-95-221).
(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
Counsellors International Equity Fund, Inc. filed on September 22, 1995
(Securities Act File No. 33-27031).
(6) Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 29, 1994.
(7) To be filed by amendment.
<PAGE>C-3
Index No. Description of Exhibit
--------- ----------------------
11(a) Consent of Coopers & Lybrand L.L.P.(7)
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Retirement Plans.(8)
15(a) Form of Shareholder Services and Distribution Plan.(1)
(b) Form of Shareholder Services Plan.(5)
(c) Form of Distribution Agreement.(2)
(d) Form of Distribution Plan.(5)
(e) Form of Rule 18f-3 Plan.(2)
16 Schedule for Computation of Total Return Performance
Quotation.(7)
17(a) Financial Data Schedule relating to semiannual financials
(Common Shares).(7)
(b) Financial Data Schedule relating to semiannual financials
(Advisor Shares).(7)
_______________
(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>C-4
Item 25. Persons Controlled by or Under Common Control with Registrant
Warburg, Pincus Counsellors, Inc. ("Counsellors"), Registrant's
investment adviser, may be deemed a controlling person of Registrants because
it possesses or shares investment or voting power with respect to more than
25% of the outstanding securities of Registrant. E.M. Warburg, Pincus & Co.,
Inc. ("EMW") controls Counsellors through its ownership of a class of voting
preferred stock of Counsellors. John L. Furth, director of the Fund, and
Lionel I. Pincus, Chairman of the Board and Chief Executive Officer of EMW,
may be deemed to be controlling persons of the Fund because they may be deemed
to possess or share investment power over shares owned by clients of
Counsellors and certain other entities.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of November 30, 1995
-------------- ------------------------
Shares of beneficial interest,
par value $.001 per share _____
Shares of beneficial interest,
par value $.001 per share
- Series 1 _____
Shares of beneficial interest,
par value $.001 per share
- Series 2 (Advisor Shares)
_____
Item 27. Indemnification
Registrant, officers and directors of Counsellors, of Counsellors
Securities Inc. ("Counsellors Securities") and of Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Registration Statement of Warburg,
Pincus Post-Venture Capital Fund, Inc., filed on July 21, 1995 (EDGAR
Accession No. 899140-95-149).
<PAGE>C-5
Item 28. Business and Other Connections of Investment Adviser
Counsellors, a wholly owned subsidiary of Warburg, Pincus
Counsellors G.P., acts as investment adviser to Registrant. Counsellors
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 28 of officers and directors of
Counsellors, together with information as to their other business, profession,
vocation or employment of a substantial nature during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by
Counsellors (SEC File No. 801-07321).
SPARX Investment & Research, USA, Inc. ("SPARX"), a wholly owned
subsidiary of SPARX Asset Management Co., Ltd. ("SPARX Management"), acts as
sub-investment adviser to Registrant. SPARX is an independent investment
advisory company owned by its president and founder, Shuhei Abe. The list
required by this Item 28 of officers and directors of SPARX, together with
information as to their other business, profession, vocation or employment of
a substantial nature during the past two years, is incorporated by reference
to Schedules A and D of Form ADV filed by SPARX (SEC File No. 801-47433).
Item 29. Principal Underwriter
(a) Counsellors Securities will act as distributor for Registrant.
Counsellors Securities currently acts as distributor for Warburg, Pincus
Capital Appreciation Fund; Warburg, Pincus Cash Reserve Fund; Warburg, Pincus
Emerging Growth Fund; Warburg, Pincus Emerging Markets Fund; Warburg, Pincus
Fixed Income Fund; Warburg, Pincus Global Fixed Income Fund; Warburg, Pincus
Institutional Fund, Inc.; Warburg, Pincus Intermediate Maturity Government
Fund; Warburg, Pincus International Equity Fund; Warburg, Pincus New York
Intermediate Municipal Fund; Warburg, Pincus Post-Venture Capital Fund;
Warburg, Pincus New York Tax Exempt Fund; Warburg, Pincus Short-Term Tax-
Advantaged Bond Fund; The RBB Fund, Inc. and Warburg, Pincus Trust.
(b) For information relating to each director, officer or partner
of Counsellors Securities, reference is made to Form BD (SEC File No. 8-32482)
filed by Counsellors Securities under the Securities Exchange Act of 1934, as
amended.
<PAGE>C-6
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Japan OTC Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, by-laws and minute books)
(2) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-administrator)
(3) PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as co-administrator)
(4) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
(5) Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as investment adviser)
(6) SPARX Investment & Research, USA, Inc.
413 Seaside Avenue
Honolulu, Hawaii 96815
(records relating to its function as sub-investment adviser)
(7) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian, transfer agent
and dividend disbursing agent)
Item 31. Management Services
Not applicable.
<PAGE>C-7
Item 32. Undertakings
(a) Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of Registrant's Registration Statement under
the Act.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
(c) Registrant hereby undertakes to call a meeting of its
shareholders for the purpose of voting upon the question of removal of a
director or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares. Registrant
undertakes further, in connection with the meeting, to comply with the
provisions of Section 16(c) of the Investment Company Act of 1940, as amended,
relating to communications with the shareholders of certain common-law trusts.
<PAGE>C-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and the State of New York,
on the 26th day of October, 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 October 26, 1995
John L. Furth and Director
/s/ Richard H. King President October 26, 1995
Richard H. King
/s/ Stephen Distler Vice President and Chief October 26, 1995
Stephen Distler Financial Officer
/s/ Howard Conroy Vice President, Treasurer October 26, 1995
Howard Conroy and Chief Accounting
Officer
/s/ Richard N. Cooper Director October 26, 1995
Richard N. Cooper
/s/ Donald J. Donahue Director October 26, 1995
Donald J. Donahue
/s/ Jack W. Fritz Director October 26, 1995
Jack W. Fritz
<PAGE>C-9
/s/ Thomas A. Melfe Director October 26, 1995
Thomas A. Melfe
/s/ Alexander B. Trowbridge Director October 26, 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.(4)
9(a) Form of Transfer Agency Agreement.(4)
(b) Form of Counsellors Service Co-Administration
Agreement.(4)
______________________
(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).
(3) Contained in Exhibit No. 15 hereto.
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of this exhibit in Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A of Warburg,
Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125;
EDGAR Accession No. 950117-95-221).
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
(c) Form of PFPC
Co-Administration Agreement.(5)
(d) Forms of Services Agreements.(7)
10(a) Opinion of Willkie Farr & Gallagher.(6)
(b) Consent of Willkie Farr & Gallagher.(7)
(c) Consent of Hamada & Matsumoto.(7)
11(a) Consent of Coopers & Lybrand L.L.P.(7)
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Retirement Plans.(8)
______________________
(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
Counsellors International Equity Fund, Inc. filed on September 22,
1995 (Securities Act File No. 33-27031).
(6) Incorporated by reference to Opinion of Willkie Farr & Gallagher filed
with Registrant's Rule 24f-2 Notice filed on December 29, 1994.
(7) To be filed by amendment.
(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 Services and Distribution Plan.(2)
(b) Form of Shareholders Services Plan.(5)
(c) Form of Distribution Agreement.(2)
(d) Form of Distribution Plan.(5)
(e) Form of Rule 18-3 Plan.(2)
16 Schedule for Computation of Total Return Performance
Quotation.(7)
17 Not applicable.
