<PAGE> 1
PROSPECTUS
Common Class
February 22, 1999
WARBURG PINCUS
JAPAN GROWTH FUND
-
WARBURG PINCUS
JAPAN SMALL COMPANY FUND
As with all mutual funds, the Securities and Exchange
Commission has not approved these funds, nor has it passed
upon the adequacy or accuracy of this Prospectus. It is a
criminal offense to state otherwise.
[Warburg Pincus Funds Logo]
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CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................... .................... 4
Goals and Principal Strategies.................. 4
Investor Profile................................ 4
A Word About Risk............................... 6
PERFORMANCE SUMMARY............... ................ 8
Year-by-Year Total Returns...................... 8
Average Annual Total Returns.................... 9
INVESTOR EXPENSES................ ................. 10
Fees and Fund Expenses.......................... 10
Example......................................... 11
THE FUNDS IN DETAIL............... ................ 12
The Management Firm............................. 12
Multi-Class Structure........................... 12
Fund Information Key............................ 13
JAPAN GROWTH FUND................ ................. 14
JAPAN SMALL COMPANY FUND............. ............. 16
MORE ABOUT RISK................. .................. 18
Introduction.................................... 18
Types of Investment Risk........................ 18
Certain Investment Practices.................... 20
MEET THE MANAGER................. ................. 22
ABOUT YOUR ACCOUNT................ ................ 23
Share Valuation................................. 23
Buying and Selling Shares....................... 23
Account Statements.............................. 24
Distributions................................... 24
Taxes........................................... 24
OTHER INFORMATION................ ................. 26
About the Distributor........................... 26
FOR MORE INFORMATION............... ............... back cover
</TABLE>
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KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
JAPAN GROWTH FUND Long-term growth of - Invests in equity securities of
Risk factors: capital Japanese companies
Market risk - May invest in companies of any
Foreign securities size
Country focus - May look for companies with
Non-diversified attractive growth potential or
status companies whose equity
securities appear undervalued
JAPAN SMALL COMPANY Long-term capital - Invests in equity securities of
FUND appreciation small Japanese companies
Risk factors: - Emphasizes equity securities
Market risk with attractive
Foreign securities capital-appreciation potential
Country focus
Non-diversified
status
Small companies
Special-situation
companies
</TABLE>
INVESTOR PROFILE
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- have longer time horizons
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are investing for growth or capital appreciation
- are seeking access to the Japanese market, which can be less accessible to
individual investors
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that has a higher degree of volatility
- are looking for income
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
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5
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A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to your fund. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
Both funds
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including equity
securities and bonds, and the mutual funds that invest in them.
FOREIGN SECURITIES
Both funds
A fund that invests outside the U.S. carries additional risks that include:
- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses. Each of the funds may, but
is not required to, seek to reduce currency risk by hedging part or all of its
exposure to the Japanese yen.
- INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
- POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security prices
and impair a fund's ability to bring its capital or income back to the U.S.
Other political risks include economic policy changes, social and political
instability, military action and war.
COUNTRY FOCUS
Both funds
Focusing on a single country involves increased currency, political,
regulatory and other risks. Market swings in the targeted country (Japan) will
have a greater effect on fund performance than they would in a more
geographically diversified equity fund.
NON-DIVERSIFIED STATUS
Both funds
The funds are considered non-diversified investment companies under the
Investment Company Act of 1940 and are permitted to invest a greater
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proportion of their assets in the securities of a smaller number of issuers. As
a result, the funds may be subject to greater volatility with respect to their
respective portfolio securities than a fund that is more broadly diversified.
SMALL COMPANIES
Japan Small Company Fund
Small companies may have less-experienced management, limited product lines,
unproven track records or inadequate capital reserves. Their securities may
carry increased market, liquidity, information and other risks. Key information
about the company may be inaccurate or unavailable.
SPECIAL-SITUATION COMPANIES
Japan Small Company Fund
"Special situations" are unusual developments that affect a company's market
value. Examples include mergers, acquisitions and reorganizations. Securities of
special-situation companies may decline in value if the anticipated benefits of
the special situation do not materialize.
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PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these funds. The bar chart shows you how each fund's
performance has varied from year to year for up to 10 years. The table compares
each fund's performance over time to that of a broadly based securities market
index and other indexes, if applicable. As with all mutual funds, past
performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS [BAR GRAPH]
<TABLE>
YEAR ENDED 12/31: 1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
JAPAN GROWTH FUND
Best quarter: 21.99% (Q2 97) 1.52% 1.28%
Worst quarter: -12.21% (Q4 97) -5.49%
Inception date: 12/29/95
- ------------------------------------------------------------------------
JAPAN SMALL COMPANY FUND
Best quarter: 24.38% (Q3 95) 12.76%
Worst quarter: -18.28% (Q1 95) -1.09%
Inception date: 9/30/94 -13.09%
-25.51%
</TABLE>
8
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AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
JAPAN GROWTH FUND 1.28% N/A N/A - 0.95% 12/29/95
TOPIX(1) 7.66% N/A N/A -13.55%
JAPAN SMALL COMPANY FUND 12.76% N/A N/A - 8.18% 9/30/94
JASDAQ INDEX ($) UNHEDGED(2) 17.60% N/A N/A -18.82%
JASDAQ INDEX (Y) HEDGED(2) 2.00% N/A N/A -15.76%
MSCI Japan Small Company
Index(3) 23.88% N/A N/A -20.16%
</TABLE>
(1) The TOPIX is an unmanaged capitalization-weighted index (with no defined
investment objective) designed to reflect the general movement of the
Japanese stock market. The index consists of all shares listed on the First
Section of the Tokyo Stock Exchange, which is generally reserved for Japan's
larger companies.
(2) The JASDAQ Over-the-Counter Composite Index is an unmanaged index (with no
defined investment objective) of stocks traded over the counter in Japan.
(3) The Morgan Stanley Capital International Japan Small Company Index is
composed of small-cap Japanese stocks.
UNDERSTANDING PERFORMANCE
- TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and capital
gains (if any) were reinvested in additional shares. The change in value
can be stated either as a cumulative return or as an average annual rate
of return.
- A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
- An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
- Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
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INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
JAPAN
JAPAN GROWTH SMALL COMPANY
FUND FUND
<S> <C> <C>
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load" NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fees NONE NONE
Exchange fees NONE NONE
ANNUAL FUND OPERATING EXPENSES
(deducted from fund assets)
Management fee 1.25% 1.25%
Distribution and service (12b-1) fee .25% .25%
Other expenses .78% 1.06%
TOTAL ANNUAL FUND OPERATING EXPENSES* 2.28% 2.56%
</TABLE>
* Actual fees and expenses for the fiscal year ended October 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced some expenses
during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
JAPAN
JAPAN GROWTH SMALL COMPANY
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS FUND FUND
<S> <C> <C>
Management fee .85% .56%
Distribution and service (12b-1) fee .25% .25%
Other expenses .65% .94%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.75% 1.75%
</TABLE>
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EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table on the opposite page (before fee waivers and
expense reimbursements or credits), and you close your account at the end of
each of the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
JAPAN GROWTH FUND $231 $712 $1,220 $2,615
JAPAN SMALL COMPANY FUND $259 $796 $1,360 $2,895
</TABLE>
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THE FUNDS IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET
MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
- Investment adviser for the funds
- Responsible for managing each fund's assets according to its goal and
strategies
- A professional investment-advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
- Currently manages approximately $22 billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this Prospectus.
MULTI-CLASS STRUCTURE
This Prospectus offers Common Class shares of the funds. Common Class shares
are no-load.
The Japan Growth Fund offers Advisor Class shares described in a separate
prospectus. Advisor Class shares are available through financial-services firms.
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOAL AND STRATEGIES
The fund's particular investment goal and the strategies it intends to use in
pursuing that goal. Percentages of fund assets are based on total assets unless
indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the fund's
day-to-day management.
INVESTOR EXPENSES
Actual fund expenses for the 1998 fiscal year. Future expenses may be higher
or lower.
- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the fund. Expressed as a percentage of average net
assets after waivers.
- DISTRIBUTION AND SERVICE (12b-1) FEES Fees paid by the fund to the
distributor for making shares of the fund available to you. Expressed as a
percentage of average net assets.
- OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets
after waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
- PORTFOLIO TURNOVER An indication of trading frequency. The funds may sell
securities without regard to the length of time they have been held. A high
turnover rate may increase the fund's transaction costs and negatively affect
its performance. Portfolio turnover may also result in capital-gain
distributions that could raise your income-tax liability.
The Annual Report includes the auditor's report, along with the fund's
financial statements. It is available free upon request.
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JAPAN GROWTH FUND
GOAL AND STRATEGIES
The Japan Growth Fund seeks long-term growth of capital. To pursue this goal,
it invests in equity securities of growth companies located in or conducting a
majority of their business in Japan.
Warburg Pincus believes that Japanese industry is in an important period of
deregulation and restructuring. By investing in growth companies positioned to
benefit from the dynamic structural changes taking place in the Japanese
industrial system, the fund intends to provide investors with an opportunity to
participate in these developments.
In choosing equity securities, the fund's portfolio manager seeks to identify
Japanese companies with attractive growth potential. The manager also looks for
companies whose equity securities appear undervalued based on factors such as
earnings or assets. The fund may invest in companies of any size, whether traded
on an exchange or over-the-counter.
Under normal market conditions, the fund will invest at least 65% of assets
in equity securities of Japanese issuers. The remaining portion may be invested
in securities of other Asian issuers. Except for temporary defensive purposes,
the fund does not intend to invest in securities of non-Asian issuers.
PORTFOLIO INVESTMENTS
This fund currently intends to invest at least 80% of assets in equity
securities of Japanese issuers. Equity holdings may consist of:
- common and preferred stocks
- rights and warrants
- securities convertible into or exchangeable for common stocks
- American Depositary Receipts ("ADRs")
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- foreign securities
- country focus
- non-diversified status
The value of your investment will fluctuate in response to the Japanese stock
market. Because the fund invests internationally, it carries additional risks,
including currency, information and political risks. These risks are defined in
"More About Risk."
Targeting a single country could hurt the fund's performance or may cause the
fund to be more volatile than a more geographically diversified equity fund.
Fund performance is closely tied to economic and political conditions within
Japan. In addition, non-diversification might cause the fund to be more volatile
than a diversified mutual fund.
To the extent that the fund invests in smaller companies or special-situation
companies, it takes on further risks that could hurt its performance. "More
About
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Risk" details these and certain other investment practices the fund may use.
Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
P. Nicholas Edwards manages the fund's investment portfolio. You can find out
more about him in "Meet the Manager."
INVESTOR EXPENSES
<TABLE>
<S> <C>
Management fee .85%
Distribution and service (12b-1) fee .25%
All other expenses .65%
----
Total expenses 1.75%
</TABLE>
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96(1)
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $9.74 $9.85 $10.00
===== ===== ======
Investment activities:
Net investment income (0.07)(2) (0.07) (0.06)
Net gains or losses on investments and foreign currency
related items (both realized and unrealized) (1.08) 0.21 (0.09)
----- ----- ------
Total from investment activities (1.15) 0.14 (0.15)
----- ----- ------
Distributions:
From net investment income 0.00 (0.20) 0.00
In excess of realized capital gains 0.00 (0.05) 0.00
----- ----- ------
Total distributions 0.00 (0.25) 0.00
----- ----- ------
Net asset value, end of period $8.59 $9.74 $9.85
===== ===== ======
Total return (11.81%) 1.47% (1.50%)(3)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $40,519 $24,954 $20,157
Ratio of expenses to average net assets 1.75%(5) 1.75%(5) 1.76%(4,5)
Ratio of net income (loss) to average net assets (0.76%) (1.03%) (1.03%)(4)
Decrease reflected in above operating expense ratios due
to waivers/reimbursements 0.53% 0.81% 1.79%(4)
Portfolio turnover rate 75.82% 93.84% 51.72%(3)
</TABLE>
(1) For the period December 29, 1995 (Commencement of Operations) through
October 31, 1996.
(2) Per share information is calculated using the average shares outstanding
method.
(3) Not annualized.
(4) Annualized.
(5) 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 years ending
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were 1.75%, 1.75% and
1.75% for the years ended October 31, 1998, 1997 and for the period ending
October 31, 1996, respectively.
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JAPAN SMALL COMPANY FUND
GOAL AND STRATEGIES
The Japan Small Company Fund seeks long-term capital appreciation. To pursue
this goal, it invests in equity securities of small companies located in or
conducting a majority of their business in Japan.
Under normal market conditions, the fund will invest at least 65% of assets
in equity securities of small Japanese companies. The fund considers a "small"
company to be one whose market capitalization does not exceed the largest
capitalization of companies in the:
- JASDAQ Index
- Second Section of the Tokyo Stock Exchange or
- smaller half of the First Section of the Tokyo Stock Exchange
Some companies may outgrow the definition of a small company after the fund
has purchased their securities. These companies continue to be considered small
for purposes of the fund's 65% minimum allocation to Japanese small-company
equities.
Once the 65% policy is met, the fund may invest in Japanese or other Asian
companies of any size. Except for temporary defensive purposes, the fund does
not intend to invest in securities of non-Asian issuers. The fund will not
invest more than 10% of assets in any one country except Japan.
In choosing equity securities, the fund's portfolio manager looks for
companies that offer attractive opportunities for capital appreciation.
PORTFOLIO INVESTMENTS
This fund invests primarily in equity securities of small Japanese companies.
Equity holdings may consist of:
- common stocks
- rights and warrants
- securities convertible into or exchangeable for common stocks
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- foreign securities
- country focus
- non-diversified status
- small companies
- special-situation companies
The value of your investment will fluctuate in response to the Japanese stock
market. Because the fund invests internationally, it carries additional risks,
including currency, information and political risks. These risks are defined in
"More About Risk."
Targeting a single country could hurt the fund's performance or may cause the
fund to be more volatile than a more geographically diversified equity fund.
Fund performance is closely tied to economic and political conditions within
Japan. In addition, non-diversification might cause the fund to be more volatile
than a diversified mutual fund.
Investing in other small companies may expose the fund to increased market,
liquidity and information risks. Often, these companies are involved in "special
situations." Securities of a special-situation company may decline in value and
hurt the fund's performance if the anticipated benefits of the special situation
do not materialize. "More About Risk" details certain other investment practices
the fund may use. Please read that section carefully before you invest.
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PORTFOLIO MANAGEMENT
P. Nicholas Edwards manages the fund's investment portfolio. You can find out
more about him in "Meet the Manager."
INVESTOR EXPENSES
<TABLE>
<S> <C>
Management fee .56%
Distribution and service (12b-1) fee .25%
All other expenses .94%
----
Total expenses 1.75%
</TABLE>
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94(1)
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $6.37 $8.47 $9.09 $9.85 $10.00
====== ===== ===== ===== ======
Investment activities:
Net investment income (0.01) (1.22) (0.23) 0.00 0.00
Net gains or losses on investments and
foreign currency related items
(both realized and unrealized) (0.67) (0.79) (0.01) (0.76) (0.15)
------ ----- ----- ----- -----
Total from investment activities (0.68) (2.01) (0.24) (0.76) (0.15)
------ ----- ----- ----- -----
Distributions:
From net investment income 0.00 0.00 (0.38) 0.00 0.00
From realized capital gains (0.07) (0.09) 0.00 0.00 0.00
Return of capital (0.05) 0.00 0.00 0.00 0.00
------ ----- ----- ----- -----
Total distributions (0.12) (0.09) (0.38) 0.00 0.00
------ ----- ----- ----- -----
Net asset value, end of period $5.57 $6.37 $8.47 $9.09 $9.85
====== ===== ===== ===== ======
Total return (10.61%) (23.98%) (2.79%) (7.72%) (1.50%)(2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s
omitted) $37,299 $41,627 $154,460 $178,568 $19,878
Ratio of expenses to average net assets 1.75%(4) 1.76%(4) 1.76%(4) 1.41% 1.00%(3)
Ratio of net income (loss) to average
net assets (0.84%) (1.10%) (1.22%) (0.15%) 0.49%(3)
Decrease reflected in above operating
expense ratios due to
waivers/reimbursements 0.81% 0.51% 0.29% 1.35% 4.96%(3)
Portfolio turnover rate 112.68% 100.60% 95.23% 82.98% .00%
</TABLE>
(1) For the period September 30, 1994 (Commencement of Operations) through
October 31, 1994.
(2) Not annualized.
(3) Annualized.
(4) Interest earned on uninvested cash balances is used to direct portions of
the transfer agent expense. These arrangements resulted in a reduction to
the Common Shares' expenses by .00%, .01% and .01% for the years ending
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were 1.75%, 1.75% and
1.75% for the years ended October 31, 1998, 1997 and 1996, respectively.
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MORE ABOUT RISK
INTRODUCTION
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this Prospectus.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can
reduce or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the fund is directly exposed to the risks of the derivative or
practice. Gains or losses from speculative positions in a derivative may
be much greater than the derivative's original cost. For example,
potential losses from writing uncovered call options and from speculative
short sales are unlimited.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell
at the time and the price that the fund would
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like. A fund may have to lower the price, sell other securities instead or
forego an investment opportunity. Any of these could have a negative effect on
fund management or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair a
fund's ability to bring its capital or income back to the U.S. Other political
risks include economic policy changes, social and political instability,
military action and war.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK The funds' investment adviser is working to address
the Year 2000 issue relating to the change from "99" to "00" on January 1, 2000,
and has obtained assurances from major service providers that they are taking
similar steps. The adviser is working on the Year 2000 issue pursuant to a plan
designed to address potential problems, and progress is proceeding according to
the plan. The adviser anticipates the completion of testing of internal systems
in the first part of 1999, and is developing contingency plans intended to
address any unexpected service problems. The funds' operations are dependent
upon interactions among many participants in the financial-services and other
related industries. There is no assurance that preparations by the adviser and
other industry participants will be sufficient, and there can be no assurance
that these efforts will be sufficient, and any noncompliant computer systems
could hurt key fund operations, such as shareholder servicing, pricing and
trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world -- including companies
or governmental entities in which the funds invest and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a fund holding or on markets or
economies is negative, it could seriously affect a fund's performance.
19
<PAGE> 19
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[-] Permitted without limitation; does not indicate
actual use
20% Italic type (e.g., 20%) represents an investment
limitation as a percentage of NET fund assets; does
not indicate actual use
20% Roman type (e.g., 20%) represents an investment
limitation as a percentage of TOTAL fund assets; does
not indicate actual use
[ ] Permitted, but not expected to be used to a
significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
Japan
Japan Small
Growth Company
Fund Fund
<S> <C> <C>
INVESTMENT PRACTICE LIMIT
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30%
- ----------------------------------------------------------------------------
COUNTRY/REGION FOCUS Investing a significant portion of fund
assets in a single country or region. Market swings in the
targeted country or region will be likely to have a greater
effect on fund performance than they would in a more
geographically diversified equity fund. Currency, market,
political risks. [-] [-]
- ----------------------------------------------------------------------------
CURRENCY HEDGING Instruments, such as options, futures,
forwards or swaps, intended to manage fund exposure to
currency risk. Options, futures or forwards involve the
right or obligation to buy or sell a given amount of foreign
currency at a specified price and future date. Swaps involve
the right or obligation to receive or make payments based on
two different currency rates. Correlation, credit, currency,
hedged exposure, liquidity, political, valuation risks.(1) [-] [-]
- ----------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable a fund to hedge against or speculate on future
changes in currency values, interest rates or stock indexes.
Futures obligate the fund (or give it the right, in the case
of options) to receive or make payment at a specific future
time based on those future changes.(1) Correlation,
currency, hedged exposure, interest-rate, market,
speculative exposure risks.(2) [ ] [ ]
- ----------------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security, currency or index of
securities at a fixed price within a certain time period. A
fund may purchase or sell (write) both put and call options
for hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure
risks. 25% 25%
- ----------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 10% 15%
- ----------------------------------------------------------------------------
</TABLE>
20
<PAGE> 20
<TABLE>
<CAPTION>
Japan
Japan Small
Growth Company
Fund Fund
<S> <C> <C>
INVESTMENT PRACTICE LIMIT
SECURITIES LENDING Lending portfolio securities to financial
institutions; a fund receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3% 33 1/3%
- ----------------------------------------------------------------------------
SMALL COMPANIES Companies with small relative market
capitalizations. Information, liquidity, market, valuation
risks. [-] [-]
- ----------------------------------------------------------------------------
SPECIAL-SITUATION COMPANIES Companies experiencing unusual
developments affecting their market values. Special
situations may include acquisition, consolidation,
reorganization, recapitalization, merger, liquidation,
special distribution, tender or exchange offer, or
potentially favorable litigation. Securities of a
special-situation company could decline in value and hurt a
fund's performance if the anticipated benefits of the
special situation do not materialize. Information, market
risks. [-] [-]
- ----------------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's
assets in investments such as money-market obligations and
investment-grade debt securities for defensive purposes.
Although intended to avoid losses in adverse market,
economic, political or other conditions, defensive tactics
might be inconsistent with a fund's principal investment
strategies and might prevent a fund from achieving its goal. [ ] [ ]
- ----------------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. 10% 10%
- ----------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. 20% 20%
- ----------------------------------------------------------------------------
</TABLE>
(1) The funds are not obligated to pursue any hedging strategy and do not
represent that these techniques are available now or will be available at
any time in the future.
(2) Each fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
21
<PAGE> 21
MEET THE MANAGER
[P. NICHOLAS EDWARDS Photo]
P. NICHOLAS EDWARDS
Managing Director
- Portfolio Manager, Japan Growth Fund since fund inception
- Portfolio Manager, Japan Small Company Fund since May 1997
- With Warburg Pincus since 1995
- Previously director at Jardine Fleming Investment Advisers, Tokyo, 1984 to
1995
22
Job title indicates position with the investment adviser.
<PAGE> 22
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the Common Class's total assets, less its
liabilities, by the number of Common Class shares outstanding.
Each fund values its securities based on market quotations when it calculates
its NAV. If market quotations are not readily available, securities and other
assets are valued by another method that the Board of Directors believes
accurately reflects fair value. Debt obligations that will mature in 60 days or
less are valued on the basis of amortized cost, unless the Board of Directors
determines that using this method would not reflect an investment's value.
Some fund securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the funds do not compute their prices. This could
cause the value of a fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
BUYING AND
SELLING SHARES
The accompanying Shareholder Guide explains how to invest directly with the
funds. You will find information about purchases, redemptions, exchanges and
services.
Each fund is open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. ET), your transaction will be priced at that day's NAV. If
we receive it after that time, it will be priced at the next business day's NAV.
FINANCIAL-SERVICES FIRMS
You can also buy and sell fund shares through a variety of financial-services
firms such as banks, brokers and financial advisors. The funds have authorized
these firms (and other intermediaries that the firms may designate) to accept
orders. When an authorized firm or its designee has received your order, it is
considered received by the fund and will be priced at the next-computed NAV.
Financial-services firms may charge transaction fees or other fees that you
could avoid by investing directly with the fund. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain features of the fund, such as the minimum
initial or subsequent investment amounts, may be modified.
Some of the firms through which the funds are available include:
- Charles Schwab & Co., Inc. Mutual Fund OneSource(R) service
- Fidelity Brokerage Services, Inc. FundsNetwork(TM) Program
- Waterhouse Securities, Inc.
23
<PAGE> 23
ACCOUNT STATEMENTS
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports.
DISTRIBUTIONS
As a fund investor, you are entitled to your share of the fund's net income
and gains on its investments. The fund passes these earnings along to its
shareholders as distributions.
Each fund earns dividends from stocks and interest from bond, money-market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital-gain distributions.
The funds typically distribute dividends and capital gains annually, usually
in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
TAXES
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable. Fund distributions are taxed based on the
length of time the fund holds its assets, regardless of how long you have held
fund shares. Distributions from a fund's long-term capital gains are taxed as
capital gains; distributions from short-term capital gains and other sources are
generally taxed as ordinary income. The funds will mostly make capital-gain
distributions, which could be short-term or long-term.
If you buy shares shortly before or on the "record date"--the date that
establishes you as the person to receive the upcoming distribution--you may
receive a portion of the money you just invested in the form of a taxable
distribution.
24
<PAGE> 24
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category.
TAXES ON TRANSACTIONS
Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or loss on the transaction. You are
responsible for any tax liabilities generated by your transactions.
25
<PAGE> 25
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
Counsellors Securities Inc., a wholly owned subsidiary of Warburg Pincus, is
responsible for:
- making the funds available to you
- account servicing and maintenance
- other administrative services related to the sale of the Common Class
As part of their business strategies, the funds each have adopted a Rule
12b-1 shareholder-servicing and distribution plan to compensate Counsellors
Securities for the above services. Under the plan, Counsellors Securities
receives fees at an annual rate of 0.25% of average daily net assets of the
fund's Common Class. Because the fees are paid out of a fund's assets on an
ongoing basis, over time they will increase the cost of your investment and may
cost you more than paying other types of sales charges.
26
<PAGE> 26
FOR MORE INFORMATION
More information about these funds is available free upon request, including
the following:
SHAREHOLDER GUIDE
Explains how to buy and sell shares. The Shareholder Guide is incorporated by
reference into (is legally part of) this Prospectus.
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the fund's manager discussing
market conditions and investment strategies that significantly affected fund
performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the funds, is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference, and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
Please contact Warburg Pincus Funds to obtain, without charge, the SAI and
Annual and Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-WARBURG
(800-927-2874)
BY MAIL:
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBERS:
Warburg Pincus Japan Growth Fund 811-07371
Warburg Pincus Japan
Small Company Fund 811-08686
[Warburg Pincus Funds Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) - www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPJPN-1-0299
<PAGE> 27
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS FUNDS
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to these Warburg Pincus funds. Under
the terms of the arrangement, no immediate changes are planned to Warburg Pincus
investment portfolio managers and investment professionals.
The funds' governing Board and fund shareholders will be asked to vote on
the "assignment" of the funds' current investment advisory agreements with
Warburg Pincus Asset Management. Shareholders will receive more information
about the advisory agreement arrangements, but until then shareholders do not
need to take any action relating to their Warburg Pincus fund shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: February 22, 1999
<PAGE> 28
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
December 3, 1998
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE> 29
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed IRA Rollover and government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt
Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Funds $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to
Minors: $ 500*
* $25,000 minimum for Long-Short
Funds.
</TABLE>
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
SHAREHOLDER SERVICE CENTER
Toll free: 800 -WARBURG
(800 -927-2874)
Fax: 212-370-9833
MAIL
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
OVERNIGHT/COURIER SERVICE
Boston Financial
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, MA 02171
INTERNET WEB SITE
www.warburg.com
2
BUYING SHARES
<PAGE> 30
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- - Complete the New Account Application. - Make your check payable to Warburg
For IRAs use the Universal IRA Pincus Funds.
Application. - Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds. - Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds. - Minimum amount is $100.
BY EXCHANGE
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new - Minimum amount is $250.
fund. Also please observe the minimum If you do not have telephone privileges,
initial investment. mail or fax a signed letter of
If you do not have telephone privileges, instruction.
mail or fax a signed letter of
instruction.
BY WIRE
- - Complete and sign the New Account - Call our Shareholder Service Center by
Application. 4 p.m. ET to inform us of the incoming
- - Call our Shareholder Service Center and wire. Please be sure to specify your
fax the signed New Account Application name, the account number and the fund
by 4 p.m. ET. name on your wire advice.
- - Shareholder Services will telephone you - Wire the money for receipt that day.
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand privileges.
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
3
<PAGE> 31
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that - Accounts of any type.
includes: - Sales of any amount.
- - your name(s) and signature(s) For IRAs please use the IRA Distribution
- - the fund name and account number Request Form.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
BY EXCHANGE
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read If you do not have telephone privileges,
the current prospectus for the new fund. mail or fax a letter of instruction to
Also please observe the minimum initial exchange shares.
investment.
BY PHONE
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your New or ACH on Demand privileges.
Account Application. - Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
()* For the Central & Eastern Europe Fund only: A short-term trading fee of 1.0%
of the amount redeemed will be deducted from the redemption proceeds if you sell
shares of the fund after holding them less than six months. This fee, which is
currently being waived, does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without charging the fees, followed by the shares held longest.
4
SELLING SHARES(*)
<PAGE> 32
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
<S> <C>
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to
Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
5
<PAGE> 33
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct Rollover
Form. If you are opening a new IRA, you will also need to complete the Universal
IRA Application. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
SHAREHOLDER SERVICES
<PAGE> 34
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for employees and clients
of its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
7
OTHER POLICIES
<PAGE> 35
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPCOM-31-1298A
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
February 22, 1999
WARBURG PINCUS JAPAN GROWTH FUND
WARBURG PINCUS JAPAN SMALL COMPANY FUND
This combined Statement of Additional Information provides
information about Warburg Pincus Japan Growth Fund ("Japan Growth Fund") and
Warburg Pincus Japan Small Company Fund ("Japan Small Company Fund") (each a
"Fund" and collectively, the "Funds") that supplements information contained in
the combined Prospectus for the Common Shares of the Funds and the Prospectus
for the Advisor Shares of the Japan Growth Fund, each dated February 22, 1999
as amended or supplemented from time to time (together the "Prospectuses"), and
is incorporated by reference in its entirety into those Prospectuses.
Each Fund's audited Annual Report dated October 31, 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, is incorporated herein by reference.
This Statement of Additional Information is not itself a prospectus
and no investment in shares of the Funds should be made solely upon the
information contained herein. Copies of the Prospectuses, Annual Reports and
information regarding each Fund's current performance may be obtained by writing
or telephoning:
Common Shares Advisor Shares
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, Massachusetts 02205-9030 Boston, MA 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES........................................ 1
Asian Securities.......................................................... 1
Strategic and Other Transactions.......................................... 2
Options on Securities and Securities Indices and Futures
and Currency Exchange Transactions................................. 2
Securities Options................................................... 2
Securities Index Options............................................. 5
OTC Options.......................................................... 6
Futures Activities................................................... 6
Futures Contracts................................................ 7
Options on Futures Contracts..................................... 8
Currency Exchange Transactions....................................... 8
Forward Currency Contracts....................................... 9
Currency Options................................................. 9
Currency Hedging................................................. 9
Hedging Generally.................................................... 10
Swaps................................................................ 11
Asset Coverage for Forward Contracts, Options, Futures
Options on Futures and Swaps...................................... 12
Additional Information on Other Investment Practices...................... 13
Foreign Investments.................................................. 13
Foreign Debt Securities.......................................... 13
Foreign Currency Exchange........................................ 13
Information...................................................... 14
Political Instability............................................ 14
Foreign Markets.................................................. 14
Increased Expenses............................................... 14
Dollar-Denominated Debt Securities of Foreign Issuers............ 14
Depositary Receipts.............................................. 14
Privatizations................................................... 14
Emerging Markets................................................. 14
Sovereign Debt................................................... 14
U.S. Government Securities........................................... 14
Debt Securities...................................................... 15
Below Investment Grade Securities................................ 16
Mortgage-Backed Securities....................................... 18
Asset-Backed Securities.......................................... 19
Loan Participations and Assignments.............................. 20
Structured Notes, Bonds or Debentures............................ 20
REITs................................................................ 20
Convertible Securities............................................... 20
Securities of Other Investment Companies............................. 20
Lending of Portfolio Securities...................................... 21
Borrowing............................................................ 21
When-Issued Securities and Delayed-Delivery Transactions............. 21
Short Sales "Against the Box"........................................ 22
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers................................................ 23
Special Situation Companies.......................................... 23
Warrants............................................................. 24
Non-Publicly Traded and Illiquid Securities.......................... 24
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Rule 144A Securities............................................. 25
Money Market Obligations............................................. 26
Repurchase Agreements............................................ 26
Money Market Mutual Funds........................................ 26
Reverse Repurchase Agreements and Dollar Rolls....................... 27
Non-Diversified Status............................................... 27
Temporary Defensive Strategies............................................ 28
Debt Securities...................................................... 28
Money Market Obligations............................................. 28
INVESTMENT RESTRICTIONS................................................... 28
All Funds................................................................. 28
Japan Growth Fund......................................................... 28
Japan Small Company Fund.................................................. 30
PORTFOLIO VALUATION....................................................... 32
PORTFOLIO TRANSACTIONS.................................................... 33
PORTFOLIO TURNOVER........................................................ 35
JAPAN AND ITS SECURITIES MARKETS.......................................... 36
Domestic Politics......................................................... 36
Economic Background....................................................... 37
Generally................................................................. 37
Economic Trends........................................................... 38
Currency Fluctuation...................................................... 39
Securities Markets........................................................ 39
The Exchange Market....................................................... 39
The OTC Market............................................................ 39
Market Risks.............................................................. 40
Other Factors............................................................. 41
MANAGEMENT OF THE FUNDS................................................... 41
Officers and Board of Directors........................................... 41
Portfolio Manager......................................................... 45
Investment Adviser and Co-Administrators.................................. 46
Custodian and Transfer Agent.............................................. 47
Organization of the Funds................................................. 48
Distribution and Shareholder Servicing.................................... 49
Common Shares........................................................ 49
Advisor Shares....................................................... 50
General.............................................................. 51
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 51
Automatic Cash Withdrawal Plan............................................ 51
EXCHANGE PRIVILEGE........................................................ 52
ADDITIONAL INFORMATION CONCERNING TAXES................................... 53
The Funds and Their Investments........................................... 53
Foreign Taxes........................................................ 55
Passive Foreign Investment Companies...................................... 56
Dividends and Distributions............................................... 57
Sales of Shares........................................................... 57
Backup Withholding........................................................ 58
Notices................................................................... 58
Other Taxation............................................................ 58
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DETERMINATION OF PERFORMANCE.............................................. 58
INDEPENDENT ACCOUNTANTS AND COUNSEL....................................... 62
MISCELLANEOUS............................................................. 63
FINANCIAL STATEMENTS...................................................... 64
APPENDIX - DESCRIPTION OF RATINGS......................................... A-1
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the descriptions of each Fund's
investment objectives and policies in the Prospectuses. There are no assurances
that the Funds will achieve their investment objectives.
The investment objective of the Japan Small Company Fund is
long-term capital appreciation.
The investment objective of the Japan Growth Fund is long-term
growth of capital.
Unless otherwise indicated, all of the Funds are permitted, but not
obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below.
The Funds are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
Asian Securities
The Japan Growth and the Japan Small Company Funds will invest,
under normal market conditions, at least 65% of its total assets in equity
securities of companies located in or conducting a majority of their business in
Japan. In addition, the Funds may invest up to 35% of their total assets in
securities of other Asian issuers. These include companies located in or
conducting a majority of their business in Asia, companies which have issued
securities traded principally in an Asian country, or governments, governmental
entities or political subdivisions of Asian countries. The Funds consider 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 Funds may
consider the company to be associated with any of such countries. Determinations
as to the eligibility of issuers under the foregoing definitions 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. Due to the rapidly evolving nature of Asian markets, the Funds
reserve the ability to consider additional countries to be included in Asia if
market conditions should develop so as
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to warrant such a change in investment policy, and the Japan Small Company Fund
reserves the right to modify its 10% limitation on investments relating to any
one Asian country (other than Japan).
Strategic and Other Transactions
Options on Securities and Securities Indices and Futures and
Currency Exchange Transactions. Each Fund may purchase and write covered or
collateralized options on securities, securities indices and currencies for both
hedging purposes and to increase total return. Up to 25% of the Fund's total
assets may be at risk in connection with investing in options on securities,
securities indices and, if applicable, currencies. The amount of assets
considered to be "at risk" is, in the case of purchasing options, the amount of
the premium paid, and, in the case of writing options, the value of the
underlying obligation.
Securities Options. Each Fund may write covered put and call options
on stock and debt securities and each Fund may purchase such options that are
traded on foreign and U.S. exchanges, as well as OTC options. A Fund realizes
fees (referred to as "premiums") for granting the rights evidenced by the
options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price for a specified time period or at a specified
time. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price for a specified time period or at a specified time.
The 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 its
would otherwise sell.
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,
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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). A Fund that writes call options retains the risk
of an increase 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 decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets 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.
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
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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 (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 cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
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
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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 and would continue
to be at market risk on the security.
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. 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 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.
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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.
Exchange-traded options generally have a continuous liquid market
while OTC or dealer options do not. 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.
Futures Activities. Each Fund may enter into futures contracts (and
related options) on securities, securities indices, foreign currencies and
interest rates, 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 futures contracts
are standardized contracts for the future delivery of a non-U.S. currency, an
interest rate sensitive security or, in the case of index futures contracts or
certain other futures contracts, a cash settlement with reference to a specified
multiplier times the change in the index. 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.
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. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
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hedging" by the CFTC will not 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 represented in 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 may 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
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several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions at an advantageous price and subjecting
the Fund to substantial losses. In such event, and in the event of adverse price
movements, the Fund would be required to make daily cash payments of variation
margin. In such situations, if 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 a
futures contract 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 a variety of factors not applicable to investment in
U.S. securities, 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) by purchasing exchange-traded currency options.
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Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, the 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 enter into an offsetting
transaction. 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. 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 non-dollar denominated securities it holds, a Fund may purchase
foreign currency put options. If the value of the foreign 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
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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 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 Generally. 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 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.
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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 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.
Swaps. The Funds may each enter into swaps relating to indexes,
currencies, interest-rates and debt 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 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. Interest
rate swaps involve the exchange by the Funds with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. An equity or debt swap is an agreement
to exchange streams of payments computed by reference to a notional amount based
on the performance of a securities index, a basket of securities or a single
security. A Fund may enter into these transactions for hedging purposes, such as
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 to increase total return, such as to
obtain the price performance of a security without actually purchasing the
security in circumstances where, for example, the subject security
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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.
A 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
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 the
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 the 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 Investment Company Act of 1940, as amended (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.
Asset Coverage for Forward Contracts, Options, Futures, Options on
Futures and Swaps. Each Fund will comply with guidelines established by the U.S.
Securities and Exchange Commission (the "SEC") and other applicable regulatory
bodies 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
the Fund of cash or liquid securities 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 or financial instrument 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 a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
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
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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. Each Fund will ordinarily hold no less than 65%
of its total assets in foreign securities. Investors should recognize that
investing in foreign companies involves certain risks, including those discussed
below, which are in addition to those associated with investing in U.S. issuers.
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. See "Japan and Its Securities
Markets" for a discussion of factors relating to Japanese investments
specifically.
Foreign Debt Securities. Each Fund may invest up to 35% of its total
assets in 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 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 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. Unless otherwise contracted, 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. 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.
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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 subject to financial reporting standards,
practices and requirements that are either not uniform or less rigorous than
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.
Foreign Markets. 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 which may
result in increased exposure to market and foreign exchange fluctuations and
increased liquidity.
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 cost of converting
foreign currency into U.S. dollars, the payment of fixed brokerage commissions
on foreign exchanges, 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 not investing in foreign securities. In addition,
foreign securities may be subject to foreign government taxes that would reduce
the net yield on such securities.
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.
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 ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs (CDRs)
and IDRs (GDRs) 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 (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European and non-U.S.
securities markets, respectively.
Privatizations. Each Fund may invest in privatizations (i.e. foreign
government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Brady Bonds. Each Fund may invest in so-called "Brady Bonds," which
are securities created through the exchange of existing commercial bank loans to
public and private entities for new bonds in connection with debt restructurings
under a debt restructuring plan announced by former U.S. Secretary of the
Treasury Nicholas F. Brady. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are currently actively traded in the OTC secondary market for debt
instruments. Brady Bonds have been issued only recently and therefore do not
have a long payment history. 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.
Emerging Markets. Each Fund may invest in securities of issuers
located in "emerging markets" (less developed countries located outside of the
U.S.). Investing in emerging markets involves not only the risks described above
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 markets countries during the latter part of 1997 and the
first half of 1998. Other characteristics of emerging markets that may affect
investment 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 structures governing private and foreign
investments and private property. The typically small size of the markets of
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.
Sovereign Debt. Investments in sovereign debt involve special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and a Fund may have limited
legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Legal recourse is therefore somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign entity
may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
pay interest in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While Warburg intends to manage the Funds in a manner that
will minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt issued
by issuers in many emerging markets generally is deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's and S&P.
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt, which may not be paying interest currently or may
be in payment default, may be comparable to securities rated "D" by S&P or "C"
by Moody's. A Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a limited trading market for such securities.
Because there is no liquid secondary market for many of these securities, the
Funds anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
have an adverse impact on the market price of such securities and 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 a
Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio and calculating its net asset value. When and if available, fixed
income securities may be purchased by a Fund at a discount from face value.
However, the Funds do not intend to hold such securities to maturity for the
purpose of achieving potential capital gains, unless current yields on these
securities remain attractive. From time to time, a Fund may purchase securities
not paying interest at the time acquired if, in the opinion of Warburg, such
securities have the potential for future income or capital appreciation.
U.S. Government Securities. The obligations issued or guaranteed by
the U.S. government in which a Fund may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ in terms of
their interest rates, maturities and dates of issuance. Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to 10
years and Treasury Bonds generally have maturities of greater than 10 years at
the date of issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are instruments that are supported by the
full faith and credit of the United States (such as certificates issued by the
Government National Mortgage Association ("GNMA")); instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan
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Banks); and instruments that are supported by the credit of the instrumentality
(such as Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan Administration, Export-Import Bank of the United States, Small
Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund 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 Fund.
Debt Securities. 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 Japan
Small Company Fund, preferred stocks that are not convertible into common stock
for the purpose of seeking capital appreciation. Any percentage limitation on a
Fund's ability to invest in debt securities will not be applicable during
periods when the Fund pursues a temporary defensive strategy as discussed below.
Each Fund may invest to a limited extent in zero coupon securities and
government zero coupon securities. See "Additional Information Concerning Taxes"
for a discussion of the tax consequences to shareholders of a Fund that invests
in zero coupon securities.
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. Securities rated in the fourth highest grade
may have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities, although Warburg will
consider such event in its determination of whether the Fund should continue to
hold the securities.
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Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
Below Investment Grade Securities. The Japan Growth Fund may invest
or hold up to 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 the Fund. The Japan Small Company
Fund may invest or hold up to 5% of its net assets in securities downgraded
below investment grade, including convertible and non-convertible debt
securities, subsequent to acquisition by the Fund.
Below investment grade debt securities may be rated as low as C by
Moody's or D by S&P, or be deemed by Warburg 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. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Investors should be aware that ratings
are relative and subjective and are not absolute standards of quality.
Below investment grade 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
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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 investment grade 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.
While the market values of medium- and lower-rated securities and
unrated securities of comparable quality tend to react less to fluctuations in
interest rate levels than do those of higher-rated securities, the market values
of certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
medium- and lower-rated securities and unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
An economic 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. A
Fund may have difficulty disposing of certain of these securities because there
may be a thin trading market. Because there is no established retail secondary
market for many of these securities, the 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 higher-rated securities.
The lack of a liquid secondary market, as well as adverse publicity and investor
perception with respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular issues when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories
is also more volatile than that of higher quality securities. Factors adversely
impacting the market value of these securities will adversely impact a Fund's
net asset value. A Fund will rely on the judgment, analysis and experience of
Warburg in evaluating the creditworthiness of an issuer. In this evaluation, in
addition to relying on ratings assigned by Moody's or S&P, 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
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the issuer's management and regulatory matters. Interest rate trends and
specific developments which may affect individual issuers will also be analyzed.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether a Fund should continue to hold the securities. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. A Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings of such securities. At times, adverse publicity regarding
lower-rated securities has depressed the prices for such securities to some
extent.
Mortgage-Backed Securities. Mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities include
those issued by GNMA, FNMA and FHLMC. Non-government issued mortgage-backed
securities may offer higher yields than those issued by government entities, but
may be subject to greater price fluctuations. 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. Although there may be government or private
guarantees on the payment of interest and principal of these securities, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates, nor do the guarantees extend
to the yield or value of the Fund's shares. These securities generally are
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. Some mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. 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
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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. Asset-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities include
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 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
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certain amounts owed on the credit cards, thereby reducing the balance due. In
addition, there is no assurance that the security interest in the collateral can
be realized. The remaining maturity of any asset-backed security a Fund invests
in will be 397 days or less. A Fund may purchase asset-backed securities that
are unrated.
Loan Participations and Assignments. Each 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 each 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.
Structured Notes, Bonds or Debentures. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon
changes in the applicable Reference. The terms of the structured securities may
provide that in certain circumstances no principal is due at maturity and,
therefore, may result in the loss of a Fund's entire investment. The value of
structured securities may move in the same or the opposite direction as the
value of the Reference, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at
maturity may be a multiple of the change in the value of the Reference so that
the security may be more or less volatile than the Reference, depending on the
multiple. Consequently, structured securities may entail a greater degree of
market risk and volatility than other types of debt obligations.
REITs. Each Fund may invest in real estate investment trusts
("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estates related loans or interests. Like
regulated investment companies such as the Funds, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, amended (the "Code"). By investing in a
REIT, a Fund will indirectly bear its proportionate share of any expenses paid
by the REIT in addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be affected by
changes in the value of the underlying property owned by such REIT or by the
quality of any credit extended by the REIT. REITs are dependent on management
skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash
flow dependency, default by borrowers, self-liquidation, the possibilities of
failing to qualify for the exemption from tax for distributed income under the
Code and failing to maintain their exemptions from the 1940 Act. REITs are also
subject to interest rate risks.
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 a Fund should continue to hold the securities.
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 33-1/3% of the Funds' total assets (including the loan collateral). The
Funds will not lend portfolio securities to its investment adviser, any
sub-investment adviser or their affiliates unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government securities,
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the 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. 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.
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. Additional 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 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.
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
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settlement date at a stated price and yield). In these transactions, payment for
and delivery of the securities occur beyond the regular settlement dates,
normally within 30-45 days after the transaction. The Funds will not enter into
a when-issued or delayed-delivery transaction for the purpose of leverage, but
may sell the right to acquire a when-issued security prior to its acquisition or
dispose of its right to deliver or receive securities in a delayed-delivery
transaction 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 and delayed-delivery transactions 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. Each Fund will establish a segregated account with its custodian
consisting of cash or liquid securities in an amount equal to its when-issued
and delayed-delivery purchase commitments and will segregate the securities
underlying commitments to sell securities for delayed delivery.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case 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 Japan Growth Fund may engage in
short sales against the box. In a short sale, the 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 the Fund does not own, a short sale is
"against the box" to the extent that the Fund contemporaneously owns or has the
right to obtain, at no added cost, securities identical to those sold short. It
may be entered into by the Fund, for example, to lock in a sales price for a
security the Fund does not wish to sell immediately. If the 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.
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The Fund may 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 the Fund owns. There will be certain additional
transactions costs associated with short sales against the box, but the Fund
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
If the 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 the 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 and companies with continuous operations of less than three
years ("unseasoned issuers"), which may include JASDAQ and Frontier Market
securities. 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.
Although investing in securities of small- and medium-sized and
emerging growth companies or unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in a Fund may involve a
greater degree of risk than an investment in other mutual funds that seek growth
of capital or capital appreciation by investing in better-known, larger
companies.
Special Situation Companies. "Special situation companies" are
involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, may provide an
attractive investment opportunity. If the actual or prospective situation does
not materialize as anticipated, the market price of the securities of a "special
situation company" may decline significantly.
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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. 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. A Fund may invest in warrants to purchase 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. 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.
This leveraging increases an investor's risk, however, 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. 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 Japan Small Company
Fund may not invest more than 15% of its net 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 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable
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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. 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. 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).
Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in the
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Funds to the extent that qualified institutional buyers are unavailable or
uninterested in purchasing such securities from the Funds. The Boards may adopt
guidelines and delegate to Warburg the daily function of determining and
monitoring the liquidity of Rule 144A Securities, although each Board will
retain ultimate responsibility for liquidity determinations.
Money Market Obligations. Each Fund is authorized to invest, under
normal market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five year
or less remaining to maturity) money market obligations. 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 net assets in securities of
money market mutual funds that are unaffiliated with the Fund or Warburg. A
money market mutual fund is an
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investment company that invests in short-term high quality money market
instruments. A money market mutual fund generally does not purchase securities
with a remaining maturity of more than one year. 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.
Reverse Repurchase Agreements and Dollar Rolls. Each of the Funds
may enter into reverse repurchase agreements with member banks of the Federal
Reserve System and certain non-bank dealers. 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 segregate
with an approved custodian containing cash or liquid securities having a value
not less than the repurchase price (including accrued interest). The segregated
assets will be marked-to-market daily and additional assets will be segregated
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.
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 segregate 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 segregated assets 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 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. As
a non-diversified fund, each Fund may invest a greater proportion of its assets
in the obligations of a smaller number of issuers and, as a result, may be
subject to greater risk with respect to portfolio securities. The
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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 single issuer and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer.
Temporary Defensive Strategies
Debt Securities. When Warburg believes that a defensive posture
is warranted, the Japan Growth 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. Each Fund, for temporary defensive
purposes, may invest in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years or less remaining to
maturity) money market obligations without limit.
INVESTMENT RESTRICTIONS
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 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.
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.
28
<PAGE> 68
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."
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
29
<PAGE> 69
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,
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.
30
<PAGE> 70
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
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
31
<PAGE> 71
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 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 highest bid and lowest asked quotations. If there are no such
quotations, the value of the securities will be taken to be the most recent bid
quotation on the exchange or market. Options contracts will be valued similarly.
Futures contracts will be valued at the most recent settlement price at the time
of valuation. 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 (each 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, futures contracts and other assets for which market
quotations are not available 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.
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
32
<PAGE> 72
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 as of noon (Eastern time). 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.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
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
33
<PAGE> 73
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 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
due to brokerage business on behalf of the Funds may be useful to Warburg in
serving 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 Funds. 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.
Research received from brokers or dealers is supplemental to Warburg's own
research program. The fees to Warburg under its advisory agreement with the Fund
are not reduced by reason of its receiving any brokerage and research services.
For the fiscal year ended October 31, 1998, $8,749 and $13,127 of total
brokerage commissions was paid by the Japan Growth Fund and the Japan Small
Company 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 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 1996 1997 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan Growth Fund $ 172,240 $149,801 $197,011
- --------------------------------------------------------------------------------
Japan Small Company $1,551,006 $849,667 $267,535
Fund
- --------------------------------------------------------------------------------
</TABLE>
As of October 31, 1998, the Japan Growth Fund and the Japan Small
Company Fund held $2,046,000 and $658,000, respectively, in the securities of
State Street Bank and Trust 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
34
<PAGE> 74
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 and a wholly-owned
subsidiary of Warburg ("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.
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
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<PAGE> 75
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the 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.
It is not possible to predict the Funds' portfolio turnover rates.
High portfolio turnover rates (100% or more) may result in higher brokerage
commissions, dealer markups or underwriting commissions as well as other
transaction costs. In addition, gains realized from portfolio turnover may be
taxable to shareholders.
JAPAN AND ITS SECURITIES MARKETS
The Japan Growth Fund and the Japan Small Company 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 several years of political unrest, the
LDP elected Ryutaro Hashimoto in August 1995, 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.
36
<PAGE> 76
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 Social
Democratic Party 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. In August
of 1998, Keizo Obuchi, foreign minister under Hashimoto, was elected to the
office of prime minister. 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. 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 through extensive deregulation plans,
including a fundamental overhaul of Japan's financial industry. 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 financial 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 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
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<PAGE> 77
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.
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
<TABLE>
<CAPTION>
1998* 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private ............ (Y)303,050 (Y)308,472 (Y)299,440 (Y)290,515 (Y)286,154 (Y)278,703
Government ......... 50,083 50,239 48,969 47,555 45,743 44,771
Gross Fixed
Capital Formation .. 133,044 143,217 148,190 136,792 137,291 140,433
Increase (Decrease) in
Stocks ............. 914 828 1,058 947 50 620
Exports of Goods and
Services ........... 56,355 55,979 49,598 45,393 44,410 44,197
Imports of Goods and
Services ........... 46,753 51,331 46,900 38,272 34,387 33,343
GDP (Expenditures) ... 499,191 507,403 500,356 482,930 479,260 475,381
Change in GDP from
Preceding Year ..... (1.6)% 1.4% 3.6% 0.8% 0.8% 0.9%
<CAPTION>
1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
Consumption
Expenditures
Private ............ (Y)272,294 (Y)261,891 (Y)249,288
Government ......... 43,262 41,356 38,807
Gross Fixed
Capital Formation .. 143,525 143,998 136,467
Increase (Decrease) in
Stocks ............. 1,489 3,453 2,430
Exports of Goods and
Services ........... 47,384 46,723 45,920
Imports of Goods and
Services ........... 36,891 39,121 42,872
GDP (Expenditures) ... 471,064 458,299 430,040
Change in GDP from
Preceding Year ..... 2.8% 6.6% --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ----------
* Average of the first and second quarters of 1998.
<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 92.3 0.1 107.2 0.2
1997 93.7 1.4 109.0 1.8
1998 91.7* (2.0) 109.6** 0.6
</TABLE>
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
- ----------
* Average of the first eleven months of 1998.
** Average of the first ten months of 1998.
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<PAGE> 78
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:
AVERAGE CURRENCY EXCHANGE RATES
<TABLE>
<CAPTION>
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
1998 139.11*
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ----------
* Average as of the first eleven months of 1998.
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, 1998, the First Section
of the TSE listed 1,340 companies with market capitalization of approximately
267.8 trillion yen (approximately $2.3 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, 1998, the
Second Section of the TSE listed 498 companies with market capitalization
of approximately 7.4 trillion yen (approximately $64.0 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
39
<PAGE> 79
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 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.
As of December 31, 1998, 868 issues were traded through JASDAQ,
having an aggregate market capitalization in excess of 7.7 trillion yen
(approximately $67.8 billion as of such date). The entry requirements for
JASDAQ were amended on December 1, 1998. As of February 22, 1999, there was no
English translation of the amendments available. JASDAQ has generally
attracted small growth companies or companies whose major shareholders wish
to sell only a small portion of the company's equity.
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.
40
<PAGE> 80
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 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 business and affairs of each Fund are managed by the Board of
Directors in accordance with the laws of the State of Maryland. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies authorized by the Board. Under each Fund's Charter, a Board
may classify or reclassify any unissued shares of the Funds 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 Funds.
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
1737 Cambridge Street Intelligence Counsel from June 1995 until
Cambridge, Massachusetts 02138 January 1997; Director or Trustee of
Circuit City Stores, Inc. (retail
electronics and appliances) and Phoenix
Home Life Mutual Insurance Company;
Director/Trustee of other investment
companies in the Warburg Pincus family
of funds.
</TABLE>
- ----------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
41
<PAGE> 81
<TABLE>
<S> <C>
Jack W. Fritz (71) Director
2425 North Fish Creek Road Private investor; Consultant and Director
P.O. Box 483 of Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators
of radio stations); Director of Advo,
Inc. (direct mail advertising);
Director/Trustee of other investment
companies in the Warburg Pincus family
of funds.
John L. Furth* (68) Chairman of the Board
466 Lexington Avenue Chief Executive Officer and Director of
New York, New York 10017-3147 Warburg; Associated with Warburg since
1970. Chairman of the Board and officer of
other investment companies advised by
Warburg. Director/Trustee of other
investment companies in the Warburg Pincus
family of funds.
Jeffrey E. Garten (51) Director
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke 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 in the Warburg Pincus family
of funds.
Thomas A. Melfe (67) Director
1251 Avenue of the Americas Partner in the law firm of Piper &
29th Floor Marbury, Partner in the law firm of
New York, New York 10020-1104 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 in the Warburg Pincus
family of funds.
Arnold M. Reichman* (50) Director
466 Lexington Avenue Managing Director, Chief Operating
New York, New York 10017-3147 Officer and Assistant Secretary of
Warburg; Associated with Warburg since 1984;
Officer of Counsellors Securities;
Director/Trustee of other investment
companies in the Warburg Pincus family
of funds.
</TABLE>
- ----------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
42
<PAGE> 82
<TABLE>
<S> <C>
Alexander B. Trowbridge (69) Director
1317 F Street President of Trowbridge Partners, Inc.
5th Floor (business consulting) from January 1990
Washington, DC 20004 to November 1996; Director or Trustee of
New England Mutual Life Insurance Co.,
ICOS Corporation (biopharmaceuticals),
WMX Technologies Inc. (solid and
hazardous waste collection and disposal),
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 in the Warburg Pincus
family of funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1991; Officer of
Counsellors Securities and other investment
companies in the Warburg Pincus family
of funds.
Steven B. Plump (40) Executive Vice President
466 Lexington Avenue Senior Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1995; Associated with
Chemical Investment Services and its
affiliates from 1993 until 1995. Officer of
Counsellors Securities and other investment
companies in the Warburg Pincus family
of funds.
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1984; Treasurer of
Counsellors Securities; Officer of other
investment companies in the Warburg Pincus
family of funds.
Janna Manes, Esq. (31) Vice President and Secretary
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1996; Associated with
the law firm of Willkie Farr & Gallagher
from 1993 to 1996; Officer of other
investment companies in the Warburg
Pincus family of funds.
Howard Conroy, CPA (45) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1992; Officer of other
investment companies in the Warburg Pincus
family of funds.
</TABLE>
43
<PAGE> 83
<TABLE>
<S> <C>
Daniel S. Madden, CPA (33) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 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 in the Warburg
Pincus family of funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1997; Associated with the law
firm of Gordon Altman Butowsky Weitzen
Shalov & Wein from 1995 to 1997; Officer of
other investment companies in the Warburg
Pincus family of funds.
</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 member of the Audit
Committee receives an annual fee of $250, and the Chairman of the Audit
Committee received an annual fee of $325. For each fund in the Warburg Pincus
family of funds, each Director/Trustee 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 or $2,000 per fund for Director services provided and $250 for
each Board meeting attended in addition to reimbursement for expenses incurred
in connection with attendance at Board meetings. Each member of the Audit
Committee receives an annual fee of $250, and the Chairman of the Audit
Committee received an annual fee of $325.
44
<PAGE> 84
Directors' Total Compensation (for the fiscal year ended October 31, 1998):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Japan Japan All Investment
Small Growth Companies in
Name of Director Company Fund the Warburg
Fund Pincus Fund Complex(1)
- -----------------------------------------------------------------
<S> <C> <C> <C>
John L. Furth(2) None None None
- -----------------------------------------------------------------
Arnold M. Reichman(2) None None None
- -----------------------------------------------------------------
Richard N. Cooper $1,900 $1,900 $56,600
- -----------------------------------------------------------------
Donald J. Donahue(3) $ 475 $ 475 $13,525
- -----------------------------------------------------------------
Jack W. Fritz $2,150 $2,150 $63,100
- -----------------------------------------------------------------
Jeffrey E. Garten $1,675 $1,675 $49,325
- -----------------------------------------------------------------
Thomas A. Melfe $2,150 $2,150 $60,700
- -----------------------------------------------------------------
Alexander B. Trowbridge $2,250 $2,250 $64,000
- -----------------------------------------------------------------
</TABLE>
- ----------
(1) Each Director/Trustee also serves as a Director or Trustee of 39
investment companies in the Warburg Pincus family of funds except for Mr.
Melfe, who also serves as a Director/Trustee of 22 investment companies in
the Warburg Pincus family of funds.
(2) Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg
and, accordingly, receive no compensation from the Funds or any other
investment company in the Warburg Pincus family of funds.
(3) Mr. Donahue resigned as a Director of each Fund effective February 6, 1998.
As of January 29, 1999, 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 Manager
45
<PAGE> 85
Mr. P. Nicholas Edwards is Portfolio Manager of the Japan Growth
Fund and Portfolio Manager of the Japan Small Company 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.
Investment Adviser and Co-Administrators
Warburg, located at 466 Lexington Avenue, New York, New York
10017-3147, serves as investment adviser to each Fund pursuant to a written
agreement (the "Advisory Agreement"). Counsellors Funds Service, Inc.
("Counsellors Service") and PFPC both serve as co-administrators to each Fund
pursuant to separate written agreements (the "Counsellors Service
Co-Administration Agreement" and the "PFPC Co-Administration Agreement,"
respectively).
Warburg, subject to the control of the Funds' 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 the Fund. Warburg also employs a support staff
of management personnel to provide services to the Funds and furnishes the Funds
with office space, furnishings and equipment. For its investment advisory
services, Warburg receives a fee calculated at an annual rate of 1.25% of each
Fund's average daily net assets.
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 each 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
developing and monitoring compliance procedures for the Funds. For its
administrative services, Counsellors Service receives a fee calculated at an
annual rate of .10% of each Fund's average daily net assets.
As a co-administrator, PFPC calculates each Fund's net asset value,
provides all accounting services for the Funds and assists in related aspects of
the Funds' operations. For its administrative services, PFPC receives a fee
calculated at an annual rate of .12% on each Fund's first $250 million in
average daily net assets, .10% on the next $250 million in average daily net
assets, .08% on the next $250 million in average daily net assets and .05% of
the average daily net assets over $750 million, subject in each case to a
minimum annual fee and exclusive out-of-pocket expenses. PFPC has its
principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
Warburg and the Funds' co-administrators may voluntarily waive a
portion of their fees from time to time and temporarily limit the expenses to
be borne by the Funds.
Each class of shares of a 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
46
<PAGE> 86
on a percentage of a Fund's average daily net assets. 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, 1996 October 31, 1997 October 31, 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth $149,987 ($149,987) $260,741 ($143,819) $438,025 ($73,158)
- ----------------------------------------------------------------------------------
Japan Small $2,721,814 ($573,600) $927,417* ($357,562) $526,522 ($288,783)
Company
- ----------------------------------------------------------------------------------
</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, 1996 October 31, 1997 October 31, 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth $ 14,399 ($11,644) $25,031 ($25,031) $49,934 ($42,040)
- ----------------------------------------------------------------------------------
Japan Small $260,256 ($53,976) $89,032 ($20,262) $58,033 ($50,546)
Company
- ----------------------------------------------------------------------------------
</TABLE>
Counsellors Service Co-Administration Fees
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1996 October 31, 1997 October 31, 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan Growth $ 11,999 $20,859 $35,042
- ----------------------------------------------------------------------------------
Japan Small $217,745 $74,193 $42,122
Company
- ----------------------------------------------------------------------------------
</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
47
<PAGE> 87
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 200 Stevens
Drive, Suite 440, Lester, Pennsylvania 19113. 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 affiliate of State Street ("BFDS"), responsibility for most shareholder
servicing functions. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies within the
meaning of the 1940 Act. 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.," and 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 of the
Funds is a non-diversified management investment company.
Although each Fund is authorized to offer two classes of shares,
Common Shares and Advisor Shares, the Japan Small Company Fund currently offers
only Common Shares. The Japan Growth Fund offers both Common and Advisor Shares,
the Advisor Shares pursuant to a separate prospectus. Unless otherwise
indicated, references to a "Fund" apply to each class of shares of that Fund.
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
48
<PAGE> 88
and, without shareholder approval, may increase the number of authorized shares
of the Fund.
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.
Distribution and Shareholder Servicing
Counsellors Securities, 466 Lexington Avenue, New York, New York
10017-3147, acts as distributor to each of the Funds and is a wholly-owned
subsidiary of Warburg.
Common Shares. The Japan Growth Fund and the Japan Small Company
Fund have each entered into a Shareholder Servicing and Distribution Plan (the
"Common Shares 12b-1 Plan"), pursuant to Rule 12b-1 under the 1940 Act, pursuant
to which each Fund pays 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 Common Shares 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 Common Shares 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 Common Shares
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 Common Shares 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, 1998, the Common Shares of the
Japan Growth Fund and the Japan Small Company Fund paid Counsellors
49
<PAGE> 89
Securities $87,542 and $105,301, respectively, which was expended on
advertising, marketing communications and public relations.
Certain financial-services firms may receive service fees from the
distributor, the adviser or their affiliates for providing recordkeeping or
other services in connection with investments in the funds. Financial-services
firms may also be reimbursed for marketing costs. The service fee may be up to
0.40% per year of the value of fund accounts maintained by the firm. The funds
may reimburse part of the service fee at rates they would normally pay to the
transfer agent for providing the services.
Advisor Shares. The Japan Growth Fund has entered into an agreement
(the "Agreement") 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. Agreements will be governed by a
distribution plan (the "Advisor Shares 12b-1 Plan") pursuant to Rule 12b-1 under
the 1940 Act. Advisor Shares of the Fund bear expenses paid pursuant to the
Advisor Shares 12b-1 Plan at an annual rate not to exceed .75% of the average
daily net asset value of the Fund's outstanding Advisor Shares. Advisor Shares
are currently bearing expenses of .50% of average daily net assets. The Advisor
Shares 12b-1 Plan requires the Board, at least quarterly, to receive and review
written reports of amounts expended under the Advisor Shares 12b-1 Plan and the
purpose for which such expenditures were made. For the fiscal year ended October
31, 1998, the Advisor Shares of the Japan Growth Fund paid $127, all of which
were paid to Institutions.
Certain Institutions may receive service fees from the
distributor, the adviser or their affiliates for providing recordkeeping or
other services in connection with investments in the funds. Institutions may
also be reimbursed for marketing and other costs. The service fee may be up to
0.10% per year of the value of fund accounts maintained by the firm. Fees
payable to any particular Institution are determined based upon a number of
factors, including the nature and quality of the services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Institutions. The funds may reimburse part of the service fee at
rates they would normally pay to the transfer agent for providing the services.
An Institution with which the Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under the
Fund's co-administration and distribution and shareholder servicing
50
<PAGE> 90
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 the Fund's
shares. Prospectuses are available from the Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
General. The Common Shares 12b-1 Plans and the Advisor Shares 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
Common Shares 12b-1 Plan or an Advisor Shares 12b-1 Plan would require the
approval of the Boards in the same manner. Neither the Common Shares 12b-1 Plans
nor the Advisor Shares 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 Common Shares 12b-1 Plan or Advisor Shares 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.
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.)
If 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
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<PAGE> 91
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 each Fund. A Common Shareholder may exchange Common
Shares of a Fund for Common Shares of another Fund or for Common Shares of
another Warburg Pincus fund at their respective net asset values. An Advisor
Shareholder may exchange Advisor Shares of a Fund for Advisor Shares of another
Warburg Pincus fund at their respective net asset values.
If an exchange request is received by Warburg Pincus Funds or their
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. 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 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 shares of a
Fund for 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 1-800-222-8977.
The Funds reserve the right to refuse exchange purchases by any
person or group 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. 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 Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
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<PAGE> 92
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 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) 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. 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.
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<PAGE> 93
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 (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.
If, in any taxable year, a Fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement,
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
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<PAGE> 94
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 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 engages in short sales or 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 a zero coupon security's face value
and its purchase price is imputed as income to the Fund each year even though
the Fund receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Fund will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Fund.
Foreign Taxes
In the opinion of Japanese counsel for the Funds, the operations of
the Funds will not subject the Funds to any Japanese income, capital gains or
other taxes except for withholding taxes on interest and dividends paid to the
Funds 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, within
certain exceptions, imposed upon dividends paid by Japanese corporations to the
Funds. Pursuant to the present terms of the Convention, interest received by the
Funds from sources within Japan is subject to a Japanese withholding tax at a
rate of 10%.
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<PAGE> 95
Each Fund may elect for U.S. income tax purposes to treat foreign
income taxes paid by it as paid by its shareholders if: (i) the Fund qualifies
as a regulated investment company, (ii) certain asset and distribution
requirements are satisfied, and (iii) more than 50% of the Fund's total assets
at the close of its fiscal year consists of stock or securities of foreign
corporations. Each 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, a 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.
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 electing 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.
Alternatively, a Fund may make a mark-to-market election that will
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 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.
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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 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
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<PAGE> 97
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, distributions and redemption proceeds
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. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at 800-927-2874.
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With respect to the Funds' Common and Advisor Shares, the average
annual total return for the periods ended October 31, 1998 were as follows
(performance figures calculated without waiver of fees by a Fund's service
provider(s), if any, are noted in parentheses):
TOTAL RETURN
COMMON SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth (11.81)% (12.22)% N/A N/A (4.34)% (5.06)%
(12/29/95)
- --------------------------------------------------------------------------------
Japan Small (10.61)% (11.54)% N/A N/A (11.72)% (12.52)%
Company (9/30/94)
- --------------------------------------------------------------------------------
</TABLE>
ADVISOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth (11.93)% (12.54)% N/A N/A (4.74)% (5.48)%
(12/29/95)
- --------------------------------------------------------------------------------
</TABLE>
These total return figures show the average percentage change in
value of an investment in a Fund from the beginning of the measurement period to
the end of the measurement period. The figures reflect changes in the price of
the Fund's shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in 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).
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)to the nth power = 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.
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 Common Shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the
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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 of 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).
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 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.
A Fund may compare its performance with (i) that of other mutual
funds with similar investment objectives and policies, which may be based on the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds; (ii) in the case of the
Japan Growth Fund, the Morgan Stanley Capital International Europe, Australasia,
Far East ("EAFE") Index, the Salomon Russell Global Equity Index, the
FT-Actuaries World Indices, the S&P 500 Index, the Nikkei over-the-counter
average, the JASDAQ Index, the Nikkei 225 and 300 Stock Indexes and the Tokyo
Stock Exchange Index, which are unmanaged indexes of common stock, and the case
of the Japan Small Company Fund, the JASDAQ and the Morgan Stanley Japan Small
Company Index; or (iii) other appropriate indexes of investment securities or
with data developed by Warburg derived from such indexes. A Fund may also
include evaluations of the Fund published by nationally recognized ranking
services and by financial publications 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 its expense ratio 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.
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
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<PAGE> 100
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 27 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
1972-1998
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
1998 18.29 26.23
</TABLE>
- ----------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 27 years.
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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 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.
In its reports, investor communications or advertisements, each
Fund may also include: (i) its total return performance; (ii) its performance
compared with various indexes or other mutual funds; (iii) published
evaluations by nationally recognized ranking services and financial
publications; (iv) descriptions and updates concerning its strategies and
portfolio investments; (v) its goals, risk factors and expenses compared with
other mutual funds; (vi) analysis of its investments by industry, country,
credit quality and other characteristics; (vii) a discussion of the risk/return
continuum relating to different investments; (viii) the general biography or
work experience of the portfolio managers of the Funds; (ix) portfolio manager
commentary or market updates; (x) research methodology underlying stock
selection or a Fund's investment objective; and (xi) other information of
interest to investors.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("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.
62
<PAGE> 102
MISCELLANEOUS
As of January 29, 1999, 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:
Japan Growth Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 33.72%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 31.64%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette* 9.90%
Securities Corp. Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Fl. 14
Jersey City, NJ 07399-0001
Susquehanna Financial Group Inc.* 5.48%
401 E. City Avenue, Suite 220
Bala Cynwyd, PA 19004-1117
ADVISOR SHARES U.S. Clearing Corporation* 38.60%
FBO 500-23759-12
26 Broadway
New York, NY 10004-1798
CIBC Oppenheimer Corp.* 31.48%
FBO 064-16436-14
P.O. Box 3484
Church Street Station
New York, NY 10008-3484
CIBC Oppenheimer Corp.* 15.76%
FBO 064-17999-11
P.O. Box 3484
Church Street Station
New York, NY 10008-3484
Donaldson Lufkin & Jenrette Securities* 8.22%
P.O. Box 2052
Jersey City, NJ 07303-2052
Warburg Pincus Asset Mgmt. 5.02%
Attn: Stephen Distler
466 Lexington Avenue, 10th Fl.
New York, NY 10017-3140
</TABLE>
63
<PAGE> 103
Japan Small Company Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 33.96%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 31.16%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette* 8.63%
Securities Corp. Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Fl. 14
Jersey City, NJ 07399-00001
</TABLE>
- ----------
* The Funds believe that these entities are not the beneficial owners of shares
held of record by it.
Mr. Lionel I. Pincus, Chief Executive Officer of Warburg, may be
deemed to have beneficially owned 0.39% and 0.01% of the outstanding shares of
the Japan Growth Fund and Japan Small Company Funds, respectively, 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, 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, is incorporated herein by reference with respect to all
information regarding the relevant Fund included therein. Each Fund will furnish
without charge a copy of the annual reports upon request by calling Warburg
Pincus Funds at 800-927-2874.
64
<PAGE> 104
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
A-1
<PAGE> 105
B, and CCC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - 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.
A-2
<PAGE> 106
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
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.
A-3
<PAGE> 107
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-4
<PAGE> 108
VIA EDGAR
- --- -----
March 2, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Warburg, Pincus Japan Small Company Fund, Inc.
Securities Act File No. 33-82362;
Investment Company Act File No. 811-8686
----------------------------------------------
Ladies and Gentlemen:
On behalf of the Warburg, Pincus Japan Small Company Fund, Inc. (the "Fund"), I
hereby transmit for filing pursuant to Rule 497(c) under the Securities Act of
1933, as amended (the "Securities Act"), the Registrant's Prospectus,
Shareholder Guide and Statement of Additional Information and supplement
thereto.
The Registration Statement, of which this Prospectus and Statement of
Additional Information are a part, was declared effective by the Securities and
Exchange Commission on February 22, 1999.
Very truly yours,
/s/ Eugene Park
- ----------------
Eugene Park
Enclosures
cc: Janna Manes
Rose F. DiMartino
