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Rule 497(e)
Securities Act File No. 33-73498
Investment Co. Act File No. 811-8252
STATEMENT OF ADDITIONAL INFORMATION
December 30, 1994,
as revised March 22, 1995
WARBURG PINCUS EMERGING MARKETS FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
Contents
Page
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 28
Additional Purchase and Redemption Information . . . . . . . . . . . . . 35
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . 36
Determination of Performance . . . . . . . . . . . . . . . . . . . . . . 40
Auditors and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Appendix -- Description of Ratings . . . . . . . . . . . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P., Independent
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Common Shares of Warburg Pincus
Emerging Markets Fund (the "Fund"), and with the Prospectus for the Series 2
Shares of the Fund, each dated December 30, 1994, and is incorporated by
reference in its entirety into those Prospectuses. Because this Statement of
Additional Information is not itself a prospectus, no investment in shares of
the Fund should be made solely upon the information contained herein. Copies
of the Fund's Prospectuses and information regarding the Fund's current
performance may be obtained by calling the Fund at (800) 257-5614.
Information regarding the status of shareholder accounts may be obtained by
calling the Fund at (800) 888-6878 or by writing to the Fund, P.O. Box 9030,
Boston, Massachusetts 02205-9030.
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INVESTMENT OBJECTIVE
The investment objective of the Fund is growth of capital.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectus.
Additional Information on Investment Practices
Special Situation Companies. The Fund may invest in the securities
of "special situation companies" 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, would improve the value of the company's stock.
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. The Fund believes, however, that if Warburg, Pincus
Counsellors, Inc., the Fund's investment adviser ("Counsellors"), analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Fund may achieve growth of capital.
There can be no assurance, however, that a special situation that exists at
the time the Fund makes its investment will be consummated under the terms and
within the time period contemplated.
Foreign Investments. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below,
which are not typically associated with investing in U.S. issuers. Since the
Fund will be investing substantially in securities denominated in currencies
other than the U.S. dollar, and since the Fund may temporarily hold funds in
bank deposits or other money market investments denominated in foreign
currencies, the Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies
and the dollar. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the dollar value of the
Fund assets denominated in that foreign currency. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
and gains, if any, to be distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of
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particular importance are rates of inflation, interest rate levels, the
balance of payments and the extent of government surpluses or deficits in the
United States and the particular foreign country, all of which are in turn
sensitive to the monetary, fiscal and trade policies pursued by the
governments of the United States and other foreign countries important to
international trade and finance. Governmental intervention may also play a
significant role. National governments rarely voluntarily allow their
currencies to float freely in response to economic forces. Sovereign
governments use a variety of techniques, such as intervention by a country's
central bank or imposition of regulatory controls or taxes, to affect the
exchange rates of their currencies.
Many of the securities held by the Fund will not be registered with,
nor the issuers thereof be subject to reporting requirements of, the U.S.
Securities and Exchange Commission (the "SEC"). Accordingly, there may be
less publicly available information about the securities and about the foreign
company or government issuing them than is available about a domestic company
or government entity. Foreign companies are generally not subject to uniform
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, with respect to some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or domestic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such
respects as growth of Gross National Product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments positions.
The Fund may invest in securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid and their
prices are more volatile than securities of comparable domestic companies.
Certain foreign countries are known to experience long delays between the
trade and settlement dates of securities purchased or sold. Due to the
increased exposure to the Fund of market and foreign exchange fluctuations
brought about by such delays, and due to the corresponding negative impact on
Fund liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable risk of
loss.
Additionally, the operating expenses of the Fund can be expected to
be higher than that of an investment company investing exclusively in domestic
securities, since the expenses of the Fund, such as custodial costs, valuation
costs and communication costs, as well as the rate of the investment advisory
fees, though similar to such expenses of some other international funds, are
higher than those costs incurred by other investment companies.
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
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impact on investment in foreign fixed income securities. The relative
performance of various countries' fixed income markets historically has
reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets
from time to time.
The foreign government securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international
organizations designated, or backed by governmental entities to promote
economic reconstruction or development, international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank"), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt
securities of quasi-governmental agencies are issued by entities owned by
either a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government's full faith and
credit and general taxing powers. An example of a multinational currency unit
is the European Currency Unit ("ECU"). An ECU represents specified amounts of
the currencies of certain member states of the European Economic Community.
The specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
Brady Bonds. The Fund may invest in so-called "Brady Bonds," which
have been issued by Costa Rica, Mexico, Uruguay and Venezuela and which may be
issued by other Latin American countries. Brady Bonds are issued as part of a
debt restructuring in which the bonds are issued in exchange for cash and
certain of the country's outstanding commercial bank loans. Investors should
recognize that Brady Bonds do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the over-the-counter
("OTC") secondary market for debt of Latin American issuers.
Loan Participations and Assignments. The Fund may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans are
expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the Borrower. The Fund will have
the right to receive payments of principal, interest and any fees to which it
is entitled only from the Lender selling the
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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 Counsellors
to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations
acquired by the Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. The Fund may have difficulty disposing of them because there is
no liquid market for such securities. The lack of a liquid secondary market
will have an adverse impact on the value of such securities and on the Fund's
ability to dispose of particular Participations or Assignments when necessary
to meet the Fund's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the Borrower. The
lack of a liquid market for Participations and Assignments also may make it
more difficult for the Fund to assign a value to these securities for purposes
of valuing the Fund's portfolio and calculating its net asset value.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed
securities, such as those issued by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation or certain foreign issuers. Mortgage-backed
securities represent direct or indirect participations in, or are secured by
and payable from, mortgage loans secured by real property. The mortgages
backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or
the issuing agency typically guarantees the payment of interest and principal
of these securities. However, the guarantees do not extend to the securities'
yield or value, which are likely to vary inversely with fluctuations in
interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities generally are "pass-through" instruments,
through which the holders receive a share of all interest and principal
payments from the mortgages underlying the securities, net of certain fees.
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Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual
pools vary widely, it is not possible to predict accurately the average life
of a particular pool. For pools of fixed-rate 30-year mortgages, a common
industry practice in the U.S. has been to assume that prepayments will result
in a 12-year average life. At present, pools, particularly those with loans
with other maturities or different characteristics, are priced on an
assumption of average life determined for each pool. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of a pool of mortgage-related securities. Conversely,
in periods of rising rates the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. However, these effects may
not be present, or may differ in degree, if the mortgage loans in the pools
have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates than
the original investment, thus affecting the Fund's yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA,
and due to any yield retained by the issuer. Actual yield to the holder may
vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the
issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces
the effective yield to the holder of such securities.
Asset-Backed Securities. The Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts and special purpose corporations.
Payments or distributions of principal and interest may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the trust
or corporation.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by
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automobiles. Most issuers of automobile receivables permit the loan servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the asset-backed
securities. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee
for the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Because asset-backed securities are relatively new,
the market experience in these securities is limited, and the market's ability
to sustain liquidity through all phases of the market cycle has not been
tested.
Zero Coupon Securities. The Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate convertible and
nonconvertible debt securities, which are bills, notes and bonds that have
been stripped of their unmatured interest coupons and custodial receipts or
certificates of participation representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its
holder prior to maturity. Accordingly, such securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. The Fund anticipates that it will not normally hold zero coupon
securities to maturity. Federal tax law requires that a holder of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest
payment on the security during the year. Such accrued discount will be
includible in determining the amount of dividends the Fund must pay each year
and, in order to generate cash necessary to pay such dividends, the Fund may
liquidate portfolio securities at a time when it would not otherwise have done
so.
Currency Transactions. The value in U.S. dollars of the assets of
the Fund that are invested in foreign securities may be affected favorably or
unfavorably by changes in exchange control regulations, and the Fund may incur
costs in connection with conversion between various currencies. The Fund,
therefore, may engage in currency exchange transactions to protect against
uncertainty in the level of future exchange rates. Although the generation of
income is not an investment objective of the Fund, income received could be
used to pay the Fund's expenses and would increase an investor's total return.
The Fund will conduct its currency exchange transactions either on a spot
(i.e., cash) basis at the rate prevailing in the currency exchange market, or
through entering into forward contracts to purchase or sell currency. If a
devaluation is generally anticipated, the Fund may not be able to contract to
sell the currency at a price above the devaluation level it anticipates. In
light of the requirements that the Fund must meet to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), for a given
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year, the Fund currently intends to limit its gross income from currency
transactions to less than 10% of its gross income for that taxable year.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The use of
forward currency contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged currency,
at the same time, they also limit any potential gain that might result should
the value of the currency increase. The Fund's dealings in forward currency
exchange for hedging purposes will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the Fund generally accruing in connection with the purchase or
sale of its portfolio securities. Position hedging is the sale of forward
currency with respect to portfolio security positions denominated or quoted in
the currency. The Fund may not position hedge with respect to a particular
currency to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a position hedging transaction, the cash or liquid high-grade debt
securities will be placed in a segregated account in an amount equal to the
value of the Fund's total assets committed to the consummation of the forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to the contract. Hedging transactions may be made from any foreign
currency into U.S. dollars or into other appropriate currencies.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
deliver. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase
of the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the Fund will suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
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The cost to the Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish
a rate of exchange that can be achieved in the future. In addition, although
forward currency contracts limit the risk of loss due to a decline in the
value of the hedged currency, at the same time, they limit any potential gain
that might result should the value of the currency increase.
Foreign Currency Options. The Fund may purchase put and call
options on foreign currencies for the purposes of hedging against changes in
future currency exchange rates or of increasing income and total return.
Foreign currency options generally have three, six and nine month expiration
cycles. 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 expires. 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 expires.
A decline in the dollar value of a foreign currency in which the
Fund's securities are denominated will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of securities it holds,
the Fund may purchase put options on the foreign currency. If the value of
the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part,
the adverse effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby potentially increasing the
cost of the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates.
Foreign Currency Futures. As described below under "Futures
Activities," the Fund may enter into foreign currency futures contracts and
related options.
While the value of currency options, currency futures and options on
currency futures may be expected to correlate with exchange rates, it will not
reflect other factors that may affect the value of the Fund's investments. A
currency hedge, for example, should protect a Yen-denominated bond against a
decline in the Yen, but will not protect the Fund against price decline if the
issuer's creditworthiness deteriorates. Because the value of the Fund's
investments denominated in foreign currency will change in response to many
factors other than exchange rates, a currency hedge may not be entirely
successful to mitigate changes in the value of the Fund's investments
denominated in that currency over time.
<PAGE>10
U.S. Government Securities. The Fund may invest in debt obligations
of varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ
in their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Federal National
Mortgage Association ("FNMA"), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board and Student Loan Marketing
Association. The Fund may also invest in instruments that are supported by
the right of the issuer to borrow from the U.S. Treasury and instruments that
are supported by the credit of the instrumentality. Because the U.S.
government is not obligated by law to provide support to an instrumentality it
sponsors, the Fund will invest in obligations issued by such an
instrumentality only if Warburg, Pincus Counsellors, Inc., the Fund's
investment adviser ("Counsellors"), determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (a) do not exceed 3% of the total outstanding voting stock of
such company, (b) do not exceed 5% of the value of the Fund's total assets and
(c) when added to all other investment company securities held by the Fund, do
not exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors. These loans, if and when made, may not exceed 20%
of the Fund's total assets taken at value. The Fund will not lend portfolio
securities to E.M. Warburg, Pincus & Co., Inc. ("EMW") or its 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
Fund. From time to time, the Fund may return a part of the interest earned
from the investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the Fund and that is
acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the
<PAGE>11
form of interest paid by the borrower when U.S. government securities are used
as collateral. Although the generation of income is not an investment
objective of the Fund, income received could be used to pay the Fund's
expenses and would increase an investor's total return. The Fund will adhere
to the following conditions whenever its portfolio securities are loaned:
(a) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(b) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (c) the Fund must be
able to terminate the loan at any time; (d) 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; (e)
the Fund may pay only reasonable custodian fees in connection with the loan;
and (f) 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 of Directors must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
Reverse Repurchase Agreements and Dollar Rolls. The Fund may also
enter into reverse repurchase agreements with the same parties with whom it
may enter into repurchase agreements. Reverse repurchase agreements involve
the sale of securities held by the Fund pursuant to its agreement to
repurchase them at a mutually agreed upon date, price and rate of interest.
At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with an approved custodian
containing cash or liquid high-grade debt securities having a value not less
than the repurchase price (including accrued interest). The assets contained
in the segregated account will be marked-to-market daily and additional assets
will be placed in such account on any day in which the assets fall below the
repurchase price (plus accrued interest). The Fund's liquidity and ability to
manage its assets might be affected when it sets aside cash or portfolio
securities to cover such commitments. Reverse repurchase agreements involve
the risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities the Fund has sold but is obligated
to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether
to enforce a Fund's obligation to repurchase the securities, and the Fund's
use of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
The Fund also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund
would be compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned on
the cash proceeds of the initial sale. At the time the Fund enters into a
dollar roll
<PAGE>12
transaction, it will place in a segregated account maintained with an approved
custodian cash or other liquid high-grade debt obligations having a value not
less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained.
Reverse repurchase agreements are considered to be borrowings under the 1940
Act.
Futures Activities. The Fund may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options. Such contracts will be entered into on U.S. or foreign
exchanges or boards of trade approved by the Commodity Futures Trading
Commission (the "CFTC"). These transactions may be entered into for "bona
fide hedging" purposes as defined in CFTC regulations and other permissible
purposes including increasing return and hedging against changes in the value
of portfolio securities. The ability of the Fund to trade in futures
contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
The Fund will not enter into futures contracts and related options
for which the aggregate initial margin and premiums required to establish
positions other than those considered to be "bona fide hedging" by the CFTC
exceed 5% of the Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. The
Fund's long and short positions in futures contracts or options thereon
written by it must be collateralized with cash or certain liquid high-grade
debt securities held in a segregated account or otherwise "covered" in
accordance with SEC interpretations in order to eliminate any potential for
leveraging. There is no overall limit on the percentage of Fund assets that
may be at risk with respect to futures activities.
Futures Contracts. An interest rate futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specific financial instrument (debt security) at a specified
price, date, time and place. A stock index futures contract is an agreement
between seller and buyer to deliver and take delivery respectively, of a
commodity which is represented by a multiplier times a stock price index at a
future specified date. The delivery is a cash settlement based on the
difference between the original transaction price and the final price of the
index at the termination of the contract. Stock indexes are capitalization
weighted indexes which reflect the market value of the firms listed on the
indexes. A foreign currency futures contract provides for the future sale by
one party and the purchase by the other party of a certain amount of a
specified non-U.S. currency at a specified price, date, time and place.
Foreign currency futures are similar to forward currency contracts, except
that they are traded on commodities exchanges and are standardized as to
contract size and delivery date. In investing in such transactions, the Fund
would incur brokerage costs and would be required to make and maintain certain
"margin" deposits.
One of the purposes of entering into a futures contract may be to
protect the Fund from fluctuations in value of its portfolio securities
without its necessarily buying or selling the securities. Of course, since
the value of portfolio securities will far exceed the
<PAGE>13
value of the futures contracts sold by the Fund, an increase in the value of
the futures contracts could only mitigate, but not totally offset, the decline
in the value of the Fund's assets. No consideration is paid or received by
the Fund upon entering into a futures contract. Upon entering into a futures
contract, the Fund will be required to deposit in a segregated account with
its custodian an amount of cash or cash equivalents, such as U.S. government
securities or other liquid high-grade debt obligations, equal to approximately
1% to 10% of the contract amount (this amount is subject to change by the
exchange on which the contract is traded, and brokers may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in
the margin account if the Fund fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the price of the index, securities or currency underlying the
futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Positions in futures contracts and options on futures contracts may
be closed out only on the exchange on which they were entered into (or through
a linked exchange). No secondary market for such contracts exists. Although
the Fund intends to enter into futures contracts only if there is an active
market for such contracts, there is no assurance that an active market will
exist for the contracts at any particular time. Most futures exchanges limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular contract,
no trades may be made that day at a price beyond that limit. It is possible
that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting the Fund to substantial
losses. In such event, and in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the Fund's
securities being hedged, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on
the futures contract.
If the Fund has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does
not occur, the Fund will lose part or all of the benefit of the increased
value of securities which it has hedged because it will have offsetting losses
in its futures positions. Losses incurred in futures transactions and the
costs of these transactions will affect the Fund's performance. In addition,
in such situations, if the Fund had insufficient cash, it might have to sell
securities to meet daily variation margin requirements at a time when it would
be disadvantageous to do so. These
<PAGE>14
sales of securities could, but will not necessarily, be at increased prices
which reflect the change in interest rates, stock indexes or currency values,
as the case may be.
Options on Futures Contracts. The Fund may purchase and write put
and call options on interest rate, foreign currency and stock index futures
contracts that are traded on an exchange designated by the CFTC or consistent
with CFTC regulations on foreign exchanges, and may enter into closing
transactions with respect to such options to terminate existing positions.
There is no guarantee that such closing transactions can be effected.
An option on an interest rate, currency or stock index futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in an interest rate, currency or stock index futures contract at a specified
exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option is fixed
at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net
asset value of the Fund.
There are several risks relating to options on futures contracts.
The ability to establish and close out positions on such options will be
subject to the existence of a liquid market. In addition, the purchase of put
or call options will be based upon predictions as to anticipated trends in
interest rates and securities markets by Counsellors, which could prove to be
incorrect. Even if Counsellors' expectations are correct, where options on
futures are used for hedging purposes there may be an imperfect correlation
between the change in the value of the options and of the portfolio securities
hedged.
When-Issued Securities and Delayed-Delivery Transactions. The Fund
may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Counsellors deems it advantageous to
do so. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers.
<PAGE>15
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations equal to the amount of the commitment
in a segregated account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may
be required subsequently to place additional assets in the segregated account
in order to ensure that the value of the account remains equal to the amount
of the Fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. When the Fund engages
in when-issued or delayed-delivery transactions, it relies on the other party
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Options on Securities. The Fund may utilize up to 10% of its total
assets to purchase put and call options on stocks and debt securities that are
traded on foreign as well as U.S. exchanges, as well as over-the-counter and
dealer options ("OTC options").
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. The Fund may realize a profit or
loss upon entering into a closing transaction. When the Fund has purchased an
option and engages in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium the Fund initially paid for
the original option plus the related transaction costs.
Although the Fund will generally purchase only those options for
which Counsellors believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest will exist to create a liquid secondary market on a securities
exchange for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow or other unforeseen
events have at times rendered certain of the facilities of the Clearing
Corporation and various securities exchanges inadequate and resulted in the
institution of special procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in one or more
options. There can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing transactions
in particular options. Moreover, the Fund's ability to terminate options
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in over-the-counter transactions would fail to meet
their obligations to the Fund. The Fund, however, intends to purchase
over-the-counter options only from dealers whose debt securities, as
determined by Counsellors, are considered to be investment grade.
<PAGE>16
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are held or exercised in
one or more accounts or through one or more brokers). It is possible that the
Fund and other clients of Counsellors and certain of its affiliates may be
considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose certain other sanctions. These limits may restrict the number of
options the Fund will be able to purchase on a particular security.
In addition to other purposes, including generating current income,
the Fund may enter into options transactions as hedges to reduce investment
risk, generally by making an investment expected to move in the opposite
direction of a portfolio position. A hedge is designed to offset a loss on a
portfolio position with a gain on the hedged position; at the same time,
however, a properly correlated hedge will result in a gain on the portfolio
position being offset by a loss on the hedged position. The Fund bears the
risk that the prices of the securities being hedged will not move in the same
amount as the hedge. The Fund will engage in hedging transactions only when
deemed advisable by Counsellors. Successful use by the Fund of options will
be subject to Counsellors' ability to predict correctly movements in the
direction of the stock underlying the option used as a hedge. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Fund's performance.
Prior to their expirations, put and call options may be sold in
closing sale transactions (sales by the Fund, prior to the exercise of options
that it has purchased, of options of the same series), and profit or loss from
the sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
Stock Index Options. The Fund may utilize up to 10% of its total
assets to purchase exchange-listed and OTC put and call options on stock
indexes. The Fund may also write put and call options on such indexes. A
stock index measures the movement of a certain group of stocks by assigning
relative values to the common stocks included in the index, fluctuating with
changes in the market values of the stocks included in the index. Some stock
index options are based on a broad market index such as the NYSE Composite
index, or a narrower market index such as the Standard & Poor's 100. Indexes
may also be based on a particular industry or market segment.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less
<PAGE>17
than (in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. The writer may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the stock index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether the Fund will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the Fund of options on stock indexes
will be subject to Counsellors' ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price
of individual stocks.
There can be no assurance that the use of these portfolio strategies
will be successful. When the Fund writes an option on a stock index, the Fund
will establish a segregated account with its custodian containing cash, U.S.
government securities and other liquid high-grade debt obligations in an
amount equal to the market value of the option and will maintain the account
while the option is open.
OTC Options. The Fund may purchase over-the-counter ("OTC") or
dealer options (hereinafter referred to either as "dealer options" or "OTC
options"). Unlike exchange-listed options where
an intermediary or clearing corporation, such as the Options Clearing
Corporation, assures that all transactions in such options are properly
executed, the responsibility for performing all transactions with respect to
OTC options rests solely with the writer and the holder of those options. A
listed call option writer, for example, is obligated to deliver the underlying
stock to the clearing organization if the option is exercised, and the
clearing corporation is then obligated to pay the writer the exercise price of
the option. If the Fund were to purchase a dealer option, however, it would
rely on the dealer from whom it purchased the option to perform if the option
were exercised. If the dealer fails to honor the exercise of the option by
the Fund, the Fund would lose the premium it paid for the option and the
expected benefit of the transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it.
<PAGE>18
Although the Fund will seek to enter into dealer options only with
dealers who will agree to and that are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund
will be able to liquidate a dealer option at a favorable price at any time
prior to expiration. The inability to enter into a closing transaction may
result in material losses to the Fund. In the event of insolvency of the
other party, the Fund may be unable to liquidate a dealer option.
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 Fund may engage in short sales if at the time of
the short sale the Fund owns or has the right to obtain at no added cost an
equivalent amount of the security being sold short. This investment technique
is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. 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.
Not more than 10% of the Fund's net assets (taken at current value) may be
held as collateral for such short sales at any one time.
The Fund does not intend to engage in short sales against the box
for investment purposes. The Fund may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline
in the value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when the Fund wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain
or loss for U.S. federal income tax purposes and for purposes of satisfying
certain tests applicable to regulated investment companies under the Code. In
such case, any future losses in the Fund's long position should be offset by a
gain in the short position and, 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
transaction 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.
<PAGE>19
American, European and Continental Depositary Receipts. The assets
of the Fund may be invested in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe typically by non-U.S. banks and trust companies
that evidence ownership of either foreign or domestic securities. Generally,
ADRs in registered form are designed for use in U.S. securities markets and
EDRs and CDRs in bearer form are designed for use in European securities
markets.
Convertible Securities. Convertible securities in which the Fund
may invest, including both convertible debt and convertible preferred stock,
may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities
enable an investor to benefit from increases in the market price of the
underlying common stock. Convertible securities provide higher yields than
the underlying equity securities, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, also fluctuates in relation to the underlying common stock.
Warrants. The Fund may invest up to 5% of net assets in warrants.
Because a warrant does not carry with it the right to dividends or voting
rights with respect to the securities which it entitles a holder to purchase,
and because it does not represent any rights in the assets of the issuer,
warrants may be considered more speculative than certain other types of
investments. Also, the value of a warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if
it is not exercised prior to its expiration date.
Stand-by Commitment Agreements. The Fund may acquire "stand-by
commitments" with respect to securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the Fund's option
specified securities at a specified price. The Fund's right to exercise
stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by the Fund may also be referred to as "put" options. A stand-by
commitment is not transferable by the Fund, although the Fund can sell the
underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. The Fund intends to enter into stand-by commitments only with
brokers, dealers and banks that, in the opinion of Counsellors, present
minimal credit risks. In evaluating the creditworthiness of the issuer of a
stand-by commitment, Counsellors will periodically review relevant financial
information concerning the issuer's assets, liabilities and contingent claims.
The Fund will
<PAGE>20
acquire stand-by commitments only in order to facilitate portfolio liquidity
and does not intend to exercise its rights under stand-by commitments for
trading purposes.
The amount payable to the Fund upon its exercise of a stand-by
commitment is normally (a) the Fund's acquisition cost of the securities
(excluding any accrued interest which the Fund paid on their acquisition),
less any amortized market premium or plus any amortized market or original
issue discount during the period the Fund owned the securities, plus (b) all
interest accrued on the securities since the last interest payment date during
that period.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for a stand-by commitment
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid
in either manner for outstanding stand-by commitments held in the Fund's
portfolio will not exceed 1/2 of 1% of the value of the Fund's total assets
calculated immediately after each stand-by commitment is acquired.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect
the valuation or assumed maturity of the underlying securities. Stand-by
commitments acquired by the Fund would be valued at zero in determining net
asset value. Where the Fund paid any consideration directly or indirectly for
a stand-by commitment, its cost would be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund. Stand-by
commitments would not affect the average weighted maturity of the Fund's
portfolio. The Fund currently anticipates that it will not invest more than
5% of its net assets in stand-by commitments.
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 15% of its net assets, in the aggregate, in illiquid
securities, including repurchase agreements which have a maturity of longer
than seven days and securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these
<PAGE>21
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public
offering of securities.
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.
The SEC has adopted Rule 144A which allows for a broader
institutional trading market for securities otherwise subject to restriction
on resale to the general public. Rule 144A establishes a "safe harbor" from
the registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Counsellors anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Counsellors will monitor the liquidity of restricted securities in
the Fund under the supervision of the Board of Directors. In reaching
liquidity decisions, Counsellors may consider, inter alia, the following
factors: (a) the unregistered nature of the security; (b) the frequency of
trades and quotes for the security; (c) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers;
(d) dealer undertakings to make a market in the security and (e) the nature of
the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics
of the transfer).
Borrowing. The Fund may borrow up to 30% of its total assets.
Counsellors may borrow for temporary or emergency purposes, including entering
into reverse repurchase agreements, 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 will
not be made when borrowings exceed 5% of the Fund's total assets. Although
the principal of such borrowings will be fixed, the Fund's assets may change
in value during the time the borrowing is outstanding. The Fund expects that
some of its borrowings may be made on a secured basis. In such situations,
either the
<PAGE>22
custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender.
Other Investment Policies and Practices of the Fund
Non-Diversified Status. The Fund is classified as non-diversified
within the meaning of the 1940 Act, which means that it is not limited by such
Act in the proportion of its assets that it may invest in securities of a
single issuer. The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Code. See
"Additional Information Concerning Taxes." To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (a) not more than 25% of the market
value of its total assets will be invested in the securities of a single
issuer, and (b) 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.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (a) 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 (b)
more than 50% of the outstanding shares. Investment limitations 10 through 16
may be changed by a vote of the Fund's Board of Directors at any time.
The Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
<PAGE>23
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in (a)
securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and may
enter into short sales "against the box".
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase and
sell futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with the purchase of securities
on a forward commitment or delayed-delivery basis and collateral and initial
or variation margin arrangements with respect to currency transactions,
options, futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale
or securities for which there are
<PAGE>24
no readily available market quotations. For purposes of this limitation,
repurchase agreements with maturities greater than seven days shall be
considered illiquid securities.
13. Purchase any security if as a result the Fund would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
14. Purchase or retain securities of any company if, to the
knowledge of the Fund, any of the Fund's officers or Directors or any officer
or director of Counsellors individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially more
than 5% of the securities.
15. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets.
16. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that any such commitment is no longer in the best
interest of the Fund and its shareholders, the Fund will revoke the commitment
by terminating the sale of Fund shares in the state involved. If a percentage
restriction is adhered to at the time of an investment, a later increase or
decrease in the percentage of assets resulting from a change in the values of
portfolio securities or in the amount of the Fund's assets will not constitute
a violation of such restriction.
Portfolio Valuation
The Prospectus discusses the time at which the net asset value of
the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of the Fund's net
asset value may not take place contemporaneously with the determination of the
prices of certain of its portfolio securities used in such calculation. 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. All assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid
and offered quotations of such currencies against U.S. dollars as last quoted
by any recognized dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by the Board of Directors. In
carrying out the Board's valuation policies, PFPC Inc., the Fund's co-
<PAGE>25
administrator ("PFPC") may consult with an independent pricing service
retained by the Fund.
Securities listed on a United States securities exchange (including
securities traded through the National Market System) or on a foreign
securities exchange will be valued on the basis of the closing value on the
date on which the valuation is made or, in the absence of sales, at the mean
between the closing bid and asked prices. United States over-the-counter
securities and securities listed or traded on certain foreign stock exchanges
whose operations are similar to the United States over-the-counter market will
be valued on the basis of the bid price at the close of business on each day,
or, if market quotations for those securities are not readily available, at
fair value, as determined in good faith by the Fund's Board of Directors.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in the
absence of sales, at the mean between the closing bid and asked prices. The
valuation of short sales of securities, which are not traded on a national
exchange, will be at the mean average of bid and asked prices. The market
valuation of fixed-income securities held by the Fund (other than U.S.
government securities and short-term investments) is made by PFPC, after
consultation with an independent pricing service (the "Pricing Service")
approved by the Board. When, in the judgment of the Pricing Service, quoted
bid prices for investments are readily available and are representative of the
bid side of the market, these investments are valued at the mean between the
quoted bid prices and asked prices. Investments for which, in the judgment of
the Pricing Service, there is no readily obtainable market quotation are
carried at fair value as determined by the Pricing Service. For the most
part, such investments are liquid and may be readily sold. Notwithstanding
the above, the Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. The procedures of
the Pricing Service are reviewed periodically by the officers of the Fund
under the general supervision and responsibility of the Board, which may
replace any such Pricing Service at any time. Short-term obligations with
maturities of 60 days or less are valued at amortized cost, which constitutes
fair value as determined by the Board of Directors. Amortized cost involves
valuing an instrument at its original cost to the Fund 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. All other securities and other assets of the Fund will be valued
at their fair value as determined in good faith by the Board of Directors.
Trading in securities in Asian countries is completed at various
times prior to the close of business on each business day in New York (i.e., a
day on which the New York Stock Exchange (the "NYSE") is open for trading).
In addition, securities trading in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place
in various foreign markets on days which are not business days in New York and
days on which the Fund's net asset value is not calculated. Such calculation
does not take place contemporaneously with the determination of the prices of
the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of
<PAGE>26
regular trading on the NYSE will not be reflected in the Fund's calculation of
net asset value unless the Fund's Directors deem that the particular event
would materially affect net asset value, in which case an adjustment may be
made.
Portfolio Transactions
Counsellors is responsible for establishing, reviewing and, where
necessary, modifying the 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 the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or
mark-down. Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the
price of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. government securities are generally purchased
from underwriters or dealers, although certain newly issued U.S. government
securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.
Counsellors will select specific portfolio investments and effect
transactions for the Fund. Counsellors seeks to obtain the best net price and
the most favorable execution of orders. In evaluating prices and executions,
Counsellors will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, to the extent that the execution and price
offered by more than one broker or dealer are comparable, Counsellors may, in
its discretion, effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934, as amended) to the Fund and/or
other accounts over which Counsellors exercises investment discretion.
Research and other services received may be useful to Counsellors in serving
both the Fund and its other clients and, conversely, research or other
services obtained by the placement of business of other clients may be useful
to Counsellors in carrying out its obligations to the Fund. The fee to
Counsellors under its advisory agreement with the Fund is not reduced by
reason of its receiving any brokerage and research services.
<PAGE>27
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Counsellors. Such other investment clients may invest in the same securities
as the Fund. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Counsellors believes to be equitable to each client, including
the Fund. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold for the Fund. To the extent permitted by law, Counsellors may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities Inc., the Fund's distributor ("Counsellors
Securities"), if, in Counsellors' judgment, the use of Counsellors Securities
is likely to result in price and execution at least as favorable as those of
other qualified brokers, and if, in the transaction, Counsellors Securities
charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to Counsellors or Counsellors Securities or any affiliated person of such
companies. In addition, the Fund will not give preference to certain
financial institutions ("Service Organizations") with whom the Fund enters
into distribution or shareholder servicing agreements ("Agreements")
concerning the provision of distribution services or support services to
customers ("Customers") who beneficially own the Fund's Common Stock, par
value $.001 per share, designated Common Stock - Series 1 Shares (the "Series
1 Shares") or Common Stock - Series 2 (the "Series 2 Shares"). See the
Prospectus, "Shareholder Servicing."
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when
Counsellors, in its sole discretion, believes such practice to be otherwise in
the Fund's interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
<PAGE>28
Certain practices that may be employed by the Fund could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold.
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names of the Fund's directors and executive officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
Lionel I. Pincus* . . . . . . . Chairman of the Board and
466 Lexington Avenue Director
New York, New York 10017-3147 Chairman of the Board, Chief Executive
Officer and Director of EMW. Associated
with EMW since 1966. Mr. Pincus is Chairman
of the Board and Director or Trustee of
other investment companies advised by
Counsellors; Director or Trustee of Journal
Company, Inc., Citizens Budget Commission,
School of American Ballet, Columbia
University, Montefiore Medical Center and
Ittleson Foundation; Partner, New York City
Partnership.
Richard N. Cooper . . . . . . . Director
Harvard University Professor at Harvard
1737 Cambridge Street University; Director of
Cambridge, Massachusetts 02138 Center for Naval Analysis, Circuit City
Stores, Inc. (retail electronics and
appliances), Phoenix Home Life Insurance
Company and Institute for International
Economics; Director or Trustee of other
investment companies advised by Counsellors.
Donald J. Donahue . . . . . . . Director
99 Indian Field Road Chairman of Magma Copper
Greenwich, Connecticut 06830 Company since January 1987; Director of
Northeast Utilities, GEV Corporation and
* Indicates a director who is an "interested person" of the Fund as defined
in the 1940 Act.
<PAGE>29
Signet Star Insurance Company; Chairman and
Director of NAC Holdings from
September 1990-June 1993; Director or
Trustee of other investment companies
advised by Counsellors.
Jack W. Fritz . . . . . . . . . Director
2425 North Fish Creek Road Private investor; Consultant
P.O. Box 483 and Director of Fritz
Wilson, Wyoming 83014 Broadcasting, Inc. and Fritz Communications
(developers and operators of radio
stations); Director of Advo, Inc. (direct
mail advertising); Director or Trustee of
other investment companies advised by
Counsellors.
John L. Furth* . . . . . . . . Chief Executive Officer and
466 Lexington Avenue Director
New York, New York 10017-3147 Vice Chairman and Director of EMW;
Associated with EMW since 1970; Officer and
Director or Trustee of other investment
companies advised by Counsellors.
Thomas A. Melfe . . . . . . . . Director
30 Rockefeller Plaza Partner in the law firm of
New York, New York 10112 Donovan Leisure Newton & Irvine; Director or
Trustee of other investment companies
advised by Counsellors.
Alexander B. Trowbridge . . . . Director
1155 Connecticut Avenue, N.W. President of Trowbridge
Suite 700 Partners, Inc. (business
Washington, DC 20036 consulting) from January 1990-January 1994;
President of the National Association of
Manufacturers from 1980-1990; Director of
New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), P.H.H.
Corporation (fleet auto management; housing
and plant relocation service), Waste
Management Inc. (solid hazardous waste
collection and disposal), The Rouse Company
(real estate development), Sunresorts
International Ltd.
* Indicates a director who is an "interested person" of the Fund as defined
in the 1940 Act.
<PAGE>30
(hotel and real estate management), Harris
Corp. (electronics and
communications equipment), The Gillette Co.
(personal care products) and Sun
Company Inc. (petroleum refining and
marketing); Director or Trustee of other
investment companies advised by Counsellors.
Richard H. King . . . . . . . . President and Co-
466 Lexington Avenue Portfolio Manager
New York, New York 10019-3147 Portfolio Manager or Co-Portfolio Manager of
other Warburg Pincus Funds; Managing
Director of EMW since 1989; Associated with
EMW since 1989; Senior Vice President of
Fiduciary Trust Company International from
1984 through 1988.
Arnold M. Reichman . . . . . . Executive Vice President
466 Lexington Avenue Managing Director and Assistant
New York, New York 10017-3147 Secretary of EMW; Associated with EMW since
1984; Officer of other investment companies
advised by Counsellors.
Eugene L. Podsiadlo . . . . . . Senior Vice President
466 Lexington Avenue Vice President of Counsellors New York, New
York 10017-3147 Securities Inc. since 1991; Vice President
of Citibank, N.A. from 1987-1991; Officer of
other investment companies advised by
Counsellors.
Eugene P. Grace . . . . . . . . Vice President and Secretary
466 Lexington Avenue Vice President of Counsellors
New York, New York 10017-3147 since April 1994; Attorney-at-law from
September 1989 - April 1994; life insurance
agent, New York Life Insurance Company from
1993-1994; General Counsel and Secretary,
Home Unity Savings Bank from 1991-1992;
Officer of other investment companies
advised by Counsellors.
Reuben S. Leibowitz . . . . . . Vice President and Chief
466 Lexington Avenue Financial Officer
New York, New York 10017-3147 Managing Director of EMW; Associated with
EMW since 1984; Officer of other investment
companies advised by Counsellors.
<PAGE>31
Stephen Distler . . . . . . . . Vice President, Treasurer and
466 Lexington Avenue Chief Accounting Officer
New York, New York 10017-3147 Managing Director, Controller and Assistant
Secretary of EMW; Associated with EMW since
1984; Officer of other investment companies
advised by Counsellors.
Karen Amato . . . . . . . . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987;
New York, New York 10017-3147 Officer of other investment companies
advised by Counsellors.
Each Director of the Fund also serves as a trustee or director of
one or more other investment companies for which Counsellors acts as
investment adviser. No employee of Counsellors or PFPC or any of their
affiliates receives any compensation from the Fund for acting as an officer or
director of the Fund. Each Director who is not a director, trustee, officer
or employee of Counsellors, PFPC or any of their affiliates receives an annual
fee of $500, and $250 for each meeting of the Board attended by him for his
services as Director and is reimbursed for expenses incurred in connection
with his attendance at Board meetings.
Richard H. King, president and co-portfolio manager of the Fund,
earned a B.A. degree from Durham University in England. Mr. King is also
portfolio manager of Warburg, Pincus International Equity Fund and the
International Equity Portfolio of Warburg, Pincus Institutional Fund, Inc. and
a co-portfolio manager of Warburg, Pincus Japan OTC Fund. From 1968 to 1982,
he worked at W.I. Carr Sons & Company (Overseas), a leading international
brokerage firm. He resided in the Far East as an Investment Analyst from 1970
to 1977, became Director, and later relocated to the U.S. where he became
founder and President of W.I. Carr (America), based in New York. From 1982 to
1984 Mr. King was a director in charge of the Far East equity investments at
N.M. Rothschild International Asset Management, a London merchant bank. In
1984 Mr. King became Chief Investment Officer and Director for all
international investment strategy with Fiduciary Trust Company International
S.A., in London. He managed EAFE mutual fund (FTIT) 1985-1986 which grew from
$3 million to over $100 million during this two-year period.
Nicholas P.W. Horsley, co-portfolio manager of the Fund, is also a
co-portfolio manager of Warburg, Pincus Japan OTC Fund and a research analyst
and associate portfolio manager of Warburg, Pincus International Equity Fund
and the International Equity Portfolio of Warburg, Pincus Institutional Fund,
Inc. He joined Counsellors in 1993. From 1981 to 1984 he was a Securities
Analyst at Barclays Merchant Bank in London, UK and Johannesburg, RSA. From
1984 to 1986 he was a Senior Analyst with BZW Investment Management in London.
From 1986 to 1993 he was a Director, portfolio manager and analyst at Barclays
deZoete Wedd in New York City. Mr. Horsley earned B.A. and M.A. degrees with
honors from University College, Oxford.
Harold W. Ehrlich, an associate portfolio manager and research
analyst of the Fund, is also an associate portfolio manager and research
analyst of Warburg, Pincus
<PAGE>32
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. Prior to joining Counsellors, Mr. Ehrlich was
a senior vice president, portfolio manager and analyst at Templeton Investment
Counsel Inc. from 1987 to 1995. He was a research analyst and assistant
portfolio manager at Fundamental Management Corporation from 1985 to 1986 and
a research analyst at First Equity Corporation of Florida from 1983 to 1985.
Mr. Ehrlich earned a B.S.B.A. degree from the University of Florida and earned
his Chartered Financial Analyst designation in 1990.
Vincent McBride, associate portfolio manager and research analyst of
the Fund, is also an associate portfolio manager of Warburg, Pincus
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. Prior to joining Counsellors in 1994, Mr.
McBride was an international equity analyst at Smith Barney Inc. from 1993 to
1994 and at General Electric Investment Corp. from 1992 to 1993. He was also
a portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride
earned a B.S. degree from the University of Delaware and an M.B.A. degree from
Rutgers University.
Investment Adviser and Co-Administrators
Counsellors serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to
the Fund and PFPC serves as a co-administrator to the Fund pursuant to
separate written agreements (the "Advisory Agreement," the "Counsellors
Service Co-Administration Agreement" and the "PFPC Co-Administration
Agreement," respectively). The services provided by, and the fees payable by
the Fund to, Counsellors under the Advisory Agreement, Counsellors Service
under the Counsellors Service Co-Administration Agreement and PFPC under the
PFPC Co-Administration Agreement are described in the Prospectus. Each class
of shares of the Fund bears its proportionate share of fees payable to
Counsellors, Counsellors Service and PFPC in the proportion that its assets
bear to the aggregate assets of the Fund at the time of calculation.
Counsellors agrees that if, in any fiscal year, the expenses borne
by the Fund exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund are registered
or qualified for sale to the public, it will reimburse the Fund to the extent
required by such regulations. Unless otherwise required by law, such
reimbursement would be accrued and paid on a monthly basis. At the date of
this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.5% of the first $30 million of the
average net assets of the Fund, 2% of the next $70 million of the average net
assets of the Fund and 1.5% of the remaining average net assets of the Fund.
Organization of the Fund
The Fund was incorporated on December 23, 1993 under the laws of the
State of Maryland, and it is registered as a non-diversified open-end
management investment company under the 1940 Act. The Fund's charter
authorizes the Board of Directors to issue three billion full and fractional
shares of common stock, $.001 par value per share.
<PAGE>33
Common Stock, Common Stock -- Series 1 Shares and Common Stock -- Series 2
Shares have been authorized by the Fund's Charter, although only shares of
Common Stock and Series 2 Shares have been issued by the Fund. When matters
are submitted for shareholder vote, each shareholder will have one vote for
each share owned and proportionate, fractional votes for fractional shares
held. Shareholders generally vote in the aggregate, except with respect to
(a) matters affecting only the shares of a particular class, in which case
only the shares of the affected class would be entitled to vote, or (b) when
the 1940 Act requires that shares of the classes be voted separately. There
will normally be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders. The Directors will call a
meeting for any purpose upon the written request of shareholders holding at
least 10% of the Fund's outstanding shares.
Shares do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Directors
can elect all Directors. Shares are transferable but have no preemptive,
conversion or subscription rights.
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") is custodian of
the Fund's assets pursuant to a custodian agreement (the "Custodian
Agreement"). Under the Custodian Agreement, State Street (a) maintains a
separate account or accounts in the name of the Fund, (b) holds and transfers
portfolio securities on account of the Fund, (c) makes receipts and
disbursements of money on behalf of the Fund, (d) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities and (e) makes periodic reports to the Fund's Board of Directors
concerning the Fund's operations. State Street is authorized to select one or
more foreign or domestic banks or trust companies to serve as sub-custodian on
behalf of the Fund, provided that State Street remains responsible for the
performance of all its duties under the Custodian Agreement and holds the Fund
harmless from the acts and omissions of any sub-custodian in accordance with
the Custodian Agreement.
State Street has also agreed to serve as the Fund's shareholder
servicing, transfer and dividend disbursing agent pursuant to a Transfer
Agency and Service Agreement, under which State Street (a) issues and redeems
shares of the Fund, (b) addresses and mails all communications by the Fund to
record owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders,
(c) maintains shareholder accounts and, if requested, sub-accounts and
(d) makes periodic reports to the Fund's Board of Directors concerning the
transfer agent's operations with respect to the Fund. The principal business
address of State Street is 225 Franklin Street, Boston, Massachusetts 02110.
Distribution and Shareholder Servicing
Common Shares. The Fund has entered into a Shareholder Servicing
and Distribution Plan (the "12b-1 Plan"), pursuant to Rule 12b-1 under the
1940 Act, pursuant to which the Fund will pay Counsellors Securities, in
consideration for Services (as defined
<PAGE>34
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 (a) the sale of the Common Shares, as set forth in the 12b-
1 Plan ("Selling Services"), (b) ongoing servicing and/or maintenance of the
accounts of Common Shareholders of the Fund, as set forth in the 12b-1 Plan
("Shareholder Services"), and (c) sub-transfer agency services, subaccounting
services or administrative services related to the sale of the Common Shares,
as set forth in the 12b-1 Plan ("Administrative Services" and collectively
with Selling Services and Administrative Services, "Services") including,
without limitation, (i) payments reflecting an allocation of overhead and
other office expenses of Counsellors Securities related to providing Services;
(ii) payments made to, and reimbursement of expenses of, persons who provide
support services in connection with the distribution of the Common Shares
including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Fund, and providing any
other Shareholder Services; (iii) payments made to compensate selected dealers
or other authorized persons for providing any Services; (iv) 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; (v) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Fund to prospective shareholders of the Fund; and (vi) costs involved in
obtaining whatever information, analyses and reports with respect to marketing
and promotional activities that the Fund may, from time to time, deem
advisable.
Pursuant to the 12b-1 Plan, Counsellors Securities provides the
Board of Directors with periodic reports of amounts expended under the 12b-1
Plan and the purpose for which the expenditures were made.
Series 2 Shares. The Fund may, in the future, enter into Agreements
with institutions ("Institutions") to perform certain distribution,
shareholder servicing, administrative and accounting services for their
Customers who are beneficial owners of Series 2 Shares. See the Series 2
Shares Prospectus, "Shareholder Servicing." The Fund's agreements with
Institutions with respect to Series 2 Shares will be governed by a
Distribution Plan. The Distribution Plan would require the Board of
Directors, at least quarterly, to receive and review written reports of
amounts expended under the Distribution Plan and the purposes for which such
expenditures were made.
General. An Institution with which the Fund has entered into an
Agreement with respect to either its Common Shares or Series 2 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 Service Organization: (1) account fees (a fixed
amount per month or per year); (2) transaction fees (a fixed amount per
transaction processed); (3) compensation balance requirements (a minimum
dollar amount a Customer must maintain in order to obtain the services
offered); or (4) account maintenance fees (a periodic charge based upon the
percentage of assets in the account or of the dividend paid on those assets).
Services provided by an Institution to Customers are in addition to, and not
duplicative of, the services to be provided under the Fund's co-administration
and distribution and shareholder servicing arrangements. A Customer of an
Institution should
<PAGE>35
read the relevant Prospectus and Statement of Additional Information in
conjunction with the Agreement and other literature describing the services
and related fees that would be provided by the an Institution to its Customers
prior to any purchase of Fund shares. Prospectuses are available from the
Fund's distributor upon request. No preference will be shown in the selection
of Fund portfolio investments for the instruments of Institutions.
The Distribution Plan and 12b-1 Plan will continue in effect for so
long as their continuance is specifically approved at least annually by the
Board of Directors, including a majority of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Service Plans ("Independent Directors"). Any
material amendment of the Distribution Plan or the 12b-1 Plan would require
the approval of the Board of Directors in the manner described above. The
Distribution Plan may be amended to increase materially the amount to be spent
under the Plan without shareholder approval of the relevant class of shares.
The Distribution Plan or the 12b-1 Plan may be terminated at any time, without
penalty, by vote of a majority of the Independent Directors or by a vote of a
majority of the outstanding voting securities of the relevant class of shares
of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares and how such
shares are priced is included in the Prospectus.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Fund's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Fund may make payment wholly or partly in securities or other
property. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. To the extent that withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All
<PAGE>36
dividends and distributions on shares in the Plan are automatically reinvested
at net asset value in additional shares of the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Counsellors is available to investors in the Fund. The funds into which
exchanges can be made by holders of Common Shares currently are the Common
Shares of Warburg Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt
Fund, Warburg Pincus New York Municipal Bond Fund, Warburg Pincus Intermediate
Maturity Government Fund, Warburg Pincus Fixed Income Fund, Warburg Pincus
Short-Term After-Tax Bond Fund, Warburg Pincus Global Fixed Income Fund,
Warburg Pincus Balanced Fund, Warburg Pincus Growth & Income Fund, Warburg
Pincus Capital Appreciation Fund, Warburg Pincus Emerging Growth Fund, Warburg
Pincus International Equity Fund and Warburg Pincus Japan OTC Fund. Common
Shareholders of the Fund may exchange all or part of their shares for shares
of these or other mutual funds organized by Counsellors in the future on the
basis of their relative net asset values per share at the time of exchange.
Exchanges of Series 2 Shares may currently be made with Series 2 Shares of
Warburg Pincus International Equity Fund, Warburg Pincus Emerging Growth Fund,
Warburg Pincus Capital Appreciation Fund and Warburg Pincus Japan OTC Fund at
their relative net asset values at the time of the exchange.
The exchange privilege enables shareholders to acquire shares in a
fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Common Shares or
Series 2 Shares being acquired, as relevant, may legally be sold. Prior to
any exchange, the investor should obtain and review a copy of the current
prospectus of the relevant class of each fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the fund into which they
are contemplating an exchange from Counsellors Securities.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same
day, at a price as described above, in shares of the relevant class of the
fund being acquired. Counsellors reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and
is not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
<PAGE>37
The Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Code. If it qualifies as a regulated investment
company, the Fund will pay no federal income taxes on its taxable net
investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to
shareholders. To qualify under Subchapter M, the Fund must, among other
things: (1) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment
income and net realized short-term capital gains); (2) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to the Fund's business of investing in
securities; (3) derive less than 30% of its annual gross income from the sale
or other disposition of securities, options, futures or forward contracts held
for less than three months; and (4) diversify its holdings so that, at the end
of each fiscal quarter of the Fund (a) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. government securities and other
securities, with those other securities limited, with respect to any one
issuer, to an amount no greater in value than 5% of the Fund's total assets
and to not more than 10% of the outstanding voting securities of the issuer,
and (b) not more than 25% of the market value of the Fund's assets is invested
in the securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies) or of two or more issuers
that the Fund controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses. In meeting these
requirements, the Fund may be restricted in the selling of securities held by
the Fund for less than three months and in the utilization of certain of the
investment techniques described above and in the Fund's prospectus. As a
regulated investment company, the Fund will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year
of distributions representing at least 98% of the Fund's taxable ordinary
income for the calendar year and at least 98% of the excess of its capital
gains over capital losses realized during the one-year period ending October
31 during such year, together with any undistributed, untaxed amounts of
ordinary income and capital gains from the previous calendar year. The Fund
expects to pay the dividends and make the distributions necessary to avoid the
application of this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (1) will require the Fund to
mark-to-market certain types of its positions (i.e., treat them as if they
were closed out) and (2) may cause the Fund to recognize income without
receiving cash with which to pay dividends or make distributions
<PAGE>38
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. The Fund will monitor its transactions, will make
the appropriate tax elections and will make the appropriate entries in its
books and records when it acquires any foreign currency, forward contract,
option, futures contract or hedged investment so that (1) neither the Fund nor
its shareholders will be treated as receiving a materially greater amount of
capital gains or distributions than actually realized or received, (2) the
Fund will be able to use substantially all of its losses for the fiscal years
in which the losses actually occur and (3) the Fund will continue to qualify
as a regulated investment company.
Dividends paid from the Fund's net investment income and
distributions of the Fund's net realized short-term capital gains are taxable
to shareholders of the Fund as ordinary income, regardless of the length of
time shareholders have held shares of the Fund and whether the dividends or
distributions are received in cash or reinvested in additional shares.
Distributions of net long-term capital gains, if any, will be taxable as
long-term capital gains, whether received in cash or reinvested in shares and
regardless of how long the shareholder has held the Fund shares. As a general
rule, a shareholder's gain or loss on a sale of his Fund shares will be a
long-term capital gain or loss if he has held his shares for more than one
year and will be a short-term capital gain or loss if he has held his shares
for one year or less. The Fund's dividends, to the extent not derived from
dividends attributable to certain types of stock issued by U.S. corporations,
will not qualify for the dividends received deduction for corporations.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them.
Upon the sale or exchange of shares, a shareholder will realize a
taxable gain or loss depending upon the amount realized and the basis in the
shares. Such gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and, as described above,
will be long-term or short-term depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the Fund, within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be increased to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of a Fund share held by the
shareholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss
<PAGE>39
to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Fund for the
prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable
year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is
not subject to "backup withholding," the shareholder may be subject to a 31%
"backup withholding" tax with respect to (1) taxable dividends and
distributions and (2) the proceeds of any sales or repurchases of shares of
the Fund. An individual's taxpayer identification number is his social
security number. Corporate shareholders and other shareholders specified in
the Code are or may be exempt from backup withholding. The backup withholding
tax is not an additional tax and may be credited against a taxpayer's federal
income tax liability. Dividends and distributions also may be subject to
state and local taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
Legislation pending in the U.S. Congress would unify and, in certain
cases, modify the anti-deferral rules contained in various provisions of the
Code, including the provisions dealing with PFICs, related to the taxation of
U.S. shareholders of foreign corporations. In the case of a passive foreign
company, as defined in the proposed legislation ("PFC"), having "marketable
stock," the proposed legislation would require U.S.
<PAGE>40
shareholders, such as the Fund, owning less than 25% of a PFC that is not
U.S.-controlled to mark-to-market the PFC stock annually, unless the
shareholders elected to include in income currently their proportionate shares
of the PFC's income and gain. Otherwise, U.S. shareholders would be treated
substantially the same as under current law. Special rules applicable to
mutual funds would classify as "marketable stock" all stock in PFCs held by
the Fund; however, the Fund would not be liable for tax on income from PFCs
that is distributed to its shareholders. It is unclear if or when the
proposed legislation will become law and if it is enacted, the form it will
take. Moreover, on April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies that would have effects similar to the proposed
legislation. The IRS subsequently issued a notice indicating that final
regulations will provide that regulated investment companies may elect the
mark-to-market election for tax years ending after March 31, 1992 and before
April 1, 1993. Whether and to what extent the notice will apply to taxable
years of the Fund is unclear.
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Series 2 Shares in advertisements or in reports and other
communications to shareholders. These figures are calculated by finding the
average 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)[*OMITTED GRAPHIC-SEE FOOTNOTE]
= ERV. For purposes of this formula, "P" is a hypothetical investment of
$1,000; "T" is average annual total return; "n" is number of years; and "ERV"
is the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods (or fractional portion
thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000 investment over the period and
assumes that all dividends and distributions are reinvested during the period.
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Series 2 Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar-year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period
- ---------------------------
* - The expression (1+T) is being raised to the nth power.
<PAGE>41
in the future. Performance information may be useful as a basis for
comparison with other investment alternatives. However, the Fund's
performance will fluctuate, unlike certain bank deposits or other investments
which pay a fixed yield for a stated period of time. Any fees charged by
Institutions or other institutional investors directly to their customers in
connection with investments in Fund shares are not reflected in the Fund's
total return, and such fees, if charged, will reduce the actual return
received by customers on their investments.
The Fund intends to diversify its assets among countries, and in
doing so, would expect to be able to reduce the risk arising from economic
problems affecting a single country. Counsellors thus believes that, by
spreading risk throughout many diverse markets outside the United States, the
Fund will reduce its exposure to country-specific economic problems.
Counsellors also believes that a diversified portfolio of international equity
securities, when combined with a similarly diversified portfolio of domestic
equity securities, tends to have a lower volatility than a portfolio composed
entirely of domestic securities. Furthermore, international equities have
been shown to reduce volatility in single asset portfolios regardless of
whether the investments are in all domestic equities or all domestic fixed-
income instruments, and research indicates that volatility can be
significantly decreased when international equities are added.
From time to time, the Fund may advertise evaluations of a class of
Fund shares published by nationally recognized financial publications, such as
Morningstar Inc. or Lipper Analytical Services, Inc. Morningstar, Inc. rates
funds in broad categories based on risk/reward analyses over various time
periods. In addition, advertising or supplemental sales literature relating
to the Fund may describe the percentage decline from all-time high levels for
certain foreign stock markets.
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), independent
auditors, with principal offices at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serves as independent auditors for the Fund. The
financial statement that appears in this Statement of Additional Information
has been audited by Coopers & Lybrand, whose report hereon appears elsewhere
herein, and has been included herein in reliance upon the report of such firm
of independent auditors given upon their authority as experts in accounting
and auditing.
Willkie Farr & Gallagher serves as counsel for the Fund as well as
counsel to Counsellors, Counsellors Service and Counsellors Securities.
<PAGE>42
FINANCIAL STATEMENT
The Fund's financial statement follows the Report of Independent
Auditors.
<PAGE>43
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is strong, but the relative degree of safety is not
as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay interest and
repay principal although they are 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 has an
adequate capacity to pay interest and repay principal. Although they normally
exhibit 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.
<PAGE>44
To provide more detailed indications of credit quality, the ratings
from "AA" to "BBB" may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C 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.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." 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.
<PAGE>45
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B". The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
