<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on August 20, 1998
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. 8 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 9 [x]
(Check appropriate box or boxes)
Warburg, Pincus Japan Small Company Fund, Inc.
(formerly known as 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 Small Company 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
787 Seventh Avenue
New York, New York 10019-6099
<PAGE> 2
Approximate Date of Proposed Public Offering: August 21, 1998
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on August 25, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[x] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Common Stock, $.001 par value per share
<PAGE> 3
WARBURG, PINCUS JAPAN SMALL COMPANY FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
---------------------------------
<TABLE>
<CAPTION>
Part A Common Shares and Advisor Shares
Item No. Prospectus Heading*
- -------- -------------------
<S> <C>
1. Cover Page.................... Cover Page
2. Synopsis...................... The Funds' Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Investment Objectives and
Policies; Portfolio Investments; Risk
Factors and Special Considerations; Certain
Investment Strategies; Investment
Guidelines; General Information
5. Management of the Fund........ Management of the Funds
6. Capital Stock and Other
Securities.................... General Information
7. Purchase of Securities Being
Offered....................... How to Open an Account; How to
Purchase Shares; Net Asset Value
8. Redemption or Repurchase...... How to Redeem and Exchange Shares
9. Legal Proceedings............. Not applicable
</TABLE>
* With respect to the Advisor Prospectus, all references to "the Funds"
in this cross-reference sheet should be read as "the Fund."
<PAGE> 4
<TABLE>
<CAPTION>
Part B Statement of Additional
Item No. Information Heading
- -------- -------------------
<S> <C>
10. Cover Page.................... Cover Page
11. Table of Contents............. Contents
12. General Information and History Management of the Funds; Notes to
Financial Statements; See Prospectuses
-- "General Information"
13. Investment Objectives and
Policies...................... Investment Objectives; Investment
Policies
14. Management of the Registrant.. Management of the Funds
15. Control Persons and
Principal Holders of Securities Management of the Funds;
Miscellaneous; See Prospectuses --
"General Information"
16. Investment Advisory and Other
Services...................... Management of the Funds; See
Prospectuses -- "Management of the
Funds;" See Advisor Shares Prospectus
-- "Shareholder Servicing"
17. Brokerage Allocation..... Investment Policies; See Prospectuses
-- "Portfolio Transactions and
Turnover Rate"
18. Capital Stock and Other
Securities.................... Management of the Funds --
Organization of the Funds; See
Prospectuses -- "General Information"
19. Purchase, Redemption and
Pricing of Securities Being
Offered....................... Additional Purchase and Redemption
Information; See Prospectuses -- "How
to Open an Account," "How to Purchase
Shares," "How to Redeem and Exchange
Shares" and "Net Asset Value"
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Part B Statement of Additional
Item No. Information Heading
- -------- -------------------
<S> <C>
20. Tax Status.................... Additional Information Concerning
Taxes; See Prospectuses -- "Dividends,
Distributions and Taxes"
21. Underwriters.................. Investment Policies -- Portfolio
Transactions; See Prospectuses --
"Management of the Funds;" See Advisor
Shares Prospectus -- "Shareholder
Servicing"
22. Calculation of Performance Data Determination of Performance
23. Financial Statements.......... Financial Statements
</TABLE>
3
<PAGE> 6
PROSPECTUS
August 24, 1998
WARBURG PINCUS
EMERGING MARKETS FUND
-
WARBURG PINCUS
INTERNATIONAL EQUITY FUND
-
WARBURG PINCUS
JAPAN GROWTH FUND
-
WARBURG PINCUS
JAPAN SMALL COMPANY FUND
[WARBURG PINCUS FUNDS LOGO]
<PAGE> 7
PROSPECTUS August 24, 1998
Warburg Pincus Funds is a family of open-end mutual funds that offer investors a
variety of investment opportunities. Four 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 GROWTH FUND seeks long-term growth of capital by investing
primarily in equity securities of Japanese issuers.
WARBURG PINCUS JAPAN SMALL COMPANY FUND seeks long-term capital appreciation by
investing in a portfolio of equity securities of small-sized Japanese companies.
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
- --------------------------------------------------------------------------------
Common Shares that are "no load" are 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.
LOW MINIMUM INVESTMENT
- --------------------------------------------------------------------------------
The minimum initial investment in each Fund is $2,500 ($500 for an IRA or
Uniform Transfers/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 has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Funds. The Statement of Additional Information is available to
investors without charge by calling Warburg Pincus Funds at (800) 927-2874.
Information regarding the status of shareholder accounts may be obtained by
calling Warburg Pincus Funds at the same number. Warburg Pincus Funds maintains
a Web site at www.warburg.com. The Statement of Additional Information, as
amended or supplemented from time to time, bears the same date as this
Prospectus and is incorporated by reference in its entirety into this
Prospectus.
SHARES OF THE FUNDS 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 FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 8
THE FUNDS' EXPENSES
- --------------------------------------------------------------------------------
Each of the Warburg Pincus Emerging Markets Fund ("Emerging Markets Fund"),
Warburg Pincus International Equity Fund ("International Equity Fund"), Warburg
Pincus Japan Growth Fund ("Japan Growth Fund") and Warburg Pincus Japan Small
Company Fund ("Japan Small Company Fund") (each a "Fund") currently offers two
separate classes of shares: Common Shares and Advisor Shares. For a description
of Advisor Shares see "General Information." Common Shares of each of the
Emerging Markets Fund, the Japan Growth Fund and the Japan Small Company Fund
pay the Funds' distributor a 12b-1 fee. See "Management of the
Funds -- Distributor."
<TABLE>
<CAPTION>
Japan
Emerging International Japan Small
Markets Equity Growth Company
Fund Fund Fund Fund
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............ 0 0 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees................................ .80% 1.00% .56% .77%
12b-1 Fees..................................... .25% 0 .25% .25%
Other Expenses................................. .61% .33% .94% .74%
---- ---- ---- ----
Total Fund Operating Expenses (after fee
waivers and expense reimbursements)+......... 1.66%* 1.33%* 1.75% 1.76%*
==== ==== ==== ====
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........................................ $ 17 $ 14 $ 18 $ 18
3 years....................................... $ 52 $ 42 $ 55 $ 55
5 years....................................... $ 90 $ 73 $ 95 $ 95
10 years....................................... $197 $160 $206 $207
</TABLE>
- --------------------------------------------------------------------------------
+ Annual Fund Operating Expenses for the Funds are based on actual expenses for
the fiscal year ended October 31, 1997, net of any applicable fee waivers or
expense reimbursements. Absent such waivers and/or reimbursements, Management
Fees for the Emerging Markets, International Equity, Japan Growth and Japan
Small Company Funds would have equalled 1.25%, 1.00%, 1.25% and 1.25%,
respectively; Other Expenses would have equalled .62%, .33%, 1.06% and .77%,
respectively; and Total Fund Operating Expenses would have equalled 2.12%,
1.33%, 2.56% and 2.27%, respectively. The investment adviser and
co-administrator are under no obligation to continue waivers and/or
reimbursements.
* Operating expenses for the Emerging Markets Fund, International Equity Fund
and Japan Small Company Fund were each reduced by .01% for the fiscal year
ended October 31, 1997 as a result of certain arrangements that served to
offset portions of the Funds' transfer agent expense. After reflecting these
arrangements, "Total Fund Operating Expenses (after fee waivers)" for these
Funds were 1.65%, 1.32% and 1.75%, respectively, for the fiscal year ended
October 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a Common Shareholder of each Fund. 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. 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 perform-
2
<PAGE> 9
ance will vary and may result in a return greater or less than 5%. Long-term
shareholders of the Emerging Markets Fund, the Japan Growth Fund and the Japan
Small Company Fund may pay more than the economic equivalent of the maximum
sales charges permitted by the National Association of Securities Dealers, Inc.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for the fiscal period November 1, 1997 through April
30, 1998 (unaudited) has been derived from the Fund's financial statements and
for the five fiscal years ended October 31, 1997 has been derived from
information audited by PricewaterhouseCoopers L.L.P., independent accountants,
whose report dated December 19, 1997 is incorporated by reference in the
Statement of Additional Information. Further information about the performance
of the Funds is contained in the Funds' annual and semi-annual reports, dated
October 31, 1997 and April 30, 1998, respectively, copies of which may be
obtained without charge by calling Warburg Pincus Funds at (800) 927-2874.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
For the For the Period
Six Months For the Year Ended December 30, 1994
Ended October 31, (Commencement of
April 30, 1998 ------------------------------------ Operations) through
(Unaudited) 1997 1996 October 31, 1995
----------- ---- ---- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $10.82 $12.19 $11.28 $10.00
------- -------- --------- ----------
Income from Investment Operations:
Net Investment Income (Loss)........... (0.08) 0.04 0.07 0.08
Net Gain (Loss) from Securities and
Foreign Currency Related Items (both
realized and unrealized)............. (0.04) (1.34) 0.99 1.25
------- -------- --------- ----------
Total from Investment Operations....... (0.12) (1.30) 1.06 1.33
------- -------- --------- ----------
Less Distributions:
Dividends from Net Investment Income... (0.06) (0.03) (0.08) (0.05)
Distributions from Realized Gains...... (0.41) (0.04) (0.07) 0.00
------- -------- --------- ----------
Total Distributions.................... (0.47) (0.07) (.15) (0.05)
------- -------- --------- ----------
NET ASSET VALUE, END OF PERIOD.......... $10.23 $10.82 $12.19 $11.28
------- -------- --------- ----------
------- -------- --------- ----------
Total Return............................ (.58%)+ (10.71%) 9.46% 13.33%+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s)........ $110,847 $155,806 $218,421 $6,780
Ratios to Average Daily Net Assets:
Operating Expenses..................... 1.66%*@ 1.66%@ 1.62%@ 1.00%*
Net Investment Income (Loss)........... (.91%)* .24% .31% 1.25%*
Decrease reflected in above operating
expense ratios due to
waivers/reimbursements............... .74%* .46% .77% 11.08%*
Portfolio Turnover Rate................. 60.99%+ 92.48% 61.84% 57.76%+
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' expenses by .01%, .01% and .01%, for the period ending April
30, 1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively. The Common Shares' operating expense ratio after reflecting
these arrangements were 1.65%, 1.65% and 1.61% for the period ended April 30,
1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively.
+ Non-annualized.
* Annualized.
3
<PAGE> 10
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
For the
Six Months
Ended For the Year Ended October 31,
April 30, 1998 ---------------------------------------------------------
(Unaudited) 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD.............. $20.76 $20.69 $19.30 $20.51 $17.00
------ ------ ------ ------ ------
Income from
Investment
Operations:
Net Investment
Income............ (0.17) 0.04 0.22 0.12 0.09
Net Gain (Loss) from
Securities and
Foreign Currency
Related Items
(both realized and
unrealized)....... 2.17 0.88 1.73 (0.67) 3.51
------ ------ ------ ------ ------
Total from
Investment
Operations........ 2.00 0.92 1.95 (0.55) 3.60
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net
Investment
Income............ (0.00) (0.11) (0.56) (0.13) (0.04)
Distributions in
Excess of Net
Investment
Income............ 0.00 0.00 0.00 0.00 (0.01)
Distributions from
Realized Gains.... (2.86) (0.74) 0.00 (0.53) (0.04)
------ ------ ------ ------ ------
Total
Distributions..... (2.86) (0.85) (0.56) (0.66) (0.09)
------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD........... $19.90 $20.76 $20.69 $19.30 $20.51
====== ====== ====== ====== ======
Total Return......... 12.28%+ 4.54% 10.35% (2.55%) 21.22%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000s)....... $1,898,192 $2,312,042 $2,885,453 $2,068,207 $1,533,872
Ratios to Average
Daily Net Assets:
Operating
Expenses.......... 1.36%*@ 1.33%@ 1.38%@ 1.39% 1.44%
Net Investment
Income (Loss)..... (.01)%* .56% .62% .69% .19%
Decrease reflected
in above operating
expense ratios due
to waivers/
reimbursements.... .00% .00% .00% .00% .00%
Portfolio Turnover
Rate................ 43.82%+ 61.80% 32.49% 39.24% 17.02%
<CAPTION>
For the Period
May 2, 1989
(Commencement
of Operations)
For the Year Ended October 31, through
--------------------------------------- October 31,
1993 1992 1991 1990 1989
-------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD.............. $12.22 $13.66 $11.81 $11.35 $10.00
------ ------ ------ ------ ------
Income from
Investment
Operations:
Net Investment
Income............ 0.09 0.15 0.19 0.13 0.05
Net Gain (Loss) from
Securities and
Foreign Currency
Related Items
(both realized and
unrealized)....... 4.84 (1.28) 2.03 0.55 1.30
------ ------ ------ ------ ------
Total from
Investment
Operations........ 4.93 (1.13) 2.22 0.68 1.35
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net
Investment
Income............ (0.02) (0.16) (0.33) (0.10) 0.00
Distributions in
Excess of Net
Investment
Income............ 0.00 0.00 0.00 0.00 0.00
Distributions from
Realized Gains.... (0.13) (0.15) (0.04) (0.12) 0.00
------ ------ ------ ------ ------
Total
Distributions..... (0.15) (0.31) (0.37) (0.22) 0.00
------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD........... $17.00 $12.22 $13.66 $11.81 $11.35
====== ====== ====== ====== ======
Total Return......... 40.68% (8.44%) 19.42% 5.92% 28.73%*
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000s)....... $378,661 $101,763 $72,553 $38,946 $13,260
Ratios to Average
Daily Net Assets:
Operating
Expenses.......... 1.48% 1.49% 1.50% 1.46% 1.50%*
Net Investment
Income (Loss)..... .38% .88% 1.19% 1.58% 1.33%*
Decrease reflected
in above operating
expense ratios due
to waivers/
reimbursements.... .07% .17% .38% .89%*
Portfolio Turnover
Rate................ 22.60% 53.29% 54.95% 66.12% 27.32%
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' expenses by .01%, .01% and .01%, for the period ending April
30, 1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively. The Common Shares' operating expense ratio after reflecting
these arrangements were 1.35%, 1.32% and 1.37% for the period ended April 30,
1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively.
* Annualized.
4
<PAGE> 11
JAPAN GROWTH FUND
<TABLE>
<CAPTION>
For the For the Period
Six Months December 29, 1995
Ended (Commencement of
April 30, 1998 For the Year Ended Operations) through
(Unaudited) October 31, 1997 October 31, 1996
----------- ---------------- ----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............ $9.74 $9.85 $10.00
------ ----- ------
Income from Investment Operations:
Net Investment Loss........................... 0.07 (0.07) (0.06)
Net Gain (Loss) from Securities and Foreign
Currency Related Items (both realized and
unrealized)................................. 0.35 0.21 (0.09)
------ ----- ------
Total from Investment Operations.............. 0.42 0.14 (0.15)
------ ----- ------
Less Distributions:
Distributions in Excess of Net Investment
Income...................................... 0.00 (0.20) 0.00
Distributions in Excess of Realized Gains..... 0.00 (0.05) 0.00
------ ----- ------
Total Distributions........................... 0.00 (0.25) 0.00
------ ----- ------
NET ASSET VALUE, END OF PERIOD.................. $10.16 $9.74 $9.85
====== ===== ======
Total Return.................................... 4.31%+ 1.47% (1.50%)+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s)................ $35,035 $24,954 $20,157
Ratios to Average Daily Net Assets:
Operating Expenses............................ 1.75%*@ 1.75%@ 1.76%*@
Net Investment Income (Loss).................. (.22%)* (1.03)% (1.03%)*
Decrease reflected in above operating expense
ratios due to waivers/reimbursements........ .52%* .81% 1.79%*
Portfolio Turnover Rate......................... 31.01%+ 93.84% 51.72%+
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' expenses by .00%, .00% and .01%, for the period ending April
30, 1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively. The Common Shares' operating expense ratio after reflecting
these arrangements were 1.75%, 1.75% and 1.75% for the period ended April 30,
1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively.
+ Non-annualized.
* Annualized.
5
<PAGE> 12
JAPAN SMALL COMPANY FUND
<TABLE>
<CAPTION>
For the Period
For the Period For the Year Ended September 30, 1994
November 1, 1997 October 31, (Commencement of
through ----------------------------- Operations) through
April 30, 1998 1997** 1996 1995 October 31, 1994
-------------- ------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $6.37 $8.47 $9.09 $9.85 $10.00
------ ----- ----- ----- -----
Income from Investment
Operations:
Net Investment Income
(Loss).................... (0.05) (1.22) (0.23) 0.00 0.00
Net Gain (Loss) from
Securities and Foreign
Currency Related Items
(both realized and
unrealized)............... (0.03) (0.79) (0.01) (0.76) (0.15)
------ ----- ----- ----- -----
Total from Investment
Operations................ (0.08) (2.01) (0.24) (0.76) (0.15)
------ ----- ----- ----- -----
Less Distributions:
Dividends from Net
Investment Income......... (0.00) 0.00 (0.38) 0.00 0.00
Distributions from Realized
Gains..................... (0.12) (0.09) 0.00 0.00 0.00
------ ----- ----- ----- -----
Total Distributions......... (0.12) (0.09) (0.38) 0.00 0.00
----- ----- ----- -----
NET ASSET VALUE, END OF
PERIOD...................... $6.17 $6.37 $8.47 $9.09 $9.85
====== ===== ===== ===== =====
Total Return................. (.98%)+ (23.98%) (2.79%) (7.72%) (1.50%)+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(000s)...................... $39,834 $41,627 $154,460 $178,568 $19,878
Ratios to Average Daily Net
Assets:
Operating Expenses.......... 1.75%*@ 1.76%@ 1.76%@ 1.41% 1.00%*
Net Investment Income
(Loss).................... (.65%)* (1.10%) (1.22%) (.15%) .49%*
Decrease reflected in above
operating expense ratios
due to waivers/
reimbursements............ .80%* .51% .29% 1.35% 4.96%*
Portfolio Turnover Rate...... 16.27%+ 100.60% 95.23% 82.98% .00%
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' expenses by .00%, .01% and .01%, for the period ending April
30, 1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively. The Common Shares' operating expense ratio after reflecting
these arrangements were 1.75%, 1.75% and 1.75% for the period ended April 30,
1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively.
+ Non-annualized.
* Annualized.
** Effective at the close of business on May 23, 1997, the investment adviser
of the Fund ceased to engage a sub-investment adviser to the Fund and
assumed all of the Fund's investment management responsibilities.
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 "Portfolio Investments"
and "Certain Investment Strategies" for descriptions of certain types of
investments the Funds may make.
EMERGING MARKETS FUND
The Emerging Markets Fund seeks growth of capital. The Fund is a non-
diversified management investment company that pursues its investment objective
by investing primarily in equity securities of non-United States issuers
consisting of companies in emerging securities markets. An investment in the
6
<PAGE> 13
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 and the Emerging Markets in which the Fund
invests will vary from time to time. 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 an 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,
(ii) which is included in the IFC Investable Index or the Morgan Stanley Capital
International Emerging Markets Index or (iii) which has 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 Pincus Asset Management, Inc., the
Fund's investment adviser ("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, Israel, 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.
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<PAGE> 14
Vincent and the Grenadines, Swaziland, Tanzania, Thailand, Trinidad and Tobago,
Tunisia, 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, The Netherlands,
New Zealand, Norway, Spain, Sweden, Switzerland, the 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. As a shareholder in a
closed-end investment company, the Fund will bear its ratable share of the
investment company'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.
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 of 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 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 econo-
8
<PAGE> 15
mies 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 GROWTH FUND
The Japan Growth Fund seeks long-term growth of capital. The Fund is a
non-diversified management investment company that pursues its objective by
investing primarily in equity securities of Japanese issuers that present
attractive opportunities for growth. Under current market conditions the Fund
intends to invest at least 80% of its total assets -- but will invest no less
than 65% of its assets under normal market conditions -- in common and preferred
stocks, warrants and other rights, securities convertible into or exchangeable
for common stocks and American Depository Receipts ("ADRs") of Japanese issuers.
Warburg believes that Japanese industry is in the process of deregulation and
restructuring. The Fund is designed to provide an opportunity to participate in
the dynamic structural changes in the Japanese industrial system through
investment in higher growth companies that can be expected to benefit from these
changes. The Fund will seek to identify and invest in Japanese issuers that are
showing or are expected to show a rapid or high rate of growth, based on
comparisons with Japanese or non-Japanese companies in the same industry or
other considerations. The Fund will also invest in Japanese companies that
Warburg believes are undervalued based on price/earnings ratios, comparisons
with Japanese or non-Japanese companies or other factors.
Unlike the Japan Small Company Fund, which invests primarily in small-sized
Japanese companies, the Fund may invest in companies of any size, whether traded
on an exchange or over-the-counter. Currently, there are eight exchanges in
Japan -- the Tokyo, Osaka, Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata and
Sapporo exchanges -- and two over-the-counter markets -- JASDAQ and the Japanese
Second Section OTC Market (the "Frontier Market"). The Fund considers Japanese
issuers to be (i) companies (A) organized under the laws of Japan, or (B) whose
principal business activities are conducted in Japan and which derive at least
50% of their revenues or profits from goods produced or sold, investments made,
or services performed in Japan, or have at least 50% of their assets in Japan,
or (C) which have issued securities which are traded principally in Japan, and
(ii) Japanese governmental entities or political subdivisions. Determinations as
to the eligibility of issuers under the foregoing definition will be made by
Warburg based on publicly available information and inquiries made to the
companies. The portion of the Fund's assets not invested in Japanese issuers may
be invested in securities of other Asian issuers. The Fund does not, except
during temporary defensive periods, intend to invest in securities of non-Asian
issuers. 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.
9
<PAGE> 16
JAPAN SMALL COMPANY FUND
The Japan Small Company 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 equity securities of small-sized
Japanese companies that present attractive opportunities for capital
appreciation.
The Fund intends to invest, under normal market conditions, at least 65% of
its total assets in common stocks, warrants and securities convertible into or
exchangeable for common stocks of small-sized Japanese companies, whether traded
on an exchange or over-the-counter. The Fund considers a "small-sized" Japanese
company to be one whose market capitalization, measured at the time the Fund
purchases a security of that company, is no larger than the largest market
capitalization of companies represented in either (i) the JASDAQ Index, (ii) the
Second Section of the Tokyo Stock Exchange or (iii) the smaller one-half
(deciles 6 through 10) of the First Section of the Tokyo Stock Exchange (the
"Small-Cap Indexes"). Companies whose market capitalization no longer meets this
definition after purchase continue to be considered small companies for purposes
of the Fund's policy of investing at least 65% of its assets in small-sized
Japanese companies.
The portion of the Fund's assets that is not invested in equity securities of
small-sized Japanese companies may be invested in securities of other Japanese
issuers or securities of companies in other Asian markets, in addition to the
other instruments described below. No more than 10% of the Fund's total assets
will be invested in securities of companies in any one Asian country (other than
Japan). 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. In appropriate circumstances, such as when a direct investment by the
Fund 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 Asia. The Fund will not invest in securities
of non-Asian issuers, except that the Fund may, for cash management purposes,
invest up to 20% of its total assets in U.S. and foreign money market
obligations. The Fund may also, for temporary defensive purposes, invest without
limit in U.S. debt securities, money market obligations or liquid securities of
Japanese companies (regardless of market capitalization), including depositary
receipts for such companies.
Currently, there are eight exchanges in Japan -- the Tokyo, Osaka, Nagoya,
Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo exchanges -- and two over-
the-counter markets -- JASDAQ and the Frontier Market. Like the Tokyo Exchange,
the Osaka and Nagoya exchanges also have second sections. The Fund considers
Japanese companies to be companies (A) organized under the laws of Japan, (B)
whose principal business activities are conducted in Japan and which derive at
least 50% of their revenues or profits from goods pro-
10
<PAGE> 17
duced or sold, investments made, or services performed in Japan, or have at
least 50% of their assets in Japan, or (C) which have issued securities that are
traded principally in Japan. Determinations as to the eligibility of Japanese
companies under the foregoing definition will be made by Warburg based on
publicly available information and inquiries made to the companies.
The Fund may involve a greater degree of risk than an investment in other
mutual funds that seek capital appreciation by investing in better-known, larger
companies. From time to time, the Fund may hedge part or all of its exposure to
the Japanese yen, thereby reducing or substantially eliminating any favorable or
unfavorable impact of changes in the value of the yen in relation to the U.S.
dollar.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The International Equity Fund, the Japan Growth Fund and the
Japan Small Company Fund may each invest up to 35% of its total assets in
investment grade debt securities (other than money market obligations) and, in
the case of the International Equity and Japan Small Company Funds, 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 such a strategy is dependent upon Warburg's ability
to forecast accurately 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 Services ("S&P") or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments 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, although Warburg will
consider such event in its determination of whether the Fund should continue to
hold the securities. The Japan Growth Fund does not currently intend during the
coming year to hold more than 5% of its net assets in securities rated below
investment grade, including convertible and non-convertible debt securities
downgraded below investment grade subsequent to acquisition by
11
<PAGE> 18
the Fund. The Japan Small Company Fund does not currently intend during the
coming year to hold more than 5% of its net assets in securities downgraded
below investment grade subsequent to acquisition by the Fund.
When Warburg believes that a defensive posture is warranted, each Fund other
than the Japan Small Company 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. The Japan Small Company Fund may, for temporary defensive
purposes, invest without limit in U.S. debt securities, money market obligations
or liquid securities of Japanese companies (regardless of market
capitalization), including depositary receipts for such companies.
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 or D by
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 and mortgage-backed securities:
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.
MONEY MARKET OBLIGATIONS. Each Fund is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign
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<PAGE> 19
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, its 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 in which 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 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 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 or Warburg. 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
13
<PAGE> 20
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. Subsequent to purchase by a Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Fund should continue to hold the securities.
WARRANTS. Each Fund may invest up to 10% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period.
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" and "Certain Investment Strategies" in this Prospectus.
JAPANESE INVESTMENTS. Investing in Japanese securities may involve the risks
described below associated with investing in foreign securities generally. In
addition, because the Japan Growth Fund and the Japan Small Company Fund invest
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 Growth Fund and the Japan
Small Company Fund should each be considered a vehicle for diversification, but
the Funds themselves are not diversified.
Securities in Japan are denominated and quoted in "yen." Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of 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
14
<PAGE> 21
favorably or unfavorably by fluctuations in the value of Japanese yen relative
to the U.S. dollar.
A significant portion of the assets of each of the Japan Growth Fund and the
Japan Small Company Fund may be invested in securities traded through JASDAQ.
JASDAQ traded securities can be volatile, which may result in a Fund's net asset
value fluctuating in response. Trading of equity securities through the JASDAQ
market is conducted by securities firms in Japan, primarily through an
organization which acts as a "matching agent," as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, 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 a 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 and volatility considerations than JASDAQ.
At December 31, 1997, 831 issues were traded through JASDAQ, having an
aggregate market capitalization in excess of 9.2 trillion yen (approximately
$70.5 billion as of such date). The entry requirements for JASDAQ generally
require a minimum of two million shares outstanding at the time of registration,
a minimum of 200 shareholders (if less than 20 million shares outstanding on the
day of registration) or 400 shareholders (if 20 million or more shares
outstanding on the day of registration), minimum pre-tax profits of 10 yen per
share (approximately $.08 per share as of January 30, 1998) for the prior fiscal
year, and net assets of 200 million yen (approximately $1.6 million as of
January 30, 1998) at the end of the prior fiscal year. JASDAQ has generally
attracted small growth companies or companies whose major shareholders wish to
sell only a small portion of the company's equity.
The Frontier Market is a second over-the-counter market and is under the
jurisdiction of JASDAQ, which is overseen by the Japanese Securities and
Exchange Commission. The Frontier Market has less stringent entry requirements
than those described above for JASDAQ and is designed to enable early stage
companies access to capital markets. Frontier Market companies need not have a
history of earnings, provided their spending on research and development equals
at least 3% of net sales. In addition, companies traded through the Frontier
Market are not required to have two 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
15
<PAGE> 22
investments in companies traded through JASDAQ. The Frontier Market was created
in July 1995, and as of the date of this Prospectus, a limited number of issues
were traded through this market.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States, even
after the recent market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest.
Japan has a parliamentary form of government. In 1993, a coalition government
was formed which, for the first time since 1955, did not include the Liberal
Democratic Party. Since mid-1993, there have been several changes in leadership
in Japan. What, if any, effect the current political situation will have on
prospective regulatory reforms in the Japanese economy 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" in the Statement
of Additional Information.
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. For example, many investments in
emerging markets experienced significant declines in value due to political and
currency volatility in emerging market countries during the latter part of 1997.
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 SMALLER CAPITALIZATION COMPANIES; UNSEASONED
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<PAGE> 23
ISSUERS. Investing in securities of emerging growth, small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers"), which may include JASDAQ and Frontier Market securities,
may involve greater risks than investing in larger, more established companies
since these securities may have limited marketability and, thus, may be more
volatile than securities of larger, more established companies or the market
averages in general. Because such 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. These companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, these companies
are typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning these companies than for larger, more
established ones. Although investing in securities of these 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
Funds may involve a greater degree of risk than an investment in other mutual
funds that seek capital appreciation by investing in more established, larger
companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Funds may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the "Securities Act"), but that can be sold to "qualified institutional buyers"
in accordance with Rule 144A under the Securities 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 Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, each Fund's
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 Board of each Fund will carefully monitor any investments by the
Fund in Rule 144A Securities. The Boards 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. In the case of the Japan Small Company Fund,
all Rule 144A Securities will be limited to 10% of the Fund's net assets,
included within the Fund's limit on illiquid securities.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and
17
<PAGE> 24
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
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.
NON-DIVERSIFIED STATUS. The Emerging Markets Fund, the Japan Growth Fund and
the Japan Small Company 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.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade and
comparable unrated securities (commonly referred to as "junk bonds") (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 securities.
In addition, these securities generally present a higher degree of credit risk.
The risk of loss due to default is significantly greater because these
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, a 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 impact 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.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
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than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment but increases an
investor's risk in the event of a decline in the value of the underlying
security and can result in a complete loss of the amount invested in the
warrant. In addition, the price of a warrant tends to be more volatile than, and
may not correlate exactly to, the price of the underlying security. If the
market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
YEAR 2000 COMPLIANCE. Many services provided to a Fund and their shareholders
by Warburg and certain of its affiliates (collectively, the "Warburg Service
Providers") and the Funds' other service providers rely on the functioning of
their respective computer systems. Many computer systems cannot distinguish the
year 2000 from the year 1900, with resulting potential difficulty in performing
various calculations (the "Year 2000 Issue"). The Year 2000 Issue could
potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Fund
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Funds nor can there be any assurance that the
Year 2000 Issue will not have an adverse effect on the Funds' investments or on
global markets or economies, generally.
The Warburg Service Providers anticipate that their systems and those of the
Funds' other service providers will be adapted in time for the year 2000. To
further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Funds' other major service
providers. The Warburg Service Providers will be monitoring the Year 2000 Issue
in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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A Fund will attempt to purchase securities with the intent of holding them for
investment but may purchase and sell portfolio securities whenever Warburg
believes it to be in the best interests of the 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 higher 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.
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All orders for transactions in securities or options on behalf of a Fund are
placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Funds' 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
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Although there is no intention of doing so during the coming year, each Fund
is authorized to: (i) purchase securities on a when-issued basis and purchase or
sell securities for delayed delivery, (ii) lend portfolio securities, and (iii)
except for the International Equity Fund, enter into reverse repurchase
agreements and dollar rolls. The Emerging Markets Fund, Japan Growth Fund and
Japan Small Company Fund may also invest in asset-backed securities and
mortgaged-backed securities, and the International Equity Fund may invest in
such securities that are issued or guaranteed by the U.S. government, its
agencies or instrumentalities, although each Fund currently anticipates that
during the coming year such investments will each not exceed 5% of net assets.
The Emerging Market Fund, Japan Growth Fund and Japan Small Company Fund may
also invest in zero coupon securities, although each Fund currently anticipates
that during the coming year investments in zero coupon securities will not
exceed 5% of net assets. The Emerging Markets Fund may invest in stand-by
commitments, although the Fund currently anticipates that during the coming year
investments in stand-by commitments will not exceed 5% of net assets. Detailed
information concerning each Fund's strategies and related risks is contained
below and in the Statement of Additional Information.
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
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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 heightened for
investments in securities of issuers in Emerging Markets.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, each Fund may,
but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and swaps. 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 A FUND'S INVESTMENT RISK. Transaction costs and any premiums associated
with these strategies, and any losses incurred, will affect a Fund's net asset
value and performance. Therefore, an investment in a 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 and commodities exchanges and other
applicable regulatory authorities.
Securities Options and Stock Index Options. The International Equity, Japan
Growth and Japan Small Company Funds may each write covered call options, and
the Japan Growth and Japan Small Company Funds 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. Each Fund may also utilize up to 10% of its assets to purchase
options on stocks and debt securities that are traded on U.S.
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and foreign exchanges, as well as over-the-counter ("OTC") options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option on a
security has the right to purchase the underlying security from the writer. In
addition to purchasing and writing options on securities, each Fund may also
utilize up to 10% of its total assets (15% in the case of the Emerging Markets
Fund) 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 a 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 foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts. Although the Funds are limited in the
amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
Currency Exchange Transactions. The 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, Japan Growth and Japan Small Company 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
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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.
Swaps. The Funds may enter into swaps relating to indexes, currencies and
equity interests of foreign issuers without limit. A swap transaction is an
agreement between a Fund and a counterparty to act in accordance with the terms
of the swap contract. Index swaps involve the exchange by the Funds with another
party of the respective amounts payable with respect to a notional principal
amount related to one or more indexes. Currency swaps involve the exchange of
cash flows on a notional amount of two or more currencies based on their
relative future values. An equity swap is an agreement to exchange streams of
payments computed by reference to a notional amount based on the performance of
a basket of stocks or a single stock. Each Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its assets, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Funds may also
use these transactions for speculative purposes, such as to obtain the price
performance of a security without actually purchasing the security in
circumstances where, for example, the subject security is illiquid, is
unavailable for direct investment or available only on less attractive terms.
Swaps have risks associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed.
The Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with a Fund receiving or paying, as the case may be,
only the net amount of the two payments. Swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to swaps is limited to the net amount of payments that a Fund is
contractually obligated to make. If the counterparty to a swap defaults, the
Fund's risk of loss consists of the net amount of payments that a Fund is
contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, Warburg believes such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, a Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
its entitlements with respect to each swap on a daily basis.
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Hedging Considerations. The Funds may engage in options, futures, currency
transactions and swaps for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts, currency exchange
transactions and swaps 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 predict correctly movements in the hedge and the hedged position and
the correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that 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 a position without incurring substantial losses, if at
all. The Fund is also subject to the risk of a default by a counterparty to an
off-exchange transaction.
Asset Coverage. 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 and swaps. The use of these strategies may require that the Fund
maintain cash or liquid securities in a segregated account with its custodian or
a designated sub-custodian to the extent the Fund's obligations with respect to
these strategies are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
SHORT SALES AGAINST THE BOX. Both the Emerging Markets Fund and the Japan
Growth Fund may enter into a short sale of securities such that when the short
position is open the Fund owns an equal amount of the securities sold short or
owns preferred stocks or debt securities, convertible or exchangeable without
payment of further consideration, into an equal number of securities sold short.
This kind of short sale, which is referred to as one "against the box," may be
entered into by the Fund, for example, to lock in a sale price for a security
the Fund does not wish to sell immediately. The Fund will
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deposit, in a segregated account with its custodian or a qualified subcustodian,
the securities sold short or convertible or exchangeable preferred stocks or
debt securities in connection with short sales against the box. Not more than
10% of each Fund's net assets (taken at current value) may be held as collateral
for short sales against the box at any one time.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
The Emerging Markets Fund and the Japan Small Company Fund may each invest up
to 15% of its net assets; the International Equity Fund may invest up to 10% of
its total assets; and the Japan Growth Fund may invest up to 10% of its net
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) certain Rule 144A Securities. 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 a Fund's 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 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 the Statement of Additional
Information.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. Each Fund employs Warburg as investment adviser to the
Fund. Warburg, subject to the control of each Fund's 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 Fund and places orders to purchase or sell
securities on behalf of each such 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.
For the services provided by Warburg, the Emerging Markets Fund, the Japan
Growth Fund and the Japan Small Company 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 and each Fund's
co-administrators may voluntarily waive a portion of their fees
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from time to time and temporarily limit the expenses to be borne by the Fund.
Warburg is a professional investment advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of July 31, 1998, Warburg
managed approximately $21.4 billion of assets, including approximately $11.9
billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has no business
other than being a holding company of Warburg and its affiliates. Lionel I.
Pincus, the managing partner of WP&Co., may be deemed to control both WP&Co. and
Warburg. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
PORTFOLIO MANAGERS. Emerging Markets Fund. Richard H. King and Vincent J.
McBride serve as Co-Portfolio Managers of the Fund and Morid Kamshad, Jun Sung
Kim and Federico D. Laffan serve as Associate Portfolio Managers of the Fund.
Mr. King has been Co-Portfolio Manager of the Fund since its inception and Mr.
McBride has been Co-Portfolio Manager of the Fund since September 1997. Mr.
Kamshad, Mr. Kim and Mr. Laffan have been Associate Portfolio Managers of the
Fund since April 1998.
International Equity Fund. Richard H. King, Harold W. Ehrlich, Vincent J.
McBride and P. Nicholas Edwards serve as Co-Portfolio Managers of the Fund. Mr.
King has been a Portfolio Manager or Co-Portfolio Manager of the Fund since the
Fund's inception. In addition, Mr. Edwards, Mr. Ehrlich and Mr. McBride have
been Co-Portfolio Managers of the Fund since April 1998, prior to which time
they served as the Fund's Associate Portfolio Managers.
Japan Growth Fund. P. Nicholas Edwards has been Portfolio Manager of the Fund
since the Fund's inception.
Japan Small Company Fund. P. Nicholas Edwards has been Co-Portfolio Manager or
Portfolio Manager of the Fund since May 1997.
Mr. King has been a Managing Director of Warburg since 1989. Mr. Edwards, a
Managing Director of Warburg, has been with Warburg since August 1995, before
which time he was a director at Jardine Fleming Investment Advisers, Tokyo. Mr.
Ehrlich, a Managing Director of Warburg, 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, a Senior
Vice President of Warburg, has been with Warburg and the Funds since 1994. Prior
to joining Warburg, Mr. McBride was an international equity analyst at Smith
Barney Inc.
Mr. Kamshad, a Vice President of Warburg, has been with Warburg since June
1997. Prior to joining Warburg, Mr. Kamshad was a senior investment manager at
Pictet Asset Management from 1995 to 1997. From 1994 to 1995 he was an
investment analyst at HSBC Asset Management, prior to which time he was a
business development manager at Air Products and Chemicals-France. Mr. Kim, a
Vice President of Warburg, has been with Warburg since September 1997. Prior to
joining Warburg, Mr. Kim was an investment manager at Asset Korea Ltd. in Seoul
from 1995 to 1997. From 1994 to 1995,
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Mr. Kim was an investment analyst at Baring Securities Ltd. (also in Seoul),
prior to which time he was an assistant investment manager at Koeneman Capital
Management in Singapore. Mr. Laffan, a Vice President of Warburg, has been with
Warburg since May 1997. Prior to joining Warburg, Mr. Laffan was a senior
manager and partner at Green Cay Asset Management from 1996 to 1997, prior to
which time he was a senior portfolio manager and director at Foreign & Colonial
Emerging Markets in London.
CO-ADMINISTRATORS. The Funds employ Counsellors Funds Service, Inc.
("Counsellors Service"), a wholly owned subsidiary of Warburg, as a
coadministrator. 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 and semiannual reports, assisting in the preparation of tax returns 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.
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.
CUSTODIANS. State Street Bank and Trust Company ("State Street") serves as
custodian of each Fund's non-U.S. assets. PNC Bank, National Association ("PNC")
serves as custodian of each Fund's U.S. assets. State Street's principal
business address is 225 Franklin Street, Boston, Massachusetts 02110. Like PFPC,
PNC is a subsidiary of PNC Bank Corp. and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103.
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., an affiliated company ("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. No com-
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pensation is payable by the International Equity Fund to Counsellors Securities
for distribution services. Counsellors Securities receives a fee at an annual
rate equal to .25% of the average daily net assets of each of the Emerging
Markets, Japan Growth and Japan Small Company 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 a 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, the Japan Growth Fund and the Japan
Small Company 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.
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of a Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. 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 Fund shares.
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.
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HOW TO OPEN AN ACCOUNT
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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) 927-2874. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
OR
Overnight to:
BFDS
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, Massachusetts 02171
Completed and signed account applications should be sent to the above.
RETIREMENT PLANS AND UTMA/UGMA ACCOUNTS. For information (i) about investing
in the Funds through a tax-advantaged retirement plan, such as an Individual
Retirement Account ("IRA"), or (ii) about opening a Uniform Transfers to Minors
Act ("UTMA") account or Uniform Gifts to Minors Act ("UGMA") account, an
investor should telephone Warburg Pincus Funds at (800) 927-2874 or write to
Warburg Pincus Funds at an address set forth above. Investors should consult
their own tax advisers about the establishment of retirement plans and UTMA or
UGMA accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account,
including changes to account registration, address and/or privileges, an
investor should telephone Warburg Pincus Funds at (800) 927-2874. Shareholders
are responsible for maintaining current account registration and addresses with
a Fund. No interest will be paid on amounts represented by uncashed distribution
or redemption checks.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Common Shares of each Fund may be purchased either by mail or, with special
advance instructions, by wire and automated clearing house transactions ("ACH on
Demand").
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 or by ACH on Demand,
as described below. For certain retirement plans (described above) and UTMA/UGMA
accounts, the minimum initial investment is $500. The Fund reserves the right to
change the initial and subsequent investment minimum requirements at any time.
In addition, the Fund may, in its sole discretion, waive the initial and
subsequent investment minimum requirements with respect to investors who are
employees of Warburg 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
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<PAGE> 36
increase in minimum investment 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 below. 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. The Fund reserves
the right to suspend the offering of shares for a period of time or to reject
any specific purchase order. In the interest of economy and convenience,
physical certificates representing shares in the Funds are not normally issued.
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 at an 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 prior to the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") (currently 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 at or after the close of regular trading
on the NYSE, 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 payment is 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) 927-2874. Federal funds may be wired using
the following wire address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
[Insert Warburg Pincus Fund name(s) here]
DDA# 9904-649-2
F/F/C: [Account Number and Account Registration]
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<PAGE> 37
If a telephone order is received prior to the close of regular trading on the
NYSE 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. However, if a wire in proper
form that is not preceded by a telephone order is received at or 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.
AUTOMATIC MONTHLY INVESTMENT PLAN AND ACH ON DEMAND. The Automatic Monthly
Investment Plan allows shareholders to authorize a Fund or its agent 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. Shareholders may
also purchase shares by calling Warburg Pincus Funds at (800) 927-2874 on any
business day to request direct debit or credit (for redemptions) of their bank
account through an ACH on Demand transaction.
To establish the Automatic Monthly Investment Plan and/or ACH on Demand
option, obtain a separate application or complete the relevant section of the
account application. Only an account maintained at a financial institution which
is an automated clearing house member may be used, and one common name must
appear on both the shareholder's Fund registration and bank account
registration. Shareholders using this service must satisfy the initial
investment minimum for the Fund prior to or concurrent with the start of any
Automatic Monthly Investment Plan or ACH on Demand transaction. Please contact
Warburg Pincus Funds at (800) 927-2874 for additional information. Investors
should allow a period of up to 30 days in order to implement an Automatic
Investment Plan. The failure to provide complete information could result in
further delays.
If an ACH on Demand transaction request is received prior to the close of
regular trading on the NYSE, the shares will be priced according to the net
asset value of Fund shares on that day and are entitled to dividends and
distributions beginning on that day. If a request is received at or after the
close of regular trading on the NYSE, the shares will be priced at the relevant
Fund's net asset value on the following business day.
TELEPHONE TRANSACTIONS. Unless otherwise indicated on the account application
or if the ACH on Demand option is elected, an investor may request transactions
by telephone. Investors should realize that in conducting transactions by
telephone they may be giving up a measure of security that they may have if they
were to conduct such transactions in writing. Neither a Fund nor its agents will
be liable for following instructions communicated by telephone that it
reasonably believes to be genuine. Reasonable procedures will be em-
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<PAGE> 38
ployed on behalf of each Fund designed to give reasonable assurance 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.
PURCHASES THROUGH INTERMEDIARIES. 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. Generally, these programs require
customers to pay either no or low transaction fees in connection with purchases,
exchanges or redemptions. The Funds are also available through certain
broker-dealers, financial institutions and other industry professionals
(including the brokerage firms offering the programs described above,
collectively, "Service Organizations"), which may impose certain conditions on
their clients or customers that invest in the Funds, which are in addition to or
different than those described in this Prospectus, and may charge their clients
or customers direct fees. Certain features of the Funds, such as the initial and
subsequent investment minimums, redemption fees and certain trading
restrictions, may be modified or waived by Service Organizations. Service
Organizations may impose transaction or administrative charges or other direct
fees, which charges and fees would not be imposed if Fund shares are purchased
directly from the Funds. Therefore, a client or customer should contact the
Service Organization acting on his behalf concerning the fees (if any) charged
in connection with a purchase, exchange or redemption of Fund shares and should
read this Prospectus in light of the terms governing his accounts with the
Service Organization. Service Organizations will be responsible for promptly
transmitting client or customer purchase and redemption orders to the Funds in
accordance with their agreements with the Funds and with clients or customers.
Service Organizations or, if applicable, their designees may enter confirmed
purchase or redemption orders on behalf of clients and 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 Service Organization could be held
liable for resulting fees or losses. A Fund may be deemed to have received a
purchase or redemption order when a Service Organization, or, if applicable, its
authorized designee, accepts the order. Such orders received by a Fund in proper
form will be priced at the Fund's net asset value next computed after they are
accepted by the Service Organization or its authorized designee.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Service Organizations and
certain recordkeeping organizations a fee of up to .40% (the "Service Fee") of
the average annual value of accounts with the Funds maintained by such Service
Organizations or recordkeepers. A portion of the Service Fee may be borne by the
Funds as a transfer agency fee. In addition, a Service Organiza-
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<PAGE> 39
tion or recordkeeper may directly or indirectly pay a portion of its Service Fee
to the Funds' custodian or transfer agent for costs related to accounts of its
clients or customers. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
GENERAL. Each Fund reserves the right to reject any specific purchase order,
including certain purchases made by exchange (see "How to Redeem and Exchange
Shares -- Exchange of Shares" below). Purchase orders may be refused if, in
Warburg's judgment, a Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. A Fund may discontinue sales of its shares if
management believes that a substantial further increase in assets may adversely
affect that Fund's ability to achieve its investment objective. In such event,
however, it is anticipated that existing shareholders would be permitted to
continue to authorize investment in such Fund and to reinvest any dividends or
capital gains distributions.
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).
Common Shares of the Funds may either be redeemed by mail or by telephone. If
an investor desires to redeem his shares by mail, a written request for
redemption should be sent to Warburg Pincus Funds at an 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. Payment of redemption proceeds may be delayed in
connection with account changes. 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) 927-2874. An investor making a telephone withdrawal should state
(i) the name of the Fund, (ii) the account number of the Fund, (iii) the name of
the investor(s) appearing on the Fund's records, (iv) the amount to be withdrawn
and (v) the name of the person requesting the redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. 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 imple-
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<PAGE> 40
ment. 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
an address shown above under "How to Open an Account." Although each Fund will
redeem shares purchased by check, through the Automatic Monthly Investment Plan
or by ACH on Demand before the check or funds clear, payments of the redemption
proceeds will be delayed for up to five days (for funds received through the
Automatic Monthly Investment Plan or by ACH on Demand) or up to ten days (for
check purchases) from the date of purchase. Investors should consider purchasing
shares using a certified or bank check, money order or federal funds wire if
they anticipate an immediate need for redemption proceeds.
If a redemption order is received by a Fund or its agent 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 at or after the close of regular trading on the NYSE, the redemption
order will be effected at the net asset value as next determined. Except as
noted above, redemption proceeds will normally be mailed or wired to an investor
on the next business day following the date a redemption order is effected. If,
however, in the judgment of Warburg, immediate payment would adversely affect 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 a retirement plan or UTMA 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.
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)
927-2874.
EXCHANGE OF SHARES. An investor may exchange Common Shares of a Fund
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<PAGE> 41
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 or its
agent prior to the close of regular trading on the NYSE, the exchange will be
made at each fund's net asset value determined at the end of that business day.
Exchanges will be effected without a sales charge but must satisfy the minimum
dollar amount necessary for new purchases. A Fund may refuse exchange purchases
at any time without prior notice. 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 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 GLOBAL FIXED INCOME FUND -- a bond fund investing in a
portfolio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
- - WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return through a
combination of long-term growth of capital and current income consistent with
preservation of capital through diversified investments in equity and debt
securities;
- - WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term growth
of capital and income and a reasonable current return;
- - WARBURG PINCUS CAPITAL APPRECIATION FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in a broadly diversified portfolio
of equity securities of domestic companies;
- - WARBURG PINCUS EMERGING GROWTH FUND -- an equity fund seeking maximum capital
appreciation by investing in emerging growth companies;
- - WARBURG PINCUS SMALL COMPANY VALUE FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of small
companies;
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<PAGE> 42
- - WARBURG PINCUS SMALL COMPANY GROWTH FUND* -- an equity fund seeking capital
growth by investing in equity securities of small-sized domestic companies;
- - WARBURG PINCUS HEALTH SCIENCES FUND -- an equity fund seeking capital
appreciation by investing primarily in equity and debt securities of health
sciences 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;
- - WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND -- an equity fund seeking
long-term growth of capital by investing principally in equity securities of
U.S. and foreign issuers in their post-venture capital stage of development;
- - WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND -- an equity fund seeking
capital appreciation by investing in a portfolio of equity securities of
non-United States small-sized companies; and
- - WARBURG PINCUS MAJOR FOREIGN MARKETS FUND -- an equity fund seeking long-term
capital appreciation by investing in equity securities of issuers consisting
of companies in major foreign securities markets.
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) 927-2874.
Each Fund reserves the right to refuse exchange purchases by any person or
group if, in Warburg's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when a Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. Each Fund reserves the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
- ---------------
* Warburg Pincus Small Company Growth Fund is currently closed to certain new
investors; the Small Company Growth Fund's prospectus describes the types of
investors that may purchase shares.
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<PAGE> 43
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
and net realized short-term and long-term capital gains annually and pays them
in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs 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 an
address set forth under "How to Open an Account" or by calling Warburg Pincus
Funds at (800) 927-2874.
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.
Dividends paid from net investment income and distributions derived from net
realized short-term capital gains are taxable to investors as ordinary income
whether received in cash or reinvested in additional Fund shares. Distributions
derived from net realized long-term capital gains will be taxable to investors
as long-term capital gains, regardless of how long investors have held Fund
shares or whether such distributions are received in cash or reinvested in Fund
shares. As a general rule, an investor's gain or loss on a sale or redemption of
Fund shares will be a long-term capital gain or loss if the investor has held
the shares for more than one year and will be a short-term capital gain or loss
if the investor has held the 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.
The Taxpayer Relief Act of 1997 made certain changes to the Code with respect
to taxation of long-term capital gains earned by taxpayers other than a
corporation. In general, for sales made after May 6, 1997, the maximum tax rate
for individual taxpayers on net long-term capital gains is lowered to 20%
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<PAGE> 44
for most assets (including long-term capital gains recognized by shareholders on
the sale or redemption of Fund shares that were held as capital assets). This
20% rate applies to sales on or after July 29, 1997 only if the asset was held
for more than 18 months at the time of disposition. Capital gains on the
disposition of assets on or after July 29, 1997 held for more than one year and
up to 18 months at the time of disposition will be taxed as "mid-term gain" at a
maximum rate of 28%. A rate of 18% instead of 20% will apply after December 31,
2000 for assets held for more than five years. However, the 18% rate applies
only to assets acquired after December 31, 2000 unless the taxpayer elects to
treat an asset held prior to such date as sold for fair market value on January
1, 2001. In the case of individuals whose ordinary income is taxed at a 15%
rate, the 20% rate is reduced to 10% and the 10% rate for assets held for more
than five years is reduced to 8%. Each Fund will provide information relating to
that portion of a "capital gain dividend" that may be treated by investors as
eligible for the reduced capital gains rate for capital assets held for more
than 18 months.
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. A 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 may qualify for the
dividends received deduction for corporations to the extent they are derived
from dividends attributable to certain types of stock issued by U.S. domestic
corporations.
Dividends and interest received by the Funds 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 a
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 consists 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. 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, each 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.
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<PAGE> 45
Special Tax Matters Relating to the Emerging Markets Fund and the Japan Growth
Fund. Certain provisions of the Code may require that a gain recognized by a
Fund upon the closing of a short sale be treated as a short-term capital gain,
and that a loss recognized by the Fund upon the closing of a short sale be
treated as a long-term capital loss, regardless of the amount of time that the
Fund held the securities used to close the short sale. A Fund's use of short
sales may also affect the holding periods of certain securities held by the Fund
if such securities are "substantially identical" to securities used by the Fund
to close the short sale. The Funds' short selling activities will not result in
unrelated business taxable income to a tax-exempt investor.
Special Tax Matters Relating to the Japan Growth Fund and the Japan Small
Company Fund. In the opinion of Japanese counsel for the Funds, the operations
of the Funds will not subject a 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 a
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, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, 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.
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<PAGE> 46
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Options and 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. Further information regarding valuation 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 a 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. The Funds'
Statement of Additional Information describes the method used to determine the
total return. Current total return figures may be obtained by calling Warburg
40
<PAGE> 47
Pincus Funds at (800) 927-2874.
Each 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,
Australasia, Far East ("EAFE") Index and/or other indexes prepared by Morgan
Stanley relating to securities represented in the Fund, 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 Growth Fund and the Japan Small
Company 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 Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various time periods. 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.
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. In addition, a Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market and industry benchmarks. Each Fund may also discuss measures
of risk, the continuum of risk and return relating to different investments and
the potential impact of foreign stocks on a portfolio otherwise composed of
domestic securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. The Emerging Markets Fund was incorporated on December 23, 1993
under the laws of the State of Maryland under the name
41
<PAGE> 48
"Warburg, Pincus Emerging Markets Fund, Inc." 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 the
Fund amended its charter to change its name to "Warburg, Pincus International
Equity Fund, Inc." The Japan Growth Fund was incorporated on October 10, 1995
under the laws of the State of Maryland under the name "Warburg, Pincus Japan
Growth Fund, Inc." The Japan Small Company Fund was incorporated on July 26,
1994 under the laws of the State of Maryland under the name "Warburg, Pincus
Japan OTC Fund, Inc." On August 21, 1998, the Fund amended its charter to change
its name to "Warburg, Pincus Japan Small Company Fund, Inc."
Each Fund's charter authorizes its Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares and two billion shares are
designated 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. A 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. Each Fund offers a separate class of shares, the
Advisor Shares, pursuant to a separate prospectus. Individual investors may only
purchase Advisor Shares through institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and financial intermediaries. Shares of each class represent equal pro
rata interests in the respective Fund and accrue dividends and calculate net
asset value and performance quotations in the same manner. Because of the higher
fees paid by the Advisor Shares, the total return on such shares can be expected
to be lower than the total return on Common Shares. Investors may obtain
information concerning the Advisor Shares from their investment professional or
by calling Counsellors Securities at (800) 369-2728.
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.
42
<PAGE> 49
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions or investment made through the Automatic Monthly
Investment Plan). 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.
Periodic listings of the investment securities held by the Fund, as well as
certain statistical characteristics of the Fund, may be obtained by calling
Warburg Pincus Funds at (800) 927-2874 or on the Warburg Pincus Funds Web site
at www.warburg.com.
The Common Share 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.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE 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.
43
<PAGE> 50
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 51
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Funds' Expenses...................................... 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 6
Portfolio Investments.................................... 11
Risk Factors and Special Considerations.................. 14
Portfolio Transactions and Turnover Rate................. 19
Certain Investment Strategies............................ 20
Investment Guidelines.................................... 25
Management of the Funds.................................. 25
How to Open an Account................................... 29
How to Purchase Shares................................... 29
How to Redeem and Exchange Shares........................ 33
Dividends, Distributions and Taxes....................... 37
Net Asset Value.......................................... 39
Performance.............................................. 40
General Information...................................... 41
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)
www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPISF-1-0898
<PAGE> 53
PROSPECTUS
WARBURG PINCUS ADVISOR FUNDS AUGUST 24, 1998
J
JAPAN SMALL COMPANY
FUND
[WARBURG PINCUS LOGO]
ASSET MANAGEMENT
<PAGE> 54
PROSPECTUS August 24, 1998
Warburg Pincus Advisor Funds is a family of open-end mutual funds that are
offered to investors who wish to buy shares through an investment professional,
to financial institutions investing on behalf of their customers and to
retirement plans that elect to make one or more Advisor Funds an investment
option for participants in the plans. One Advisor Fund is described in this
Prospectus:
WARBURG PINCUS JAPAN SMALL COMPANY FUND seeks long-term capital appreciation by
investing in a portfolio of equity securities of small-sized Japanese companies.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See "Risk Factors and Special
Considerations."
The Fund currently offers two classes of shares, one of which, the Advisor
Shares, is offered pursuant to this Prospectus. The Advisor Shares of the Fund,
as well as Advisor Shares of certain other Warburg Pincus-advised funds, are
sold under the name "Warburg Pincus Advisor Funds." Individual investors may
purchase Advisor Shares only through institutional shareholder of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries ("Institutions"). The Advisor Shares
impose a 12b-1 fee of .50% per annum, which is the economic equivalent of a
sales charge. The Funds' 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 has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is also available to
investors without charge by calling the Fund at (800) 369-2728. Information
regarding the status of shareholder accounts may also be obtained by calling the
Fund at the same number. Warburg Pincus Funds maintains a Web site at
www.warburg.com. The Statement of Additional Information, as amended or
supplemented from time to time, bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 55
THE FUND'S EXPENSES
- --------------------------------------------------------------------------------
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See "General Information." Because of the higher fees paid by
Advisor Shares, the total return on such shares can be expected to be lower than
the total return on Common Shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)........................................ 0
Annual Fund Operating Expenses (as a percentage of average
net assets)
Management Fees........................................... .39%
12b-1 Fees................................................ .50%*
Other Expenses............................................ 1.11%
----
Total Fund Operating Expenses (after fee waivers and
expense reimbursements)+................................ 2.00%
====
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................................................... $ 20
3 years.................................................. $ 63
5 years.................................................. $108
10 years.................................................. $233
</TABLE>
- --------------------------------------------------------------------------------
* 12b-1 fees are .50% out of a maximum .75% authorized under the Advisor
Shares' Distribution Plan.
+ Annual Fund Operating Expenses for the Fund are based on actual expenses for
the fiscal year ended October 31, 1997, net of any applicable fee waivers or
expense reimbursements. Absent such waivers and/or reimbursements, Management
Fees for the Fund would have equalled 1.25%, Other Expenses would have
equalled 6.94%, and Total Fund Operating Expenses would have equalled 8.69%.
The investment adviser and co-administrator are under no obligation to
continue waivers and/or reimbursements.
----------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an Advisor Shareholder of the Fund. Institutions also
may charge their clients fees in connection with investments in the Advisor
Shares, which fees are not reflected in the table. The Example should not be
considered a representation of past or future expenses; actual Fund expenses may
be greater or less than those shown. Moreover, while the Example assumes a 5%
annual return, the Fund's actual performance will vary and may result in a
return greater or less than 5%. Long-term shareholders may pay more than the
economic equivalent of the maximum sales charges permitted by the National
Association of Securities Dealers, Inc.
2
<PAGE> 56
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN ADVISOR SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information regarding the Fund for the fiscal period November 1,
1997 through April 30, 1998 (unaudited) has been derived from the Fund's
financial statement and for the three fiscal years ended October 31, 1997 and
the fiscal period ended October 31, 1994 has been derived from information
audited by PricewaterhouseCoopers L.L.P., independent accountants, whose report
dated December 19, 1997 is incorporated by reference in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the annual and semi-annual reports, dated October 31, 1997 and
April 30, 1998, respectively, copies of which may be obtained without charge by
calling the Fund at (800) 369-2728.
<TABLE>
<CAPTION>
For the Period
For the Period For the Year Ended September 30, 1994
November 1, 1997 October 31, (Commencement of
through -------------------------- Operations) through
April 30, 1998 1997** 1996 1995 October 31, 1994
---------------- ------- ------- ------ -------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $6.37 $8.45 $9.08 $9.85 $10.00
------- ------- ------- ------ ------
Income from Investment
Operations:
Net Investment Income
(Loss)..................... (0.97) 0.35 (0.13) (0.02) 0.00
Net Gain (Loss) from
Securities and Foreign
Currency Related Items
(both realized and
unrealized)................ 0.90 (2.43) (0.14) (0.75) (0.15)
------- ------- ------- ------ ------
Total from Investment
Operations................. (0.07) (2.08) (0.27) 0.77 (0.15)
------- ------- ------- ------ ------
Less Distributions:
Dividends from Net Investment
Income..................... (0.00) 0.00 (0.36) 0.00 0.00
Distributions from Realized
Gains...................... (0.12) 0.00 0.00 0.00 0.00
------- ------- ------- ------ ------
Total Distributions.......... (0.12) 0.00 (0.36) 0.00 0.00
------- ------- ------- ------ ------
NET ASSET VALUE, END OF
PERIOD....................... $6.18 $6.37 $8.45 $9.08 $9.85
======= ======= ======= ====== ======
Total Return................... (.84%)+ (24.62%) (3.17%) (7.82%) (1.50%)+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(000s)....................... $1 $3 $1 $1 $1
Ratios to Average Daily Net
Assets:
Operating Expenses........... 2.00%*@ 2.00%@ 2.01%@ 1.31% 1.18%*
Net Investment Income
(Loss)..................... (1.16%)* (1.10%) (1.57%) (.19%) 0.12%*
Decrease reflected in above
operating expense ratios
due to waivers/
reimbursements............. 6.70%* 6.69% .28% 1.83% 4.74%*
Portfolio Turnover Rate........ 16.27%+ 100.60% 95.23% 82.98% .00%
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Advisor Shares' expenses by .00%, .00% and .01%, for the period ended April
30, 1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively. The Advisor Shares' operating expense ratio after reflecting
these arrangements were 2.00%, 2.00% and 2.00% for the period ended April 30,
1998, and for the years ended October 31, 1997 and October 31, 1996,
respectively.
+ Non-annualized.
* Annualized.
** Effective at the close of business on May 23, 1997, the investment adviser
of the Fund ceased to engage a sub-investment adviser to the Fund and
assumed all of the Fund's investment management responsibilities.
3
<PAGE> 57
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
the Fund. Any investment involves risk and, therefore, there can be no assurance
that the Fund will achieve its investment objective. See "Portfolio Investments"
and "Certain Investment Strategies" for descriptions of certain types of
investments the Fund may make.
The Fund 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 equity securities of small-sized Japanese companies that
present attractive opportunities for appreciation.
The Fund intends to invest, under normal market conditions, at least 65% of
its total assets in common stocks, warrants and securities convertible into or
exchangeable for common stocks of small-sized Japanese companies, whether traded
on an exchange or over-the-counter. The Fund considers a "small-sized" Japanese
company to be one whose market capitalization, measured at the time the Fund
purchases a security of that company, is no larger than the largest market
capitalization of companies represented in either (i) the JASDAQ Index, (ii) the
Second Section of the Tokyo Stock Exchange or (iii) the smaller one-half
(deciles 6 through 10) of the First Section of the Tokyo Stock Exchange (the
"Small-Cap Indexes"). Companies whose market capitalization no longer meets this
definition after purchase continue to be considered small companies for purposes
of the Fund's policy of investing at least 65% of its assets in small-sized
Japanese companies.
The portion of the Funds' assets that is not invested in equity securities of
small-sized Japanese companies may be invested in securities of other Japanese
issuers or securities of companies in other Asian markets, in addition to the
other instruments described below. No more than 10% of the Fund's total assets
will be invested in securities of companies in any one Asian country (other than
Japan). 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. In appropriate circumstances, such as when a direct investment by the
Fund 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 Asia. The Fund will not invest in securities of non-Asian issuers, except
that the Fund may, for cash management purposes, invest up to 20% of its total
assets in U.S. and foreign money market obligations. The Fund may also, for
temporary defensive purposes, invest without limit in U.S. debt securities,
money market obligations or liquid securities of Japanese companies (regardless
of market capitalization), including depositary receipts for such companies.
Currently, there are eight exchanges in Japan -- the Tokyo, Osaka, Nagoya,
4
<PAGE> 58
Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo exchanges -- and two over-
the-counter markets -- JASDAQ and the Japanese Second Section OTC Market (the
"Frontier Market"). Like the Tokyo Exchange, the Osaka and Nagoya exchanges also
have second sections. The Fund considers Japanese companies to be companies (A)
organized under the laws of Japan, (B) whose principal business activities are
conducted in Japan and which derive at least 50% of their revenues or profits
from goods produced or sold, investments made, or services performed in Japan,
or have at least 50% of their assets in Japan, or (C) which have issued
securities that are traded principally in Japan. Determinations as to the
eligibility of Japanese companies under the foregoing definition will be made by
Warburg based on publicly available information and inquiries made to the
companies.
The Fund may involve a greater degree of risk than an investment in other
mutual funds that seek capital appreciation by investing in better-known, larger
companies. From time to time, the Fund may hedge part or all of its exposure to
the Japanese yen, thereby reducing or substantially eliminating any favorable or
unfavorable impact of changes in the value of the yen in relation to the U.S.
dollar.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
INVESTMENT GRADE DEBT. The Fund may invest up to 35% of its total assets in
investment grade debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg
Pincus Asset Management, 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 Services ("S&P") or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities, although Warburg will
consider such event in its determination of whether the Fund should continue
5
<PAGE> 59
to hold the securities. The Fund does not currently intend during the coming
year to hold more than 5% of its net assets in securities that have been
downgraded below investment grade.
When Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in U.S. debt securities, money market
obligations or liquid securities of Japanese companies (regardless of market
capitalization), including depository receipts for such companies.
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,
its agencies or instrumentalities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic or foreign banks,
domestic savings and loans and similar institutions) that are high quality
investments or, if unrated, deemed by Warburg to be high quality investments;
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. The Fund may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain non-
bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement,
the Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which 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 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be benefi-
6
<PAGE> 60
cial 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 or Warburg. 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. Subsequent to purchase by the Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Fund should continue to hold the securities. The Fund will invest
only in convertible securities rated investment grade at the time of purchase or
deemed to be of equivalent quality. The Fund does not currently intend during
the coming year to hold more than 5% of its net assets in the aggregate of
investment grade convertible securities and investment grade debt downgraded
below investment grade subsequent to acquisition by the Fund.
WARRANTS. The Fund may invest up to 10% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to the Fund's investments, see "Portfolio
Investments" and "Certain Investment Strategies" in this Prospectus.
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
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subject to general economic and political conditions in Japan. The Fund should
be considered a vehicle for diversification, but the Fund itself is not
diversified.
Securities in Japan are denominated and quoted in "yen." Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by fluctuations in the value of Japanese yen relative to the U.S.
dollar.
A significant portion of the Fund's assets may be invested in securities
traded through JASDAQ. JASDAQ traded securities can be volatile, which may
result in the Fund's net asset value fluctuating in response. Trading of equity
securities through the JASDAQ market is conducted by securities firms in Japan,
primarily through an organization which acts as a "matching agent," as opposed
to a recognized stock exchange. Consequently, securities traded through JASDAQ
may, 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 and
volatility considerations than JASDAQ.
At December 31, 1997, 831 issues were traded through JASDAQ, having an
aggregate market capitalization of approximately 9.2 trillion yen (approximately
$70.5 billion as of such date). The entry requirements for JASDAQ generally
require a minimum of two million shares outstanding at the time of registration,
a minimum of 200 shareholders (if less than 20 million shares outstanding on the
day of registration) or 400 shareholders (if 20 million or more shares
outstanding on the day of registration), minimum pre-tax profits of 10 yen per
share (approximately $.08 per share as of January 30, 1998) for the prior fiscal
year and net assets of 200 million yen (approximately $1.6 million as of January
30, 1998) at the end of the prior fiscal year. JASDAQ has generally attracted
small growth companies or companies whose major shareholders wish to sell only a
small portion of the company's equity.
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The Frontier Market is a second over-the-counter market and is under the
jurisdiction of JASDAQ, which is overseen by the Japanese Securities and
Exchange Commission. The Frontier Market has less stringent entry requirements
than those described above for JASDAQ and is designed to enable early stage
companies access to capital markets. Frontier Market companies need not have a
history of earnings, provided their spending on research and development equals
at least 3% of net sales. In addition, companies traded through the Frontier
Market are not required to have two 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. The Frontier Market was created in July 1995, and as of the date of this
Prospectus, a limited number of issues were traded through this market.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States, even
after the recent market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest.
Japan has a parliamentary form of government. In 1993, a coalition government
was formed which, for the first time since 1955, did not include the Liberal
Democratic Party. Since mid-1993, there have been several changes in leadership
in Japan. What, if any, effect the current political situation will have on
prospective regulatory reforms in the Japanese economy cannot be predicted.
Recent and future developments in Japan and neighboring Asian countries may lead
to changes in policy that might adversely affect the Fund. For additional
information, see "Japan and its Securities Markets" in 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 generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. For example, many investments in
emerging markets experienced significant declines in value due to political
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and currency volatility in emerging market countries during the latter part of
1997. 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 SMALLER CAPITALIZATION COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth, small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers"), which may include JASDAQ and Frontier Market securities,
may involve greater risks than investing in larger, more established companies
since these securities may have limited marketability and, thus, may be more
volatile than securities of larger, more established companies or the market
averages in general. Because such 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. These companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, these companies
are typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning these companies than for larger, more
established ones. Although investing in securities of these 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 more established, larger
companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the "Securities Act"), but that can be sold to "qualified institutional buyers"
in accordance with Rule 144A under the Securities Act ("Rule 144A Securities").
An investment in Rule 144A Securities will be considered illiquid and therefore
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Board determines on an ongoing basis that an adequate trading market exists
for the security. In addition to an adequate trading market, the Board will also
consider factors such as trading activity, availability of reliable price
information and other relevant information in determining whether a Rule 144A
Security is liquid. This investment practice could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become uninterested for a time in purchasing Rule 144A Securities. The
Board will carefully monitor any investments by the
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Fund in Rule 144A Securities. The Board may adopt guidelines and delegate to
Warburg the daily function of determining and monitoring the liquidity of Rule
144A Securities, although the Board will retain ultimate responsibility for any
determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and the
Fund may take longer to liquidate these positions than would be the case for
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment but increases an
investor's risk in the event of a decline in the value of the underlying
security and can result in a complete loss in the amount invested in the
warrant. In addition, the price of a warrant tends to be more volatile than, and
may not correlate exactly to, the price of the underlying security. If the
market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
YEAR 2000 COMPLIANCE. Many services provided to the Fund and its shareholders
by Warburg and certain of its affiliates (collectively, the "Warburg Service
Providers") and the Fund's other service providers rely on the functioning of
their respective computer systems. Many computer systems cannot
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distinguish the year 2000 from the year 1900, with resulting potential
difficulty in performing various calculations (the "Year 2000 Issue"). The Year
2000 Issue could potentially have an adverse impact on the handling of security
trades, the payment of interest and dividends, pricing, account services and
other Fund operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Fund nor can there be any assurance that the
Year 2000 Issue will not have an adverse effect on the Fund's investments or on
global markets or economies, generally.
The Warburg Service Providers anticipate that their systems and those of the
Fund's other service providers will be adapted in time for the year 2000. To
further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Fund's other major service
providers. The Warburg Service Providers will be monitoring the Year 2000 Issue
in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
The Fund will attempt to purchase securities with the intent of holding them
for investment but may purchase and sell portfolio securities whenever Warburg
believes it to be in the best interests of the Fund. The Fund will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with its investment objective and policies. High portfolio turnover
rates (100% or more) may result in higher 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 Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Fund's distributor ("Counsellors Securities"). The Fund may
utilize Counsellors Securities in connection with a purchase or sale of
securities when Warburg believes that the charge for the transaction does not
exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
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Although there is no intention of doing so during the coming year, the Fund is
authorized to: (i) purchase securities on a when-issued basis and purchase or
sell securities for delayed delivery, (ii) lend portfolio securities, and (iii)
enter into reverse repurchase agreements and dollar rolls. The Fund may also
invest in asset-backed securities, mortgage-backed securities and zero coupon
securities, although the Fund currently anticipates that during the
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coming year such investments will each not exceed 5% of net assets. Detailed
information concerning the Fund's strategies and related risks is contained
below and in the 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 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.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, the Fund may,
but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and swaps. These strategies, commonly
referred to as "derivatives," may be used (i) for the purpose of hedging
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against a decline in value of the Fund's current or anticipated portfolio
holdings, (ii) as a substitute for purchasing or selling portfolio securities or
(iii) to seek to generate income to offset expenses or increase return.
TRANSACTIONS THAT ARE NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE
AND MAY SERVE TO INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any
premiums associated with these strategies, and any losses incurred, will affect
the Fund's net asset value and performance. Therefore, an investment in the Fund
may involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by securities and commodities exchanges
and other applicable regulatory authorities.
Securities Options and Stock Index Options. The Fund may write put and call
options on up to 25% of the net asset value of the stock and debt securities in
its portfolio and will realize fees (referred to as "premiums") for granting the
rights evidenced by the options; the Fund may also utilize up to 10% of its
assets to purchase options on stocks and debt securities that are traded on U.S.
and foreign exchanges, as well as over-the-counter ("OTC") options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option on a
security has the right to purchase the underlying security from the writer. In
addition to purchasing and writing options on securities, the Fund may also
utilize up to 10% of its total assets to purchase exchange-listed and OTC put
and call options on stock indexes, and may also write such options. A stock
index measures the movement of a certain group of stocks by assigning relative
values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
Futures Contracts and Related Options. The Fund may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
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Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts. Although the Fund is limited in the
amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
Currency Exchange Transactions. The Fund will conduct its currency exchange
transactions either (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on futures contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing exchange-
traded currency options. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date at a price set at the time
of the contract. An option on a foreign currency operates similarly to an option
on a security. Risks associated with currency forward contracts and purchasing
currency options are similar to those described in this Prospectus for futures
contracts and securities and stock index options. In addition, the use of
currency transactions could result in losses from the imposition of foreign
exchange controls, suspension of settlement or other governmental actions or
unexpected events.
Swaps. The Fund may enter into swaps relating to indexes, currencies and
equity interests of foreign issuers without limit. A swap transaction is an
agreement between the Fund and a counterparty to act in accordance with the
terms of the swap contract. Index swaps involve the exchange by the Fund with
another party of the respective amounts payable with respect to a notional
principal amount related to one or more indexes. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values. An equity swap is an agreement to exchange streams
of payments computed by reference to a notional amount based on the performance
of a basket of stocks or a single stock. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its assets, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund may also
use these transactions for speculative purposes, such as to obtain the price
performance of a security without actually purchasing the security in
circumstances where, for example, the subject security is illiquid, is
unavailable for direct investment or available only on less attractive terms.
Swaps have risks associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
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specified in the agreement, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps is limited to the net amount of payments that a Fund
is contractually obligated to make. If the counterparty to a swap defaults, the
Fund's risk of loss consists of the net amount of payments that a Fund is
contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, Warburg believes such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, the Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
its entitlements with respect to each swap on a daily basis.
Hedging Considerations. The Fund may engage in options, futures, currency
transactions and swaps for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts, currency exchange
transactions and swaps 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 predict correctly movements in the hedge and the hedged position and
the correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that the Fund engages in the
strategies described above, the Fund may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the Fund
may be unable to close out a position without incurring substantial losses, if
at all. The Fund is also subject to the risk of a default by a counterparty to
an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable regulatory requirements
designed to eliminate any potential for leverage with respect to options written
by the Fund on securities and indexes; currency, interest rate and stock index
futures contracts and options on these futures contracts; and forward currency
contracts and swaps. The use of these strategies may require that the Fund
maintain cash or liquid securities in a segregated account with its custodian or
a designated sub-custodian to the extent the Fund's obligations with respect to
these strategies are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies.
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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
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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. The Fund may
borrow from banks for temporary or emergency purposes, such as meeting
anticipated redemption requests, provided that borrowings by the Fund may not
exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of the Fund's net assets, the Fund
will not make any investments (including roll-overs). Except for the limitations
on borrowing, the investment guidelines set forth in this paragraph may be
changed at any time without shareholder consent by vote of the Board, subject to
the limitations contained in the 1940 Act. A complete list of investment
restrictions that the Fund has adopted identifying additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. The Fund employs Warburg as investment adviser to the
Fund. Warburg, subject to the control of the Fund's officers and the Board,
manages the investment and reinvestment of the assets of the Fund in accordance
with the Fund's investment objective and stated investment policies. Warburg
makes investment decisions for the Fund and places orders to purchase or sell
securities on behalf of the Fund. Warburg also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund with
office space, furnishings and equipment.
The Fund pays Warburg an advisory fee calculated at an annual rate of 1.25% of
the Fund's average daily net assets. Warburg and the Fund's co-administrators
may voluntarily waive a portion of their fees from time to time and temporarily
limit the expenses to be borne by the Fund.
Warburg is a professional investment advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of July 31, 1998, Warburg
managed approximately $21.4 billion of assets, including approximately $11.9
billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."),
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which has no business other than being a holding company of Warburg and its
affiliates. Lionel I. Pincus, the managing partner of WP&Co., may be deemed to
control both WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New
York, New York 10017-3147.
PORTFOLIO MANAGER. P. Nicholas Edwards has been Co-Portfolio Manager or
Portfolio Manager of the Fund since May 1997. Mr. Edwards, a Managing Director
of Warburg, has been with Warburg since August 1995, before which time he was a
director at Jardine Fleming Investment Advisers, Tokyo.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
("Counsellors Service"), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual and semiannual reports, assisting in the preparation of tax returns and
monitoring and developing compliance procedures for the Fund. As compensation,
the Fund pays Counsellors Service a fee calculated at an annual rate of .10% of
its average daily net assets.
The Fund employs PFPC 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.
CUSTODIANS. State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's non-U.S. assets, and PNC Bank, National Association
("PNC") serves as custodian of the Fund's U.S. assets. State Street's principal
business address is 225 Franklin Street, Boston, Massachusetts 02110. Like PFPC,
PNC is a subsidiary of PNC Bank Corp. and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Fund. It has delegated to
Boston Financial Data Services, Inc., an affiliated company ("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
Fund. Counsellors Securities is a wholly owned subsidiary of Warburg and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No com-
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<PAGE> 72
pensation is payable by the Advisor Shares to Counsellors Securities for
distribution services.
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. 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 Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO OPEN AN ACCOUNT
- --------------------------------------------------------------------------------
In order to invest in the Fund, an account application must first be completed
and signed. To obtain an application, telephone the Fund at (800) 369-2728. An
application may also be obtained by writing to:
Warburg Pincus Advisor Funds
P.O. Box 4906
Grand Central Station
New York, New York 10163
Attn: Institutional Services
OR
Overnight to:
Warburg Pincus Advisor Funds
335 Madison Avenue
15th Floor
New York, New York 10017
Attn: Institutional Services
Completed and signed applications should be mailed to the above. References in
this Prospectus to shareholders or investors also include Institutions which may
act as record holders of the Advisor Shares.
UTMA/UGMA ACCOUNTS. For information about opening a Uniform Transfers to
Minors Act ("UTMA") account or Uniform Gifts to Minors Act ("UGMA") account, an
Institution should telephone the Fund at (800) 369-2728 or write to the Fund at
an address set forth above. Individual
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<PAGE> 73
investors should consult their own tax advisors about the establishment of UTMA
or UGMA accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account,
including changes to account registration, address and/or privileges, telephone
the Fund at (800) 369-2728. Institutions and their customers are responsible for
maintaining current account registrations and addresses with the Fund. No
interest will be paid on amounts represented by uncashed distribution or
redemption checks.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Individual investors may only purchase Warburg Pincus Advisor Fund shares
through Institutions. The Fund reserves the right to make Advisor Shares
available to other investors in the future.
Each Institution separately determines the rules applicable to its customers
investing in the Fund, including minimum initial and subsequent investment
requirements and the procedures to be followed to effect purchases, redemptions
and exchanges of Advisor Shares. There is no minimum amount of initial or
subsequent purchases of Advisor Shares imposed on Institutions, although the
Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Advisor Shares may be purchased at any time by mail or by wire in the manner
outlined below. Wire payments for initial and subsequent investments should be
preceded by an order placed with the Fund and should clearly indicate the
account number and the name of the Fund in which shares are being purchased. In
the interest of economy and convenience, physical certificates representing
shares in the Fund are not normally issued.
BY MAIL. To purchase Advisor Shares by mail, a check or money order made
payable to the Fund or Warburg Pincus Advisor Funds (in U.S. currency) should be
sent along with a completed account application to Warburg Pincus Advisor Funds
at an address set forth above. Checks payable to the investor and endorsed to
the order of the Fund or Warburg Pincus Advisor Funds will not be accepted as
payment and will be returned to the sender. If payment is received in proper
form prior to the close of regular trading on The New York Stock Exchange, Inc.
(the "NYSE") (currently 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 at or after the close of regular trading on the NYSE, 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 payment is
received.
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<PAGE> 74
Checks or money orders in payment for shares of more than one Fund should be
made payable to Warburg Pincus Advisor 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. Advisor Shares in the Fund may also be purchased by wired funds from
a bank. 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. Orders should be placed with the Fund prior to wiring funds by
telephoning (800) 369-2728. Federal funds may be wired using the following wire
address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
Warburg Pincus Advisor Japan Small Company Fund
DDA# 9904-649-2
F/F/C: [Account Number and Account Registration]
If a telephone order is received prior to the close of regular trading on the
NYSE 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. However, if a wire in proper
form that is not preceded by a telephone order is received at or 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.
TELEPHONE TRANSACTIONS. Unless otherwise indicated on the account application,
transactions may be conducted by telephone. Institutions should realize that in
conducting transactions by telephone they may be giving up a measure of security
that they may have if they were to conduct these transactions in writing.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. Reasonable
procedures will be employed on behalf of the Fund designed to give reasonable
assurance 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.
GENERAL. The Fund understands that some Institutions may impose certain
conditions on their clients or customers that invest in the Fund, which are in
addition to or different than those described in this Prospectus, and may charge
their clients or customers transaction or administrative charges or other
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<PAGE> 75
direct fees. Certain features of the Fund, such as initial and subsequent
investment minimums, redemption fees and certain trading restrictions, may be
modified or waived by Institutions. Therefore, a client or customer should
contact the Institution acting on his behalf concerning the fees (if any)
charged in connection with a purchase, exchange or redemption of Fund shares and
should read this Prospectus in light of the terms governing his accounts with
the Institution. Institutions will be responsible for promptly transmitting
client or customer purchase and redemption orders to the Fund in accordance with
their agreements with the Fund and with clients or customers.
Institutions or, if applicable, their designees may enter confirmed purchase,
exchange or redemption orders on behalf of clients and customers, with payment
to follow no later than the Fund's pricing on the following business day. If
payment is not received by such time, the Institution could be held liable for
resulting fees or losses. The Fund may be deemed to have received a purchase or
redemption order when an Institution, or, if applicable, its authorized
designee, accepts the order. Such orders received by the Fund in proper form
will be priced at the Fund's net asset value next computed after they are
accepted by the Institution or its authorized designee.
The Fund reserves the right to reject any specific purchase order, including
certain purchases made by exchange (see "How to Redeem and Exchange
Shares -- Exchange of Shares" below). Purchase orders may be refused if, in
Warburg's judgment, the Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. The Fund may discontinue sales of its shares
if management believes that a substantial further increase in assets may
adversely affect the Fund's ability to achieve its investment objective. In such
event, however, it is anticipated that existing shareholders would be permitted
to continue to authorize investment in the Fund and to reinvest any dividends or
capital gains distributions.
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.
Advisor Shares of the Fund may either be redeemed by mail or by telephone. If
an investor desires to redeem his shares by mail, a written request for
redemption should be sent to Warburg Pincus Advisor Funds at an 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. Payment of redemption proceeds may be delayed
in connection with account changes. Each mail redemption request must be signed
by the registered owner(s) (or his legal representative(s)) exactly as the
shares are registered. Institutions may redeem
22
<PAGE> 76
Advisor Shares by calling Warburg Pincus Advisor Funds at (800) 369-2728 between
9:00 a.m. and 4:00 p.m. (Eastern time) on any business day. An Institution
making a telephone withdrawal should state (i) the name of the Fund, (ii) the
account number of the Fund, (iii) the name of the investor(s) appearing on the
Fund's records, (iv) the amount to be withdrawn and (v) the name of the person
requesting the redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out. The Fund currently does not
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 an address shown
above under "How to Open an Account." Although the Fund will redeem shares
purchased by check before the funds or check clear, payments of the redemption
proceeds will be delayed for up to 10 days from the date of purchase. Investors
should consider purchasing shares using a certified or bank check, money order
or federal funds wire if they anticipate an immediate need for redemption
proceeds.
If a redemption order is received by the Fund or its agent 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 at or after the close of regular trading on the NYSE, the redemption
order will be effected at the net asset value as next determined. Except as
noted above, redemption proceeds will normally be mailed or wired to an investor
on the next business day following the date a redemption order is effected. If,
however, in the judgment of Warburg, immediate payment would adversely affect
the Fund, the Fund reserves the right to pay the redemption proceeds within
seven days after the redemption order is effected. Furthermore, the Fund may
suspend the right of redemption or postpone the date of payment upon redemption
(as well as suspend or postpone the recordation of an exchange of shares) for
such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount invested
depending upon a share's net asset value at the time of redemption. If an
investor redeems all the shares in his account, all dividends and distributions
declared up to and including the date of redemption are paid along with the
proceeds of the redemption.
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 or its agent prior to the close of regular trading on the
NYSE, the exchange will be made at each fund's net
23
<PAGE> 77
asset value determined at the end of that business day. Exchanges will be
effected without a sales charge. The Fund may refuse exchange purchases at any
time without prior notice.
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 the Fund at
(800) 369-2728.
The Fund reserves the right to refuse exchange purchases by any person or
group if, in Warburg's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Fund reserves the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
and net realized short-term and long-term capital gains annually and pays them
in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs the
Fund to pay dividends or distributions in cash, dividends and distributions will
automatically be reinvested in additional Advisor Shares of the Fund at net
asset value. The election to receive dividends in cash may be made on the
account application or, subsequently, by writing to Warburg Pincus Advisor Funds
at an address set forth under "How to Open an Account" or by calling Warburg
Pincus Advisor Funds at (800) 369-2728.
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.
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<PAGE> 78
TAXES. The Fund intends 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 derived from net
realized short-term capital gains are taxable to investors as ordinary income
whether received in cash or reinvested in additional Fund shares. Distributions
derived from net realized long-term capital gains will be taxable to investors
as long-term capital gains, regardless of how long investors have held Fund
shares or whether such distributions are received in cash or reinvested in Fund
shares. As a general rule, an investor's gain or loss on a sale or redemption of
Fund shares will be a long-term capital gain or loss if the investor has held
the shares for more than one year and will be a short-term capital gain or loss
if the investor has held the 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.
The Taxpayer Relief Act of 1997 made certain changes to the Code with respect
to taxation of long-term capital gains earned by taxpayers other than a
corporation. In general, for sales made after May 6, 1997, the maximum tax rate
for individual taxpayers on net long-term capital gains is lowered to 20% for
most assets (including long-term capital gains recognized by shareholders on the
sale or redemption of Fund shares that were held as capital assets). This 20%
rate applies to sales on or after July 29, 1997 only if the asset was held for
more than 18 months at the time of disposition. Capital gains on the disposition
of assets on or after July 29, 1997 held for more than one year and up to 18
months at the time of disposition will be taxed as "mid-term gain" at a maximum
rate of 28%. A rate of 18% instead of 20% will apply after December 31, 2000 for
assets held for more than five years. However, the 18% rate applies only to
assets acquired after December 31, 2000 unless the taxpayer elects to treat an
asset held prior to such date as sold for fair market value on January 1, 2001.
In the case of individuals whose ordinary income is taxed at a 15% rate, the 20%
rate is reduced to 10% and the 10% rate for assets held for more than five years
is reduced to 8%. The Fund will provide information relating to that portion of
a "capital gain dividend" that may be treated by investors as eligible for the
reduced capital gains rate for capital assets held for more than 18 months.
Investors may be proportionately liable for taxes on income and gains of the
Fund, but investors not subject to tax on their income will not be required to
pay tax on amounts distributed to them. The Fund's investment activities,
including short sales of securities, will not result in unrelated business
taxable
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<PAGE> 79
income to a tax-exempt investor. The Fund's dividends may qualify for the
dividends received deduction for corporations to the extent they are derived
from dividends attributable to certain types of stock issued by U.S. domestic
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> 80
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, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday, respectively.
The net asset value per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Advisor Shares and then dividing the result by the
total number of outstanding Advisor Shares.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Options and 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. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
The Fund quotes the performance of Advisor Shares separately from Common
Shares. The net asset value of the Advisor Shares is listed in The Wall Street
Journal each business day under the heading Warburg Pincus Advisor Funds. From
time to time, the Fund may advertise the average annual total return of Advisor
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Advisor Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Advisor Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Advisor Shares. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as on a year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the Fund's annual total return for one year
in the period might have been greater or less than the average for the entire
27
<PAGE> 81
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 the Fund at (800)
369-2728.
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, Australasia, Far East ("EAFE") Index and/or other indexes prepared by
Morgan Stanley relating to securities represented in the Fund, the Salomon
Russell Global Equity Index, 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
Barron's Business Week, Financial Times, Forbes, Fortune, Inc., Institutional
Investor, Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine,
SmartMoney, The Wall Street Journal and Worth. Morningstar, Inc. rates funds in
broad categories based on risk/reward analyses over various time periods. In
addition, the Fund may from time to time compare the expense ratio of Advisor
Shares to that of investment companies with similar objectives and policies,
based on data generated by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, the Fund and its portfolio managers may render peri-
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<PAGE> 82
odic updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country credit quality and
other characteristics; and comparison and analysis of the Fund with respect to
relevant market and industry benchmarks. The Fund may also discuss measures of
risk, the continuum of risk and return relating to different investments and the
potential impact of foreign stocks on a portfolio otherwise composed of domestic
securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. The Fund was incorporated on July 26, 1994 under the laws of the
State of Maryland. On August 21, 1998, the Fund changed its name from "Warburg,
Pincus Japan OTC Fund, Inc." to "Warburg, Pincus Japan Small Company Fund, Inc."
The Fund's charter authorizes the Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares and two billion shares are
designated Advisor Shares. Under the Fund's charter documents, the Board has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the Common
Shares, directly to individuals pursuant to a separate prospectus. Shares of
each class represent equal pro rata interests in the Fund and accrue dividends
and calculate net asset value and performance quotations in the same manner,
except that Advisor Shares bear fees payable by the Fund to Institutions for
services they provide to the beneficial owners of such shares and enjoy certain
exclusive voting rights on matters relating to these fees. Because of the higher
fees paid by the Advisor Shares, the total return on such shares can be expected
to be lower than the total return on Common Shares. Investors may obtain
information concerning the Common Shares from their investment professional or
by calling Counsellors Securities at (800) 927-2874.
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
29
<PAGE> 83
the written request of holders of 10% of the outstanding shares of the Fund.
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. Periodic listings of the investment securities held by the Fund, as
well as certain statistical characteristics of the Fund, may be obtained by
calling the Fund at (800) 369-2728 or on the Warburg Pincus Funds Web site at
www.warburg.com. Each Institution that is the record owner of Advisor Shares on
behalf of its customers will send a statement to those customers periodically
showing their indirect interest in Advisor Shares, as well as providing other
information about the Fund. See "Shareholder Servicing."
SHAREHOLDER SERVICING
- --------------------------------------------------------------------------------
The Fund is authorized to offer Advisor Shares exclusively through
Institutions whose clients or customers (or participants in the case of
retirement plans) ("Customers") are owners of Advisor Shares. Either those
Institutions or companies providing certain services to Customers (together,
"Service Organizations") will enter into agreements ("Agreements") with the Fund
and/ or Counsellors Securities pursuant to a Distribution Plan as described
below. Such entities may provide certain distribution, shareholder servicing,
administrative and/or accounting services for its Customers. Distribution
services would be marketing or other services in connection with the promotion
and sale of Advisor Shares. Shareholder services that may be provided include
responding to Customer inquiries, providing information on Customer investments
and providing other shareholder liaison services. Administrative and accounting
services related to the sale of Advisor Shares may include (i) aggregating and
processing purchase and redemption requests from Customers and placing net
purchase and redemption orders with the Fund's transfer agent, (ii) processing
dividend payments from the Fund on behalf of Customers and (iii) providing
sub-accounting related to the sale of Advisor Shares beneficially owned by
Customers or the information to the Fund necessary for sub-accounting. The Board
has approved a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act under which each participating Service Organization will be paid, out
of the assets of the Fund (either directly or by Counsellors Securities on
behalf of the Fund), a negotiated fee on an annual basis not to exceed .75% (up
to a .25% annual service fee and a .50% annual distribution and/or
administrative services fee) of the value of the average daily net assets of its
Customers invested in Advisor Shares. The current 12b-1 fee is .50% per annum. A
Service Organization may use a portion of the fees paid directly or indirectly
pursuant to the Plan to compensate the Fund's custodian or transfer agent for
costs related to accounts of Customers. The Board evaluates the appropriateness
of the Plan on a continu-
30
<PAGE> 84
ing basis and in doing so considers all relevant factors.
In addition to the 12b-1 fees payable by the Fund, Warburg or Counsellors
Securities may pay Service Organizations a fee of up to .10% (the "Service Fee")
of the average annual value of accounts with the Fund maintained by such Service
Organizations for services provided or expenses incurred by the Service
Organization that are not covered by an Agreement under the Fund's Distribution
Plan. A portion of the Service Fee may be reimbursed by the Fund. The Service
Fee payable to any particular Service Organization is determined based upon a
number of factors, including the nature and quality of services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Service Organization.
------------------------------
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.
31
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<PAGE> 86
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<PAGE> 87
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund's Expenses...................................... 2
Financial Highlights..................................... 3
Investment Objective and Policies........................ 4
Portfolio Investments.................................... 5
Risk Factors and Special Considerations.................. 7
Portfolio Transactions and Turnover Rate................. 12
Certain Investment Strategies............................ 12
Investment Guidelines.................................... 17
Management of the Fund................................... 17
How to Open an Account................................... 19
How to Purchase Shares................................... 20
How to Redeem and Exchange Shares........................ 22
Dividends, Distributions and Taxes....................... 24
Net Asset Value.......................................... 27
Performance.............................................. 27
General Information...................................... 29
Shareholder Servicing.................................... 30
</TABLE>
[WARBURG PINCUS ASSET MANAGEMENT LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. ADOTC-1-0898
<PAGE> 88
STATEMENT OF ADDITIONAL INFORMATION
August 24, 1998
------------------------
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS JAPAN GROWTH FUND
WARBURG PINCUS JAPAN SMALL COMPANY FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) WARBURG
------------------------
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives.............................................................................................1
Investment Policies...............................................................................................1
Japan and Its Securities Markets..................................................................................34
Management of the Funds...........................................................................................39
Additional Purchase and Redemption Information....................................................................47
Exchange Privilege................................................................................................48
Additional Information Concerning Taxes...........................................................................48
Determination of Performance......................................................................................53
Independent Accountants and Counsel...............................................................................56
Miscellaneous.....................................................................................................56
Financial Statements..............................................................................................59
Appendix - Description of Ratings.................................................................................A-1
</TABLE>
This combined Statement of Additional Information is meant to
be read in conjunction with the combined Prospectus for the Common Shares of
Warburg Pincus Emerging Markets Fund ("Emerging Markets Fund"), Warburg Pincus
International Equity Fund ("International Equity Fund"), Warburg Pincus Japan
Growth Fund ("Japan Growth Fund") and Warburg Pincus Japan Small Company Fund
("Japan Small Company Fund") (collectively, the "Funds"), and with the
Prospectus for the Advisor Shares of each Fund, each dated August 24, 1998, as
amended or supplemented from time to time, and is incorporated by reference in
its entirety into those Prospectuses. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of a Fund should
be made solely upon the information contained herein. Copies of the Funds'
Prospectuses and information regarding each Fund's current performance may be
obtained by calling the Fund at (800) 927-2874. Information regarding the status
of shareholder accounts may also be obtained by calling the Fund at the same
number or by writing to the Fund, P.O. Box 9030, Boston, Massachusetts
02205-9030.
<PAGE> 89
INVESTMENT OBJECTIVES
The investment objective of the Emerging Markets Fund is
growth of capital. The investment objective of each of the International Equity
Fund and the Japan Small Company Fund is long-term capital appreciation. The
investment objective of the Japan Growth Fund is long-term growth of capital.
INVESTMENT POLICIES
The following policies supplement the descriptions of the
Funds' investment objectives and policies in the Prospectuses.
Asian Securities
As described in their respective Prospectuses, the Japan
Growth Fund will maintain at least 65% of its total assets in equity securities
of Japanese issuers and the Japan Small Company Fund will maintain at least 65%
of its total assets in securities of small-sized Japanese companies, whether
traded on an exchange or in the over-the-counter market, including the Japanese
over-the-counter market ("JASDAQ") and the Frontier Market. In addition, the
Japan Small Company Fund may invest up to 35% of its total assets in securities
of other Asian issuers. 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 Warburg Pincus Asset Management, Inc., the Funds' investment
adviser ("Warburg"), based on publicly available information and inquiries made
to the companies. The Japan Small Company Fund considers Asia to be comprised of
the contiguous eastern Eurasian land mass and adjacent islands, including,
without limitation, the countries of Taiwan, Korea, Indonesia, China, Hong Kong,
Turkey, India, 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 Japan Small Company Fund may consider the company to
be associated with any of such countries. Due to the rapidly evolving nature of
Asian markets, the Japan Small Company Fund reserves the ability to consider
additional countries to be included in Asia if market conditions should develop
so as to warrant such a change in investment policy, and to modify its 10%
limitation on investments relating to any one Asian country (other than Japan).
Options, Futures and Currency Exchange Transactions
Securities Options. The International Equity Fund may write
covered call options on stock and debt securities, and the Japan Growth Fund and
the Japan Small Company Fund may write covered put and call options on stock and
debt securities. The
<PAGE> 90
Funds may purchase covered put and call options that are traded on foreign and
U.S. exchanges, as well as over-the-counter ("OTC").
The Funds which can write put and call options on securities
realize fees (referred to as "premiums") for granting the rights evidenced by
the options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price for a specified time period or at a specified
time. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price for a specified time period or at a specified time.
The principal reason for writing covered options on a
security is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a premium,
a 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, a 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 Funds 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 a 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, a 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 a 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.
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<PAGE> 91
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the- money" and
"out-of-the-money," respectively. Each Fund that can write put and call options
on securities may write (i) in-the-money call options when 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, each 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 a Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which a 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 OTC market. When a 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 a 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. A 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 a 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 a 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. A Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
3
<PAGE> 92
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, a Fund's ability to terminate options positions
established in the OTC market may be more limited than for exchange-traded
options and may also involve the risk that securities dealers participating in
OTC transactions would fail to meet their obligations to the Fund. The Funds,
however, intend to purchase OTC options only from dealers whose debt securities,
as determined by Warburg, are considered to be investment grade. If, as a
covered call option writer, a 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
Funds 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 Funds will
be able to purchase on a particular security.
Securities Index Options. Each Fund may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities 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. For
example, the Japan Growth Fund or the Japan Small Company Fund might utilize
securities options on indexes such as the Nikkei 225 Index, the Nikkei 300
Index, the OTC (JASDAQ) Index and the Topix Index.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities 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
4
<PAGE> 93
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 securities 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. Securities index options may be offset by entering into
closing transactions as described above for securities options.
OTC Options. Each 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 securities 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 a 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, a 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 a 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 each 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 Funds 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 Funds.
Until a 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 Funds' 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
Funds may be unable to liquidate a dealer option.
Futures Activities. Each Fund may enter into foreign
currency, interest rate and securities index futures contracts and purchase and
write (sell) related options traded on exchanges designated by the Commodity
Futures Trading Commission (the "CFTC") or consistent with CFTC regulations on
foreign exchanges. These transactions may be entered into for "bona fide
hedging" purposes as defined in CFTC regulations and other permissible purposes
including hedging against changes in the value of portfolio securities due to
anticipated changes in currency values, interest rates and/or market conditions
and increasing return.
5
<PAGE> 94
No Fund will 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. Each 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.
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. Securities indexes are capitalization
weighted indexes which reflect the market value of the securities listed on the
indexes. A securities 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 a 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 liquid securities
acceptable to the broker, 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 securities 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." A Fund will also incur
brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
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 each
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
6
<PAGE> 95
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 a 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 a Fund's performance.
Options on Futures Contracts. Each 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 securities 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 each
Fund.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of the Funds that are invested in foreign securities may be affected
favorably or unfavorably by changes in exchange control regulations, and the
Funds 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. Each 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) except for
the International Equity Fund, 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
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directly between currency traders (usually large commercial banks and brokers)
and their customers. Forward currency contracts are similar to currency futures
contracts, except that futures contracts are traded on commodities exchanges and
are standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Funds
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 a 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. With the exception of the International
Equity Fund, the Funds 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. Each 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 a 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. No Fund may 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 a Fund's securities are denominated will reduce the U.S. dollar value of
the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate 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, a 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 a 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
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potential gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, a 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 a 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, each 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 a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities 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 security. The risk of
imperfect correlation increases as the composition of a 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, a 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. Securities 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 securities 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 securities index and
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movements in the price of securities index futures, a correct forecast of
general market trends by Warburg still may not result in a successful hedging
transaction.
Each 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 predict
correctly 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 a Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectuses, each Fund will comply with
guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by a Fund on currencies, securities, if applicable, 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 a
Fund of cash or liquid securities.
For example, a call option written by a Fund on securities
may require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a 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 a Fund
may require the Fund to segregate assets (as described above) equal to the
exercise price. Each 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 a 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. Each 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 Funds will be investing
in securities denominated in currencies of non-U.S. countries, and since the
Funds may temporarily hold
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funds in bank deposits or other money market investments denominated in foreign
currencies, the Funds 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 a Fund. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Of particular importance are rates of inflation, interest rate
levels, the balance of payments and the extent of government surpluses or
deficits in the United States and the particular foreign country, all of which
are in turn sensitive to the monetary, fiscal and trade policies pursued by the
governments of the United States and foreign countries important to
international trade and finance. Governmental intervention may also play a
significant role. National governments rarely voluntarily allow their currencies
to float freely in response to economic forces. Sovereign governments use a
variety of techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange rates of
their currencies. See "Japan and Its Securities Markets -- Economic Background
- -- Currency Fluctuation" below. The Funds may use hedging techniques with the
objective of protecting against loss through the fluctuation of the value of the
yen against the U.S. dollar, particularly the forward market in foreign
exchange, currency options and currency futures. See "Currency Transactions" and
"Futures Activities" above.
Information. The majority of the securities held by the
Funds will not be registered with, nor will 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 Funds, political or
social instability, or domestic developments which could affect U.S. investments
in those and neighboring countries.
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 Funds to market and foreign exchange fluctuations brought about
by such delays, and due to the corresponding negative impact on Fund liquidity,
the Funds will avoid investing in countries which are known to experience
settlement delays which may expose the Funds to unreasonable risk of loss.
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Increased Expenses. The operating expenses of the Funds can
be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Funds, such as
custodial costs, valuation costs and communication costs, as well as the rate of
the investment advisory fees, though similar to such expenses of some other
international funds, are higher than those costs incurred by other investment
companies.
Dollar-Denominated Debt Securities of Foreign Issuers. The
returns on foreign debt securities reflect interest rates and other market
conditions prevailing in those countries. The relative performance of various
countries' fixed income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-year
fluctuations in certain markets have been significant, and negative returns have
been experienced in various markets from time to time.
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 Funds may invest in
securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which each of the Funds
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
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the ECU may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies.
Brady Bonds. The Emerging Markets Fund may invest in
so-called "Brady Bonds," which have been issued by Costa Rica, Mexico, Uruguay
and Venezuela and which may be issued by other Latin American countries. Brady
Bonds are issued as part of a debt restructuring in which the bonds are issued
in exchange for cash and certain of the country's outstanding commercial bank
loans. Investors should recognize that Brady Bonds do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (primarily the U.S. dollar) and are actively traded in the
OTC secondary market for debt of Latin American issuers.
U.S. Government Securities. Each of the Funds 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 Funds 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 Funds will invest in obligations issued by such
an instrumentality only if Warburg determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for investment by
the Funds.
Below Investment Grade Securities. The market values of
below investment grade securities and unrated securities of comparable quality
tend to react less to fluctuations in interest rate levels than do those of
investment grade securities and the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than below investment grade securities. In addition,
these securities generally present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired.
The market for below investment grade 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.
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The Funds 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 Funds
anticipate 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 investment grade 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 a Fund's ability to
dispose of particular issues when necessary to meet a 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 Funds to obtain
accurate market quotations for purposes of valuing the Funds and calculating net
asset value.
The market value of securities rated below investment grade
is more volatile than that of investment grade securities. Factors adversely
impacting the market value of these securities will adversely impact a Fund's
net asset value. The Funds 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, below investment grade securities and comparable unrated securities
are not intended for short-term investment. The Funds 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.
Mortgage-Backed Securities. The Japan Growth Fund and the
Japan Small Company Fund may each invest up to 5% of its net assets, and the
Emerging Markets Fund may invest up to 35% of its net assets, in U.S. and
foreign governmental and private mortgage-backed securities. The International
Equity Fund may invest in mortgage-backed securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, such as those issued by
GNMA, FNMA and FHLMC. 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 Funds' shares. These securities generally are "pass-through"
instruments, through which the holders receive a share of all interest and
principal payments from the mortgages underlying the securities, net of certain
fees.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
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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 Funds'
yield. In addition, mortgage-backed securities issued by certain non-government
entities and collateralized mortgage obligations may be less marketable than
other securities.
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 Japan Growth Fund and the Japan
Small Company Fund may each invest up to 5% of its net assets, and the Emerging
Markets Fund may invest up to 35% of its net assets, in U.S. and foreign
governmental and private asset-backed securities. The International Equity Fund
may invest in asset-backed securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, such as those issued by the
Student Loan Marketing Association. Asset-backed securities 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 these Funds may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the asset-backed securities. In addition, because of the large
number of vehicles
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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. Each of the Emerging Markets Fund,
the Japan Growth Fund and the Japan Small Company 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. These Funds currently anticipate that during the coming year, zero
coupon securities will not exceed 5% of their respective 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. Each 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
included in determining the amount of dividends the Funds must pay each year
and, in order to generate cash necessary to pay such dividends, the Funds may
liquidate portfolio securities at a time when it would not otherwise have done
so.
Convertible Securities. Convertible securities in which each
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.
Securities of Other Investment Companies. Each 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, each 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.
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Lending of Portfolio Securities. Each 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 Funds' total assets taken at value. The Funds will not lend
portfolio securities to affiliates of Warburg unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government securities,
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Funds. From time to time, the Funds 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 Funds and that is acting as a "finder."
By lending its securities, each 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 any of the Funds, income
received could be used to pay the Funds' expenses and would increase an
investor's total return. Each 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 a Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.
When-Issued Securities and Delayed-Delivery Transactions.
Each 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). The Funds 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 Warburg deems it advantageous
to do so. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the prices obtained on such securities
may be higher or lower than the prices available in the market on the dates when
the investments are actually delivered to the buyers.
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When a Fund agrees to purchase when-issued or
delayed-delivery securities, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a segregated account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case a 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 a 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 a 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 Funds' incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Short Sales "Against the Box". The Emerging Markets Fund and
the Japan Growth Fund may engage in short sales against the box. In a short
sale, a Fund sells a borrowed security and has a corresponding obligation to the
lender to return the identical security. The seller does not immediately deliver
the securities sold and is said to have a short position in those securities
until delivery occurs. While a short sale is made by selling a security a Fund
does not own, a short sale is "against the box" to the extent that a Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. If a Fund engages in a short sale, the collateral
for the short position will be maintained by the Fund's custodian or qualified
sub-custodian. While the short sale is open, the Fund will maintain in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute the Fund's long position.
Neither the Emerging Markets Fund or the Japan Growth Fund
intends to engage in short sales against the box for investment purposes. Either
Fund may, however, make a short sale as a hedge when it believes that the price
of a security may decline, causing a decline in the value of a security owned by
the Fund (or a security convertible or exchangeable for such security). In such
case, any future losses in the Fund's long position should be offset by a gain
in the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount these Funds own. There will be certain additional
transactions costs associated with short sales against the box, but these Funds
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when
it has an unrealized gain on the securities, it may be required to recognize
that gain as if it had actually sold the securities (as a "constructive sale")
on the date it effects the short sale. However, such constructive sale treatment
may not apply if the Fund closes out the short sale with securities other than
the appreciated securities held at the time of the short sale and if certain
other conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Fund may effect short
sales.
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers. The Funds may invest in securities of small- and
medium-sized, emerging growth companies
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and companies with continuous operations of less than three years ("unseasoned
issuers"). Such investments involve 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
financial disclosure requirements, illiquidity of securities and markets, higher
brokerage commissions and fees and greater market risk in general. In addition,
securities of these companies may involve greater risks since these securities
may have limited marketability and, thus, may be more volatile.
Depositary Receipts. The assets of each Fund may be invested
in the securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). 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, are receipts
issued in Europe, and IDRs, which are sometimes referred to as Global Depositary
Receipts, are issued outside the United States. EDRs and IDRs are typically
issued by non-U.S. banks and trust companies and 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 IDRs in bearer form are designed
for use in European and non-U.S. securities markets, respectively.
Warrants. Each Fund may invest up to 10% of net assets in
warrants to purchase newly created equity securities consisting of common and
preferred stock. The equity security underlying a warrant is outstanding at the
time the warrant is issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a warrant may decline
because of a decline in the value of the underlying security, the passage of
time, changes in interest rates or in the dividend or other policies of the
company whose equity underlies the warrant or a change in the perception as to
the future price of the underlying security, or any combination thereof.
Warrants generally pay no dividends and confer no voting or other rights other
than to purchase the underlying security.
Non-Publicly Traded and Illiquid Securities. The Emerging
Markets Fund and the Japan Small Company Fund may not invest more than 15% of
its net assets, the International Equity Fund may not invest more than 10% of
its total assets, and the Japan Growth Fund may not invest more than 10% 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, certain
Rule 144A Securities (as defined below), and time deposits maturing in more than
seven days. Securities that have legal or contractual restrictions on resale but
have a readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of
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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. 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 without borrowing. A mutual fund might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Funds' limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board or its
delegates may consider, inter alia, the following factors: (i) the unregistered
nature of the security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (iv) dealer undertakings to make a
market in the security and (v) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Borrowing. Each Fund may borrow up to 30% of its total
assets for temporary or emergency purposes, including to meet portfolio
redemption requests so as to permit the orderly disposition of portfolio
securities or to facilitate settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when borrowings exceed 5% of
a Fund's net assets. Although the principal of such borrowings will be fixed, a
Fund's assets may change in value during the time the borrowing is outstanding.
Each Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the
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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.
Reverse Repurchase Agreements and Dollar Rolls. With the
exception of the International Equity Fund, each of the Funds may enter into
reverse repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by a Fund pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time a Fund enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with an approved custodian containing cash or liquid securities having a
value not less than the repurchase price (including accrued interest). The
assets contained in the segregated account will be marked-to-market daily and
additional assets will be placed in such account on any day in which the assets
fall below the repurchase price (plus accrued interest). A Fund's liquidity and
ability to manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale may decline below the price of the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce a Fund's obligation to repurchase the securities, and a Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
With the exception of the International Equity Fund, each of the Funds
also may enter into "dollar rolls," in which a Fund sells fixed-income
securities for delivery in the current month and simultaneously contracts to
repurchase similar but not identical (same type, coupon and maturity) securities
on a specified future date. During the roll period, the Fund would forego
principal and interest paid on such securities. A Fund would be compensated by
the difference between the current sales price and the forward price for the
future purchase, as well as by the interest earned on the cash proceeds of the
initial sale. At the time a Fund enters into a dollar roll transaction, it will
place in a segregated account maintained with an approved custodian, cash or
liquid securities having a value not less than the repurchase price (including
accrued interest) and will subsequently monitor the account to ensure that its
value is maintained. Reverse repurchase agreements and dollar rolls that are
accounted for as financings are considered to be borrowings under the 1940 Act.
Non-Diversified Status. The Emerging Markets Fund, the Japan
Growth Fund and the Japan Small Company Fund are classified as non-diversified
within the meaning of the 1940 Act, which means that each of these Funds is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The investments of these Funds will be limited,
however, in order to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). See "Additional
Information Concerning Taxes." To qualify, a Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
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single issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
Other Investment Practices and Policies of the Emerging Markets Fund
Loan Participations and Assignments. The Emerging Markets
Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign government (a "Borrower") and one or more
financial institutions ("Lenders"). The majority of the Fund's investments in
Loans are expected to be in the form of participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the Borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the Borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the Borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the Borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the Borrower is determined by
Warburg to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund
will acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Fund as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. The Fund may have difficulty disposing of them because there is no
liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Fund's ability
to dispose of particular Participations or Assignments 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 Borrower. The lack of a liquid
market for Participations and Assignments also may make it more difficult for
the Fund to assign a value to these securities for purposes of valuing the
Fund's portfolio and calculating its net asset value.
Stand-By Commitments. The Emerging Markets Fund may acquire
"stand-by commitments" with respect to securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the Fund's option specified
securities at a specified price. The Fund's right to exercise stand-by
commitments is unconditional and unqualified. Stand-by commitments acquired by
the Fund may also be referred to as "put" options. A stand-by
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commitment is not transferable by the Fund, although the Fund can sell the
underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the
writer of a commitment may default on its obligation to repurchase the
securities acquired with it. The Fund intends to enter into stand-by commitments
only with brokers, dealers and banks that, in the opinion of Warburg, present
minimal credit risks. In evaluating the creditworthiness of the issuer of a
stand-by commitment, Warburg will periodically review relevant financial
information concerning the issuer's assets, liabilities and contingent claims.
The Fund will acquire stand-by commitments only in order to facilitate portfolio
liquidity and does not intend to exercise its rights under stand-by commitments
for trading purposes.
The amount payable to the Fund upon its exercise of a
stand-by commitment is normally (i) the Fund's acquisition cost of the
securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
The Fund would acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a stand-by commitment would
not affect the valuation or assumed maturity of the underlying securities.
Stand-by commitments acquired by the Fund would be valued at zero in determining
net asset value. Where the Fund paid any consideration directly or indirectly
for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the Fund.
Stand-by commitments would not affect the average weighted maturity of the
Fund's portfolio. The Fund currently anticipates that it will not invest more
than 5% of its net assets in stand-by commitments.
Other Investment Limitations
All Funds. Certain investment limitations of each Fund may
not be changed without the affirmative vote of the holders of a majority of a
Fund's outstanding shares ("Fundamental Restrictions"). 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.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 of each of the Funds) is adhered to at the time of
an investment, a later increase or decrease in
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the percentage of assets resulting from a change in the values of portfolio
securities or in the amount of the Funds' assets will not constitute a violation
of such restriction.
Emerging Markets Fund. The investment limitations numbered 1
through 9 are Fundamental Restrictions. Investment limitations 10 through 14 may
be changed by a vote of the Board at any time.
The Emerging Markets Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets at the time of such borrowing. For purposes of this restriction,
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and may
enter into short sales "against the box".
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.
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8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's 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 in connection with the 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.
13. 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
10% of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if
the Fund's borrowings exceed 5% of its net assets.
International Equity Fund. The investment limitations
numbered 1 through 11 are Fundamental Restrictions. Investment limitations 12
through 14 may be changed by a vote of the Board at any time.
The International Equity Fund may not:
1. Borrow money or issue senior securities except that the
Fund may (a) borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 30% of the value of the Fund's
total assets at the time of such borrowing and (b) enter into futures contracts;
or mortgage, pledge or hypothecate any assets except in connection with any bank
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of such
borrowing. Whenever borrowings described in (a) exceed 5% of the value of the
Fund's total assets, the Fund will not make any investments (including
roll-overs). For purposes of this restriction, (a) the deposit of assets in
escrow in connection with the purchase of securities on a when-issued or
delayed-delivery basis and (b) collateral arrangements with respect to initial
or variation margin for futures contracts will not be deemed to be pledges of
the Fund's assets.
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2. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to U.S.
Government Securities and except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
3. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
4. Make loans, except that the Fund may purchase or hold
publicly distributed fixed-income securities, lend portfolio securities and
enter into repurchase agreements.
5. Underwrite any issue of securities except to the extent
that the investment in restricted securities and the purchase of fixed-income
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting.
6. Purchase or sell real estate, real estate investment
trust securities, commodities or commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) fixed-income securities secured by real estate, mortgages or interests
therein, (b) securities of companies that invest in or sponsor oil, gas or
mineral exploration or development programs and (c) futures contracts and
related options. The entry into forward foreign currency exchange contracts is
not and shall not be deemed to involve investing in commodities.
7. Make short sales of securities or maintain a short
position.
8. Purchase, write or sell puts, calls, straddles, spreads
or combinations thereof, except that the Fund may (a) purchase put and call
options on securities, (b) write covered call options on securities, (c)
purchase and write put and call options on stock indices and (d) enter into
options on futures contracts.
9. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
10. Purchase more than 10% of the voting securities of any
one issuer, more than 10% of the securities of any class of any one issuer or
more than 10% of the outstanding debt securities of any one issuer; provided
that this limitation shall not apply to investments in U.S. government
securities.
11. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
12. Invest more than 10% of the value of the Fund's total
assets in securities which may be illiquid because of legal or contractual
restrictions on resale or securities for
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which there are no readily available market quotations. For purposes of this
limitation, (a) repurchase agreements with maturities greater than seven days
and (b) time deposits maturing in more than seven calendar days shall be
considered illiquid securities.
13. 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
10% of the value of the Fund's net assets.
14. Invest in oil, gas, or mineral leases.
Japan Growth Fund. The investment limitations numbered 1
through 9 are Fundamental Restrictions. Investment limitations 10 through 14 may
be changed by a vote of the Board at any time.
The Japan Growth 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,
the entry into currency transactions, options, futures contracts, options on
futures contracts, forward commitment transactions and dollar roll transactions
that are not accounted for as financings (and the segregation of assets in
connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and enter
into short sales "against the box."
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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 10% 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.
13. 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
10% of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if
the Fund's borrowings exceed 5% of its net assets.
Japan Small Company Fund. The investment limitations
numbered 1 through 9 are Fundamental Restrictions. Investment limitations 10
through 14 may be changed by a vote of the Board at any time.
The Japan Small Company 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,
28
<PAGE> 117
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts.
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
29
<PAGE> 118
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. 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
10% of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if
the Fund's borrowings exceed 5% of its net assets.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset
value of each Fund is determined for purposes of sales and redemptions. The
following is a description of the procedures used by the Funds in valuing its
assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an OTC market will be valued at the most recent
sale as of the time the valuation is made or, in the absence of sales, at the
mean between the bid and asked quotations. If there are no such quotations, the
value of the securities will be taken to be the highest bid quotation on the
exchange or market. Options and futures contracts will be valued similarly. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board.
Amortized cost involves valuing a portfolio instrument at its initial cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. Notwithstanding the foregoing, in determining the market value of
portfolio investments, the Funds 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 each Fund under the general supervision and responsibility of the
Boards, which may replace a Pricing Service at any time. Securities, options and
futures contracts for which market quotations are not available and certain
other assets of the Funds will be valued at their fair value as determined in
good faith pursuant to consistently applied procedures established by the
Boards. In addition, the Boards or their 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.
30
<PAGE> 119
Trading in securities in Japan and certain foreign countries
is completed at various times prior to the close of business on each business
day in New York (i.e., a day on which The New York Stock Exchange, Inc. (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 Funds' net asset value is
not calculated. As a result, calculation of the Funds' net asset value does not
take place contemporaneously with the determination of the prices of the
majority of the Funds' securities. 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 Boards.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and,
where necessary, modifying each Fund's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a 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 OTC markets, but the price of securities traded in OTC markets includes
an undisclosed commission or mark-up. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for the Funds and in doing so, seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to
the Funds and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services
31
<PAGE> 120
provided by such broker or dealer viewed in terms of either that particular
transaction or of the overall responsibilities of Warburg. Research and other
services received may be useful to Warburg in serving both a Fund and its other
clients and, conversely, research or other services obtained by the placement of
business of other clients may be useful to Warburg in carrying out its
obligations to the Fund. Research may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends and portfolio strategy; access to
research analysts, corporate management personnel, industry experts, economists
and government officials; comparative performance evaluation and technical
measurement services and quotation services; and products and other services
(such as third party publications, reports and analyses, and computer and
electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities. For
the fiscal year ended October 31, 1997, $144,409 and $1,019,515 of total
brokerage commissions was paid by the Emerging Markets Fund and the
International Equity Fund, respectively, to brokers and dealers who provided
such research and other services. Research received from brokers or dealers is
supplemental to Warburg's own research program. The fees to Warburg under its
advisory agreement with each Fund are not reduced by reason of its receiving any
brokerage and research services.
The following table details amounts paid by each Fund in
commissions to broker-dealers for execution of portfolio transactions during the
indicated fiscal years or periods ended October 31.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fund 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Fund $31,789 $1,416,683 $2,287,575*
- -----------------------------------------------------------------------------------------------------------------
International Equity Fund $5,991,704 $8,400,700 $12,784,100*
- -----------------------------------------------------------------------------------------------------------------
Japan Growth Fund None $172,240 $149,801
- -----------------------------------------------------------------------------------------------------------------
Japan Small Company Fund $1,019,865 $1,551,006 $849,667
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* The increase in brokerage commissions paid by the Emerging Markets Fund and
the International Equity Fund in the most recent fiscal year was a result of
sharp increases in the volume of share-related activity as the Funds
experienced large inflows or outflows of capital, as the case may be.
As of October 31, 1997, the International Equity Fund, the
Japan Growth Fund and the Japan Small Company Fund had $162,786,000, $953,000
and $1,212,000, respectively, in outstanding repurchase agreements with Goldman,
Sachs & Co., one of the regular broker-dealers of each Fund.
Investment decisions for the Funds concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg. Such other investment clients may invest in the same securities as
the Funds. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions
32
<PAGE> 121
are averaged as to price and available investments allocated as to amount, in a
manner which Warburg believes to be equitable to each client, including the
Funds. In some instances, this investment procedure may adversely affect the
price paid or received by the Funds or the size of the position obtained or sold
for the Funds. To the extent permitted by law, Warburg may aggregate the
securities to be sold or purchased for each Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for a Fund may be executed through
Counsellors Securities Inc., each Fund's distributor ("Counsellors Securities"),
if, in Warburg's judgment, the use of Counsellors Securities is likely to result
in price and execution at least as favorable as those of other qualified
brokers, and if, in the transaction, Counsellors Securities charges the Fund a
commission rate consistent with those charged by Counsellors Securities to
comparable unaffiliated customers in similar transactions. All transactions with
affiliated brokers will comply with Rule 17e-1 under the 1940 Act. No portfolio
transactions have been executed through Counsellors Securities since the
commencement of each Fund's operations.
In no instance will portfolio securities be purchased from
or sold to Warburg, Counsellors Securities or any affiliated person of such
companies. In addition, the Funds will not give preference to any institutions
with whom the Funds enter into distribution or shareholder servicing agreements
concerning the provision of distribution services or support services. See the
Prospectuses, "Shareholder Servicing."
Transactions for each of the Funds may be effected on
foreign securities exchanges. In transactions for securities not actively traded
on a foreign securities exchange, the Funds 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.
Each 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. A Fund will engage in this practice, however, only when
Warburg, in its sole discretion, believe such practice to be otherwise in the
Fund's interest.
Portfolio Turnover
The Funds do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when a Fund
deems it desirable to sell or purchase securities. The Funds' 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.
33
<PAGE> 122
Certain practices that may be employed by the Funds 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. To the extent that its
portfolio is traded for the short-term, a Fund will be engaged essentially in
trading activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of a Fund may be higher than mutual funds having
a similar objective that do not utilize these strategies.
JAPAN AND ITS SECURITIES MARKETS
The Japan Growth Fund and the Japan Small Company Fund, as
well as the International Equity Fund, which may invest a significant portion of
its assets in Japanese securities, 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 FUNDS MAKE NO
REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR HAVE THE FUNDS
ATTEMPTED TO VERIFY IT. FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY
CORRELATION EXISTS BETWEEN JAPAN OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE
OF EACH 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 (lower house) and a House of Councillors (upper house). 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
lower house in June 1993, when certain members of the lower house left the LDP
and formed two new political parties. After an election for the lower house was
held on July 18, 1993 and the LDP failed to secure a majority, seven parties
formed a coalition to control the lower house 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 ("SDP") 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 continued in 1995, as
34
<PAGE> 123
the Social Democrats incurred significant losses in the July elections. In
August 1995, the LDP elected Ryutaro Hashimoto, the minister for international
trade and industry, as its new leader, and in January 1996, he became prime
minister. Mr. Hashimoto dissolved the Diet and called a general election in
October 1996, in which the LDP won 239 of the 500 lower-house seats. As a
result, LDP members filled all the new cabinet seats for the first time in three
years. The LDP, along with its former coalition partners (the SDP and Shinto
Sakigake) agreed to continue to work together, but only in loose alliance.
Meanwhile, many dissatisfied Diet members from the main opposition party have
left the party to join the LDP. By September 1997, enough Diet members from the
main opposition party and other parties had defected to the LDP for the LDP to
regain its simple majority in the lower house. Japan's continuing political
instability may hamper its ability to establish and maintain effective economic
and fiscal policies, and recent and future political developments may lead to
changes in policy that might adversely affect the Funds' investments.
Economic Background
Generally. Since the end of World War II, 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. 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. There is no guarantee, however, that
these favorable trends will continue.
The Japanese government has called for a transformation of the
economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy. In addition, there has been a move toward
more economic liberalization and discounting in the consumer sector. These
shifts have already begun to take place and may cause disruption in the Japanese
economy.
Strains in the system have also been one of the major causes
of Japan's economic weakness. The non-performing loans of financial institutions
have hampered their ability to take on risk, thus obstructing the flow of funds
into capital outlays as well as equities. The large commercial banks are having
to bear a heavy burden of the bad-debt problem (e.g., in accepting write-offs of
loans they have extended to distressed smaller institutions, in recapitalizing
failed institutions and in stepping up contributions to the Deposit Insurance
Corporation, an organization jointly established in 1971 by the government and
private financial institutions to protect depositors). While the banking system
appears to be making some progress in its attempt to deal with non-performing
assets, it is extremely difficult to gauge the true extent of the bad-debt
problem which could lead to a crisis in the banking system.
Japan's economy is a market economy in which industry and
commerce are predominantly privately owned and operated. However, the Japanese
government is involved
35
<PAGE> 124
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people.
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. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly-type industries, has contributed to the reduction of oil
consumption. However, there is no guarantee this favorable trend will continue.
Economic Trends. The following tables set forth Japan's gross
domestic product and certain other economic indicators for the years shown.
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
1997* 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption Expenditures
Private ..........................(Y)308,472 (Y)299,440 (Y)290,515 (Y)286,154 (Y)278,703 (Y)272,294 (Y)261,891 (Y)249,288
Government ....................... 50,239 48,969 47,555 45,743 44,771 43,262 41,356 38,807
Gross Fixed Capital Formation ...... 143,217 148,190 136,792 137,291 140,433 143,525 143,998 136,467
Increase (Decrease) in Stocks ...... 828 1,058 947 50 620 1,489 3,453 2,430
Exports of Goods and Services ...... 55,979 49,598 45,393 44,410 44,197 47,384 46,723 45,920
Imports of Goods and Services ...... 51,331 46,900 38,272 34,387 33,343 36,891 39,121 42,872
GDP (Expenditures) ................. 507,403 500,356 482,930 479,260 475,381 471,064 458,299 430,040
Change in GDP from Preceding Year .. 1.4% 3.6% 0.8% 0.8% 0.9% 2.8% 6.6% --
Source: International Monetary Fund, International Financial Statistics
</TABLE>
- ------------------
* Average of the first and second quarters of 1997.
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
1992 98.7 (1.5) 105.1 1.8
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.8 0.6 107.2 0.2
1997 94.5* 1.7 108.9** 1.7
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
</TABLE>
- ------------------
36
<PAGE> 125
* Average of the first eleven months of 1997.
** Average of the first ten months of 1997.
Currency Fluctuation. Investments by a Fund in Japanese
securities will be denominated in yen and most income received by these Funds
from such investments will be in yen. However, the Funds' 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 a Fund's Japanese investments. The following
table presents the average exchange rates of Japanese yen for U.S. dollars for
the years shown:
<TABLE>
<CAPTION>
AVERAGE CURRENCY EXCHANGE RATES
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
</TABLE>
Source: International Monetary Fund, International Financial Statistics
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systemized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1997, the First Section
of the TSE listed 1,324 companies with market capitalization in excess of 273.9
trillion yen (approximately $2.1 trillion as of such date). The Second Sections
of the main Japanese Exchanges generally list smaller, less capitalized
companies than those traded on the First Sections. As of December 31, 1997, the
Second Section of the TSE listed 478 companies with market capitalization in
excess of 7 trillion yen (approximately $53.6 billion as of such date).
The OTC Market. The Japanese OTC market ("JASDAQ") is less
systemized than the stock exchanges. 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 a Fund. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts a 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
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<PAGE> 126
restricts the ability of a 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 and
volatility considerations than JASDAQ.
As of December 31, 1997, 831 issues were traded through
JASDAQ, having an aggregate market capitalization in excess of 9.2 trillion yen
(approximately $70.5 billion as of such date). The entry requirements for JASDAQ
generally require a minimum of two million shares outstanding at the time of
registration, a minimum of 200 shareholders (if less than 20 million shares
outstanding on the day of registration) or 400 shareholders (if 20 million or
more shares outstanding on the day of registration), minimum pre-tax profits of
10 yen per share (approximately $.08 per share as of January 30, 1998) for the
prior fiscal year, and net assets of 200 million yen (approximately $1.6 million
as of January 30, 1998) at the end of the prior fiscal year. JASDAQ has
generally attracted small growth companies or companies whose major shareholders
wish to sell only a small portion of the company's equity.
The Frontier Market is a second over-the-counter market and is
under the jurisdiction of JASDAQ, which is overseen by the Japanese Securities
and Exchange Commission. The Frontier Market has less stringent entry
requirements than those described above for JASDAQ and is designed to enable
early stage companies access to capital markets. Frontier Market companies need
not have a history of earnings, provided their spending on research and
development equals at least 3% of net sales. In addition, companies traded
through the Frontier Market are not required to have two 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. The Frontier Market was created
in July 1995, and as of the date of this Statement of Additional Information, a
limited number of issues were traded through this market.
Market Risks. Although the market for Japanese equities traded
on the First Section of the TSE is substantial in terms of trading volume and
liquidity, the TSE has nonetheless exhibited significant market volatility in
the past several years. With respect to the OTC market, trades of certain stocks
may not be effected on days when the matching of buy and sell orders for such
stocks does not occur. The liquidity of the Japanese OTC market, as well as that
of the Second Sections of the exchanges, although increasing in recent years, is
limited by the small number of publicly held shares which trade on a regular
basis. Overall, Japanese securities markets have declined significantly since
1989 which has contributed to a weakness in the Japanese economy and the impact
of a further decline cannot be ascertained.
Other 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, and the risks of
such phenomena, and the damage resulting therefrom, continue to exist. The
long-term economic effects of such geological factors on the Japanese economy as
a whole, and on the Funds' investments, cannot be predicted. In addition, Japan
has one of the world's highest population densities. A significant percentage
38
<PAGE> 127
of the total population of Japan is concentrated in the metropolitan areas of
Tokyo, Yokohama, Osaka and Nagoya.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper* (64) Director
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (retail electronics and
appliances) and Phoenix
Home Life Mutual Insurance
Company; Director/Trustee
of other investment
companies advised by
Warburg.
Jack W. Fritz (71) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc. (direct
mail advertising); Director/Trustee of other investment
companies advised by Warburg.
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1970; Director of Counsellors
Securities; Chairman of the
Board of other investment
companies advised by
Warburg.
</TABLE>
- --------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
39
<PAGE> 128
<TABLE>
<S> <C>
Jeffrey E. Garten (51) Director
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for International Trade
from November 1993 to October 1995; Professor at Columbia
University from September 1992 to November 1993;
Director/Trustee of other investment companies advised by
Warburg.
Thomas A. Melfe (66) Director
30 Rockefeller Plaza Partner in the law firm of Piper & Marbury L.L.P.; Partner
New York, New York 10112 in the law firm of Donovan Leisure Newton & Irvine from
April 1984 to April 1998; Chairman of the Board, Municipal
Fund for New York Investors, Inc.; Director/Trustee of other
investment companies advised by Warburg.
Arnold M. Reichman* (50) Director
466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant
New York, New York 10017-3147 Secretary of Warburg; Director of The RBB Fund, Inc.;
Associated with Warburg since 1984; Director and officer of
Counsellors Securities; Director/Trustee of other investment
companies advised by Warburg.
Alexander B. Trowbridge (68) Director
1317 F Street President of Trowbridge Partners, Inc. (business consulting)
5th Floor from January 1990 to November 1996; Director or Trustee of
Washington, DC 20004 New England Mutual Life Insurance Co., ICOS Corporation
(biopharmaceuticals), Waste Management, Inc. (solid and
hazardous waste collection and disposal), IRI International
(energy services), The Rouse Company (real estate
development), Harris Corp. (electronics and communications
equipment), The Gillette Co. (personal care products) and
Sun Company Inc. (petroleum refining and marketing);
Director/Trustee of other investment companies advised by
Warburg.
</TABLE>
- ---------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
40
<PAGE> 129
<TABLE>
<S> <C>
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1991; Officer of Counsellors Securities and other investment
companies advised by Warburg.
Stephen Distler (44) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1984; Treasurer of Counsellors Securities; Officer of other
investment companies advised by Warburg.
Eugene P. Grace (46) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since April 1994; Attorney-at-law from September 1989-April
1994; Life insurance agent,
New York Life Insurance Company from 1993 to 1994; Officer of
Counsellors Securities and other investment companies advised
by Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1992; Officer of other investment companies advised by
Warburg.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc.
from September 1994 to October 1995; Associated with BEA
Associates from April 1993 to September 1994; Associated with
Ernst & Young LLP from 1990 to 1993; Officer of other
investment companies advised by Warburg.
Janna Manes, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other investment
companies advised by Warburg.
</TABLE>
No employee of Warburg, PFPC Inc., the Funds' co-administrator
("PFPC"), or any of their affiliates, receives any compensation from the Funds
for acting as an officer or director of a Fund. Each Director who is not a
director, trustee, officer or employee of Warburg, PFPC or any of their
affiliates receives an annual fee of $500 ($1,000 for the
41
<PAGE> 130
International Equity Fund) and $250 for each meeting of the Boards attended by
him for his services as Director, and is reimbursed for expenses incurred in
connection with his attendance at Board meetings.
Directors' Total Compensation (for the fiscal year ended October 31, 1997):
<TABLE>
<CAPTION>
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Japan All Investment
Emerging Small International Japan Companies Managed
Markets Fund Company Equity Growth Fund by Warburg+
Name of Director Fund Fund
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
John L. Furth* None None None None None
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Arnold M. Reichman* None None None None None
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Richard N. Cooper $1,500 $1,500 $2,000 $1,500 $44,500
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Donald J. Donahue** $1,500 $1,500 $2,000 $1,500 $44,500
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Jack W. Fritz $1,500 $1,500 $2,000 $1,500 $44,500
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Jeffrey E. Garten*** None None None None None
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Thomas A. Melfe $1,500 $1,500 $2,000 $1,500 $44,500
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
Alexander B. Trowbridge $1,500 $1,500 $2,000 $1,500 $44,500
- --------------------------------- -------------- ------------ ---------------- ------------ -------------------
</TABLE>
- ------------------
+ Each Director also serves as a Director or Trustee of 25 (23 in the case
of Mr. Melfe) investment companies advised by Warburg.
* Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg
and, accordingly, receive no compensation from the Funds or any other
investment company advised by Warburg.
** Mr. Donahue resigned as a Director of each Fund effective February 6,
1998.
*** Mr. Garten became a Director of each Fund effective February 6, 1998 and,
accordingly, received no compensation from the Funds for the fiscal year
ended October 31, 1997.
As of January 30, 1998 (July 30, 1998, in the case of the
Japan Growth Fund), Directors and officers as a group, owned of record less than
1% of each Fund's outstanding Common Shares. No Director or officer owned any of
the Funds' outstanding Advisor Shares.
Portfolio Managers
Mr. Richard H. King, Co-Portfolio Manager of the Emerging
Markets Fund, and the International Equity Fund, earned a B.A. degree from
Durham University in England. 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 EAFE mutual fund (FTIT)
from 1985 to 1986, which grew from $3 million to over $100 million during this
two-year period.
42
<PAGE> 131
Mr. Vincent J. McBride is Co-Portfolio Manager of the Emerging
Markets Fund and the International Equity Fund. Prior to joining Warburg in
1994, Mr. McBride was an international equity analyst at Smith Barney Inc. from
1993 to 1994, and at General Electric Investment Corp. from 1992 to 1993. He was
also a portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride earned a
B.S. degree from the University of Delaware and an M.B.A. degree from Rutgers
University.
Mr. Harold W. Ehrlich is Co-Portfolio Manager of the
International Equity Fund. Prior to joining Warburg in February 1995, Mr.
Ehrlich was a senior vice president, portfolio manager and analyst at Templeton
Investment Counsel Inc. from 1987 to 1995. He was a research analyst and
assistant portfolio manager at Fundamental Management Corporation from 1985 to
1986, and a research analyst at First Equity Corporation of Florida from 1983 to
1985. Mr. Ehrlich earned a B.S.B.A. degree from the University of Florida and
earned his Chartered Financial Analyst designation in 1990.
Mr. P. Nicholas Edwards is Portfolio Manager of the Japan
Growth Fund and the Japan Small Company Fund and Co-Portfolio Manager of the
International Equity Fund. Prior to joining Warburg in August 1995, Mr. Edwards
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. Edwards
earned M.A. degrees from Oxford University and Hiroshima University in Japan.
Mr. Morid Kamshad is an Associate Portfolio Manager of the
Emerging Markets Fund. Prior to joining Warburg in June 1997, Mr. Kamshad was a
senior investment manager at Pictet Asset Management from 1995 to 1997. From
1994 to 1995, he was an investment analyst at HSBC Asset Management, prior to
which time he was a business development manager at Air Products and
Chemicals-France. Mr. Kamshad received his M.B.A. from I.E.S.E. in Barcelona and
his B.S. form the University of Colorado.
Mr. Jun Sung Kim is an Associate Portfolio Manager of the
Emerging Markets Fund. Prior to joining Warburg in September 1997, Mr. Kim was
an investment manager at Asset Korea Ltd. in Seoul from 1995 to 1997. From 1994
to 1995, Mr. Kim was an investment analyst at Baring Securities Ltd. (also in
Seoul), prior to which time he was an assistant investment manager at Koeneman
Capital Management in Singapore. From 1991 to 1993, he was in institutional
sales at W.I. Carr, Singapore, and from 1990 to 1991, Mr. Kim was an investment
analyst at Lee & Company in Singapore. Mr. Kim received his B.S. in Economics
and Industrial Management from Carnegie Mellon University in 1990.
Mr. Federico D. Laffan is an Associate Portfolio Manager of
the Emerging Markets Fund. Prior to joining Warburg in May 1997, Mr. Laffan was
a senior manager and partner at Green Cay Asset Management from 1996 to 1997,
prior to which time he was a senior portfolio manager and director at Foreign &
Colonial Emerging
43
<PAGE> 132
Markets in London, and from 1988 to 1989, he was development
manager at Bristol Myers Squibb in Caracas. Mr. Laffan received his M.S. from
the London School of Business and his B.A. from the University of Texas at
Austin.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Funds, and
Counsellors Funds Service, Inc. ("Counsellors Service") and PFPC serve as
co-administrators to the Funds, each pursuant to separate written agreements
(the "Advisory Agreement," "Counsellors Service Co-Administration Agreement" and
the "PFPC Co-Administration Agreement," respectively). The services provided by,
and the fees payable by the Funds to, Warburg under the Advisory Agreement,
Counsellors Service under the Counsellors Service Co-Administration Agreement
and PFPC under the PFPC Co-Administration Agreement are described in the
Prospectuses. Each class of shares of each Fund bears its proportionate share of
fees payable to Warburg, Counsellors Service and PFPC in the proportion that its
assets bear to the aggregate assets of the Fund at the time of calculation.
These fees are calculated at an annual rate based on a percentage of a Fund's
average daily net assets. See the Prospectuses, "Management of the Fund(s)." The
advisory fees earned by Warburg and the co-administration fees earned by PFPC
and Counsellors Service, respectively, for the last three fiscal years are
described below.
Warburg Advisory Fees
(portions of fees waived, if any, noted in parenthesis)
<TABLE>
<CAPTION>
- -------------------------- ------------------------------- ------------------------------- -----------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1995 October 31, 1996 October 31, 1997
- -------------------------- ------------------------------- ------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets $29,641 ($29,641) $1,789,738 ($1,031,252) $3,124,684 ($1,146,495)
- -------------------------- ---------------- -------------- --------------- --------------- ------------- ---------------
International Equity $20,225,631 (None) $30,605,750 (None) $33,440,864 (None)
- -------------------------- ---------------- -------------- --------------- --------------- ------------- ---------------
Japan Growth $23,045 ($22,663) $149,987 ($149,987) $260,741 ($143,819)
- -------------------------- ---------------- -------------- --------------- --------------- ------------- ---------------
Japan Small Company $599,720 ($599,720) $2,721,814 ($573,600) $927,417* ($357,562)
- -------------------------- ---------------- -------------- --------------- --------------- ------------- ---------------
</TABLE>
* Effective at the close of business on May 23, 1997, Warburg ceased to
engage SPARX Investment & Research, USA, Inc. ("SPARX") as sub-investment
adviser to the Japan Small Company Fund. Up until that time, Warburg paid
SPARX from its advisory fee at an annual rate of .625% of the average
daily net assets of the Fund.
PFPC Co-Administration Fees
(portions of fees waived, if any, noted in parenthesis)
<TABLE>
<CAPTION>
- --------------------------- ------------------------------- ---------------------------- -----------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1995 October 31, 1996 October 31, 1997
- --------------------------- ------------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets $2,845 ($2,845) $171,815 ($71,109) $297,624 (None)
- --------------------------- ---------------- -------------- -------------- ------------- -------------- --------------
International Equity $1,386,283 (None) $1,905,288 (None) $2,047,043 (None)
- --------------------------- ---------------- -------------- -------------- ------------- -------------- --------------
Japan Growth $2,212 ($2,176) $14,399 ($11,644) $25,031 ($25,031)
- --------------------------- ---------------- -------------- -------------- ------------- -------------- --------------
Japan Small Company $90,701 ($26,746) $260,256 ($53,976) $89,032 ($20,262)
- --------------------------- ---------------- -------------- -------------- ------------- -------------- --------------
</TABLE>
44
<PAGE> 133
Counsellors Service Co-Administration Fees
<TABLE>
<CAPTION>
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1995 October 31, 1996 October 31, 1997
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
<S> <C> <C> <C>
Emerging Markets $2,372 $143,179 $249,975
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
International Equity $2,022,563 $3,060,575 $3,344,086
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
Japan Growth $1,844 $11,999 $20,859
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
Japan Small Company $47,97 $217,745 $74,193
- ---------------------------- ---------------------------- ------------------------------- ----------------------------
</TABLE>
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") serves as
custodian of each of the Fund's non-U.S. assets, and PNC Bank, National
Association ("PNC") serves as custodian of each of the Fund's U.S. assets.
Pursuant to separate custodian agreements (the "Custodian Agreements"), State
Street and PNC each (i) maintain a separate account or accounts in the name of
the Funds, (ii) hold and transfer portfolio securities on account of the Funds,
(iii) make receipts and disbursements of money on behalf of the Funds, (iv)
collect and receive all income and other payments and distributions for the
account of the Funds' portfolio securities and (v) make periodic reports to the
Boards concerning the Funds' custodial arrangements. State Street is authorized
to select one or more foreign banking institutions and foreign securities
depositories to serve as sub-custodian on behalf of the Funds, and PNC is
authorized to select one or more domestic banks or trust companies to serve as
sub-custodian on behalf of the Funds. PNC may delegate its duties under its
Custodian Agreement with a Fund to a wholly owned direct or indirect subsidiary
of PNC or PNC Bank Corp. upon notice to the Fund and upon the satisfaction of
certain other conditions. PNC is an indirect, wholly owned subsidiary of PNC
Bank Corp., and its principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103. The principal business address of State Street
is 225 Franklin Street, Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of the Funds pursuant to a Transfer
Agency and Service Agreement, under which State Street (i) issues and redeems
shares of the Funds, (ii) addresses and mails all communications by the Funds to
record owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Boards concerning the transfer agent's operations with
respect to the Funds. State Street has delegated to Boston Financial Data
Services, Inc., an affiliated company ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
Organization of the Funds
All shareholders of each 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.
45
<PAGE> 134
Distribution and Shareholder Servicing
Common Shares. The Emerging Markets Fund, the Japan Growth
Fund and the Japan Small Company Fund have each entered into a Shareholder
Servicing and Distribution Plan (the "12b-1 Plan"), pursuant to Rule 12b-1 under
the 1940 Act, pursuant to which each 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
Funds, as set forth in the 12b-1 Plan ("Shareholder Services"), and (iii)
sub-transfer agency services, subaccounting services or administrative services
related to the sale of the Common Shares, as set forth in the 12b-1 Plan
("Administrative Services" and collectively with Selling Services and
Administrative Services, "Services") including, without limitation, (a) payments
reflecting an allocation of overhead and other office expenses of Counsellors
Securities related to providing Services; (b) payments made to, and
reimbursement of expenses of, persons who provide support services in connection
with the distribution of the Common Shares including, but not limited to, office
space and equipment, telephone facilities, answering routine inquiries regarding
the Funds, 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 Funds to prospective shareholders of the Funds; and (f) costs
involved in obtaining whatever information, analyses and reports with respect to
marketing and promotional activities that the Funds may, from time to time, deem
advisable.
Pursuant to the 12b-1 Plan, Counsellors Securities provides
the Boards with periodic reports of amounts expended under the 12b-1 Plan and
the purpose for which the expenditures were made. For the fiscal year ended
October 31, 1997, the Common Shares of the Emerging Markets Fund, the Japan
Growth Fund and the Japan Small Company Fund paid Counsellors Securities
$624,354, $52,138 and $185,480, respectively, which was expended on advertising,
marketing communications and public relations.
Advisor Shares. The Funds have entered into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and financial
intermediaries ("Institutions") to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients or
customers (or participants in the case of retirement plans) ("Customers") who
are beneficial owners of Advisor Shares. See the Advisor Prospectus,
"Shareholder Servicing." Agreements will be governed by a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The Distribution
Plan requires the Board, at least quarterly, to receive and review written
reports of amounts expended under the Distribution Plan and the purpose for
which such expenditures were made. For the fiscal year ended October 31, 1997,
the Advisor Shares of the Emerging Markets Fund, the International Equity Fund,
the Japan Growth Fund
46
<PAGE> 135
and the Japan Small Company Fund paid $1,166, $2,710,056, $21 and $6,
respectively, all of which were paid to Institutions.
An Institution with which a Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under a Fund's
co-administration and distribution and shareholder servicing arrangements. A
Customer of an Institution should read the relevant Prospectus and this
Statement of Additional Information in conjunction with the Agreement and other
literature describing the services and related fees that would be provided by
the Institution to its Customers prior to any purchase of any Fund's shares.
Prospectuses are available from each Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
General. The Distribution Plans and the 12b-1 Plans will
continue in effect for so long as their continuance is specifically approved at
least annually by the Boards, including a majority of the Directors who are not
interested persons of the Funds and who have no direct or indirect financial
interest in the operation of the Distribution Plans or the 12b-1 Plans, as the
case may be ("Independent Directors"). Any material amendment of a Distribution
Plan or a 12b-1 Plan would require the approval of the Boards in the same
manner. Neither the Distribution Plans nor the 12b-1 Plans may be amended to
increase materially the amount to be spent thereunder without shareholder
approval of the relevant class of shares. Each Distribution Plan or 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 each Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each 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, a 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. (A Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
47
<PAGE> 136
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, each Fund
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. Each Fund will comply with Rule 18f-1 promulgated under the
1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of the relevant 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 a 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 a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Warburg is available to investors in any Fund. The funds into which exchanges of
Common Shares currently can be made are listed in each Fund's Common Share
Prospectus. Exchanges may also be made between certain Warburg Pincus Advisor
Funds.
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. Subject to the restrictions
on exchange purchases contained in the Common Share Prospectus and any other
applicable restrictions, 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.
Subject to the restrictions described above, 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. The exchange privilege
may be modified or terminated at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in the Funds. Each prospective shareholder is urged to
consult his own tax adviser with respect to the specific federal, state, local
and foreign tax consequences of investing in the Funds. The summary is
48
<PAGE> 137
based on the laws in effect on the date of this Statement of Additional
Information, which are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify, a
Fund must, among other things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities,
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of the Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
securities of other regulated investment companies, United States government
securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of any one issuer or any two or more issuers that the Fund
controls and are determined to be engaged in the same or similar trades or
businesses or related trades or businesses. Each Fund expects that all of its
foreign currency gains will be directly related to its principal business of
investing in stocks and securities.
As a regulated investment company, a Fund will not be subject
to United States federal income tax on its net investment income (i.e., income
other than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes to its
shareholders, provided that an amount equal to at least 90% of the sum of its
investment company taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) and its net
tax-exempt income for the taxable year is distributed, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
distribute. Furthermore, a Fund will be subject to a United States corporate
income tax with respect to such distributed amounts in any year that it fails to
qualify as a regulated investment company or fails to meet this distribution
requirement. Any dividend declared by a Fund in October, November or December of
any calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax
49
<PAGE> 138
(currently at a rate of 35%) on the amount retained. In that event, the Fund
will designate such retained amounts as undistributed capital gains in a notice
to its shareholders who (a) will be required to include in income for United
Stares federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will be entitled to credit
their proportionate shares of the 35% tax paid by the Fund on the undistributed
amount against their United States federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities, if any,
and (c) will be entitled to increase their tax basis, for United States federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income. Organizations
or persons not subject to federal income tax on such capital gains will be
entitled to a refund of their pro rata share of such taxes paid by the Fund upon
filing appropriate returns or claims for refund with the Internal Revenue
Service (the "IRS").
The Code imposes a 4% nondeductible excise tax on each Fund to
the extent the Fund does not distribute by the end of any calendar year at least
98% of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
With regard to a Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income and
capital or the proceeds of securities sales by foreign investors such as a Fund
and may limit the Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code, it would be taxed in the same
manner as an ordinary corporation and distributions to its shareholders would
not be deductible by the Fund in computing its taxable income. In addition, in
the event of a failure to qualify, the Fund's distributions, to the extent
derived from the Fund's current or accumulated earnings and profits would
constitute dividends (eligible for the corporate dividends-received deduction)
which are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains. If a Fund fails to qualify as a
regulated investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a regulated
investment company. In addition, if a Fund failed to qualify as a regulated
investment company for a period greater than one taxable year, the Fund may be
required to recognize any net built-in gains (the excess of the aggregate gains,
including items of income, over aggregate losses that would have been realized
if it had been liquidated) in order to qualify as a regulated investment company
in a subsequent year.
A Fund's short sales against the box, if any, and transactions
in foreign currencies, forward contracts, options and futures contracts
(including options and futures
50
<PAGE> 139
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
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer Fund losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require the Fund
to mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out) and (b) 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. Each 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 in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
A Fund's investments in zero coupon securities, if any, may
create special tax consequences. Zero coupon securities do not make interest
payments, although a portion of the difference between 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.
Passive Foreign Investment Companies. If a Fund purchases
shares in certain foreign investment entities, called "passive foreign
investment companies" (a "PFIC"), it may be subject to United States federal
income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on the Fund in respect of deferred taxes arising from
such distributions or gains. If a Fund were to invest in a PFIC and elected to
treat the PFIC as a "qualified electing fund" under the Code, in lieu of the
foregoing requirements, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the qualified
election fund, even if not distributed to the Fund, and such amounts would be
subject to the 90% and excise tax distribution requirements described above. In
order to make this election, the Fund would be required to obtain certain annual
information from the passive foreign investment companies in which it invests,
which may be difficult or not possible to obtain. If a Fund were able to make
the election described in this paragraph, the Fund would not be able to treat
any portion of the long-term capital gains included in income pursuant to the
election as eligible for the 20% maximum capital gains rate. On October 9, 1997,
the Ways and Means Committee of the U.S. Congress approved technical corrections
legislation that would treat PFICs as pass-through entities for purposes of
applying the 20% rate to the portion of a PFIC's long-term gain attributable to
assets held more than 18 months.
Recently, legislation was enacted that provides a
mark-to-market election for regulated investment companies effective for taxable
years beginning after December 31, 1997. This election would result in a Fund
being treated as if it had sold and repurchased all of the PFIC stock at the end
of each year. In this case, the Fund would report gains as ordinary income and
would deduct losses as ordinary losses to the extent of previously
51
<PAGE> 140
recognized gains. The election, once made, would be effective for all subsequent
taxable years of the Fund, unless revoked with the consent of the IRS. By making
the election, the Fund could potentially ameliorate the adverse tax consequences
with respect to its ownership of shares in a PFIC, but in any particular year
may be required to recognize income in excess of the distributions it receives
from PFICs and its proceeds from dispositions of PFIC company stock. A Fund may
have to distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. The Fund will make the
appropriate tax elections, if possible, and take any additional steps that are
necessary to mitigate the effect of these rules.
Dividends and Distributions. Dividends of net investment
income and distributions of net realized short-term capital gains are taxable to
a United States shareholder as ordinary income, whether paid in cash or in
shares. Distributions of net-long-term capital gains, if any, that the Fund
designates as capital gains dividends are taxable as long-term capital gains,
whether paid in cash or in shares and regardless of how long a shareholder has
held shares of the Fund. Dividends and distributions paid by the Fund (except
for the portion thereof, if any, attributable to dividends on stock of U.S.
corporations received by the Fund) will not qualify for the deduction for
dividends received by corporations. Distributions in excess of the Fund's
current and accumulated earnings and profits will, as to each shareholder, be
treated as a tax-free return of capital, to the extent of a shareholder's basis
in his shares of the Fund, and as a capital gain thereafter (if the shareholder
holds his shares of the Fund as capital assets).
Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend
or capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and his basis in his 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 will be long-term capital gain or loss if the shares
are held for more than one year and short-term capital gain or loss if the
shares are held for one
52
<PAGE> 141
year or less. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced, including replacement through the
reinvesting of dividends and capital gains distributions in a Fund, within a
61-day period 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. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six months or less will be
treated for United States federal income tax purposes as a long-term capital
loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Backup Withholding. A Fund may be required to withhold, for
United States federal income tax purposes, 31% of the dividends and
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 IRS that they are subject to backup withholding.
Certain shareholders are exempt from backup withholding. Backup withholding is
not an additional tax and any amount withheld may be credited against a
shareholder's United States federal income tax liabilities.
Notices. Shareholders will be notified annually by the
relevant Fund as to the United States federal income tax status of the
dividends, distributions and deemed distributions attributable to undistributed
capital gains (discussed above in "The Funds and Their Investments") made by the
Fund to its shareholders. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable year
regarding the United States federal income tax status of certain dividends,
distributions and deemed distributions that were paid (or that are treated as
having been paid) by the Fund to its shareholders during the preceding taxable
year.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED
TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUNDS.
DETERMINATION OF PERFORMANCE
From time to time, a 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 Funds' Common Shares, the
average annual total return for the periods ended October 31, 1997 (April 30,
1998, in the case of the Japan Small Company Fund) were as follows (performance
figures calculated without waiver of fees by a Fund's service provider(s), if
any, are noted in parentheses):
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<PAGE> 142
<TABLE>
<CAPTION>
- ------------------------------ -------------------------- ------------------------- -------------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
- ------------------------------ -------------------------- ------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets (12/30/94) -10.71% (-11.30%) N/A (N/A) 3.66% (2.74%)
- ------------------------------ ------------ ------------- ----------- ------------- -------------- ----------------
International Equity (5/2/89) 4.54% (N/A) 13.90% (N/A) 11.48% (N/A)
- ------------------------------ ------------ ------------- ----------- ------------- -------------- ----------------
Japan Growth (12/29/95) 1.47% (0.64%) N/A (N/A) -0.03% (-1.08%)
- ------------------------------ ------------ ------------- ----------- ------------- -------------- ----------------
Japan Small Company (9/30/94) -10.66% (-11.39%) N/A (N/A) -10.75% (-11.55%)
- ------------------------------ ------------ ------------- ----------- ------------- -------------- ----------------
</TABLE>
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)n = 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. Investors should note that this performance may not be
representative of the Fund's total returns in longer market cycles.
With respect to the Funds' Advisor Shares, the average annual
total return for the periods ended October 31, 1997 (April 30, 1998, in the case
of the Japan Small Company Fund) were as follows (performance figures calculated
without waiver of fees by a Fund's service provider(s), if any, are noted in
parentheses):
<TABLE>
<CAPTION>
--------------------------- -------------------------- --------------------------- ----------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
--------------------------- -------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets -10.94% (-11.35%) N/A (N/A) 3.47% (2.98%)
(12/30/94)
--------------------------- ------------ ------------- ------------- ------------- ------------- --------------
International Equity 4.04% (N/A) 13.40% (N/A) 9.20% (N/A)
(5/2/89)
--------------------------- ------------ ------------- ------------- ------------- ------------- --------------
Japan Growth 0.61% (-0.71%) N/A (N/A) -0.60% (-1.42%)
(12/29/95)
--------------------------- ------------ ------------- ------------- ------------- ------------- --------------
Japan Small Company -11.28% (-17.90%) N/A (N/A) -11.04% (-15.48%)
(9/30/94)
--------------------------- ------------ ------------- ------------- ------------- ------------- --------------
</TABLE>
A 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. A Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph, except
that the relevant measuring period would be the number of months that have
elapsed in the current calendar year or most recent three months, as the case
may be. Investors should note that this performance may not be representative of
the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time
to time depending upon market conditions, the composition of a 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, a Fund's performance will fluctuate, unlike
certain bank
54
<PAGE> 143
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 a 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, Australasia, Far East Index (the "EAFE Index"), has equaled 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 26
years. The following table compares annual total returns of the EAFE Index and
the S&P 500 Index for the calendar years shown.
EAFE INDEX VS. S&P 500 INDEX
1972-1997
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
1996 4.40 20.26
1997 0.24 31.01
</TABLE>
- --------------------
55
<PAGE> 144
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 26 years.
The quoted performance information shown above is not intended
to indicate the future performance of the Funds.
Advertising or supplemental sales literature relating to the
International Equity Fund, the Japan Growth Fund and the Japan Small Company
Fund may describe the percentage decline from all-time high levels for certain
foreign stock markets. It may also describe how such Funds differ from the EAFE
Index in composition. The Japan Growth Fund and the Japan Small Company 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 sales literature for these Funds may also discuss current statistics
and projections of the volume, market capitalization, sector weightings and
number of issues traded on Japanese exchanges and in Japanese OTC markets, and
may include graphs of such statistics in advertising and other sales literature.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers L.L.P. ("PWC"), with principal offices
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for each Fund. The financial statements that are
incorporated by reference in this Statement of Additional Information have been
audited by PWC, and have been included herein in reliance upon the report of
such firm of independent accountants given upon their authority as experts in
accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Funds as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of January 30, 1998, the name, address and percentage of
ownership of each person that owns of record 5% or more of a class of each
Fund's outstanding shares were as follows:
Emerging Markets Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 38.62%
Reinvest Account
Attn.: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
56
<PAGE> 145
<TABLE>
<S> <C> <C>
National Financial Services Corporation* 11.65%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Smith Barney Inc.* 11.29%
Book Entry Account
Attn.: Matt Maesstri
333 West 34th Street
7th Floor Mutual Fund Dept.
New York, NY 10001-2483
ADVISOR SHARES Mesirow Financial Inc. Cust. 34.50%
Sidney Lieberstein IRA #88520319
Attn.: No Load/Mutual Funds
350 North Clark Street
Chicago, IL 60610-4712
Janet M. Westcott TTEE* 26.31%
Janet M. Westcott Revocable Trust
U/A DTD 5/17/90
2935 Sioux CT
Des Moines, IA 50321-1427
Janet M. Westcott TTEE* 14.57%
Richard A. Westcott Family Trust
U/A DTD 9/14/95
7500 E McCormick Pkwy.
Scottsdale, AZ 85258-3454
Donaldson Lufkin & Jenrette Securities* 8.91%
P.O. Box 2052
Jersey City, NJ 07303-2052
International Equity Fund
COMMON SHARES Charles Schwab & Co., Inc.* 34.13%
Reinvest Account
Attn.: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 9.86%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
ADVISOR SHARES Connecticut General Life Ins. Co.* 99.79%
On behalf of its separate accounts
55F c/o Melissa Spencer M110
CIGNA Corp. P.O. Box 2975
Hartford, CT 06104-2975
</TABLE>
57
<PAGE> 146
Japan Growth Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 47.03%
Reinvest Account
Attn.: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 19.98%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette* 10.06%
Securities Corp. Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Fl. 14
Jersey City, NJ 07399-0001
ADVISOR SHARES U.S. Clearing Corporation* 49.46%
FBO 500-23759-12
26 Broadway
New York, NY 10004-1798
Donaldson Lufkin & Jenrette Securities* 36.99%
P.O. Box 2052
Jersey City, NJ 07303-2052
U.S. Clearing Corporation* 7.85%
FBO 156-97808-18
26 Broadway
New York, NY 10004-1798
</TABLE>
Japan Small Company Fund
(as of July 30, 1998)
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 37.07%
Reinvest Account
Attn.: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 24.96%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
FTC & Co.* 7.17%
Attn.: Datalynx - House Account
P.O. Box 173736
Denver, CO 80217-3736
ADVISOR SHARES Warburg Pincus Asset Management, Inc. 84.09%
Attn.: Stephen Distler
466 Lexington Avenue
New York, NY 10017-3140
</TABLE>
- --------------------
58
<PAGE> 147
* The Funds believe that these entities are not the beneficial owners of shares
held of record by it.
Mr. Lionel I. Pincus, Chairman of the Board and Chief
Executive Officer of Warburg, may be deemed to have beneficially owned 5.1% of
the outstanding shares of the International Equity Fund, including shares owned
by clients for which Warburg has investment discretion and by companies that
Warburg 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
Each Fund's audited financial report dated October 31, 1997
and unaudited semi-annual report dated April 30, 1998, which either accompanies
this Statement of Additional Information or has previously been provided to the
investor to whom this Statement of Additional Information is being sent, are
incorporated herein by reference. Each Fund will furnish without charge a copy
of its annual report and/or semi-annual report upon request by calling Warburg
Pincus Funds at (800) 927-2874.
59
<PAGE> 148
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings
Services ("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 Service, 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 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
A-1
<PAGE> 149
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces 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 - Debt rated B has a greater vulnerability to default but
currently has 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 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.
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.
A-2
<PAGE> 150
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.
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 comprise 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.
A-3
<PAGE> 151
PART C
OTHER INFORMATION
WARBURG, PINCUS JAPAN SMALL COMPANY FUND, INC.
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial Statements included in
Part A:
(a) Financial Highlights
(2) Financial Statements included in Part B: (incorporated
by reference to the Fund's Annual Report dated October
31, 1997 and semiannual report (unaudited) dated April
30, 1998)
(a) Report of PricewaterhouseCoopers LLP, Independent
Accountants
(b) Statement of Assets and Liabilities
(c) Statement of Operations
(d) Statement of Changes in Net Assets
(e) Financial Highlights
(f) Notes to Financial Statements
(b) Exhibits:
Exhibit No. Description of Exhibit
1(a) Articles of Incorporation.(1)
(b) Articles Supplementary.(1)
(c) Articles of Amendments.(2)
(d) Articles Supplementary.(2)
(e) Articles of Amendments.
2(a) By-Laws.(1)
(b) Amendment to By-Laws.(1)
(c) Amendment to By-Laws.(3)
(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 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A, filed on February 25,
1997.
C-1
<PAGE> 152
(d) Amendment to By-Laws.
3 Not applicable.
4 Form of Share Certificates.(4)
5 Form of Investment Advisory Agreement.(1)
6 Form of Distribution Agreement.(2)
7 Not applicable.
8(a) Form of Custodian Agreement with State Street Bank and
Trust Company.(5)
(b) Form of Custodian Agreement with PNC Bank, National
Association.(5)
9(a) Form of Transfer Agency Agreement.(6)
(b) Form of Counsellors Service Co-Administration Agreement.(6)
(c) Form of PFPC Co-Administration Agreement.(7)
(3) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A
of Warburg, Pincus Global Fixed Income Fund, Inc., filed on February 17,
1998 (Securities Act File No. 33-36066).
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-1A
of Warburg, Pincus Post-Venture Capital Fund, Inc., filed on September 25,
1995 (Securities Act File No. 33-61225).
(5) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in the
Registration Statement on Form N-14 of Warburg, Pincus Major Foreign
Markets Fund, Inc. (formerly known as Warburg, Pincus Managed EAFE(R)
Countries Fund, Inc.), filed on November 5, 1997 (Securities Act File No.
333-39611).
(6) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A
of Warburg, Pincus Trust, filed on June 14, 1995 (Securities Act File No.
33-58125).
(7) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A
of
C-2
<PAGE> 153
(d) Forms of Services Agreements.(2)
10 Opinion and Consent of Willkie Farr & Gallagher, counsel to
the Fund.
11(a) Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
(b) Consent of Hamada & Matsumoto, Japanese counsel to the Fund.
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Retirement Plans.(8)
15(a) Form of Shareholder Servicing and Distribution Plan.(5)
(b) Form of Distribution Plan.(5)
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to Common Shares.
(b) Financial Data Schedule relating to Advisor Shares.
18 Form of Rule 18f-3 Plan.(2)
Warburg, Pincus International Equity Fund, Inc., filed on September 22,
1995 (Securities Act File No. 33-27031).
(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).
C-3
<PAGE> 154
Item 25. Persons Controlled by or Under Common Control with
Registrant
From time to time, Warburg Pincus Asset Management, Inc. ("Warburg")
may be deemed to control the Fund and other registered investment companies it
advises through its beneficial ownership of more than 25% of the relevant fund's
shares on behalf of discretionary advisory clients. Warburg has seven
wholly-owned subsidiaries: Counsellors Securities Inc., a New York corporation;
Counsellors Funds Service Inc., a Delaware corporation; Counsellors Agency Inc.,
a New York corporation; Warburg, Pincus Investments International (Bermuda),
Ltd., a Bermuda corporation; Warburg, Pincus Asset Management International,
Inc., a Delaware corporation; Warburg Pincus Asset Management (Japan), Inc., a
Japanese corporation; and Warburg Pincus Asset Management (Dublin) Limited, an
Irish corporation.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of July 30, 1998
-------------- ---------------------
<S> <C>
Common Shares
(par value $.001 per share) 3,535
Advisor Shares
(par value $.001 per share) 7
</TABLE>
Item 27. Indemnification
Registrant, and officers and directors of Warburg, Counsellors
Securities Inc. ("Counsellors Securities") and Registrant, are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Registration Statement of Warburg, Pincus
Post-Venture Capital Fund, Inc., filed on July 21, 1995.
Item 28. Business and Other Connections of Investment Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus Asset
Management Holdings, Inc., acts as investment adviser to Registrant. Warburg
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 28 of officers and directors of Warburg,
together with information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by Warburg (SEC File No.
801-07321).
C-4
<PAGE> 155
Item 29. Principal Underwriter
(a) Counsellors Securities will act as distributor for
Registrant, as well as for Warburg Pincus Balanced Fund; Warburg Pincus Capital
Appreciation Fund; Warburg Pincus Cash Reserve Fund; Warburg Pincus Central and
Eastern Europe Fund; Warburg Pincus Emerging Growth Fund; Warburg Pincus
Emerging Markets Fund; Warburg Pincus Emerging Markets II Fund; Warburg Pincus
European Equity Fund; Warburg Pincus Fixed Income Fund; Warburg Pincus Global
Fixed Income Fund; Warburg Pincus Global Post-Venture Capital Fund; Warburg
Pincus Global Telecommunications Fund; Warburg Pincus Growth & Income Fund;
Warburg Pincus Health Sciences Fund; Warburg Pincus High Yield Fund; Warburg
Pincus Institutional Fund; Warburg Pincus Intermediate Maturity Government Fund;
Warburg Pincus International Equity Fund; Warburg Pincus International Growth
Fund; Warburg Pincus International Small Company Fund; Warburg Pincus Japan
Growth Fund; Warburg Pincus Japan Small Company Fund; Warburg Pincus Long-Short
Equity Fund; Warburg Pincus Long-Short Market Neutral Fund; Warburg Pincus Major
Foreign Markets Fund; Warburg Pincus Money Market Fund; Warburg Pincus Municipal
Bond Fund; Warburg Pincus New York Intermediate Municipal Fund; Warburg Pincus
New York Tax Exempt Fund; Warburg Pincus Post-Venture Capital Fund; Warburg
Pincus Select Economic Value Equity Fund; Warburg Pincus Small Company Growth
Fund; Warburg Pincus Small Company Value Fund; Warburg Pincus Strategic Global
Fixed Income Fund; Warburg Pincus Strategic Value Fund; Warburg Pincus Tax Free
Money Market Fund; Warburg Pincus Trust; Warburg Pincus Trust II; Warburg Pincus
U.S. Core Equity Fund and Warburg Pincus U.S. Core Fixed Income Fund.
(b) For information relating to each director, officer or partner of
Counsellors Securities, reference is made to Form BD (SEC File No. 8-32482)
filed by Counsellors Securities under the Securities Exchange Act of 1934, as
amended.
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Japan Small Company 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)
C-5
<PAGE> 156
(3) PFPC Inc.
400 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 Asset Management, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions
as investment adviser)
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions
as custodian, shareholder servicing
agent, transfer agent and
dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as
transfer agent and dividend disbursing agent)
(8) PNC Bank, National Association
1600 Market Street
Philadelphia, Pennsylvania 19103
(records relating to its functions as custodian)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
(b) Registrant hereby undertakes to call a meeting of its
shareholders for the purpose of voting upon the question of removal of a
director or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares. Registrant
undertakes further, in connection with the meeting, to comply with the
provisions of
C-6
<PAGE> 157
Section 16(c) of the 1940 Act relating to communications with the shareholders
of certain common-law trusts.
C-7
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933,
as amended, and has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State of
New York, on the 20th day of August, 1998.
WARBURG, PINCUS JAPAN SMALL COMPANY FUND, INC.
By: /s/Eugene L. Podsiadlo
----------------------------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<S> <C> <C>
/s/ John L. Furth Chairman of the August 20, 1998
- ------------------ Board
John L. Furth of Directors
/s/ Eugene L. Podsiadlo President August 20, 1998
- -----------------------
Eugene L. Podsiadlo
/s/ Howard Conroy Vice President August 20, 1998
- ----------------- and Chief
Howard Conroy Financial
Officer
/s/ Daniel S. Madden Treasurer and August 20, 1998
- -------------------- Chief
Daniel S. Madden Accounting
Officer
/s/ Richard N. Cooper Director August 20, 1998
- ---------------------
Richard N. Cooper
/s/ Jack W. Fritz Director August 20, 1998
- -----------------
Jack W. Fritz
/s/Jeffrey E. Garten Director August 20, 1998
- --------------------
Jeffrey E. Garten
/s/ Thomas A. Melfe Director August 20, 1998
- -------------------
Thomas A. Melfe
/s/ Arnold M. Reichman Director August 20, 1998
- ----------------------
Arnold M. Reichman
/s/ Alexander B. Trowbridge Director August 20, 1998
- ---------------------------
Alexander B. Trowbridge
</TABLE>
C-8
<PAGE> 159
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
1(e) Articles of Amendments.
2(d) Amendment to By-Laws.
10 Opinion and Consent of Willkie Farr & Gallagher, counsel
to the Fund.
11(a) Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
(b) Consent of Hamada & Matsumoto, Japanese counsel to the
Fund.
16 Schedule for Computation of Total Return Performance
Quotation.
17(a) Financial Data Schedule relating to Common Shares.
(b) Financial Data Schedule relating to Advisor Shares.
</TABLE>
C-9
<PAGE> 1
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
WARBURG, PINCUS JAPAN OTC FUND, INC.
EUGENE P. GRACE and JANNA MANES, being Vice President and Secretary
and Assistant Secretary, respectively, of WARBURG, PINCUS JAPAN OTC FUND, INC.
(the "Corporation"), a corporation organized and existing under and by virtue of
the Maryland Corporation Law, DO HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation at a meeting
on June 10, 1998 and a majority of the stockholders of the Corporation at a
meeting held on August 21, 1998, in each case at which a quorum was present and
acting throughout, adopted a resolution proposing and declaring advisable the
following amendment to the Articles of Incorporation of the Corporation:
RESOLVED, that, subject to shareholder approval of the change in
the Fund's Portfolio Investment Policy, the Articles of Incorporation and
By-Laws of the Fund be amended to reflect that the name of the Fund is changed
from "Warburg, Pincus Japan OTC Fund, Inc." to "Warburg, Pincus Japan Small
Company Fund, Inc.".
IN WITNESS WHEREOF, the undersigned have executed these Articles of
Amendment and do hereby acknowledge that it is the act and deed of each of them
and, under penalty of perjury, to the best of the knowledge, information and
belief of each of them, the matters and facts contained herein are true in all
material respects.
DATE: August 21, 1998 /s/ Eugene P. Grace
------------------------------------
Eugene P. Grace
Vice President and Secretary
ATTEST:
/s/ Janna Manes
- ---------------------
Janna Manes
Assistant Secretary
<PAGE> 1
Amendment to the By-Laws
of
Warburg, Pincus Japan OTC Fund, Inc.
Pursuant to Article VIII of the By-Laws of Warburg, Pincus Japan OTC Fund, Inc.,
the name of the Fund has changed to Warburg, Pincus Japan Small Company Fund,
Inc.
Dated the 21st day of August, 1998
<PAGE> 1
[ LETTERHEAD - Willkie Farr & Gallagher]
August 20, 1998
Warburg, Pincus Japan Small Company Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Re: Post-Effective Amendment No. 8 to Registration Statement
(Securities Act File No. 33-82362; Investment Company Act
File No. 811-8686) (the "Registration Statement")
Ladies and Gentlemen:
You have requested us, as counsel to Warburg, Pincus Japan Small Company Fund,
Inc. (formerly known as Warburg, Pincus Japan OTC Fund, Inc.) (the "Fund"), a
corporation organized under the laws of the State of Maryland, to furnish you
with this opinion in connection with the Fund's filing of Post-Effective
Amendment No. 8 to its Registration Statement on Form N-1A (the "Amendment").
We have examined copies of the Fund's Articles of Incorporation, as amended or
supplemented (the "Articles"), the Fund's By-Laws, as amended (the "By-Laws"),
and the Amendment. We have also examined such other records, documents, papers,
statutes and authorities as we have deemed necessary to form a basis for the
opinion hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us. As to
various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Fund and
others.
Based upon the foregoing, we are of the opinion that the shares of common stock
of the Fund, par value $.001 per share (the "Shares"), when duly sold, issued
and paid for in accordance with the laws of applicable jurisdictions and the
terms of the Articles, the By-Laws and the Prospectuses and Statement of
Additional Information ("SAI") included as part of the Amendment, and assuming
that at the time of sale such Shares will be sold at a sales price in each case
in excess of the par value, will be valid, legally issued, fully paid and
non-assessable.
<PAGE> 2
Warburg, Pincus Japan Small Company Fund, Inc.
August 20, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the Amendment,
to the reference to our name under the heading "Independent Accountants and
Counsel" in the SAI included as part of the Amendment, and to the filing of this
opinion as an exhibit to any application made by or on behalf of the Fund or any
distributor or dealer in connection with the registration or qualification of
the Fund or the Shares under the securities laws of any state or other
jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 8 to the Registration Statement under the Securities Act of 1933 (File No.
33-82362) of Warburg, Pincus Japan Small Company Fund, Inc. (formerly known as
Warburg, Pincus Japan OTC Fund, Inc.) on Form N-1A of our report dated December
19, 1997 on our audit of the financial statements and financial highlights,
which report is included in the Annual Report to Shareholders for the year ended
October 31, 1997 which is incorporated by reference in the Post-Effective
Amendment to the Registration Statement. We also consent to the reference to
our Firm under the caption "Financial Highlights" in the Prospectus and under
the caption "Independent Accountants and Counsel" in the Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 20, 1998
<PAGE> 1
THE LAW FIRM OF
HAMADA & MATSUMOTO
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-Chome
Chiyoda-Ku, Tokyo 100, Japan
Tel: 03-3580-3377
Fax: 03-3581-4713
August 20, 1998
Warburg, Pincus Japan Small Company Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
We have acted as counsel to Warburg, Pincus Japan Small Company Fund, Inc. (the
"Fund"), a corporation organized under the laws of the State of Maryland, as to
matters of Japanese law.
We hereby confirm that the information concerning Japanese law set forth under
the caption "Dividends, Distributions and Taxes -- Taxes" in the Prospectuses
contained in the Fund's Registration Statement on Form N-1A, as amended (the
"Registration Statement"), has been reviewed by us and in our opinion is
correct. In addition, we hereby consent to the reference to us in the
Prospectuses and to the filing of this opinion with the U.S. Securities and
Exchange Commission as an exhibit to the Registration Statement.
Very truly yours,
HAMADA & MATSUMOTO
By:/s/ Yogo Kimura
----------------------------
Yogo Kimura
<PAGE> 1
EXHIBIT 16
WARBURG PINCUS JAPAN OTC FUND
COMMON SHARES
Schedule 16 Calculations
JAPAN OTC FUND
For the Year Ended April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((8,934-10,000)/10,000) = -10.66%
AGGREGATE RETURN WITHOUT WAIVERS:
((8,861-10,000)/10,000) = -11.39%
For the Six Months Ended April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((9,902-10,000)/10,000) = -0.98%
AGGREGATE RETURN WITHOUT WAIVERS:
((9,855-10,000)/10,000) = -1.45%
For the Period December 31, 1997 thru April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((10,787-10,000)/10,000) = 7.87%
AGGREGATE RETURN WITHOUT WAIVERS:
((10,752-10,000)/10,000) = 7.52%
For Inception (09/30/94) thru April 30, 1998
ANNUALIZED RETURN WITH WAIVERS:
1/3.58630
((6,651/10,000) -1) = -10.75%
ANNUALIZED RETURN WITHOUT WAIVERS:
1/3.58630
((6,438/10,000) -1) = -11.55%
<PAGE> 2
ARBURG PINCUS JAPAN OTC FUND
ADVISOR SHARES
Schedule 16 Calculations
JAPAN OTC FUND
For the Year Ended April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((8,872-10,000)/10,000) = -11.28%
AGGREGATE RETURN WITHOUT WAIVERS:
((8,210-10,000)/10,000) = -17.90%
For the Six Months Ended April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((9,916-10,000)/10,000) = -0.84%
AGGREGATE RETURN WITHOUT WAIVERS:
((9,200-10,000)/10,000) = -8.00%
For the Period December 31, 1997 thru April 30, 1998
AGGREGATE RETURN WITH WAIVERS:
((10,804-10,000)/10,000) = 8.04%
AGGREGATE RETURN WITHOUT WAIVERS:
((10,087-10,000)/10,000) = 0.87%
For Inception (09/30/94) thru April 30, 1998
ANNUALIZED RETURN WITH WAIVERS:
1/3.58630
((6,573/10,000) -1) = -11.04%
ANNUALIZED RETURN WITHOUT WAIVERS:
1/3.58630
((5,470/10,000) -1) = -15.48%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927947
<NAME> WARBURG PINCUS JAPAN OTC FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> COMMON CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 43,099,039
<INVESTMENTS-AT-VALUE> 38,296,328
<RECEIVABLES> 1,910,980
<ASSETS-OTHER> 470,590
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,677,898
<PAYABLE-FOR-SECURITIES> 712,592
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 130,386
<TOTAL-LIABILITIES> 842,978
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,192,965
<SHARES-COMMON-STOCK> 6,456,176
<SHARES-COMMON-PRIOR> 6,539,596
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (29,735,077)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,622,968)
<NET-ASSETS> 39,834,920
<DIVIDEND-INCOME> 137,367
<INTEREST-INCOME> 93,742
<OTHER-INCOME> 0
<EXPENSES-NET> 368,170
<NET-INVESTMENT-INCOME> (137,061)
<REALIZED-GAINS-CURRENT> (5,423,279)
<APPREC-INCREASE-CURRENT> 5,122,793
<NET-CHANGE-FROM-OPS> (437,547)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (826,721)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
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