-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Skrn/aVHRzJ1sawE8NU4tWZXPWHO4YSa41VpwZIQYUjjO4viz12lMT2oO+bXUnhy RVasaeQp8/Bow1gw7NXtGw== 0000950123-98-007010.txt : 19980803 0000950123-98-007010.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950123-98-007010 CONFORMED SUBMISSION TYPE: N-1A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980730 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARBURG PINCUS CENTRAL & EASTERN EUROPE FUND INC CENTRAL INDEX KEY: 0001067131 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-1A SEC ACT: SEC FILE NUMBER: 333-60229 FILM NUMBER: 98674516 FILING VALUES: FORM TYPE: N-1A SEC ACT: SEC FILE NUMBER: 811-08905 FILM NUMBER: 98674517 BUSINESS ADDRESS: STREET 1: 466 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10017-3147 BUSINESS PHONE: 2127166081 MAIL ADDRESS: STREET 1: 466 LEXINGTON AVENUE CITY: NEW YORK STATE: NY ZIP: 10017-3147 N-1A 1 WARBURG, PINCUS EUROPEAN CENTRAL & EASTERN EUROPE 1 As filed with the U.S. Securities and Exchange Commission on July 30, 1998 Securities Act File No. 333- Investment Company Act File No. 811- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x] Pre-Effective Amendment No. __ [ ] Post-Effective Amendment No.__ [ ] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x] Amendment No. __ [ ] (Check appropriate box or boxes) Warburg, Pincus European Central and Eastern Europe Fund, Inc. ....................................... (Exact Name of Registrant as Specified in Charter) 466 Lexington Avenue New York, New York 10017-3147 ........................................................ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (212) 878-0600 Mr. Eugene P. Grace Warburg, Pincus Central and Eastern Europe Fund, Inc. 466 Lexington Avenue New York, New York 10017-3147 ...................................... (Name and Address of Agent for Service) Copy to: Rose F. DiMartino, Esq. Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019-6099 2 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. Title of Securities Being Registered: Common Stock, $.001 par value per share. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended (the "1933 Act"), or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 3 WARBURG, PINCUS CENTRAL AND EASTERN EUROPE FUND, INC. FORM N-1A CROSS REFERENCE SHEET ------------------------- Part A Item No. Prospectus Heading 1. (a) Front Cover Page...................... Front Cover Page (b) Back Cover Page....................... Back Cover Page 2. Risk/Return Summary: Investments, Risks, and Performance......................... Overview -- Investor Profile; Goals and Principal Strategies; A Word About Risk 3. Risk/Return Summary: Fee Table............................... Fees and Fund Expenses; Example 4. Investment Objectives, Principal Investment Strategies, and Related Risks....................... Overview -- Goals and Principal Strategies; A Word About Risk; European Equity Fund; Central and Eastern Europe Fund; More About Risk; Other Investment Strategies 5. Management's Discussion of Fund Performance........................ Not Applicable 6. Management, Organization and Capital Structure......................... Overview -- Multi-Class Structure; The Funds In Detail; Fund Information Key; Meet The Managers 7. Shareholder Information................... Fund Information Key; About Your Account; Other Information; For More Information; Shareholder Guide 4 8. Distribution Arrangements................. The Funds In Detail; Other Information 9. Financial Highlights Information.......... Not Applicable 5 Part B Item No. 10. (a) Front Cover Page...................... Cover Page (b) Table of Contents..................... Cover Page 11. Fund History.............................. Organization of the Funds 12. Description of the Fund and its Investments and Risks................... Organization of the Funds; Investment Objectives and Policies; See Prospectus -- "Goals and Principal Strategies," "A Word About Risk," "Other Investment Strategies," "More About Risk," "European Equity Fund," and "Central and Eastern Europe Fund" 13. Management of the Fund.................... Management of the Funds; See Prospectus -- "The Funds In Detail," and "Meet The Managers" 14. Control Persons and Principal Holders of Securities................... Management of the Funds 15. Investment Advisory and Other Services.......................... Management of the Funds; See Prospectus -- "The Funds In Detail," and "Other Information" 16. Brokerage Allocation and Other Practices..................... Investment Objectives and Policies -- Portfolio Transactions 17. Capital Stock and Other Securities.............................. Management of the Funds; Organization of the Fund; See Prospectus -- 1 6 "Overview -- Multi-Class Structure" 18. Purchase, Redemption and Pricing of Shares............................... Additional Purchase and Redemption Information; See Prospectus -- "About Your Account," "Other Information," "For More Information," and "Shareholder Guide" 19. Taxation of the Fund...................... Additional Information Concerning Taxes; See Prospectus -- "About Your Account" 20. Underwriters.............................. Investment Objectives and Policies -- Portfolio Transactions; Management of the Funds -- Distribution and Shareholder Servicing; See Prospectus -- "The Funds In Detail," and "Other Information" 21. Calculation of Performance Data........... Determination of Performance 22. Financial Statements...................... Financial Statements; Report of PricewaterhouseCoopers LLP, Independent Accountants Part C Information required to be included in Part C is set forth after the appropriate item, so numbered, in Part C to this Registration Statement. 7 COMMON Subject to Completion, dated July 30, 1998 PROSPECTUS October 1, 1998 WARBURG PINCUS EUROPEAN EQUITY FUND WARBURG PINCUS CENTRAL AND EASTERN EUROPE FUND As with all mutual funds, the Securities and Exchange Commission has not approved these funds, nor does it guarantee that the information in this prospectus is accurate or complete. It is a criminal offense to state otherwise. 8 CONTENTS OVERVIEW 3 Multi-Class Structure 3 Investor Profile 3 Goals and Principal Strategies 4 A Word About Risk 5 Fees and Fund Expenses 6 Example 7 THE FUNDS IN DETAIL 8 The Management Firms 8 Fund Information Key 9 EUROPEAN EQUITY FUND 10 CENTRAL AND EASTERN EUROPE FUND 12 MORE ABOUT RISK 14 Introduction 14 Types of Investment Risk 14 Other Investment Practices 16 MEET THE MANAGERS 18 ABOUT YOUR ACCOUNT 20 How to Invest 20 Share Valuation 20 Buying and Selling Shares 20 Distributions 21 Taxes 21 OTHER INFORMATION 22 About the Distributor 22 Other Ways to Invest 22 Communication Topics FOR MORE INFORMATION 23 2 9 OVERVIEW MULTI-CLASS STRUCTURE Each of these funds offers two classes of shares, Common and Institutional. This prospectus offers the Common Class. The Institutional Class is described in a separate prospectus. INVESTOR PROFILE These funds are designed for investors who: - - are investing for long-term goals - - are willing to assume the risk of losing money in exchange for attractive potential long-term returns - - are seeking access to European markets that can be less accessible to individual investors - - can accept a higher degree of volatility - - want to diversify a portfolio of domestic investments They may NOT be appropriate if you: - - are investing for a shorter time horizon - - are uncomfortable with an investment that may suffer substantial declines in value - - are looking for a broadly diversified global or international equity fund You should base your selection of a fund on your own goals, risk preferences and time horizon. The Central and Eastern Europe Fund targets the emerging markets of a single geographic region. The fund's investments may include Russia, a country whose stock markets have experienced extreme volatility and illiquidity. Because this fund involves a high level of risk, you should consider it only for the aggressive portion of your portfolio. The Central and Eastern Europe Fund may not be appropriate for everyone. 3 10 GOALS AND PRINCIPAL STRATEGIES
FUND / RISK FACTORS GOAL STRATEGY EUROPEAN EQUITY FUND Capital appreciation - Invests in European stocks Risk factors: - Targets Western European countries Market risk - May use growth or value approaches Foreign securities Region focus CENTRAL AND EASTERN EUROPE FUND Capital appreciation - Invests primarily in Central and Risk Factors: Eastern European stocks Market risk Foreign securities - Focuses on the Czech Republic, Hungary, Emerging markets focus Poland and Russia Region focus Country focus - Combines growth and value approaches
4 11 A WORD ABOUT RISK All investments involve some level of risk. Simply defined, risk is the possibility that you will lose money or not make money. The principal risks of investing in the funds are discussed below. Before you invest, please make sure you understand the risks that apply to your fund. As with any mutual fund, you could lose money over any period of time. Investments in the funds are not bank deposits. They are not FDIC-insured or government-endorsed. MARKET RISK Both funds The market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations, which are often referred to as "volatility," may cause a security to be worth less than the price originally paid for it or less than it was at an earlier time. Market risk may affect a single issuer, industry, sector of an economy, or market as a whole. Market risk is common to most investments - including stocks and bonds, and the mutual funds that invest in them. FOREIGN SECURITIES Both funds A fund that invests outside the U.S. carries additional risks that include: - - CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign-currency denominated investments and may widen any losses. - - INFORMATION RISK Key information about an issuer, security or market may be inaccurate or unavailable. - - POLITICAL RISK Foreign-government actions such as capital controls, nationalizing a company or industry, expropriating assets, or imposing punitive taxes could have a severe effect on foreign security prices and impair a fund's ability to repatriate capital or income. Other political risks include economic policy changes, social and political instability, military action and war. COUNTRY/REGION FOCUS Both funds Market swings in the targeted country or region will be likely to have a greater effect on fund performance than they would in a more geographically diversified equity fund. EMERGING MARKETS FOCUS Central and Eastern Europe Fund Focusing on emerging markets involves higher levels of risk, including increased currency, information, liquidity, market, political and valuation risk. Deficiencies in regulatory oversight, market infrastructure, shareholder protections and company laws could expose a fund to operational and other risks as well. Some countries may have restrictions that could limit a fund's access to attractive opportunities. Additionally, emerging markets often face serious problems (such as high external debt, inflation and unemployment) that could subject a fund to increased volatility or substantial declines in value). 5 12 FEES AND FUND EXPENSES This table describes the fees and expenses you may bear as a shareholder. Annual fund operating expense figures are estimates for fiscal 1999, but do not reflect fee waivers and expense reimbursements.*
Central and European Equity Eastern Europe Fund Fund SHAREHOLDER FEES (paid directly from your investment) --------------------------------- ------------------ ---------------- Sales charge "load" on purchases NONE NONE --------------------------------- ------------------ ---------------- Deferred sales charge "load" NONE NONE --------------------------------- ------------------ ---------------- Sales charge "load" on NONE NONE reinvested distributions --------------------------------- ------------------ ---------------- Redemption fee (short-term NONE 1.00%(1) trading fee) on shares held less than six months (as a percent of amount redeemed) --------------------------------- ------------------ ---------------- Exchange fee NONE NONE --------------------------------- ------------------ ---------------- --------------------------------- ------------------ ---------------- ANNUAL FUND OPERATING EXPENSES (deducted from fund assets) --------------------------------- ------------------ ---------------- Management fee 1.00% 1.25% --------------------------------- ------------------ ---------------- Distribution and service .25% .25% (12b-1) fee --------------------------------- ------------------ ---------------- Other expenses X.xx% X.xx% --------------------------------- ------------------ ---------------- TOTAL ANNUAL FUND OPERATING X.xx%* X.xx%* EXPENSES* --------------------------------- ------------------ ----------------
(1) The short-term trading fee is waived until further notice. * Through at least December 1999, fund service providers have voluntarily agreed to waive some of their fees and reimburse expenses. These waivers and reimbursements are expected to lower fund expenses as follows:
Management Distribution and Other Total annual fund fee service (12b-1) fee expenses operating expenses European Equity Fund X.xx% .25% X.xx% [X.xx%] Central and Eastern Europe Fund X.xx% .25% X.xx% [X.xx%]
6 13 EXAMPLE This example may help you compare the cost of investing in these funds with the cost of investing in other mutual funds. Because it uses hypothetical conditions, your actual costs may be higher or lower. Assume you invest $10,000, each fund returns 5% annually, expense ratios remain as listed previously, and you close your account at the end of the time periods shown. Based on these assumptions, your cost would be:
BEFORE WAIVERS AND REIMBURSEMENTS* ONE YEAR THREE YEARS ------------------------------------- ---------- ------------ European Equity Fund $ $ ------------------------------------- ---------- ------------ Central and Eastern Europe Fund $ $ ------------------------------------- ---------- ------------
*Fee waivers and expense reimbursements would lower your cost as follows:
One year Three years European Equity Fund $ $ Central and Eastern Europe Fund $ $
7 14 THE FUNDS IN DETAIL THE MANAGEMENT FIRMS BEA ASSOCIATES One Citicorp Center 153 East 53rd Street New York, NY 10022 - - Investment adviser for the funds - - A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse Group, one of the world's leading banks - - An investment manager for corporate and state pension funds, endowments and other institutions - - Currently manages approximately $35 billion in assets Together with its predecessor firms, BEA has been engaged in the investment advisory business for over 60 years. CREDIT SUISSE ASSET MANAGEMENT LIMITED Beaufort House 15 St. Botolph Street London, EC 3A 7JJ - - Sub-adviser for the funds under the supervision of BEA - - Currently manages approximately $35 billion in assets - - A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse Group - - Credit Suisse Asset Management has offices in Budapest, Moscow, Prague, Warsaw, Frankfurt, Milan, Paris, Sydney, Tokyo and Zurich (these offices are not registered with the U.S. Securities and Exchange Commission) DISTRIBUTION AND SERVICE COUNSELLORS SECURITIES INC. 466 Lexington Avenue New York, NY 10017 - - Distributor of the funds - - A wholly owned subsidiary of Warburg Pincus Asset Management, Inc. COUNSELLORS FUNDS SERVICE, INC. 466 Lexington Avenue New York, NY 10017 - - Provides the funds with administrative services - - A wholly owned subsidiary of Warburg Pincus Asset Management, Inc. 8 15 FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: GOAL AND STRATEGY The fund's particular investment goals and the strategies it intends to use in pursuing them. PORTFOLIO INVESTMENTS The primary types of securities in which the fund invests. Secondary investments are described in "More About Risk." RISK FACTORS The major risk factors associated with the fund. Additional risk factors are included in "More About Risk." PORTFOLIO MANAGEMENT The individuals designated by the investment adviser or sub-adviser to handle the fund's day-to-day management. INVESTOR EXPENSES Estimated expenses for the 1999 fiscal year. - - MANAGEMENT FEE The fee paid to the investment adviser and sub-adviser for providing investment advice to the fund. Expressed as a percentage of average net assets after waivers. - - OTHER EXPENSES Fees paid by the fund for miscellaneous items such as administration, transfer agency, custody, auditing, legal and registration fees. Expressed as a percentage of average net assets after waivers, credits and reimbursements. 9 16 EUROPEAN EQUITY FUND GOAL AND STRATEGY The European Equity Fund seeks capital appreciation. To pursue this goal, the fund invests primarily in stocks of Western European companies. Normally the fund invests at least 65% of assets in equity securities of companies located in or conducting a majority of their business in Western Europe, considered to be the countries of the European Union, as well as Norway and Switzerland. The European Union currently consists of the following Western European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. To enhance return potential, the fund may also pursue opportunities in other European countries. The fund intends to diversify its investments across different countries. However, at times the fund may invest a significant part of its assets in a single country. In choosing stocks, the portfolio managers consider factors that include (but are not limited to): - - stock price relative to the company's rate of earnings growth - - valuation relative to other European companies and market averages - - the stock's currency denomination PORTFOLIO INVESTMENTS This fund intends to invest at least 80% of its assets in equity securities of Western European companies. These equity securities include: - - common and preferred stocks - - securities convertible into common stocks - - securities such as rights and warrants, whose values are based on common stocks The fund may also invest in investment-grade debt securities issued by Western European companies and governments. To a limited extent, the fund may engage in other investment practices. RISK FACTORS This fund's principal risk factors are: - - market risk - - foreign securities - - region focus The value of your investment will fluctuate in response to stock market movements. Because the fund invests internationally, it carries additional risks, including currency, information and political risks. These risks are described in "More About Risk." Also, because the fund targets a single region, you should expect it to be more volatile than a more geographically diversified equity fund. Fund performance is closely tied to economic and political conditions within Europe. To the extent that the fund uses certain investment practices, it takes on further risks that could adversely affect its performance. Please read "More About Risk" carefully before you invest. 10 17 PORTFOLIO MANAGEMENT Patricia Maxwell-Arnot and Susan E. Boland manage the fund's investment portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES Management fee X.xx% All other expenses X.xx% Total expenses X.xx%
11 18 CENTRAL AND EASTERN EUROPE FUND GOAL AND STRATEGY The Central and Eastern Europe Fund seeks capital appreciation. To pursue this goal, it invests primarily in stocks of Central and Eastern European companies. Under normal conditions, the fund invests at least 65% of assets in equity securities of companies located in or conducting a majority of their business in Central and Eastern Europe. The fund currently intends to focus on the Czech Republic, Hungary, Poland and Russia. Although it may invest a significant part of its assets in any of these countries, the fund will not invest more than 40% of assets (measured at the time of purchase) in any single one. Other Central and Eastern European countries in which the fund may invest include Bulgaria, Croatia, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia and the Ukraine. Up to 20% of assets (measured at the time of purchase) may be invested in any one of these countries. The fund may also invest in equity and debt securities of companies located in other European countries. These include emerging markets issuers, as well as companies expected to benefit from economic growth in Central and Eastern Europe. The portfolio managers seek to identify countries where economic and political reforms are most likely to produce above-average long-term returns. The managers then look for companies best positioned to take advantage of these developments. The fund's managers may consider factors such as: - - operating ratios relative to other companies in the same industry - - price/cash flow ratio relative to industry peers and market averages PORTFOLIO INVESTMENTS This fund invests primarily in equity securities that include: - - common and preferred stocks - - securities convertible into common stocks - - securities such as rights and warrants, whose values are based on common stocks The fund may also invest in debt securities, including those rated below investment grade (junk bonds). To a limited extent, the fund may engage in other investment practices. RISK FACTORS This fund's principal risk factors are: - - market risk - - foreign securities - - emerging-markets focus - - region focus - - country focus The value of your investment will fluctuate in response to stock market movements. Because the fund invests internationally, it carries additional risks, including currency, information and political risks. These risks, as well as access, operational and other risks associated with the fund's emerging-markets focus, are described in "More About Risk." Also, because the fund targets a single region, you should expect it to be more volatile than a more geographically diversified equity fund. Fund performance is closely tied to 12 19 economic and political conditions within Central and Eastern Europe. To the extent that the fund invests in start-up or other small companies and uses certain other investment practices, it takes on further risks that could adversely affect its performance. Please read "More About Risk" carefully before you invest. PORTFOLIO MANAGEMENT Glenn Wellman and Isabel Knight manage the fund's investment portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES Management fee X.xx% All other expenses X.xx% Total expenses X.xx%
13 20 MORE ABOUT RISK INTRODUCTION A fund's goal and principal strategies largely determine its risk profile. You will find a concise description of each fund's risk profile in "Overview." The fund-by-fund discussions contain more detailed information. This section discusses other risks that may affect the funds. The funds may use certain investment practices that have higher risks associated with them. However, each fund has limitations and policies designed to reduce many of the risks. "Other Investment Practices" describes these practices and the limitations on their use. TYPES OF INVESTMENT RISK The following risks are referred to throughout this prospectus. ACCESS RISK Some countries may restrict a fund's access to investments or offer terms that are less advantageous than those for local investors. This could limit the attractive investment opportunities available to a fund. CREDIT RISK The issuer of a security or the counterparty to a contract may default or otherwise become unable to honor a financial obligation. CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign-currency denominated investments and may widen any losses. EXPOSURE RISK The risk associated with investments (such as derivatives) or practices (such as short selling) that increase the amount of money a fund could gain or lose on an investment. - - HEDGED Exposure risk could multiply losses generated by a derivative or practice used for hedging purposes. Such losses should be substantially offset by gains on the hedged investment. However, while hedging can reduce or eliminate losses, it can also reduce or eliminate gains. - - SPECULATIVE To the extent that a derivative or practice is not used as a hedge, the fund is directly exposed to its risks. Gains or losses from speculative positions in a derivative may be much greater than the derivative's original cost. For example, potential losses from writing uncovered call options and from speculative short sales are unlimited. INFORMATION RISK Key information about an issuer, security or market may be inaccurate or unavailable. INTEREST-RATE RISK Changes in interest rates may cause a decline in the market value of an investment. With bonds and other fixed-income securities, a rise in interest rates typically causes a fall in values, while a fall in interest rates typically causes a rise in values. LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell at the time and the price that the fund would like. A fund may have to lower the price, sell other securities instead 14 21 or forego an investment opportunity. Any of these could have a negative effect on fund management or performance. MARKET RISK The market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations, which are (often referred to as "volatility") may cause a security to be worth less than the price originally paid for it, or less than it was worth at an earlier time. Market risk may affect a single issuer, industry, sector of the economy, or the market as a whole. Market risk is common to most investments - including stocks and bonds, and the mutual funds that invest in them. OPERATIONAL RISK Some countries have less developed securities markets (and related transaction, registration and custody practices) that could subject a fund to losses from fraud, negligence, settlement delays or other actions. POLITICAL RISK Foreign-government actions such as capital controls, nationalizing a company or industry, expropriating assets, or imposing punitive taxes could have a severe effect on foreign security prices and impair a fund's ability to repatriate capital or income. Other political risks include economic policy changes, social and political instability, military action and war. VALUATION RISK The lack of an active trading market may make it difficult to obtain an accurate price for a fund security. YEAR 2000 PROCESSING RISK The funds could be adversely affected if the computer systems used by their adviser, sub-adviser and other service providers do not correctly handle the change from "99" to "00" on January 1, 2000. The adviser and sub-adviser are working to avoid such problems and to obtain assurances from service providers that they are taking similar steps. However, there can be no assurance that these efforts will be sufficient. The Year 2000 issue affects practically all companies, organizations, governments and markets throughout the world - including companies or governmental entities in which the funds invest. However, at this time no one knows precisely what the degree of impact will be. To the extent that the impact on a fund holding or on the global markets or economies is negative, it could adversely affect a fund's returns. 15 22 OTHER INVESTMENT PRACTICES
- -------------------------------------------------------------------------------------- This table shows each fund's limitations on certain investment E practices. In each case the significant types of risk are listed (see U two preceding pages for definitions). Numbers in this table show R allowable use only. O C P & KEY TO TABLE: E E * No policy limitation on use; fund may be using currently. A N x Permitted, but typically not used to a significant extent. E U - -- Not permitted E R Q O 20% italic type represents percent of total fund assets U P T E 20% roman type represents percent of net fund assets Y - ------------------------------------------------------------------------- ----- ------ BORROWING The borrowing of money from banks to meet redemptions or for other temporary or emergency purposes. Exposure risk. 30% 30% - ------------------------------------------------------------------------- ----- ------ COUNTRY/REGION FOCUS Investing a significant portion of fund assets in a single country or region. Market swings in the targeted country or * * region will be likely to have a greater effect on fund performance than they would in a more geographically diversified equity fund. Currency, market, political risks. - ------------------------------------------------------------------------- ----- ------ EMERGING MARKETS Countries generally considered to be relatively less developed or industrialized. Emerging markets often face economic problems that could subject a fund to increased volatility or substantial declines x * in value. Deficiencies in regulatory oversight, market infrastructure, shareholder protections and company laws could expose a fund to risks beyond those normally encountered in developed countries. Access, currency, information, liquidity, market, operational, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ FOREIGN SECURITIES Securities of foreign issuers, such as American or European depositary receipts (abbreviated ADRs and EDRs). Depositary * * receipts are dollar-denominated securities typically issued by banks and based on ownership of securities issued by foreign companies. Currency, information, liquidity, market, political, valuation risks.
16 23
- ------------------------------------------------------------------------- ----- ------ NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated below BBB/Baa (or of comparable quality, if unrated) are considered junk x 35% bonds. Credit, information, interest rate, liquidity, market, valuation risks. - ------------------------------------------------------------------------- ----- ------ PRIVATIZATION PROGRAMS Foreign governments may sell all or part of their interests in enterprises they own or control. Access, currency, * * information, liquidity, operational, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with restrictions on trading, or those not actively traded. Liquidity, valuation, market 15% 15% risks. - ------------------------------------------------------------------------- ----- ------ SECURITIES LENDING Lending portfolio securities to financial institutions; a fund receives cash, U.S. government securities or bank letters of credit 50% 50% as collateral. Credit, liquidity, market, operational risks. - ------------------------------------------------------------------------- ----- ------ SHORT-TERM TRADING Selling a security shortly after purchase. A fund engaging in short-term trading will have higher turnover and * * transaction expenses. Increased short-term capital gains distributions could raise shareholders' income tax liability. - ------------------------------------------------------------------------- ----- ------ START-UP OR OTHER SMALL COMPANIES Companies with small relative market capitalizations. Information, liquidity, market, valuation risks. x * ----- ------ - ------------------------------------------------------------------------- ----- ------ STRUCTURED INSTRUMENTS Structured securities and other instruments (such as swaps) allow a fund to gain access to the performance of * * a benchmark asset such as an index or selected stocks where the fund's direct investment in the benchmark asset is restricted. Access, credit, currency, exposure, information, interest-rate, liquidity, market, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's assets in investments such as money market obligations and investment-grade debt x x securities for defensive purposes. Although intended to avoid losses in unusual market conditions, defensive tactics might prevent a fund from achieving its goal. - ------------------------------------------------------------------------- ----- ------ WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or sale of securities for delivery at a future date; market value may change 20% 20% before delivery. Exposure, liquidity, market risks. - ------------------------------------------------------------------------- ----- ------
17 24 MEET THE MANAGERS [Susan E. Boland] SUSAN E. BOLAND Senior Vice President, BEA Associates - - Co-Portfolio Manager, European Equity Fund since fund inception - - Joined BEA in 1996 - - Director and portfolio manager with Barran & Partners Limited, 1995-1996 - - Partner and European portfolio manager for Teton Partners, 1992-1995 - - Portfolio manager and analyst with Fidelity Management & Research Company, 1985-1991 [Isabel Knight] ISABEL KNIGHT Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, Central and Eastern Europe Fund since fund inception - - Joined CSAM in 1997 - - Senior fund manager for emerging Europe with Foreign & Colonial Emerging Markets, 1995-1997 - - Portfolio manager for Morgan Stanley Asset Management, 1992-1995 Portfolio managers are introduced in alphabetical order. 18 25 [Patricia Maxwell-Arnot] PATRICIA MAXWELL-ARNOT Managing Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, European Equity Fund since fund inception - - Joined CSAM in 1995 - - Director at Lazard Brothers (London), 1984-1994 [Glenn Wellman] GLENN WELLMAN Managing Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, Central and Eastern Europe Fund since fund inception - - Joined CSAM in 1993 - - Managing director and chief investment officer, Alliance Capital Limited, 1987-1993 19 26 ABOUT YOUR ACCOUNT HOW TO INVEST The accompanying Shareholder Guide explains how to invest. You will find information about purchases, redemptions, exchanges and services. SHARE VALUATION The price of your shares is also referred to as their net asset value (NAV). The NAV is determined at the close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time) each day the Exchange is open for business. It is calculated by dividing the Common Class total assets, less its liabilities, by the number of Common Class shares outstanding. Each fund values its securities at the most recent sale price when it calculates its NAV. If there are no sales of a security it is valued at the mean between bid and asked quotations. When market quotations are not readily available, securities and other assets are valued at fair value. A fund determines fair value in good faith, according to procedures established by its Board. Debt obligations that will mature in 60 days or less are valued on the basis of amortized cost, unless the Board determines that using this method would not reflect the investments' value. BUYING AND SELLING SHARES Each fund is open on those days when the New York Stock Exchange is open, typically Monday through Friday. If we receive your request in proper form by 4 p.m. ET, your transaction will be priced at that day's NAV. If we receive it after 4 p.m., it will be priced at the next business day's NAV. You can also buy and sell fund shares through financial-services firms such as banks, brokers and investment advisors. The funds have authorized these firms (and other intermediaries that the firms may designate) to accept orders, and your order will be considered received by the fund when received by an authorized firm (or its designee). The order will be priced at the NAV next computed after the firm (or its designee) has accepted it. A short-term trading fee of 1.0% of the amount redeemed will be deducted from the redemption proceeds if you sell shares of the Central and Eastern Europe Fund after holding them less than six months. This fee, which is currently being waived, is paid to the fund to offset costs associated with short-term shareholder trading. It does not apply to shares acquired through reinvestment of distributions. If you bought shares on different days, any shares you bought through reinvestment of distributions will be redeemed first, followed by the shares you held longest. Some fund securities may be listed on foreign exchanges that are open on days (such as U.S. holidays) when the funds do not compute their prices. This could cause the value of a fund's portfolio investments to be affected by trading on days when you cannot buy or sell shares. ACCOUNT STATEMENTS In general, you will receive account statements as follows: - - after every transaction that affects your account balance (except for distribution reinvestments and automatic transactions) - - after any changes of name or address of the registered owner(s) 20 27 - - otherwise, every quarter You will receive annual and semiannual financial reports. Every year you also should receive, if applicable, a Form 1099 tax information statement mailed by January 31. DISTRIBUTIONS As a fund investor, you are entitled to your share of the fund's net income and gains on its investments. The fund passes these earnings along to its shareholders as distributions. Each fund earns dividends from stocks and interest from bond, money market and other investments. These are passed along as dividend distributions. A fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These are passed along as capital gain distributions. Each fund distributes substantially all of its net income and capital gains to shareholders at least annually, usually in November or December. Most investors have their distributions reinvested in additional shares of the same fund. Alternatively, you can choose to have a check for your distributions mailed to you or sent by electronic transfer. Distributions will be reinvested unless you select another option on your account application. TAXES As with any investment, you should consider how your investment in a fund will be taxed. Unless your account is an IRA or other tax-advantaged account, you should be aware of the potential tax implications. Please consult your tax professional concerning your own tax situation. TAXES ON DISTRIBUTIONS As long as a fund continues to meet the requirements for being a tax-qualified regulated investment company, it pays no federal income tax on the earnings it distributes to shareholders. Consequently, distributions you receive from a fund, whether reinvested or taken in cash, are generally considered taxable. Distributions from a fund's long-term capital gains are taxed as capital gains; distributions from other sources are generally taxed as ordinary income. Some dividends paid in January may be taxable as if they had been paid the previous December. If you buy shares shortly before or on the "record date" - the date that establishes you as the person to receive the upcoming distribution - you will receive a portion of the money you just invested in the form of a taxable distribution. The Form 1099 that is mailed to you every January details your distributions and their federal tax category. TAXES ON TRANSACTIONS Any time you sell or exchange shares, it is considered a taxable event for you. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or loss on the transaction. You are responsible for any tax liabilities generated by your transactions. 21 28 OTHER INFORMATION ABOUT THE DISTRIBUTOR Counsellors Securities Inc. is responsible for: - - making the funds available to you - - account servicing and maintenance - - sub-transfer agency services, sub-accounting services, and administrative services related to sale of the Common Class As part of their business strategies, the funds each have adopted a Rule 12b-1 shareholder servicing and distribution plan to compensate Counsellors Securities for its services. Under the plan, Counsellors Securities receives fees at an annual rate of 0.25% of average daily net assets of the fund's Common Class. Rule 12b-1 is the federal securities regulation authorizing fees of this type. Because the fees are paid out of a fund's assets on an on-going basis, over time they will increase the cost of your investment and may cost you more than paying other types of sales charges. OTHER WAYS TO INVEST You can also invest in the funds through a variety of financial-services firms. Some of these include: - - Charles Schwab & Company, Inc. Mutual Fund OneSource(TM) service - - Fidelity Brokerage Services, Inc. FundsNetwork(TM) Program - - Jack White & Company, Inc. - - Waterhouse Securities, Inc. Your financial services firm may charge transaction fees or other fees that you could avoid by investing directly with the fund. Please read their program materials for any special provisions or service features that may apply to your investment. Some account policies, such as the minimum initial or subsequent investment amounts, may be different. The distributor has contracted with a number of financial-services firms to provide administrative, sub-accounting, sub-transfer agency and other services. Each of these firms receives a fee based on the quality and types of services it provides. In some cases the service fee may also depend on the firm's standardized fee schedule or on special requirements of its business relationship with the distributor. The fee may be up to ___% (or up to 0.40% in connection with certain retirement plan programs) of the average annual value of fund accounts maintained by the firm. The funds are not responsible for paying the fee, although they may reimburse part of the fees paid at the rates normally paid to the transfer agent. Some financial-services firms and their investment professionals may receive extra compensation. This compensation, which the distributor or adviser pays out of their own resources, may include promotional incentives as well as (for the distributor) reimbursement for marketing costs. The distributor or adviser may also provide opportunities to attend events such as business meetings, conferences and training programs. Travel, meals and lodging may be included. COMMUNICATION TOPICS In its reports, investor communications or advertisements a fund may include: - - its total return performance - - its performance compared with various indexes or other mutual funds - - published evaluations by nationally recognized ranking services and financial publications - - updates concerning its strategies and portfolio investments - - information about its goals, risk factors and expenses, including comparisons with other mutual funds - - analysis of its investments by industry, country, credit quality and other characteristics - - a discussion of the risk/return continuum relating to different investments - - the potential impact of adding foreign stocks to a domestic portfolio - - portfolio manager quotations and commentary 22 29 FOR MORE INFORMATION More information about these funds is available free upon request, including the following: SHAREHOLDER GUIDE Explains how to buy and sell shares. The Shareholder Guide is incorporated by reference into (is legally considered part of) this prospectus. ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS Includes financial statements, portfolio investments, detailed performance information and the auditor's report. The annual report also contains a letter from the fund's manager discussing market conditions and investment strategies that significantly affected fund performance during its past fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides more details about the fund. A current SAI is on file with the Securities and Exchange Commission (SEC) and is incorporated by reference. You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI, material incorporated by reference and other information. You can also obtain copies by visiting the SEC's Public Reference Room in Washington, DC (phone 800-SEC-0330) or by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, DC 20549-6009. Please contact Warburg Pincus Funds to obtain information: By telephone: 800-WARBURG (800-927-2874) By mail: Warburg Pincus Funds P.O. Box 9030 Boston, MA 02205-9030 By overnight or courier service: BFDS Attn: Warburg Pincus Funds 2 Heritage Drive North Quincy, MA 02171 On the Internet: www.warburg.com SEC file numbers: Warburg Pincus European Equity Fund 811-xxxx Warburg Pincus Central and Eastern Europe Fund 811-xxxx 23 30 BUYING SHARES OPENING AN ACCOUNT Your account application provides us with key information we need to set up your account correctly. It also lets you authorize services that you may find convenient in the future. If you need an application, call our Shareholder Service Center to receive one by mail or fax. Or you can download it from our Internet Web site: www.warburg.com. You can make your initial investment by check or wire. The "By Wire" method in the table enables you to buy shares on a particular day at the closing NAV. ADDING TO AN ACCOUNT You can add to your account in a variety of ways, as shown in the table. If you want to use ACH transfer, be sure to complete the "ACH on Demand" section of the account application. INVESTMENT CHECKS Please use either a personal or bank check payable in U.S. dollars to Warburg Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have your name pre-printed on them, or checks payable to you and endorsed to the order of Warburg Pincus Funds. These types of checks will be returned to you and your purchase order will not be processed. Limited exceptions include properly endorsed IRA Rollover and government checks. MINIMUM INITIAL INVESTMENT Cash Reserve Fund: $1,000 NY Tax Exempt Fund: $1,000 Growth & Income Fund: $1,000 Balanced Fund: $1,000 All other funds: $2,500 IRAs: $ 500 Transfers/Gifts to Minors: $ 500
WIRE INSTRUCTIONS State Street Bank and Trust Company ABA# 0110 000 28 Attn: Mutual Funds/Custody Dept. [Warburg Pincus Fund Name] DDA# 9904-649-2 F/F/C: [Acct. # and Registration] HOW TO REACH US SHAREHOLDER SERVICE CENTER Toll-free: 800-WARBURG (800-927-2874) Fax: 212-370-9833 MAIL Warburg Pincus Funds P.O. Box 9030 Boston, MA 02205-9030 OVERNIGHT/COURIER SERVICE BFDS Attn: Warburg Pincus Funds 2 Heritage Drive North Quincy, MA 02171 INTERNET WEB SITE www.warburg.com Buying Shares OPENING AN ACCOUNT ADDING TO AN ACCOUNT - -------------------------------------------------------------------------------- By Check - -------------------------------------------------------------------------------- - - Complete the New Account - Make your check payable to Warburg Application. For IRAs use the Pincus Funds. Universal IRA Application. - - Make your check payable to - Write the account number and the fund Warburg Pincus Funds. name on your check. - - Mail to the address on the - Mail to Warburg Pincus Funds. application. - Minimum amount is $100. - -------------------------------------------------------------------------------- By Exchange - -------------------------------------------------------------------------------- Call our Shareholder Service Center - Call our Shareholder Service Center to to request an exchange. Be sure to request an exchange. read the current prospectus for the new fund. Also please observe the - Minimum amount is $250. minimum initial investment. - - If you do not have telephone privileges, mail or fax a letter of instruction. - -------------------------------------------------------------------------------- By Wire - -------------------------------------------------------------------------------- - - Complete and sign the New Account - Call our Shareholder Service Center Application. by 4 p.m. ET to inform us of the incoming wire. - - Call our Shareholder Service - Wire the money for receipt by the Center and fax the signed New close of business. Account Application by 4 p.m. ET. - - Shareholder Services will telephone - Minimum amount is $500. you with your account number. - - Wire your initial investment for receipt by the close of business. - - Mail the original, signed application to Warburg Pincus Funds. - - This method is not available for IRAs. - -------------------------------------------------------------------------------- By Automated Clearing House (ACH) Transfer - -------------------------------------------------------------------------------- - Call our Shareholder Service Center to request an ACH transfer from your bank. Cannot be used to open an account. - Your purchase will be effective at the next NAV calculated after we accept your order. - Minimum amount is $50. - Requires ACH on Demand privileges - -------------------------------------------------------------------------------- 31 SELLING SHARES Selling Shares TO SELL SOME OR ALL OF YOUR SHARES CAN BE USED FOR - -------------------------------------------------------------------------------- By Mail - -------------------------------------------------------------------------------- Write us a letter of instruction - Accounts of any type. that includes: - Sales of any amount. - - your name(s) and signature(s) - For IRAs please use the IRA Distribution Form. - - the fund name and account number - - the dollar amount you want to sell - - how to send the proceeds Obtain a signature guarantee or other documentation, if required (see "Selling Shares in Writing"). Mail the materials to Warburg Pincus Funds. - - If only a letter of instruction is required, you can fax it to the Shareholder Service Center. - -------------------------------------------------------------------------------- By Exchange - -------------------------------------------------------------------------------- - - Obtain a current prospectus for the - Accounts with telephone privileges. fund into which you would like to exchange. Please observe the minimum - If you do not have telephone initial investment. privileges, mail or fax a letter of instruction to exchange shares. - - Call our Shareholder Service Center to request an exchange. - -------------------------------------------------------------------------------- By Phone - -------------------------------------------------------------------------------- Call our Shareholder Service Center - Non-IRA accounts with telephone to request a redemption. You can privileges. receive the proceeds as: - - A check mailed to the address - Sales of up to of record $250,000. - - An ACH transfer to your bank ($50 minimum) - - A wire to your bank ($500 minimum) - - See "By Wire or ACH Transfer" for details. - -------------------------------------------------------------------------------- By Wire or ACH Transfer - -------------------------------------------------------------------------------- - - Complete the "Wire Instructions" or - Non-IRA accounts with wire redemption "ACH on Demand" section of your New or ACH on Demand privileges. Account Application. - - Proceeds will be wired on the next - Requests by phone or mail. business day. - -------------------------------------------------------------------------------- SELLING SHARES IN WRITING Some circumstances require a written sell order, along with a signature guarantee. These include: - - accounts whose address of record has been changed within the past 30 days - - amounts of more than $250,000 - - IRA transfers of more than $100,000 - - requests to send the proceeds to a different payee or address - - shares represented by certificates, which must be returned with your sell order A signature guarantee helps protect against fraud. You can obtain one from most banks or securities dealers, but not from a notary public. RECENTLY PURCHASED SHARES If the fund has not yet collected payment for the shares you are selling, it will delay sending you the proceeds until your purchase payment clears. This may take up to 10 business days after the purchase. To avoid the collection period, consider buying shares by bank wire, bank check, certified check or money order. LOW-BALANCE ACCOUNTS If your account balance falls below the minimum required to keep it open, the fund may ask you to increase your balance. If it is still below the minimum after 60 days, the fund may close your account and mail you the proceeds. MINIMUM TO KEEP AN ACCOUNT OPEN Cash Reserve Fund: $ 750 NY Tax Exempt Fund: $ 750 Growth & Income Fund: $ 500 Balanced Fund: $ 500 All other funds: $2,000 IRAs: $ 250 Transfers/Gifts to Minors: $ 250
32 SHAREHOLDER SERVICES AUTOMATIC SERVICES Buying or selling shares automatically is easy with the services described below. You can set up most of these services with your account application or by calling our Shareholder Service Center. AUTOMATIC MONTHLY INVESTMENT PLAN For making automatic investments ($50 minimum) from a designated bank account. SYSTEMATIC WITHDRAWAL PLAN For making automatic monthly, quarterly or annual withdrawals of $250 or more. DISTRIBUTION SWEEP For automatically reinvesting your dividend and capital-gain distributions into another identically registered Warburg Pincus fund. Not available for IRAs. RETIREMENT PLANS Warburg Pincus offers a range of tax-advantaged retirement accounts, including: - - Traditional IRAs - - Roth IRAs - - Roth Conversion IRAs - - Spousal IRAs - - Rollover IRAs - - SEP-IRAs To transfer your IRA to Warburg Pincus, use the IRA Direct Rollover/Transfer Form. If you are opening a new IRA, you will also need to complete the Universal IRA Application. Shareholder Services will handle the transfer and keep you advised of its status. Please consult your tax professional concerning your IRA eligibility and tax situation. TRANSFERS/GIFTS TO MINORS Depending on state laws, you can set up a custodial account under the Uniform Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please consult your tax professional about these types of accounts. ACCOUNT CHANGES Call our Shareholder Service Center to update your account records whenever you change your address. Shareholder Services can also help you change your account privileges or registration. [Cover page legend]: This guide is incorporated into and legally part of each Warburg Pincus Funds prospectus. 1 33 OTHER POLICIES TRANSACTION DETAILS You are entitled to dividend and capital-gain distributions as soon as your purchase order is executed. Your purchase order will be canceled and you may be liable for losses or fees incurred by the fund if: - - your investment check or ACH transfer does not clear - - you place a telephone order by 4 p.m. ET and we do not receive your wire by the close of business If you wire money without first calling Shareholder Services to place an order, and your wire arrives after the close of regular trading on the New York Stock Exchange, then your order will not be executed until the end of the next business day. In the meantime, your payment will be held uninvested. Unless you decline telephone privileges on your application, you may be responsible for any fraudulent telephone order as long as the fund takes reasonable measures to verify the order. Uncashed redemption or distribution checks do not earn interest. SPECIAL SITUATIONS A fund reserves the right to: - - stop offering its shares for a period of time (such as when management believes that a substantial increase in assets could adversely affect it) - - refuse any purchase or exchange request, including those from any person or group who, in the fund's view, is likely to engage in excessive trading - - change or discontinue its exchange privilege after 30 days' notice to current investors, or temporarily suspend this privilege during unusual market conditions - - change its minimum investment amounts after 15 days' notice to current investors of any increases - - waive its minimum investment requirements for employees and clients of its adviser, sub-adviser, distributor and their affiliates - - charge a wire redemption fee - - delay sending out redemption proceeds for up to seven days - - suspend redemptions or postpone payment dates as permitted by the Investment Company Act of 1940 - - make a "redemption in kind" - payment in portfolio securities rather than cash - if the amount you are redeeming is over $250,000 and could adversely affect fund operations 800-WARBURG (800-927-2874) MONDAY-FRIDAY, 8 A.M. - 8 P.M. SATURDAY, 8 A.M. - 4 P.M. (ET) 2 34 Subject to Completion, dated July 30, 1998 PROSPECTUS October 1, 1998 BEA INSTITUTIONAL FUNDS European Equity Fund Central and Eastern Europe Fund As with all mutual funds, the Securities and Exchange Commission has not approved these funds, nor does it guarantee that the information in this prospectus is accurate or complete. It is a criminal offense to state otherwise. 35 CONTENTS OVERVIEW 3 Multi-Class Structure 3 Investor Profile 3 Goals and Principal Strategies 4 A Word About Risk 5 Fees and Fund Expenses 6 Example 7 THE FUNDS IN DETAIL 8 The Management Firms 8 Fund Information Key 9 EUROPEAN EQUITY FUND 10 CENTRAL AND EASTERN EUROPE FUND 12 MORE ABOUT RISK 14 Introduction 14 Types of Investment Risk 14 Other Investment Practices 16 MEET THE MANAGERS 18 ABOUT YOUR ACCOUNT 20 How to Invest 20 Share Valuation 20 Buying and Selling Shares 20 Distributions 21 Taxes 21 OTHER INFORMATION 22 About the Distributor 22 Communication Topics 22 FOR MORE INFORMATION 23 2 36 OVERVIEW MULTI-CLASS STRUCTURE The BEA Institutional Funds are separate Institutional Classes of shares of certain Warburg Pincus Funds. This prospectus describes the Institutional Classes of the Warburg Pincus European Equity Fund and the Warburg Pincus Central and Eastern Europe Fund. The Common Class is described in a separate prospectus. INVESTOR PROFILE These funds are designed for investors who: - - are investing for long-term goals - - are willing to assume the risk of losing money in exchange for attractive potential long-term returns - - are seeking access to European markets that can be less accessible to individual investors - - can accept a higher degree of volatility - - want to diversify a portfolio of domestic investments They may NOT be appropriate if you: - - are investing for a shorter time horizon - - are uncomfortable with an investment that may suffer substantial declines in value - - are looking for a broadly diversified global or international equity fund You should base your selection of a fund on your own goals, risk preferences and time horizon. The Central and Eastern Europe Fund targets the emerging markets of a single geographic region. The fund's investments may include Russia, a country whose stock markets have experienced extreme volatility and illiquidity. Because this fund involves a high level of risk, you should consider it only for the aggressive portion of your portfolio. The Central and Eastern Europe Fund may not be appropriate for everyone. 3 37 GOALS AND PRINCIPAL STRATEGIES
FUND / RISK FACTORS GOAL STRATEGY EUROPEAN EQUITY FUND Capital appreciation - Invests in European stocks Risk factors: - Targets Western European countries Market risk - May use growth or value approaches Foreign securities Region focus CENTRAL AND EASTERN EUROPE FUND Capital appreciation - Invests primarily in Central and Risk Factors: Eastern European stocks Market risk Foreign securities - Focuses on the Czech Republic, Hungary, Emerging markets focus Poland and Russia Region focus Country focus - Combines growth and value approaches
4 38 A WORD ABOUT RISK All investments involve some level of risk. Simply defined, risk is the possibility that you will lose money or not make money. The principal risks of investing in the funds are discussed below. Before you invest, please make sure you understand the risks that apply to your fund. As with any mutual fund, you could lose money over any period of time. Investments in the funds are not bank deposits. They are not FDIC-insured or government-endorsed. MARKET RISK Both funds The market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations, which are often referred to as "volatility," may cause a security to be worth less than the price originally paid for it or less than it was at an earlier time. Market risk may affect a single issuer, industry, sector of economy, or market as a whole. Market risk is common to most investments - including stocks and bonds, and the mutual funds that invest in them. FOREIGN SECURITIES Both funds A fund that invests outside the U.S. carries additional risks that include: - - CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign-currency denominated investments and may widen any losses. - - INFORMATION RISK Key information about an issuer, security or market may be inaccurate or unavailable. - - POLITICAL RISK Foreign-government actions such as capital controls, nationalizing a company or industry, expropriating assets, or imposing punitive taxes could have a severe effect on foreign security prices and impair a fund's ability to repatriate capital or income. Other political risks include economic policy changes, social and political instability, military action and war. COUNTRY/REGION FOCUS Both funds Market swings in the targeted country or region will be likely to have a greater effect on fund performance than they would in a more geographically diversified equity fund. EMERGING MARKETS FOCUS Central and Eastern Europe Fund Focusing on emerging markets involves higher levels of risk, including increased currency, information, liquidity, market, political and valuation risk. Deficiencies in regulatory oversight, market infrastructure, shareholder protections and company laws could expose a fund to operational and other risks as well. Some countries may have restrictions that could limit a fund's access to attractive opportunities. Additionally, emerging markets often face serious problems (such as high external debt, inflation and unemployment) that could subject a fund to increased volatility or substantial declines in value). 5 39 FEES AND FUND EXPENSES This table describes the fees and expenses you may bear as a shareholder. Annual fund operating expense figures are estimates for fiscal 1999, but do not reflect fee waivers and expense reimbursements.*
Central and European Equity Eastern Europe Fund Fund SHAREHOLDER FEES (paid directly from your investment) --------------------------------- ------------------ ---------------- Sales charge "load" on purchases NONE NONE --------------------------------- ------------------ ---------------- Deferred sales charge "load" NONE NONE --------------------------------- ------------------ ---------------- Sales charge "load" on NONE NONE reinvested distributions --------------------------------- ------------------ ---------------- Redemption fee (short-term NONE 1.00%(1) trading fee) on shares held less than six months (as a percent of amount redeemed) --------------------------------- ------------------ ---------------- Exchange fee NONE NONE --------------------------------- ------------------ ---------------- --------------------------------- ------------------ ---------------- ANNUAL FUND OPERATING EXPENSES (deducted from fund assets) --------------------------------- ------------------ ---------------- Management fee 1.00% 1.25% --------------------------------- ------------------ ---------------- Distribution and service .25% .25% (12b-1) fee --------------------------------- ------------------ ---------------- Other expenses X.xx% X.xx% --------------------------------- ------------------ ---------------- TOTAL ANNUAL FUND OPERATING X.xx%* X.xx%* EXPENSES* --------------------------------- ------------------ ----------------
(1) The short-term trading fee is waived until further notice. * Through at least December 1999, fund service providers have voluntarily agreed to waive some of their fees and reimburse expenses. These waivers and reimbursements are expected to lower fund expenses as follows:
Management Distribution and Other Total annual fund fee service (12b-1) fee expenses operating expenses European Equity Fund X.xx% .25% X.xx% [X.xx%] Central and Eastern Europe Fund X.xx% .25% X.xx% [X.xx%]
6 40 EXAMPLE This example may help you compare the cost of investing in these funds with the cost of investing in other mutual funds. Because it uses hypothetical conditions, your actual costs may be higher or lower. Assume you invest $10,000, each fund returns 5% annually, expense ratios remain as listed previously, and you close your account at the end of the time periods shown. Based on these assumptions, your cost would be:
BEFORE WAIVERS AND REIMBURSEMENTS* ONE YEAR THREE YEARS ------------------------------------- ---------- ------------ European Equity Fund $ $ ------------------------------------- ---------- ------------ Central and Eastern Europe Fund $ $ ------------------------------------- ---------- ------------
*Fee waivers and expense reimbursements would lower your cost as follows:
One year Three years European Equity Fund $ $ Central and Eastern Europe Fund $ $
7 41 THE FUNDS IN DETAIL THE MANAGEMENT FIRMS BEA ASSOCIATES One Citicorp Center 153 East 53rd Street New York, NY 10022 - - Investment adviser for the funds - - A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse Group, one of the world's leading banks - - An investment manager for corporate and state pension funds, endowments and other institutions - - Currently manages approximately $35 billion in assets Together with its predecessor firms, BEA has been engaged in the investment advisory business for over 60 years. CREDIT SUISSE ASSET MANAGEMENT LIMITED Beaufort House 15 St. Botolph Street London, EC 3A 7JJ - - Sub-adviser for the funds under the supervision of BEA - - Currently manages approximately $35 billion in assets - - A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse Group - - Credit Suisse Asset Management has offices in Budapest, Moscow, Prague, Warsaw, Frankfurt, Milan, Paris, Sydney, Tokyo and Zurich (these offices are not registered with the U.S. Securities and Exchange Commission) DISTRIBUTION AND SERVICE COUNSELLORS SECURITIES INC. 466 Lexington Avenue New York, NY 10017 - - Distributor of the funds - - A wholly owned subsidiary of Warburg Pincus Asset Management, Inc. COUNSELLORS FUNDS SERVICE, INC. 466 Lexington Avenue New York, NY 10017 - - Provides the funds with administrative services - - A wholly owned subsidiary of Warburg Pincus Asset Management, Inc. 8 42 FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: GOAL AND STRATEGY The fund's particular investment goals and the strategies it intends to use in pursuing them. PORTFOLIO INVESTMENTS The primary types of securities in which the fund invests. Secondary investments are described in "More About Risk." RISK FACTORS The major risk factors associated with the fund. Additional risk factors are included in "More About Risk." PORTFOLIO MANAGEMENT The individuals designated by the investment adviser or sub-adviser to handle the fund's day-to-day management. INVESTOR EXPENSES Estimated expenses for the 1999 fiscal year. - - MANAGEMENT FEE The fee paid to the investment adviser and sub-adviser for providing investment advice to the fund. Expressed as a percentage of average net assets after waivers. - - OTHER EXPENSES Fees paid by the fund for miscellaneous items such as administration, transfer agency, custody, auditing, legal and registration fees. Expressed as a percentage of average net assets after waivers, credits and reimbursements. 9 43 EUROPEAN EQUITY FUND GOAL AND STRATEGY The European Equity Fund seeks capital appreciation. To pursue this goal, the fund invests primarily in stocks of Western European companies. Normally the fund invests at least 65% of assets in equity securities of companies located in or conducting a majority of their business in Western Europe, considered to be the countries of the European Union, as well as Norway and Switzerland. The European Union currently consists of the following Western European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. To enhance return potential, the fund may also pursue opportunities in other European countries. The fund intends to diversify its investments across different countries. However, at times the fund may invest a significant part of its assets in a single country. In choosing stocks, the portfolio managers consider factors that include (but are not limited to): - - stock price relative to the company's rate of earnings growth - - valuation relative to other European companies and market averages - - the stock's currency denomination PORTFOLIO INVESTMENTS This fund intends to invest at least 80% of its assets in equity securities of Western European companies. These equity securities include: - - common and preferred stocks - - securities convertible into common stocks - - securities such as rights and warrants, whose values are based on common stocks The fund may also invest in investment-grade debt securities issued by Western European companies and governments. To a limited extent, the fund may engage in other investment practices. RISK FACTORS This fund's principal risk factors are: - - market risk - - foreign securities - - region focus The value of your investment will fluctuate in response to stock market movements. Because the fund invests internationally, it carries additional risks, including currency, information and political risks. These risks are described in "More About Risk." Also, because the fund targets a single region, you should expect it to be more volatile than a more geographically diversified equity fund. Fund performance is closely tied to economic and political conditions within Europe. To the extent that the fund uses certain investment practices, it takes on further risks that could adversely affect its performance. Please read "More About Risk" carefully before you invest. 10 44 PORTFOLIO MANAGEMENT Patricia Maxwell-Arnot and Susan E. Boland manage the fund's investment portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES Management fee X.xx% All other expenses X.xx% Total expenses X.xx%
11 45 CENTRAL AND EASTERN EUROPE FUND GOAL AND STRATEGY The Central and Eastern Europe Fund seeks capital appreciation. To pursue this goal, it invests primarily in stocks of Central and Eastern European companies. Under normal conditions, the fund invests at least 65% of assets in equity securities of companies located in or conducting a majority of their business in Central and Eastern Europe. The fund currently intends to focus on the Czech Republic, Hungary, Poland and Russia. Although it may invest a significant part of its assets in any of these countries, the fund will not invest more than 40% of assets (measured at the time of purchase) in any single one. Other Central and Eastern European countries in which the fund may invest include Bulgaria, Croatia, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia and the Ukraine. Up to 20% of assets (measured at the time of purchase) may be invested in any one of these countries. The fund may also invest in equity and debt securities of companies located in other European countries. These include emerging markets issuers, as well as companies expected to benefit from economic growth in Central and Eastern Europe. The portfolio managers seek to identify countries where economic and political reforms are most likely to produce above-average long-term returns. The managers then look for companies best positioned to take advantage of these developments. The fund's managers may consider factors such as: - - operating ratios relative to other companies in the same industry - - price/cash flow ratio relative to industry peers and market averages PORTFOLIO INVESTMENTS This fund invests primarily in equity securities that include: - - common and preferred stocks - - securities convertible into common stocks - - securities such as rights and warrants, whose values are based on common stocks The fund may also invest in debt securities, including those rated below investment grade (junk bonds). To a limited extent, the fund may engage in other investment practices. RISK FACTORS This fund's principal risk factors are: - - market risk - - foreign securities - - emerging-markets focus - - region focus - - country focus The value of your investment will fluctuate in response to stock market movements. Because the fund invests internationally, it carries additional risks, including currency, information and political risks. These risks, as well as access, operational and other risks associated with the fund's emerging-markets focus, are described in "More About Risk." Also, because the fund targets a single region, you should expect it to be more volatile than a more geographically diversified equity fund. Fund performance is closely tied to 12 46 economic and political conditions within Central and Eastern Europe. To the extent that the fund invests in start-up or other small companies and uses certain other investment practices, it takes on further risks that could adversely affect its performance. Please read "More About Risk" carefully before you invest. PORTFOLIO MANAGEMENT Glenn Wellman and Isabel Knight manage the fund's investment portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES Management fee X.xx% All other expenses X.xx% Total expenses X.xx%
13 47 MORE ABOUT RISK INTRODUCTION A fund's goal and principal strategies largely determine its risk profile. You will find a concise description of each fund's risk profile in "Overview." The fund-by-fund discussions contain more detailed information. This section discusses other risks that may affect the funds. The funds may use certain investment practices that have higher risks associated with them. However, each fund has limitations and policies designed to reduce many of the risks. "Other Investment Practices" describes these practices and the limitations on their use. TYPES OF INVESTMENT RISK The following risks are referred to throughout this prospectus. ACCESS RISK Some countries may restrict a fund's access to investments or offer terms that are less advantageous than those for local investors. This could limit the attractive investment opportunities available to a fund. CREDIT RISK The issuer of a security or the counterparty to a contract may default or otherwise become unable to honor a financial obligation. CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and foreign currencies may negatively affect an investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign-currency denominated investments and may widen any losses. EXPOSURE RISK The risk associated with investments (such as derivatives) or practices (such as short selling) that increase the amount of money a fund could gain or lose on an investment. - - HEDGED Exposure risk could multiply losses generated by a derivative or practice used for hedging purposes. Such losses should be substantially offset by gains on the hedged investment. However, while hedging can reduce or eliminate losses, it can also reduce or eliminate gains. - - SPECULATIVE To the extent that a derivative or practice is not used as a hedge, the fund is directly exposed to its risks. Gains or losses from speculative positions in a derivative may be much greater than the derivative's original cost. For example, potential losses from writing uncovered call options and from speculative short sales are unlimited. INFORMATION RISK Key information about an issuer, security or market may be inaccurate or unavailable. INTEREST-RATE RISK Changes in interest rates may cause a decline in the market value of an investment. With bonds and other fixed-income securities, a rise in interest rates typically causes a fall in values, while a fall in interest rates typically causes a rise in values. LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell at the time and the price that the fund would like. A fund may have to lower the price, sell other securities instead 14 48 or forego an investment opportunity. Any of these could have a negative effect on fund management or performance. MARKET RISK The market value of a security may move up and down, sometimes rapidly and unpredictably. These fluctuations, which are (often referred to as "volatility") may cause a security to be worth less than the price originally paid for it, or less than it was worth at an earlier time. Market risk may affect a single issuer, industry, sector of the economy, or the market as a whole. Market risk is common to most investments - including stocks and bonds, and the mutual funds that invest in them. OPERATIONAL RISK Some countries have less developed securities markets (and related transaction, registration and custody practices) that could subject a fund to losses from fraud, negligence, settlement delays or other actions. POLITICAL RISK Foreign-government actions such as capital controls, nationalizing a company or industry, expropriating assets, or imposing punitive taxes could have a severe effect on foreign security prices and impair a fund's ability to repatriate capital or income. Other political risks include economic policy changes, social and political instability, military action and war. VALUATION RISK The lack of an active trading market may make it difficult to obtain an accurate price for a fund security. YEAR 2000 PROCESSING RISK The funds could be adversely affected if the computer systems used by their adviser, sub-adviser and other service providers do not correctly handle the change from "99" to "00" on January 1, 2000. The adviser and sub-adviser are working to avoid such problems and to obtain assurances from service providers that they are taking similar steps. However, there can be no assurance that these efforts will be sufficient. The Year 2000 issue affects practically all companies, organizations, governments and markets throughout the world - including companies or governmental entities in which the funds invest. However, at this time no one knows precisely what the degree of impact will be. To the extent that the impact on a fund holding or on the global markets or economies is negative, it could adversely affect a fund's returns. 15 49 OTHER INVESTMENT PRACTICES
- -------------------------------------------------------------------------------------- This table shows each fund's limitations on certain investment E practices. In each case the significant types of risk are listed (see U two preceding pages for definitions). Numbers in this table show R allowable use only. O C P & KEY TO TABLE: E E * No policy limitation on use; fund may be using currently. A N x Permitted, but typically not used to a significant extent. E U - -- Not permitted E R Q O 20% italic type represents percent of total fund assets U P T E 20% roman type represents percent of net fund assets Y - ------------------------------------------------------------------------- ----- ------ BORROWING The borrowing of money from banks to meet redemptions or for other temporary or emergency purposes. Exposure risk. 30% 30% - ------------------------------------------------------------------------- ----- ------ COUNTRY/REGION FOCUS Investing a significant portion of fund assets in a single country or region. Market swings in the targeted country or * * region will be likely to have a greater effect on fund performance than they would in a more geographically diversified equity fund. Currency, market, political risks. - ------------------------------------------------------------------------- ----- ------ EMERGING MARKETS Countries generally considered to be relatively less developed or industrialized. Emerging markets often face economic problems that could subject a fund to increased volatility or substantial declines x * in value. Deficiencies in regulatory oversight, market infrastructure, shareholder protections and company laws could expose a fund to risks beyond those normally encountered in developed countries. Access, currency, information, liquidity, market, operational, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ FOREIGN SECURITIES Securities of foreign issuers, such as American or European depositary receipts (abbreviated ADRs and EDRs). Depositary * * receipts are dollar-denominated securities typically issued by banks and based on ownership of securities issued by foreign companies. Currency, information, liquidity, market, political, valuation risks.
16 50
- ------------------------------------------------------------------------- ----- ------ NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated below BBB/Baa (or of comparable quality, if unrated) are considered junk x 35% bonds. Credit, information, interest rate, liquidity, market, valuation risks. - ------------------------------------------------------------------------- ----- ------ PRIVATIZATION PROGRAMS Foreign governments may sell all or part of their interests in enterprises they own or control. Access, currency, * * information, liquidity, operational, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with restrictions on trading, or those not actively traded. Liquidity, valuation, market 15% 15% risks. - ------------------------------------------------------------------------- ----- ------ SECURITIES LENDING Lending portfolio securities to financial institutions; a fund receives cash, U.S. government securities or bank letters of credit 50% 50% as collateral. Credit, liquidity, market, operational risks. - ------------------------------------------------------------------------- ----- ------ SHORT-TERM TRADING Selling a security shortly after purchase. A fund engaging in short-term trading will have higher turnover and * * transaction expenses. Increased short-term capital gains distributions could raise shareholders' income tax liability. - ------------------------------------------------------------------------- ----- ------ START-UP OR OTHER SMALL COMPANIES Companies with small relative market capitalizations. Information, liquidity, market, valuation risks. x * ----- ------ - ------------------------------------------------------------------------- ----- ------ STRUCTURED INSTRUMENTS Structured securities and other instruments (such as swaps) allow a fund to gain access to the performance of * * a benchmark asset such as an index or selected stocks where the fund's direct investment in the benchmark asset is restricted. Access, credit, currency, exposure, information, interest-rate, liquidity, market, political, valuation risks. - ------------------------------------------------------------------------- ----- ------ TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's assets in investments such as money market obligations and investment-grade debt x x securities for defensive purposes. Although intended to avoid losses in unusual market conditions, defensive tactics might prevent a fund from achieving its goal. - ------------------------------------------------------------------------- ----- ------ WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or sale of securities for delivery at a future date; market value may change 20% 20% before delivery. Exposure, liquidity, market risks. - ------------------------------------------------------------------------- ----- ------
17 51 MEET THE MANAGERS [Susan E. Boland] SUSAN E. BOLAND Senior Vice President, BEA Associates - - Co-Portfolio Manager, European Equity Fund since fund inception - - Joined BEA in 1996 - - Director and portfolio manager with Barran & Partners Limited, 1995-1996 - - Partner and European portfolio manager for Teton Partners, 1992-1995 - - Portfolio manager and analyst with Fidelity Management & Research Company, 1985-1991 [Isabel Knight] ISABEL KNIGHT Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, Central and Eastern Europe Fund since fund inception - - Joined CSAM in 1997 - - Senior fund manager for emerging Europe with Foreign & Colonial Emerging Markets, 1995-1997 - - Portfolio manager for Morgan Stanley Asset Management, 1992-1995 Portfolio managers are introduced in alphabetical order. 18 52 [Patricia Maxwell-Arnot] PATRICIA MAXWELL-ARNOT Managing Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, European Equity Fund since fund inception - - Joined CSAM in 1995 - - Director at Lazard Brothers (London), 1984-1994 [Glenn Wellman] GLENN WELLMAN Managing Director, Credit Suisse Asset Management Limited - - Co-Portfolio Manager, Central and Eastern Europe Fund since fund inception - - Joined CSAM in 1993 - - Managing director and chief investment officer, Alliance Capital Limited, 1987-1993 19 53 ABOUT YOUR ACCOUNT HOW TO INVEST The accompanying Shareholder Guide explains how to invest. You will find information about purchases, redemptions, exchanges and services. SHARE VALUATION The price of your shares is also referred to as their net asset value (NAV). The NAV is determined at the close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time) each day the Exchange is open for business. It is calculated by dividing the Institutional Class total assets, less its liabilities, by the number of Institutional Class shares outstanding. Each fund values its securities at the most recent sale price when it calculates its NAV. If there are no sales of a security it is valued at the mean between bid and asked quotations. When market quotations are not readily available, securities and other assets are valued at fair value. A fund determines fair value in good faith, according to procedures established by its Board. Debt obligations that will mature in 60 days or less are valued on the basis of amortized cost, unless the Board determines that using this method would not reflect the investments' value. BUYING AND SELLING SHARES Each fund is open on those days when the New York Stock Exchange is open, typically Monday through Friday. If we receive your request in proper form by 4 p.m. ET, your transaction will be priced at that day's NAV. If we receive it after 4 p.m., it will be priced at the next business day's NAV. The funds may authorize financial-services firms, such as banks, brokers and investment advisers (and other intermediaries that the firms may designate), to accept orders, and your order will be considered received by the fund when received by an authorized firm (or its designee). A short-term trading fee of 1.0% of the amount redeemed will be deducted from the redemption proceeds if you sell shares of the Central and Eastern Europe Fund after holding them less than six months. This fee, which is currently being waived, is paid to the fund to offset costs associated with short-term shareholder trading. It does not apply to shares acquired through reinvestment of distributions. If you bought shares on different days, any shares you bought through reinvestment of distributions will be redeemed first, followed by the shares you held longest. Some fund securities may be listed on foreign exchanges that are open on days (such as U.S. holidays) when the funds do not compute their prices. This could cause the value of a fund's portfolio investments to be affected by trading on days when you cannot buy or sell shares. ACCOUNT STATEMENTS In general, you will receive account statements as follows: - - after every transaction that affects your account balance (except for distribution reinvestments and automatic transactions) - - after any changes of name or address of the registered owner(s) 20 54 - - otherwise, every quarter You will receive annual and semiannual financial reports. Every year you also should receive, if applicable, a Form 1099 tax information statement mailed by January 31. DISTRIBUTIONS As a fund investor, you are entitled to your share of the fund's net income and gains on its investments. The fund passes these earnings along to its shareholders as distributions. Each fund earns dividends from stocks and interest from bond, money market and other investments. These are passed along as dividend distributions. A fund realizes capital gains whenever it sells securities for a higher price than it paid for them. These are passed along as capital gain distributions. Each fund distributes substantially all of its net income and capital gains to shareholders at least annually, usually in November or December. Most investors have their distributions reinvested in additional shares of the same fund. Alternatively, you can choose to have a check for your distributions mailed to you or sent by electronic transfer. Distributions will be reinvested unless you select another option on your account application. TAXES As with any investment, you should consider how your investment in a fund will be taxed. Unless your account is an IRA or other tax-advantaged account, you should be aware of the potential tax implications. Please consult your tax professional concerning your own tax situation. TAXES ON DISTRIBUTIONS As long as a fund continues to meet the requirements for being a tax-qualified regulated investment company, it pays no federal income tax on the earnings it distributes to shareholders. Consequently, distributions you receive from a fund, whether reinvested or taken in cash, are generally considered taxable. Distributions from a fund's long-term capital gains are taxed as capital gains; distributions from other sources are generally taxed as ordinary income. Some dividends paid in January may be taxable as if they had been paid the previous December. If you buy shares shortly before or on the "record date" - the date that establishes you as the person to receive the upcoming distribution - you will receive a portion of the money you just invested in the form of a taxable distribution. The Form 1099 that is mailed to you every January details your distributions and their federal tax category. TAXES ON TRANSACTIONS Any time you sell or exchange shares, it is considered a taxable event for you. Depending on the purchase price and the sale price of the shares you sell or exchange, you may have a gain or loss on the transaction. You are responsible for any tax liabilities generated by your transactions. 21 55 OTHER INFORMATION ABOUT THE DISTRIBUTOR Counsellors Securities Inc. is responsible for: - - making the funds available to you - - account servicing and maintenance - - sub-transfer agency services, sub-accounting services, and administrative services related to sale of the Institutional Class Some financial-services firms and their investment professionals may receive extra compensation. This compensation, which the distributor or adviser pays out of their own resources, may include promotional incentives as well as (for the distributor) reimbursement for marketing costs. The distributor or adviser may also provide opportunities to attend events such as business meetings, conferences and training programs. Travel, meals and lodging may be included. COMMUNICATION TOPICS In its reports, investor communications or advertisements a fund may include: - - its total return performance - - its performance compared with various indexes or other mutual funds - - published evaluations by nationally recognized ranking services and financial publications - - updates concerning its strategies and portfolio investments - - information about its goals, risk factors and expenses, including comparisons with other mutual funds - - analysis of its investments by industry, country, credit quality and other characteristics - - a discussion of the risk/return continuum relating to different investments - - the potential impact of adding foreign stocks to a domestic portfolio - - portfolio manager quotations and commentary 22 56 FOR MORE INFORMATION More information about these funds is available free upon request, including the following: SHAREHOLDER GUIDE Explains how to buy and sell shares. The Shareholder Guide is incorporated by reference into (is legally considered part of) this prospectus. ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS Includes financial statements, portfolio investments, detailed performance information and the auditor's report. The annual report also contains a letter from the fund's manager discussing market conditions and investment strategies that significantly affected fund performance during its past fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides more details about the fund. A current SAI is on file with the Securities and Exchange Commission (SEC) and is incorporated by reference. You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI, material incorporated by reference and other information. You can also obtain copies by visiting the SEC's Public Reference Room in Washington, DC (phone 800-SEC-0330) or by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, DC 20549-6009. Please contact BEA Institutional Funds to obtain information: By telephone: 800-401-2230 By mail: BEA Institutional Funds P.O. Box 8500 Boston, MA 02266-8500 By overnight or courier service: BFDS Attn: BEA Institutional Funds 66 Brooks Drive Braintree, MA 02171 On the Internet: www.beafunds.com SEC file numbers: BEA Institutional/Warburg Pincus European Equity Fund 811-xxxx BEA Institutional/Warburg Pincus Central and Eastern Europe Fund 811-xxxx 23 57 SUBJECT TO COMPLETION, DATED JULY 30, 1998 STATEMENT OF ADDITIONAL INFORMATION October 1, 1998 WARBURG PINCUS EUROPEAN EQUITY FUND WARBURG PINCUS CENTRAL AND EASTERN EUROPE FUND P.O. Box 9030, Boston, Massachusetts 02205-9030 For information, call (800) WARBURG BEA INSTITUTIONAL EUROPEAN EQUITY FUND BEA INSTITUTIONAL CENTRAL AND EASTERN EUROPE FUND P.O. Box 8500, Boston, Massachusetts 02266-85000 For information, call (800) 401-2230
CONTENTS Page ---- ORGANIZATION OF THE FUNDS.................................................. 2 INVESTMENT OBJECTIVES AND POLICIES......................................... 2 MANAGEMENT OF THE FUNDS.................................................... 35 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................. 45 EXCHANGE PRIVILEGE......................................................... 46 ADDITIONAL INFORMATION CONCERNING TAXES.................................... 47 DETERMINATION OF PERFORMANCE............................................... 52 INDEPENDENT ACCOUNTANTS AND COUNSEL........................................ 53 FINANCIAL STATEMENTS....................................................... 53 APPENDIX - DESCRIPTION OF RATINGS.......................................... A-1
This combined Statement of Additional Information is meant to be read in conjunction with the combined Prospectus for the Common Shares of Warburg Pincus European Equity Fund (the "European Equity Fund") and Warburg Pincus Central and Eastern Europe Fund (the "Central and Eastern Europe Fund") (collectively the "Funds"), and with the combined Prospectus for the Institutional Shares of each Fund, which are offered under the names BEA Institutional European Equity Fund and BEA Institutional Central and Eastern Europe Fund, each dated October 1, 1998, as amended or supplemented from time to time (collectively the "Prospectus"), and is incorporated by reference in its entirety into the Prospectus. Because this Statement of Additional Information is not itself a prospectus, no investment in shares of a Fund should be made solely upon the information contained herein. Copies of each Fund's Prospectus and information regarding a Fund's current performance may be obtained by calling (800) 927-2874 (Common Shares) or (800) 401-2230 (Institutional 58 Shares). Information regarding the status of shareholder accounts may also be obtained by calling the above numbers or by writing to a Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030 (Common Shares) or P.O. Box 8500, Boston, Massachusetts 02266-8500 (Institutional Shares). INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. 59 ORGANIZATION OF THE FUNDS The Funds are diversified open-end management investment companies that were incorporated under the laws of the State of Maryland on July 27, 1998. Each Fund is authorized to offer three classes of shares, one of which, the Institutional Shares, is offered under the name BEA Institutional Funds. Unless otherwise indicated, references to a "Fund" apply to all classes of shares of that Fund as a group, including its Institutional Shares. INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of each Fund's investment objectives and policies in the Prospectus. There are no assurances that the Funds will achieve their investment objectives. The investment objective of the European Equity Fund is capital appreciation, which it seeks to achieve by investing primarily in stocks of Western European companies. The investment objective of the Central and Eastern Europe Fund is capital appreciation, which it seeks to achieve by investing primarily in stocks of Central and Eastern European companies. The European Equity Fund: As stated in the Prospectus, the European Equity Fund, under normal circumstances, will invest at least 65% of its total assets in equity securities of companies (i) that, alone or on a consolidated basis, derive 50% or more of their annual revenue from either goods produced, sales made or services performed in Western European markets; (ii) that are organized under the laws of, and with a principal office in, a Western European country; or (iii) the principal securities trading market for which is in a Western European market. Determinations as to eligibility will be made by each Fund's investment adviser or sub-investment adviser (each an "Adviser") based on publicly available information and inquiries made to the companies. Additional countries may in the future be considered part of a Fund's definition of Western Europe and appropriate spheres of investment by a Fund. The European Equity Fund intends to invest at least 80% of its assets in equity securities of Western European companies. The Central and Eastern Europe Fund: As stated in the Prospectus, the Central and Eastern Europe Fund, under normal circumstances, will invest at least 65% of its total assets in equity securities of companies (i) that, alone or on a consolidated basis, derive 50% or more of their annual revenue from either goods produced, sales made or services performed in Central and Eastern European markets; (ii) that are organized under the laws of, and with a principal office in, a Central or Eastern European country; or (iii) the principal securities trading market for which is in a Central or Eastern European market. Determinations as to eligibility will be made by each Fund's Adviser based on publicly available information and inquiries made to the companies. The Fund considers Central Europe to be the area north of 2 60 Italy and the former Yugoslavia, west of Romania and the former Soviet Union, east of Switzerland and Germany and south of the Baltic Sea. The Fund considers Eastern Europe to be currently comprised of, but not limited to, the countries of the former Warsaw Pact and the European successor states of the former Soviet Union. Additional countries may in the future be considered part of a Fund's definition of Central and Eastern Europe and appropriate spheres of investment by a Fund. Investment companies that invest principally in securities of Central or Eastern European companies will also be considered to be Central or Eastern European companies, as will American Depositary Receipts and Global Depositary Receipts with respect to those securities. By investing in shares of investment companies that invest in Central and Eastern Europe, a Fund will indirectly pay a portion of the operating expenses, management expenses and brokerage costs of such companies. Options, Futures and Currency Exchange Transactions Securities Options. Each Fund may write covered put and call options on stock and debt securities and may purchase covered put and call options that are traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC"). Each Fund will realize fees (referred to as "premiums") for granting the rights evidenced by the options it has written. A put option embodies the right of its purchaser to compel the writer of the option to purchase from the option holder an underlying security at a specified price for a specified time period or at a specified time. In contrast, a call option embodies the right of its purchaser to compel the writer of the option to sell to the option holder an underlying security at a specified price for a specified time period or at a specified time. The principal reason for writing covered options on a security is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. In return for a premium, a Fund, as the writer of a covered call option, forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, a Fund as a put or call writer retains the risk of a decline in the price of the underlying security. The size of the premiums that a Fund may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities. If security prices rise, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If security prices remain the same over time, it is likely that the writer will also profit, because it should be able to close out the option at a lower price. If security prices fall, the put writer would expect to suffer a loss. This loss should be less than the loss from purchasing the underlying instrument directly, however, because the premium received for writing the option should mitigate the effects of the decline. In the case of options written by a Fund that are deemed covered by virtue of a Fund's holding convertible or exchangeable preferred stock or debt securities, the time required to convert or exchange and obtain physical delivery of the underlying common stock with respect to which a Fund has written options may exceed the time within which a Fund must make delivery in accordance with an exercise notice. In these instances, a Fund may 3 61 purchase or temporarily borrow the underlying securities for purposes of physical delivery. By so doing, a Fund will not bear any market risk, since a Fund will have the absolute right to receive from the issuer of the underlying security an equal number of shares to replace the borrowed securities, but a Fund may incur additional transaction costs or interest expenses in connection with any such purchase or borrowing. Additional risks exist with respect to certain of the securities for which a Fund may write covered call options. For example, if a Fund writes covered call options on mortgage-backed securities, the mortgage-backed securities that it holds as cover may, because of scheduled amortization or unscheduled prepayments, cease to be sufficient cover. If this occurs, a Fund will compensate for the decline in the value of the cover by purchasing an appropriate additional amount of mortgage-backed securities. Options written by a Fund will normally have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the times the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money," respectively. Each Fund may write (i) in-the-money call options when a Fund's Adviser expects that the price of the underlying security will remain flat or decline moderately during the option period, (ii) at-the-money call options when the Adviser expects that the price of the underlying security will remain flat or advance moderately during the option period and (iii) out-of-the-money call options when the Adviser expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In any of the preceding situations, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be used in the same market environments that such call options are used in equivalent transactions. To secure its obligation to deliver the underlying security when it writes a call option, each Fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (the "Clearing Corporation") and of the securities exchange on which the option is written. Prior to their expirations, put and call options may be sold in closing sale or purchase transactions (sales or purchases by a Fund prior to the exercise of options that it has purchased or written, respectively, of options of the same series) in which a Fund may realize a profit or loss from the sale. An option position may be closed out only where there exists a secondary market for an option of the same series on a recognized securities exchange or in the OTC market. When a Fund has purchased an option and engages in a closing sale transaction, whether a 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 a Fund initially paid for the original option plus the related transaction costs. Similarly, in cases where a Fund has written an option, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option and will incur a loss if the cost of the closing purchase transaction exceeds the premium received upon writing the original option. 4 62 A Fund may engage in a closing purchase transaction to realize a profit, to prevent an underlying security with respect to which it has written an option from being called or put or, in the case of a call option, to unfreeze an underlying security (thereby permitting its sale or the writing of a new option on the security prior to the outstanding option's expiration). The obligation of a Fund under an option it has written would be terminated by a closing purchase transaction, but a Fund would not be deemed to own an option as a result of the transaction. So long as the obligation of a Fund as the writer of an option continues, a Fund may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring a Fund to deliver the underlying security against payment of the exercise price. This obligation terminates when the option expires or a Fund effects a closing purchase transaction. A Fund can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. 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, a Fund's ability to terminate options positions established in the OTC market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in OTC transactions would fail to meet their obligations to the Fund. Each Fund, however, intends to purchase OTC options only from dealers whose debt securities, as determined by its Adviser are considered to be investment grade. If, as a covered call option writer, a Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. In either case, a Fund would continue to be at market risk on the security and could face higher transaction costs, including brokerage commissions. Securities exchanges generally have established limitations governing the maximum number of calls and puts of each class which may be held or written, or exercised within certain time periods by an investor or group of investors acting in concert (regardless of whether the options are written on the same or different securities exchanges or are held, written or exercised in one or more accounts or through one or more brokers). It is possible that the Funds and other clients of their Advisers and certain of their affiliates may be considered to be such a group. A securities exchange may order the liquidation of positions found to be in violation of these limits and it may impose certain other sanctions. These limits may restrict the number of options the Funds will be able to purchase on a particular security. Securities Index Options. Each Fund may purchase and write exchange-listed and OTC put and call options on securities indexes. A securities index measures the movement of a certain group of securities by assigning relative values to the securities included 5 63 in the index, fluctuating with changes in the market values of the securities included in the index. Some securities index options are based on a broad market index, such as the NYSE Composite Index, or a narrower market index such as the Standard & Poor's 100. Indexes may also be based on a particular industry or market segment. Options on securities indexes are similar to options on securities except that (i) the expiration cycles of securities index options are monthly, while those of securities options are currently quarterly, and (ii) the delivery requirements are different. Instead of giving the right to take or make delivery of securities at a specified price, an option on a securities index gives the holder the right to receive a cash "exercise settlement amount" equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the securities index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the index and the exercise price of the option times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Securities index options may be offset by entering into closing transactions as described above for securities options. OTC Options. Each Fund may purchase OTC or dealer options or sell covered OTC options. Unlike exchange-listed options where an intermediary or clearing corporation, such as the Clearing Corporation, assures that all transactions in such options are properly executed, the responsibility for performing all transactions with respect to OTC options rests solely with the writer and the holder of those options. A listed call option writer, for example, is obligated to deliver the underlying securities to the clearing organization if the option is exercised, and the clearing organization is then obligated to pay the writer the exercise price of the option. If a Fund were to purchase a dealer option, however, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. If the dealer fails to honor the exercise of the option by a Fund, a Fund would lose the premium it paid for the option and the expected benefit of the transaction. Listed options generally have a continuous liquid market while dealer options have none. Consequently, a Fund will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when a Fund writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which a Fund originally wrote the option. Although each Fund will seek to enter into dealer options only with dealers who will agree to and that are expected to be capable of entering into closing transactions with a Fund, there can be no assurance that a 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 a Fund. Until a Fund, as a covered OTC call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used to cover the written option until the option expires or is exercised. This requirement may impair a Fund's ability to sell portfolio securities or, with respect to currency options, currencies at a time when such sale might be advantageous. In the event of insolvency of the other party, a Fund may be unable to liquidate a dealer option. 6 64 Futures Activities. Each Fund may enter into foreign currency, interest rate and securities index futures contracts and purchase and write (sell) related options traded on exchanges designated by the Commodity Futures Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign exchanges. These transactions may be entered into for "bona fide hedging" purposes as defined in CFTC regulations and other permissible purposes including hedging against changes in the value of portfolio securities due to anticipated changes in currency values, interest rates and/or market conditions and increasing return. No Fund will enter into futures contracts and related options for which the aggregate initial margin and premiums (discussed below) required to establish positions other than those considered to be "bona fide hedging" by the CFTC exceed 5% of a Fund's net asset value after taking into account unrealized profits and unrealized losses on any such contracts it has entered into. Each Fund reserves the right to engage in transactions involving futures contracts and options on futures contracts to the extent allowed by CFTC regulations in effect from time to time and in accordance with a Fund's policies. There is no overall limit on the percentage of a Fund's assets that may be at risk with respect to futures activities. The over the counter market in forward foreign currency exchange contracts offers less protection against defaults by the other party to such instruments than is available for currency instruments traded on an exchange. Such contracts are subject to the risk that the counterparty to the contract will default on its obligations. Since these contracts are not guaranteed by an exchange or clearinghouse, a default on the contract would deprive a Fund of unrealized profits, transaction costs or the benefits of a currency hedge or force a Fund to cover its purchase or sale commitments, if any, at the current market price. Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the U.S. or abroad. Futures Contracts. A foreign currency futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specified non-U.S. currency at a specified price, date, time and place. An interest rate futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specific interest rate sensitive financial instrument (debt security) at a specified price, date, time and place. Securities indexes are capitalization weighted indexes which reflect the market value of the securities listed on the indexes. A securities index futures contract is an agreement to be settled by delivery of an amount of cash equal to a specified multiplier times the difference between the value of the index at the close of the last trading day on the contract and the price at which the agreement is made. No consideration is paid or received by a Fund upon entering into a futures contract. Instead, a Fund is required to deposit in a segregated account with its custodian an amount of cash or liquid securities acceptable to the broker, equal to approximately 1% to 7 65 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 a 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 a Fund fails to meet its contractual obligations. Subsequent payments, known as "variation margin," to and from the broker, will be made daily as the currency, financial instrument or securities index underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." A Fund will also incur brokerage costs in connection with entering into futures transactions. At any time prior to the expiration of a futures contract, a Fund may elect to close the position by taking an opposite position, which will operate to terminate a Fund's existing position in the contract. Positions in futures contracts and options on futures contracts (described below) may be closed out only on the exchange on which they were entered into (or through a linked exchange). No secondary market for such contracts exists. Although each Fund intends to enter into futures contracts only if there is an active market for such contracts, there is no assurance that an active market will exist at any particular time. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions at an advantageous price and subjecting a Fund to substantial losses. In such event, and in the event of adverse price movements, a Fund would be required to make daily cash payments of variation margin. In such situations, if a Fund had insufficient cash, it might have to sell securities to meet daily variation margin requirements at a time when it would be disadvantageous to do so. In addition, if the transaction is entered into for hedging purposes, in such circumstances a Fund may realize a loss on a futures contract or option that is not offset by an increase in the value of the hedged position. Losses incurred in futures transactions and the costs of these transactions will affect a Fund's performance. Options on Futures Contracts. Each Fund may purchase and write put and call options on foreign currency, interest rate and stock index futures contracts and may enter into closing transactions with respect to such options to terminate existing positions. There is no guarantee that such closing transactions can be effected; the ability to establish and close out positions on such options will be subject to the existence of a liquid market. An option on a currency, interest rate or securities index futures contract, as contrasted with the direct investment in such a contract, gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time prior to the expiration date of the option. The writer of the option is required upon exercise to assume an offsetting futures position (a short position if the option is a call and a long position if the option is a put). Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is 8 66 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 a Fund. Currency Exchange Transactions. The value in U.S. dollars of the assets of a Fund that are invested in foreign securities may be affected favorably or unfavorably by changes in exchange control regulations, and a Fund may incur costs in connection with conversion between various currencies. Currency exchange transactions may be from any non-U.S. currency into U.S. dollars or into other appropriate currencies. Each Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, (ii) through entering into futures contracts or options on such contracts (as described above), (iii) through entering into forward contracts to purchase or sell currency or (iv) by purchasing exchange-traded currency options. Forward Currency Contracts. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into in the interbank market conducted directly between currency traders (usually large commercial banks and brokers) and their customers. Forward currency contracts are similar to currency futures contracts, except that futures contracts are traded on commodities exchanges and are standardized as to contract size and delivery date. At or before the maturity of a forward contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and fully or partially offset its contractual obligation to deliver the currency by negotiating with its trading partner to purchase a second, offsetting contract. If a Fund retains the portfolio security and engages in an offsetting transaction, a Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement has occurred in forward contract prices. Currency Options. Each Fund may purchase exchange-traded put and call options on foreign currencies. Put options convey the right to sell the underlying currency at a price which is anticipated to be higher than the spot price of the currency at the time the option is exercised. Call options convey the right to buy the underlying currency at a price which is expected to be lower than the spot price of the currency at the time the option is exercised. Currency Hedging. Each Fund's currency hedging will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward currency with respect to specific receivables or payables of a Fund generally accruing in connection with the purchase or sale of its portfolio securities. Position hedging is the sale of forward currency with respect to portfolio security positions. No Fund may position hedge to an extent greater than the aggregate market value (at the time of entering into the hedge) of the hedged securities. 9 67 A decline in the U.S. dollar value of a foreign currency in which a Fund's securities are denominated will reduce the U.S. dollar value of the securities, even if their value in the foreign currency remains constant. The use of currency hedges does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. For example, in order to protect against diminutions in the U.S. dollar value of securities it holds, a Fund may purchase currency put options. If the value of the currency does decline, a Fund will have the right to sell the currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on the U.S. dollar value of its securities that otherwise would have resulted. Conversely, if a rise in the U.S. dollar value of a currency in which securities to be acquired are denominated is projected, thereby potentially increasing the cost of the securities, a Fund may purchase call options on the particular currency. The purchase of these options could offset, at least partially, the effects of the adverse movements in exchange rates. The benefit to a Fund derived from purchases of currency options, like the benefit derived from other types of options, will be reduced by premiums and other transaction costs. Because transactions in currency exchange are generally conducted on a principal basis, no fees or commissions are generally involved. Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Although currency hedges limit the risk of loss due to a decline in the value of a hedged currency, at the same time, they also limit any potential gain that might result should the value of the currency increase. If a devaluation is generally anticipated, a Fund may not be able to contract to sell a currency at a price above the devaluation level it anticipates. While the values of currency futures and options on futures, forward currency contracts and currency options may be expected to correlate with exchange rates, they will not reflect other factors that may affect the value of a Fund's investments and a currency hedge may not be entirely successful in mitigating changes in the value of a Fund's investments denominated in that currency. A currency hedge, for example, should protect a bond denominated in a foreign currency against a decline in the particular currency, but will not protect a Fund against a price decline if the issuer's creditworthiness deteriorates. Swaps. Each Fund may enter into swaps relating to indexes, currencies and equity interests of foreign issuers without limit. A swap transaction is an agreement between a Fund and a counterparty to act in accordance with the terms of the swap contract. Index swaps involve the exchange by a Fund with another party of the respective amounts payable with respect to a notional principal amount related to one or more indexes. Currency swaps involve the exchange of cash flows on a notional amount of two or more currencies based on their relative future values. An equity swap is an agreement to exchange streams of payments computed by reference to a notional amount based on the performance of a basket of stocks or a single stock. Each Fund may enter into these transactions to preserve a return or spread on a particular investment or portion of its assets, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date. Each Fund may also use these transactions for speculative purposes, such as to obtain the price performance of a security without actually purchasing the security in circumstances, for example, the subject security is illiquid, is unavailable for direct investment or available only on less attractive terms. Swaps have risks associated with them including possible default by the counterparty to the transaction, 10 68 illiquidity and, where swaps are used as hedges, the risk that the use of a swap could result in losses greater than if the swap had not been employed Each Fund will usually enter into swaps on a net basis (i.e. the two payment streams are netted out in a cash settlement on the payment date or dates specified in the agreement, with a Fund receiving or paying, as the case may be, only the net amount of the two payments. Swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to swaps is limited to the net amount of payments that a Fund is contractually obligated to make. If the counterparty to a swap defaults, a Fund's risk of loss consists of the net amount of payments that a Fund is contractually entitled to receive. Where swaps are entered into for good faith hedging purposes, the Adviser believes such obligations do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to a Fund's borrowing restrictions. Where swaps are entered into for other than hedging purposes, a Fund will segregate an amount of cash or liquid securities having a value equal to the accrued excess of its obligations over entitlements with respect to each swap on a daily basis. Hedging. In addition to entering into options, futures and currency exchange transactions for other purposes, including generating current income to offset expenses or increase return, each Fund may enter into these transactions as hedges to reduce investment risk, generally by making an investment expected to move in the opposite direction of a portfolio position. A hedge is designed to offset a loss in a portfolio position with a gain in the hedged position; at the same time, however, a properly correlated hedge will result in a gain in the portfolio position being offset by a loss in the hedged position. As a result, the use of options, futures, contracts and currency exchange transactions for hedging purposes could limit any potential gain from an increase in the value of the position hedged. In addition, the movement in the portfolio position hedged may not be of the same magnitude as movement in the hedge. With respect to futures contracts, since the value of portfolio securities will far exceed the value of the futures contracts sold by a Fund, an increase in the value of the futures contracts could only mitigate, but not totally offset, the decline in the value of a Fund's assets. In hedging transactions based on an index, whether a Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of securities prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular security. The risk of imperfect correlation increases as the composition of a Fund's portfolio varies from the composition of the index. In an effort to compensate for imperfect correlation of relative movements in the hedged position and the hedge, a Fund's hedge positions may be in a greater or lesser dollar amount than the dollar amount of the hedged position. Such "over hedging" or "under hedging" may adversely affect a Fund's net investment results if market movements are not as anticipated when the hedge is established. Securities index futures transactions may be subject to additional correlation risks. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which would distort the normal relationship between the securities index and futures markets. Secondly, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased 11 69 participation by speculators in the futures market also may cause temporary price distortions. Because of the possibility of price distortions in the futures market and the imperfect correlation between movements in the securities index and movements in the price of securities index futures, a correct forecast of general market trends by each Fund's Adviser still may not result in a successful hedging transaction. Each Fund will engage in hedging transactions only when deemed advisable by its Adviser, and successful use by a Fund of hedging transactions will be subject to its Adviser's ability to predict trends in currency, interest rate or securities markets, as the case may be, and to predict correctly movements in the directions of the hedge and the hedged position and the correlation between them, which predictions could prove to be inaccurate. This requires different skills and techniques than predicting changes in the price of individual securities, and there can be no assurance that the use of these strategies will be successful. Even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or trends. Losses incurred in hedging transactions and the costs of these transactions will affect a Fund's performance. Asset Coverage for Forward Contracts, Options, Futures and Options on Futures. Each Fund will comply with guidelines established by the U.S. Securities and Exchange Commission (the "SEC") with respect to coverage of forward currency contracts; options written by a Fund on currencies, securities, if applicable, and indexes; and currency, interest rate and index futures contracts and options on these futures contracts. These guidelines may, in certain instances, require segregation by a Fund of cash or liquid securities. For example, a call option written by a Fund on securities may require a Fund to hold the securities subject to the call (or securities convertible into the securities without additional consideration) or to segregate assets (as described above) sufficient to purchase and deliver the securities if the call is exercised. A call option written by a Fund on an index may require a Fund to own portfolio securities that correlate with the index or to segregate assets (as described above) equal to the excess of the index value over the exercise price on a current basis. A put option written by a Fund may require a Fund to segregate assets (as described above) equal to the exercise price. A Fund could purchase a put option if the strike price of that option is the same or higher than the strike price of a put option sold by a Fund. If a Fund holds a futures or forward contract, a Fund could purchase a put option on the same futures or forward contract with a strike price as high or higher than the price of the contract held. A Fund may enter into fully or partially offsetting transactions so that its net position, coupled with any segregated assets (equal to any remaining obligation), equals its net obligation. Asset coverage may be achieved by other means when consistent with applicable regulatory policies. Additional Information on Other Investment Practices Foreign Investments. Investors should recognize that investing in foreign companies, whether in emerging or more developed countries, involves certain risks, including those discussed below, which are not typically associated with investing in U.S. issuers. These risks include 12 70 currency exchange rates and exchange control regulations, less publicly available information, different accounting and reporting standards, less liquid markets, more volatile markets, higher brokerage commissions and other fees, possibility of nationalization or expropriation, confiscatory taxation, political instability, and less protection provided by the judicial system. In addition, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Fund's operations. Furthermore, the economies of individual foreign nations may differ from that of the U.S., whether favorably or unfavorably, in areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Any foreign investments made by the Funds must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments. Foreign Currency Exchange. Since the Funds will invest in securities denominated in currencies other than the U.S. dollar, and since the Funds may temporarily hold funds in bank deposits or other money market investments denominated in foreign currencies, the Funds may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rate between such currencies and the dollar. A change in the value of a foreign currency relative to the U.S. dollar will result in a corresponding change in the dollar value of the Funds' 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 Funds. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange markets. Changes in the exchange rate may result over time from the interaction of many factors directly or indirectly affecting economic and political conditions in the United States and a particular foreign country, including economic and political developments in other countries. Of particular importance are rates of inflation, interest rate levels, the balance of payments and the extent of government surpluses or deficits in the United States and the particular foreign country, all of which are in turn sensitive to the monetary, fiscal and trade policies pursued by the governments of the United States and foreign countries important to international trade and finance. Governmental intervention may also play a significant role. National governments rarely voluntarily allow their currencies to float freely in response to economic forces. Sovereign governments use a variety of techniques, such as intervention by a country's central bank or imposition of regulatory controls or taxes, to affect the exchange rates of their currencies. The Funds may use hedging techniques with the objective of protecting against loss through the fluctuation of the value of foreign currencies against the U.S. dollar, particularly the forward market in foreign exchange, currency options and currency futures. See "Currency Transactions" and "Futures Activities" above. Information. The majority of the securities held by the Funds will not be registered with, nor will the issuers thereof be subject to reporting requirements of the SEC. Accordingly, there may be less publicly available information about the securities and about the foreign company or government issuing them than is available about a domestic company or government entity. Foreign companies are generally not subject to uniform financial reporting standards, practices and requirements comparable to those applicable to U.S. companies. Political Instability. With respect to some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Funds, political or social instability, or domestic developments which could affect U.S. investments in those and neighboring countries. Emerging Markets. Investing in securities of issuers located in "emerging markets" (less developed countries located outside of the U.S.) involves not only the risks 13 71 described above with respect to investing in foreign securities, but also other risks, including exposure to economic structures that are generally less diverse and mature than, and to political systems that can be expected to have less stability than, those of developed countries. For example, many investments in emerging markets experienced significant declines in value due to political and currency volatility in emerging markets countries during the latter part of 1997 and the first half of 1998. Other characteristics of emerging markets that may affect investment include certain national policies that may restrict investment by foreigners in issuers or industries deemed sensitive to relevant national interests and the absence of developed structures governing private and foreign investments and private property. The typically small size of the markets for securities of issuers located in emerging markets and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities. Delays. Securities of some foreign companies are less liquid and their prices are more volatile than securities of comparable U.S. companies. Certain foreign countries are known to experience long delays between the trade and settlement dates of securities purchased or sold. Due to the increased exposure of the Funds to market and foreign exchange fluctuations brought about by such delays, and due to the corresponding negative impact on the Funds' liquidity, the Funds will take reasonable steps to mitigate investing in countries which are known to experience settlement delays which may expose the Funds to unreasonable risk of loss. Increased Expenses. The operating expenses of the Funds can be expected to be higher than that of an investment company investing exclusively in U.S. securities, since the expenses of the Funds, such as custodial costs, valuation costs and communication costs, as well as the rate of the investment advisory fees, though similar to such expenses of some other international funds, are higher than those costs incurred by other investment companies not investing in foreign securities. Foreign Debt Securities. Each Fund may invest in debt securities (other than money market obligations) and preferred stocks that are not convertible into common stock for the purpose of seeking capital appreciation. Each Fund's holdings of debt securities will be considered investment grade at the time of purchase, except that each Fund may purchase a certain amount of below investment grade securities (see "Below Investment Grade Securities"). A security will be deemed to be investment grade if it is rated within the four highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Service ("S&P") or, if unrated, is determined to be of comparable quality by a Fund's Adviser. The returns on foreign debt securities reflect interest rates and other market conditions prevailing in those countries and the effect of gains and losses in the denominated currencies against the U.S. dollar, which have had a substantial impact on investment in foreign fixed-income securities. The relative performance of various countries' fixed-income markets historically has reflected wide variations relating to the unique characteristics of each country's economy. Year-to-year fluctuations in certain markets have been significant, and negative returns have been experienced in various markets from time to time. The foreign government securities in which the Funds may invest generally consist of obligations issued or backed by national, state or provincial governments or similar 14 72 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 Union to reflect changes in relative values of the underlying currencies. General. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments positions. The Funds may invest in securities of foreign governments (or agencies or instrumentalities thereof), and many, if not all, of the foregoing considerations apply to such investments as well. Sovereign Debt. Investments in sovereign debt involve special risks. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due in accordance with the terms of such debt, and a Fund may have limited legal recourse in the event of a default. Sovereign debt differs from debt obligations issued by private entities in that, generally, remedies for defaults must be pursued in the courts of the defaulting party. Legal recourse is therefore somewhat limited. Political conditions, especially a sovereign entity's willingness to meet the terms of its debt obligations, are of considerable significance. Also, there can be no assurance that the holders of commercial bank loans to the same sovereign entity may not contest payments to the holders of sovereign debt in the event of default under commercial bank loan agreements. A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward principal international lenders and the political constraints to which a sovereign debtor may be subject. Increased protectionism on the part of a country's trading partners, or political changes in those countries, could also adversely affect its exports. Such events could diminish a country's trade account surplus, if any, or the credit standing of a particular local government or agency. 15 73 The occurrence of political, social or diplomatic changes in one or more of the countries issuing sovereign debt could adversely affect a Fund's investments. Political changes or a deterioration of a country's domestic economy or balance of trade may affect the willingness of countries to service their sovereign debt. While the Adviser intends to manage the Funds in a manner that will minimize the exposure to such risks, there can be no assurance that adverse political changes will not cause a Fund to suffer a loss of interest or principal on any of its holdings. Investors should also be aware that certain sovereign debt instruments in which a Fund may invest involve great risk. Sovereign debt issued by issuers in many emerging markets generally is deemed to be the equivalent in terms of quality to securities rated below investment grade by Moody's and S&P. Such securities are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Some of such sovereign debt, which may not be paying interest currently or may be in payment default, may be comparable to securities rated "D" by S&P or "C" by Moody's. A Fund may have difficulty disposing of certain sovereign debt obligations because there may be a limited trading market for such securities. Because there is no liquid secondary market for many of these securities, the Funds anticipate that such securities could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market may have an adverse impact on the market price of such securities and a Fund's ability to dispose of particular issues when necessary to meet a Fund's liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities also may make it more difficult for a Fund to obtain accurate market quotations for purposes of valuing a Fund's portfolio and calculating its net asset value. When and if available, fixed income securities may be purchased by a Fund at a discount from face value. However, the Funds do not intend to hold such securities to maturity for the purpose of achieving potential capital gains, unless current yields on these securities remain attractive. From time to time, a Fund may purchase securities not paying interest at the time acquired if, in the opinion of its Adviser, such securities have the potential for future income or capital appreciation. Privatizations. Each Fund may invest in privatizations (i.e. foreign government programs of selling interests in government-owned or controlled enterprises). The ability of U.S. entities, such as the Funds, to participate in privatizations may be limited by local law, or the terms for participation may be less advantageous than for local investors. There can be no assurance that privatization programs will be available or successful. Central and Eastern European Countries. Both Funds will be exposed to the risks of investing in Central and Eastern Europe although to a different extent. The risks normally associated with investing in foreign securities may be increased in Central and Eastern European countries due to the infancy of political and economic structures. Many of these countries lack the political and economic stability characteristic of more developed countries, and unanticipated political or social developments may affect the value of a Fund's investment. The small size and inexperience of the securities markets and the limited volume of trading in such securities may make a Fund's investments illiquid and more volatile than investments in more developed countries. There may be little financial or accounting 16 74 information available with respect to companies located in certain Central and Eastern European countries and it may be difficult to assess the value of an investment in such companies. These securities markets are substantially smaller, less liquid and significantly more volatile than U.S. or Western European markets. As a result, obtaining prices on portfolio securities from independent sources may be more difficult. These factors may make it more difficult for a Fund to calculate an accurate net asset value on a daily basis and to respond to significant shareholder redemptions. The value of a Fund's assets may be adversely affected by political, economic, and social factors, changes in the law or regulations of Central and Eastern European countries and the status of political and economic foreign relations of Central and Eastern European countries. There is also speculation that organized crime exerts significant influence on certain countries in this region. Developments in the region may also affect the value of a Fund's assets. Actions of Central and Eastern European governments could significantly affect private sector companies and the Funds, market conditions, and prices and yields of securities in each Fund's portfolio. Despite privatization programs that have been implemented, the governments of Central and Eastern European countries have exercised and continue to exercise significant influence over many aspects of the local economies, and the number of public sector enterprises in Central and Eastern Europe is substantial. New governments and new economic policies may also have an unpredictable impact on Central and Eastern European economies. Many of the countries in Central and Eastern Europe experienced extremely high rates of inflation, particularly in the early 1990s when central planning was first being replaced by the capitalist free market system. As a result, the exchange rates of such countries experienced significant depreciation relative to the U.S. dollar. While the inflation experience of such countries has generally improved, there can be no assurance that this improvement will continue. Consequently, the possibility of significant loss arising from foreign currency depreciation must be considered as a serious risk. Although Central and Eastern European governments are currently implementing reforms directed at political and economic liberalization, there is no assurance that these reforms will continue or, if continued, will be successful. The economies of Central and Eastern European countries are heavily dependent on the manufacturing sector, and adverse developments affecting this sector in a particular country could adversely affect the economy as a whole. In addition, these economies generally are heavily dependent upon international trade and have been and may continue to be adversely affected by trade barriers and other protectionist measures, exchange controls and relative currency values. These economies may also be adversely affected by economic or political developments in or controversies with neighboring countries and major trading partners. The economies of certain Central and Eastern European countries are heavily dependent on oil and gas imported from Russia via pipelines through the Ukraine and the Slovak Republic. Political or economic turmoil in any one of these nations could result in an energy crisis that could affect the economic stability of certain Central and Eastern European countries, and consequently adversely affect the Funds. Political or economic turmoil in nearby regions could also lead to an influx of refugees to one or more Central or Eastern European countries with adverse economic and political effects on such countries. 17 75 Investments in Central and Eastern European countries may include the securities of both large and small companies. Small companies may offer greater opportunities for capital appreciation than larger companies, but these investments may involve certain special risks. Small companies may have limited product lines, markets, or financial resources and may be dependent on a limited management group. Securities issued by small companies may trade less frequently and in smaller volume than more widely held securities issued by large companies. Also, the values of securities issued by small companies may fluctuate more sharply than those issued by larger companies, and a Fund may experience some difficulty in establishing or closing out positions in small company securities at prevailing prices. Central and Eastern European countries may be subject to a greater amount of social, political and economic instability resulting from extra-constitutional changes or attempted changes in government, popular unrest and hostile relations with neighboring countries or territories. Investments in Central and Eastern Europe could also be adversely affected by developments in other emerging markets, such as Asia or Latin America. Some Central and Eastern European countries have substantial external debt. Although, some countries have entered into debt restructuring agreements with foreign creditors and some are negotiating the rescheduling of their debt, there can be no assurance that such negotiations will succeed. In many cases, it may be necessary to adopt economic policies to facilitate debt service requirements (such as taking steps to control inflation) and these measures may lead to periods of lower economic growth. Central and Eastern European countries have been characterized by declining real gross domestic product, high inflation, rising unemployment and declining personal income (in real terms). Countries in this region lack a developed infrastructure, telecommunications generally are poor and banks and financial systems are not well developed. There is also a limited supply of domestic savings in the region and businesses can experience difficulty in obtaining working capital. Many Central and Eastern European currencies are not fully convertible. Some currencies have depreciated in value substantially against the U.S. dollar and could depreciate further in the future. Since the net asset value of each Fund will be calculated and reported in U.S. dollars, depreciation in these currencies could adversely impact a Fund's performance. Changes in local exchange control regulations, tax laws, withholding taxes and economic or monetary policies may also affect the value of an investment in the Funds, and may give rise to a capital gains tax liability on a Fund's investment gains. The tax laws and regulations are not well drafted and are difficult to comply with, and a company may incur substantial penalties despite using all reasonable efforts to ensure compliance. The tax laws and regulations may be given retroactive effect which could result in additional taxes that are not taken into account when calculating a Fund's net asset value. The system of taxation in certain Central and Eastern European countries may deter investment and hinder financial stability by concentrating on the taxation of industry with relatively little emphasis on individual taxation. Finally, accounting standards do not generally correspond to generally accepted accounting principles or accepted international accounting standards, and a Fund may have access to less financial information on investments than would normally be the case in more sophisticated markets. 18 76 Many Central and Eastern European businesses do not have established histories of operating within a market-oriented economy. These businesses generally lack experience operating in the free market environment, modern technology and a sufficient capital base with which to develop and expand operations. Many of these countries are in need of restructuring their industries to, among other things, close out-dated facilities and increase investment in technology and management. The securities in which a Fund may invest may not be listed or traded on any securities market for the foreseeable future and, in some cases, may not be registered for resale under the securities laws of any country. There may be significant disparities between the prices paid for securities in private transactions and the prices at which the same securities trade on an exchange or in an over-the-counter market. These factors may limit a Fund's ability to obtain accurate market quotations for purposes of valuing its portfolio securities and calculating its net asset value. Although, many Central and Eastern European countries are developing stock exchanges and formulating rules and regulations, it is unlikely that these stock exchanges will, in the foreseeable future, offer the liquidity available in western securities markets. Accordingly, there may be no readily available market for the timely liquidation of investments made by a Fund, particularly in periods when the relevant market is declining. The lack of environmental controls in Central and Eastern Europe has led to widespread pollution and the legislative framework for environmental liability and the extent of any exposure of businesses to the costs of pollution clean-up have not been fully established. The extent of responsibility, if any, for pollution-related liabilities of any business may not be determinable at the time a Fund is considering an investment. Environmental liability could have a significant adverse effect on the performance of companies in which a Fund invests. Legislative change in Central and Eastern Europe has been rapid, but it is difficult to anticipate the impact of legislative reforms on the companies in which a Fund will invest. Although there is significant political support for legislative change to a market economy, it is not certain that legislation when enacted will advance this objective. It will be more difficult for a Fund to obtain effective redress or enforcement of its rights, in certain Central and Eastern European countries, than in western jurisdictions. Also, the judicial and civil procedure system in this region has not been modernized to a material extent and many courts lack experience in commercial dispute resolution. Further, many of the procedural remedies for enforcement and the protection of legal rights typically found in western jurisdictions are not available in Central and Eastern Europe. Employment and labor legislation can be pro-employee, particularly in matters such as termination of employment, maternity benefits, overtime restrictions and trade union participation. Laws regulating ownership, control and corporate governance of companies as well as protection of minority shareholders have been adopted recently and have virtually never been tested in the courts. The judicial systems have very limited experience with the adjudication of securities claims and corporate disputes. Consequently, it may be more difficult for a Fund to obtain a judgment in a court outside the U.S. to the extent that there is a default with respect to a security of a Central or Eastern European issuer or a Fund has any other claim against such an issuer. 19 77 Disclosure and reporting requirements are minimal and anti-fraud and insider trading legislation is generally rudimentary. Due to the newness of Central and Eastern European securities markets, there is a low level of monitoring and regulation of the markets and the activities of investors in such markets, and there has been no or very limited enforcement to date of existing regulations. The concept of fiduciary duties on the part of management or directors to their companies as a whole is undeveloped. The regulatory requirements for participants in the securities markets in the region as well as the structure of relevant regulatory authorities are subject to constant change. This may result in challenges to the validity of any license, permission, consent or registration which is required in the particular country and which were originally obtained in compliance with the laws. Foreign investment in the securities of Central and Eastern European companies is restricted and controlled to varying degrees. These restrictions or controls may limit or preclude foreign investment in certain cases, may require government approval prior to foreign investment, or may give preferential treatment to nationals over foreign investors. Issuers in certain Central and Eastern Europe countries are allowed by law to restrict the rights of foreign investors to participate in the subscription of securities. This may result in the disenfranchisement of foreign investors in respect of their rights to participate in bonus issues, rights and issues or other corporate actions. This may result in dilution of holdings and loss of voting power. A high proportion of the shares of many Central and Eastern European companies are held by a limited number of investment funds and other institutional investors, which may limit the number of shares available for investment by the Funds. In addition, minority shareholders in companies, such as the Funds, have limited rights against actions taken by controlling parties, and those actions may adversely affect the value of a Fund's holdings. A limited number of issuers represents a disproportionately large percentage of market capitalization and trading value. The prices at which a Fund may acquire investments may be affected by the market's anticipation of a Fund's investing. In addition, trading on material non-public information and securities transactions by brokers in anticipation of transactions by a Fund in particular securities may impact such prices. These and other factors may also affect the rate at which a Fund can initially invest its assets. Shareholders should be aware that settlement and safe custody of securities in Central and Eastern Europe involves certain risks and considerations which do not normally apply in more developed countries. Verification and perfection of legal ownership in securities also differs and are less effective than in Western Europe. In certain countries, securities are issued only in bearer form. In other countries, no certificates are issued and legal ownership of shares is perfected through registration either in the share register of the company or at a central depository, in either case by a third party over whom a Fund may not have control. In certain countries, the market practice is settlement against production of evidence of title in the form of extracts from the shareholders' register. Such extracts do not in themselves constitute securities or constitute definitive evidence of title or ownership rights. As such, these extracts do not guarantee that title to the securities has in fact passed. In addition, fraudulent or incorrect registration may result in title being removed from the securities register of an issuer. Access to securities registers may also be limited and therefore registers may be difficult to check. 20 78 Fixed Income Securities. The value of the securities held by a Fund, and thus the net asset value of the shares of a Fund, generally will vary inversely in relation to changes in prevailing interest rates. Thus, if interest rates have increased from the time a debt or other fixed income security was purchased, such security, if sold, might be sold at a price less than its cost. Conversely, if interest rates have declined from the time such a security was purchased, such security, if sold, might be sold at a price greater than its cost. Also, the value of such securities may be affected by changes in real or perceived creditworthiness of the issuers. Thus, if creditworthiness is enhanced, the price may rise. Conversely, if creditworthiness declines, the price may decline. A Fund is not restricted to any maximum or minimum time to maturity in purchasing portfolio securities, and the average maturity of a Fund's assets will vary based on its Adviser's assessment of economic and market conditions. Below Investment Grade Securities. Each Fund may invest its assets in non-investment grade securities (securities that are rated below the fourth highest grade at the time of purchase by Moody's or S&P, or, if unrated, deemed by the Adviser to be of comparable quality). Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced. Neither event will require a sale of such securities by a Fund, although its Adviser will consider such event in its determination of whether a Fund should continue to hold the securities. The widespread expansion of government, consumer and corporate debt within the economy has made the corporate sector, especially cyclically sensitive industries, more vulnerable to economic downturns or increased interest rates. Because lower-rated securities involve issuers with weaker credit fundamentals (such as debt-to-equity ratios, interest charge coverage, earnings history and the like), an economic downturn, or increases in interest rates, could severely disrupt the market for lower-rated securities and adversely affect the value of outstanding securities and the ability of the issuers to repay principal and interest. Securities rated below investment grade are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve large uncertainties or major risk exposures to adverse conditions. The market values of below investment grade securities and unrated securities of comparable quality tend to react less to fluctuations in interest rate levels than do those of investment grade securities and the market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than below investment grade securities. In addition, these securities generally present a higher degree of credit risk. Issuers of these securities are often highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater because below investment grade securities generally are unsecured and frequently are subordinated to prior payment of senior indebtedness. If the issuer of a security owned by a Fund defaulted, a Fund could incur additional expenses in seeking recovery with no guarantee of recovery. Also, a recession could disrupt severely the market for such securities and may adversely affect the value of such securities and the ability of the issuers of such securities to repay principal and pay interest thereon. Lower-rated securities also present risks based on payment expectations. For example, lower-rated securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, a Fund would have to replace the security with a lower yielding security, resulting in a decreased return for investors. 21 79 The Funds may have difficulty disposing of certain of these securities because there may be a thin trading market. Because there is no established retail secondary market for many of these securities, the Funds anticipate that these securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for investment grade securities. The lack of a liquid secondary market, as well as adverse publicity and investor perception with respect to these securities, may have an adverse impact on market price and a Fund's ability to dispose of particular issues when necessary to meet liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities also may make it more difficult for the Funds to obtain accurate market quotations for purposes of valuing the Funds and calculating net asset value. The market value of securities rated below investment grade is more volatile than that of investment grade securities. Factors adversely impacting the market value of these securities will adversely impact a Fund's net asset value. The Funds will rely on the judgment, analysis and experience of their Advisers in evaluating the creditworthiness of an issuer. In this evaluation, an Adviser will consider, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. Normally, below investment grade securities and comparable unrated securities are not intended for short-term investment. The Funds may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings of such securities. Securities of Other Investment Companies. The Funds may invest in securities of other investment companies to the extent permitted under the Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under the 1940 Act, each Fund may hold securities of another investment company in amounts which (i) do not exceed 3% of the total outstanding voting stock of such company, (ii) do not exceed 5% of the value of each Fund's total assets and (iii) when added to all other investment company securities held by each Fund, do not exceed 10% of the value of a Fund's total assets. Lending of Portfolio Securities. The Funds may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by each Fund's Board of Directors (the "Board"). These loans, if and when made, may not exceed 50% of a Fund's total assets taken at value. No Fund will lend portfolio securities to affiliates of Warburg Pincus Asset Management, Inc. ("Warburg"), or to affiliates of its Adviser 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 102% of the current market value of loaned U.S. securities and at least 105% of the current market value of loaned non-U.S. securities. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Funds. From time to time, the Funds may return a part of the interest earned from the investment of collateral received for securities loaned to the borrower and/or a third party that is unaffiliated with the Funds and that is acting as a "finder." 22 80 By lending its securities, each Fund can increase its income by continuing to receive interest and any dividends on the loaned securities as well as by either investing the collateral received for securities loaned in short-term instruments or obtaining yield in the form of interest paid by the borrower when U.S. government securities are used as collateral. Although the generation of income is not an investment objective of the Funds, income received could be used to pay the Funds' expenses and would increase an investor's total return. Each Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) each Fund must receive cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) each Fund must be able to terminate the loan at any time; (iv) each Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and any increase in market value; (v) each Fund may pay only reasonable custodian fees in connection with the loan; and (vi) voting rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Board must terminate the loan and regain the right to vote the securities. Loan agreements involve certain risks in the event of default or insolvency of the other party including possible delays or restrictions upon a Fund's ability to recover the loaned securities or dispose of the collateral for the loan. When-Issued Securities, Delayed-Delivery Transactions and Forward Commitments. Each Fund may utilize up to 20% of its total assets to purchase securities on a "when-issued" basis, for delayed delivery (i.e., payment or delivery occur beyond the normal settlement date at a stated price and yield) or on a forward commitment basis. Each Fund does not intend to engage in these transactions for speculative purposes, but only in furtherance of its investment objectives. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to a Fund at the time of entering into the transaction. 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, delayed-delivery basis or forward commitment basis, the prices obtained on such securities may be higher or lower than the prices available in the market on the dates when the investments are actually delivered to the buyers. When a Fund agrees to purchase when-issued, delayed-delivery securities or securities on a forward commitment basis, its custodian will set aside cash or liquid securities equal to the amount of the commitment in a segregated account. Normally, the custodian will set aside portfolio securities to satisfy a purchase commitment, and in such a case a Fund may be required subsequently to place additional assets in the segregated account in order to ensure that the value of the account remains equal to the amount of a Fund's commitment. The assets contained in the segregated account will be marked-to-market daily. It may be expected that a Fund's net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash. When a Fund engages in when-issued, delayed-delivery or forward commitment transactions, it relies on the other party to consummate the trade. Failure of the seller to do so may result in a Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous. 23 81 Brady Bonds. Each Fund may invest in so-called "Brady Bonds," which are securities created through the exchange of existing commercial bank loans to public and private entities for new bonds in connection with debt restructurings under a debt restructuring plan announced by former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are currently actively traded in the over-the-counter secondary market for debt instruments. Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Interest payments on these Brady Bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in the case of floating rate bonds, initially is equal to at least one year's rolling interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Brady Bonds are often viewed as having three or four valuation components: the collateralized repayment of principal at final maturity; the collateralized interest payments; the uncollateralized interest payments; and any uncollateralized repayment of principal at maturity (these uncollateralized amounts constituting the "residual risk"). Repurchase Agreements. Each Fund may agree to purchase securities from a bank or recognized securities dealer and simultaneously commit to resell the securities to the bank or dealer at an agreed-upon date and price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased securities ("repurchase agreements"). Such Fund would maintain custody of the underlying securities prior to their repurchase; thus, the obligation of the bank or dealer to pay the repurchase price on the date agreed to would be, in effect, secured by such securities. If the value of such securities were less than the repurchase price, plus interest, the other party to the agreement would be required to provide additional collateral so that at all times the collateral is at least 102% of the repurchase price plus accrued interest. Default by or bankruptcy of a seller would expose a Fund to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations. The financial institutions with which a Fund may enter into repurchase agreements will be banks and non-bank dealers of U.S. Government securities that are listed on the Federal Reserve Bank of New York's list of reporting dealers, if such banks and non-bank dealers are deemed creditworthy by a Fund's Adviser. A Fund's Adviser will continue to monitor creditworthiness of the seller under a repurchase agreement, and will require the seller to maintain during the term of the agreement the value of the securities subject to the agreement to equal at least 102% of the repurchase price (including accrued interest). In addition, a Fund's Adviser will require that the value of this collateral, after transaction costs (including loss of interest) reasonably expected to be incurred on a default, be equal to 102% or greater than the repurchase price (including accrued premium) provided in the repurchase agreement or the daily amortization of the difference between the purchase price and the repurchase price specified in the repurchase agreement. A Fund's adviser will mark-to-market daily the value of the securities. There are no percentage limits on a Fund's ability to enter into repurchase agreements. Repurchase agreements are considered to be loans by the Fund under the 1940 Act. 24 82 Loan Participations and Assignments. Each Fund may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign government and one or more financial institutions ("Lenders"). The majority of the Funds' 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 a Fund having a contractual relationship only with the Lender, not with the borrower. A participating Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, a Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any rights of set-off against the borrower, and a Fund may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, participating Funds 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, a 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 Funds will acquire Participations only if the Lender interpositioned between the Funds and the borrower is determined by the Adviser to be creditworthy. Each Fund currently anticipates that it will not invest more than 5% of its net assets in Loan Participations and Assignments. Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers. Convertible securities rank senior to common stock in a corporation's capital structure but are usually subordinated to comparable nonconvertible securities. While no securities investment is completely without risk, investments in convertible securities generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed-income security. Convertible securities have unique investment characteristics in that they generally (1) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (2) are less subject to fluctuation in value than the underlying stock since they have fixed-income characteristics and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases. Most convertible securities currently are issued by U.S. companies, although a substantial Eurodollar convertible securities market has developed, and the markets for convertible securities denominated in local currencies are increasing. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The 25 83 investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed-income security. A convertible security might be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. The Funds will invest in convertible securities without regard to their credit rating. Structured Notes. The Funds may invest in structured notes. The distinguishing feature of a structured note is that the amount of interest and/or principal payable on the notes is based on the performance of a benchmark asset or market other than fixed-income securities or interest rates. Examples of a benchmark include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows a Fund to gain exposure to the benchmark asset or market, such as investments in certain emerging markets that restrict investment by foreigners. The structured note fixes the maximum loss that a Fund may experience in the event that the market does not perform as expected. The performance tie can be a straight relationship or leveraged, although the Adviser generally will not use leverage in its structured note strategies. Depending on the terms of the note, a Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; a Fund's loss cannot exceed this foregone interest and/or principal. An investment in a structured note involves risks similar to those associated with a direct investment in the benchmark asset. Structured notes will be treated as illiquid securities for investment limitation purposes. Short Sales. In a short sale, a Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. If a Fund engages in a short sale, the collateral for the short position will be maintained by the Funds' custodian or qualified sub-custodian. While the short sale is open, a 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 a Fund's long position. While a short sale is made by selling a security a Fund does not own, a short sale is "against the box" to the extent that a Fund contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. The Funds do not intend to 26 84 engage in short sales against the box for investment purposes. Each 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 a Fund (or a security convertible or exchangeable for such security). In such case, any future losses in a Fund's long position should be offset by a gain in the short position and, conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount each Fund owns. There will be certain additional transactions costs associated with short sales against the box, but the Funds will endeavor to offset these costs with the income from the investment of the cash proceeds of short sales. If a Fund effects a short sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize that gain as if it had actually sold the securities (as a "constructive sale") on the date it effects the short sale. However, such constructive sale treatment may not apply if a Fund closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which the Funds may effect short sales. Emerging Growth and Smaller Capitalization Companies; Unseasoned Issuers. Investments in securities of small- and medium-sized, emerging growth companies and companies with continuous operations of less than three years ("unseasoned issuers") involve considerations that are not applicable to investing in securities of established, larger-capitalization issuers, including reduced and less reliable information about issuers and markets, less stringent financial disclosure requirements, illiquidity of securities and markets, higher brokerage commissions and fees and greater market risk in general. In addition, securities of these companies may involve greater risks since these securities may have limited marketability and, thus, may be more volatile. Because such companies normally have fewer shares outstanding than larger, more established companies, it may be more difficult for the Fund to buy or sell significant amounts of such shares without an unfavorable impact on prevailing prices. These companies may have limited product lines, markets or financial resources and may lack management depth. In addition, these companies are typically subject to a greater degree of changes in earnings and business prospects than are larger, more established companies. Although investing in securities of these companies offers potential for above-average returns if the companies are successful, the risk exists that the companies will not succeed and the prices of the companies' shares could significantly decline in value. Depositary Receipts. The assets of each Fund may be invested in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and International Depositary Receipts ("IDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a U.S. bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, and IDRs, which are sometimes referred to as Global Depositary Receipts, are issued outside the United States. EDRs and IDRs are typically issued by non-U.S. banks and trust companies and evidence ownership of either foreign or domestic securities. Generally, ADRs 27 85 in registered form are designed for use in U.S. securities markets and EDRs and IDRs in bearer form are designed for use in European and non-U.S. securities markets, respectively. Temporary Investments. The short-term and medium-term debt securities in which each Fund may invest for temporary defensive purposes consist of: (a) obligations of the United States or foreign governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of U.S. and foreign corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. Rights Offerings and Purchase Warrants. Each Fund may invest in rights and warrants to purchase newly created equity securities consisting of common and preferred stock. The equity security underlying a right or warrant is outstanding at the time the right or warrant is issued or is issued together with the right or warrant. Investing in rights and warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and, thus, can be a speculative investment. The value of a right or warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the company whose equity underlies the warrant or a change in the perception as to the future price of the underlying security, or any combination thereof. Rights and warrants generally pay no dividends and confer no voting or other rights other than to purchase the underlying security. Non-Publicly Traded and Illiquid Securities. No Fund may invest more than 15% of its net assets in non-publicly traded and illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market, repurchase agreements which have a maturity of longer than seven days, certain Rule 144A Securities (as defined below), and time deposits maturing in more than seven days. Securities that have legal or contractual restrictions on resale but have a readily available market are not considered illiquid for purposes of this limitation. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days without borrowing. A mutual fund might also have to register such restricted securities 28 86 in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. Rule 144A Securities. Rule 144A under the Securities Act adopted by the SEC allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. Each Fund's Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this regulation and use of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. An investment in Rule 144A Securities will be considered illiquid and therefore subject to a Fund's limit on the purchase of illiquid securities unless the Board or its delegates determines that the Rule 144A Securities are liquid. In reaching liquidity decisions, the Board or its delegates may consider, inter alia, the following factors: (i) the unregistered nature of the security; (ii) the frequency of trades and quotes for the security; (iii) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (iv) dealer undertakings to make a market in the security and (v) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). Borrowing. Each Fund may borrow up to 30% of its total assets for temporary or emergency purposes, including to meet portfolio redemption requests so as to permit the orderly disposition of portfolio securities or to facilitate settlement transactions on portfolio securities. Investments (including roll-overs) will not be made when borrowings exceed 5% of a Fund's net assets. Although the principal of such borrowings will be fixed, a Fund's assets may change in value during the time the borrowing is outstanding. Each Fund expects that some of its borrowings may be made on a secured basis. In such situations, either the 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. Stand-By Commitments. Each 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 a Fund's option specified securities at a specified price. A Fund's right to exercise stand-by commitments is unconditional and unqualified. Stand-by commitments acquired by a Fund may also be referred to as "put" options. A stand-by commitment is not transferable by a Fund, although a Fund can sell the underlying securities to a third party at any time. 29 87 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 Funds intends to enter into stand-by commitments only with brokers, dealers and banks that, in the opinion of their Advisers, present minimal credit risks. In evaluating the creditworthiness of the issuer of a stand-by commitment, each Fund's Adviser will periodically review relevant financial information concerning the issuer's assets, liabilities and contingent claims. A Fund will acquire stand-by commitments only in order to facilitate portfolio liquidity and does not intend to exercise its rights under stand-by commitments for trading purposes. The amount payable to a Fund upon its exercise of a stand-by commitment is normally (i) a 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 a Fund owned the securities, plus (ii) all interest accrued on the securities since the last interest payment date during that period. Each Fund expects that stand-by commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, a 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 a Fund's portfolio will not exceed 1/2 of 1% of the value of a Fund's total assets calculated immediately after each stand-by commitment is acquired. A 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 a Fund would be valued at zero in determining net asset value. Where a 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 a Fund. Stand-by commitments would not affect the average weighted maturity of a Fund's portfolio. 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 each Fund's outstanding shares. Such majority is defined as the lesser of (i) 67% or more of the shares present at the meeting, if the holders of more than 50% of the outstanding shares of a Fund are present or represented by proxy, or (ii) more than 50% of the outstanding shares. Investment limitations 10 through 13 may be changed by a vote of the Board at any time. Each Fund may not: 1. Borrow money except that the Fund may borrow from banks for temporary or emergency purposes provided that any such 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 and the entry into currency transactions, options, futures contracts, 30 88 options on futures contracts, and forward commitment transactions that are not accounted for as financings (and the segregation of assets in connection with any of the foregoing) shall not constitute borrowing. 2. Purchase any securities which would cause 25% or more of the value of the Fund's total assets at the time of purchase to be invested in the securities of issuers conducting their principal business activities in the same industry; provided that there shall be no limit on the purchase of U.S. government securities. 3. Purchase the securities of any issuer if as a result more than 5% of the value of the Fund's total assets would be invested in the securities of such issuer, except that this 5% limitation does not apply to U.S. Government Securities and except that up to 25% of the value of the Fund's total assets may be invested without regard to this 5% limitation. 4. Make loans, except that the Fund may purchase or hold fixed-income securities, including structured securities, lend portfolio securities and enter into repurchase agreements. 5. 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. 6. 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. 7. Purchase securities on margin, except that the Fund may obtain any short-term credits necessary for the clearance of purchases and sales of securities. For purposes of this restriction, the deposit or payment of initial or variation margin in connection with transactions in currencies, options, futures contracts or related options will not be deemed to be a purchase of securities on margin. 8. Invest in commodities, except that the Fund may purchase and sell futures contracts, including those relating to securities, currencies and indices, and options on futures contracts, securities, currencies or indices, and purchase and sell currencies on a forward commitment or delayed-delivery basis 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 and in connection with the writing of covered put and call options and purchase of securities on a 31 89 forward commitment or delayed-delivery basis and collateral and initial or variation margin arrangements with respect to currency transactions, options, futures contracts, and options on futures contracts. 12. Invest more than 15% of the Fund's net assets in securities which may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. For purposes of this limitation, repurchase agreements with maturities greater than seven days shall be considered illiquid securities. 13. Make additional investments (including roll-overs) if the Fund's borrowings exceed 5% of its net assets. If a percentage restriction (other than the percentage limitation set forth in No. 1 and No. 12) 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 a 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 each Fund is determined for purposes of sales and redemptions. The following is a description of the procedures used by each Fund in valuing its assets. Securities listed on a U.S. securities exchange (including securities traded through the Nasdaq National Market System) or foreign securities exchange or traded in an OTC market will be valued at the most recent sale as of the time the valuation is made or, in the absence of sales, at the mean between the bid and asked quotations. If there are no such quotations, the value of the securities will be taken to be the highest bid quotation on the exchange or market. Options and futures contracts will be valued similarly. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which constitutes fair value as determined by the Fund's Board. Amortized cost involves valuing a portfolio instrument at its initial cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The amortized cost method of valuation may also be used with respect to other debt obligations with 60 days or less remaining to maturity. Notwithstanding the foregoing, in determining the market value of portfolio investments, the Funds may employ outside organizations (a "Pricing Service") which may use a matrix, formula or other objective method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. The procedures of Pricing Services are reviewed periodically by the officers of the Funds under the general supervision and responsibility of the Board, which may replace a Pricing Service at any time. Securities, options and futures contracts for which market quotations are not available and certain other assets of the Funds will be valued at their fair value as determined in good faith pursuant to consistently applied procedures established by the Board. In addition, the Board or its delegates may value a security at fair value if it determines that such security's value determined by the methodology set forth above does not reflect its fair value. 32 90 Trading in securities in certain foreign countries is completed at various times prior to the close of business on each business day in New York (i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open for trading). In addition, securities trading in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in various foreign markets on days which are not business days in New York and days on which a Fund's net asset value is not calculated. As a result, calculation of a Fund's net asset value does not take place contemporaneously with the determination of the prices of the majority of a Fund's securities. All assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values at the prevailing exchange rate as quoted by a Pricing Service. If such quotations are not available, the rate of exchange will be determined in good faith pursuant to consistently applied procedures established by the Board. Portfolio Transactions Each Fund's Adviser is responsible for establishing, reviewing and, where necessary, modifying each Fund's investment program to achieve its investment objective. Purchases and sales of newly issued portfolio securities are usually principal transactions without brokerage commissions effected directly with the issuer or with an underwriter acting as principal. Other purchases and sales may be effected on a securities exchange or over-the-counter, depending on where it appears that the best price or execution will be obtained. The purchase price paid by the Funds to underwriters of newly issued securities usually includes a concession paid by the issuer to the underwriter, and purchases of securities from dealers, acting as either principals or agents in the after market, are normally executed at a price between the bid and asked price, which includes a dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some foreign stock exchanges involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. On most foreign exchanges, commissions are generally fixed. There is generally no stated commission in the case of securities traded in domestic or foreign OTC markets, but the price of securities traded in OTC markets includes an undisclosed commission or mark-up. U.S. government securities are generally purchased from underwriters or dealers, although certain newly issued U.S. government securities may be purchased directly from the U.S. Treasury or from the issuing agency or instrumentality. Each Fund's Adviser will select specific portfolio investments and effect transactions for each Fund and in doing so, seeks to obtain the overall best execution of portfolio transactions. In evaluating prices and executions, the Adviser 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. The Adviser may, in its discretion, effect transactions in portfolio securities with dealers who provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended) to the Funds and/or other accounts over which the Adviser exercises investment discretion. The Adviser may place portfolio transactions with a broker or dealer with whom it has negotiated a commission that is in excess of the commission another broker or dealer would have charged for effecting the transaction if 33 91 the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of such brokerage and research services provided by such broker or dealer viewed in terms of either that particular transaction or of the overall responsibilities of the Adviser. Research and other services received may be useful to the Adviser in serving each Fund and their other clients and, conversely, research or other services obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to the Funds. Research may include furnishing advice, either directly or through publications or writings, as to the value of securities, the advisability of purchasing or selling specific securities and the availability of securities or purchasers or sellers of securities; furnishing seminars, information, analyses and reports concerning issuers, industries, securities, trading markets and methods, legislative developments, changes in accounting practices, economic factors and trends and portfolio strategy; access to research analysts, corporate management personnel, industry experts, economists and government officials; comparative performance evaluation and technical measurement services and quotation services; and products and other services (such as third party publications, reports and analyses, and computer and electronic access, equipment, software, information and accessories that deliver, process or otherwise utilize information, including the research described above) that assist the Adviser in carrying out its responsibilities. Research received from brokers or dealers is supplemental to the Adviser's own research program. The fees paid to the Adviser under its advisory agreement with a Fund are not reduced by reason of its receiving any brokerage and research services. Investment decisions for the Funds concerning specific portfolio securities are made independently from those for other clients advised by the Adviser. Such other investment clients may invest in the same securities as the Funds. When purchases or sales of the same security are made at substantially the same time on behalf of such other clients, transactions are averaged as to price and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each client, including a Fund. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold for a Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased for such other investment clients in order to obtain best execution. The Funds may use Counsellors Securities Inc. ("Counsellors Securities"), the Distributor, or affiliates of Credit Suisse Group in connection with the purchase or sale of securities in accordance with rules or exemptive orders adopted by the SEC when the Adviser believes that the charge for the transaction does not exceed usual and customary levels. 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 Securities, BEA Associates ("BEA"), Credit Suisse Asset Management Limited ("CSAM"), or any affiliated person of such companies. In addition, the Funds will not give preference to any institutions with whom a Fund enters into distribution or shareholder servicing agreements concerning the provision of administrative and other support services. Transactions for each Fund may be effected on foreign securities exchanges. In transactions for securities not actively traded on a foreign securities exchange, the Funds will 34 92 deal directly with the dealers who make a market in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Such portfolio securities are generally traded on a net basis and do not normally involve brokerage commissions. Securities firms may receive brokerage commissions on certain portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon exercise of options. The Funds may participate, if and when practicable, in bidding for the purchase of securities for each Fund's portfolio directly from an issuer in order to take advantage of the lower purchase price available to members of such a group. A Fund will engage in this practice, however, only when its Adviser, in its sole discretion, believes such practice to be otherwise in a Fund's interest. Portfolio Turnover The Funds do not intend to seek profits through short-term trading, but the rate of turnover will not be a limiting factor when the Funds deem it desirable to sell or purchase securities. Each Fund's portfolio turnover rate is calculated by dividing the lesser of purchases or sales of its portfolio securities for the year by the monthly average value of the portfolio securities. Securities with remaining maturities of one year or less at the date of acquisition are excluded from the calculation. Certain practices that may be employed by the Funds could result in high portfolio turnover. For example, options on securities may be sold in anticipation of a decline in the price of the underlying security (market decline) or purchased in anticipation of a rise in the price of the underlying security (market rise) and later sold. To the extent that its portfolio is traded for the short-term, the Funds will be engaged essentially in trading activities based on short-term considerations affecting the value of an issuer's stock instead of long-term investments based on fundamental valuation of securities. Because of this policy, portfolio securities may be sold without regard to the length of time for which they have been held. Consequently, the annual portfolio turnover rate of the Funds may be higher than mutual funds having a similar objective that do not utilize these strategies. Each Fund expects its turnover rate for its first year of operation to total approximately 100%. MANAGEMENT OF THE FUNDS Officers and Board of Directors The business and affairs of each Fund is managed by its Board of Directors in accordance with the laws of the State of Maryland. Each Board elects officers who are responsible for the day-to-day operations of a Fund and who execute policies formulated by the Board. Under each Fund's Charter, a Board may classify or reclassify any unissued shares of the Funds into one or more additional classes by setting or changing in any one or more respects their relative rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption. A Board may similarly classify or reclassify any class of its shares into one or more series and, without shareholder approval, may increase the number of authorized shares of the Funds. 35 93 The names (and ages) of each Fund's Directors and officers, their addresses, present positions and principal occupations during the past five years and other affiliations are set forth below. Richard N. Cooper* (63) Director Harvard University Professor at Harvard University; National Intelligence 1737 Cambridge Street Council from June 1995 until January 1997; Director or Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (retail electronics and appliances) and Phoenix Home Life Mutual Insurance Company; Director/Trustee of other investment companies advised by Warburg. Jack W. Fritz (71) Director 2425 North Fish Creek Road Private investor; Consultant and Director of Fritz P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc. (direct mail advertising); Director/Trustee of other investment companies advised by Warburg. John L. Furth* (67) Chairman of the Board 466 Lexington Avenue Vice Chairman, Managing Director and Director of Warburg; New York, New York 10017-3147 Associated with Warburg since 1970; Director of Counsellors Securities; Chairman of the Board of other investment companies advised by Warburg. Jeffrey E. Garten (51) Director Box 208200 Dean of Yale School of Management and William S. Beinecke New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and Finance; Undersecretary of Commerce for International Trade from November 1993 to October 1995; Professor at Columbia University from September 1992 to November 1993; Director/Trustee of other investment companies advised by Warburg.
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act. 36 94 Arnold M. Reichman *(50) Director 466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant New York, New York 10017-3147 Secretary of Warburg; Director of The RBB Fund, Inc.; Associated with Warburg since 1984; Director and officer of Counsellors Securities; Director/Trustee of other investment companies advised by Warburg. Alexander B. Trowbridge (68) Director 1317 F Street President of Trowbridge Partners, Inc. (business consulting) 5th Floor from January 1990 to November 1996; Director or Trustee of Washington, DC 20004* New England Mutual Life Insurance Co., ICOS Corporation (biopharmaceuticals), Waste Management, Inc. (solid and hazardous waste collection and disposal), IRI International (energy services), The Rouse Company (real estate development), Harris Corp. (electronics and communications equipment), The Gillette Co. (personal care products) and Sun Company Inc. (petroleum refining and marketing); Director/Trustee of other investment companies advised by Warburg. Eugene L. Podsiadlo (41) President 466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since New York, New York 10017-3147 1991; Officer of Counsellors Securities and other investment companies advised by Warburg. Stephen Distler (44) Vice President 466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since New York, New York 10017-3147 1984; Treasurer of Counsellors Securities; Officer of other investment companies advised by Warburg.
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act. 37 95 Eugene P. Grace (46) Vice President and Secretary 466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg New York, New York 10017-3147 since April 1994; Attorney-at-law from September 1989-April 1994; Life insurance agent, New York Life Insurance Company from 1993 to 1994; Officer of Counsellors Securities and other investment companies advised by Warburg. Howard Conroy, CPA (44) Vice President and Chief Financial Officer 466 Lexington Avenue Vice President of Warburg; Associated with Warburg since New York, New York 10017-3147 1992; Officer of other investment companies advised by Warburg. Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer 466 Lexington Avenue Vice President of Warburg; Associated with Warburg since New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc. from September 1994 to October 1995; Associated with BEA from April 1993 to September 1994; Associated with Ernst & Young LLP from 1990 to 1993; Officer of other investment companies advised by Warburg. Hal Liebes (34) Assistant Secretary 153 East 53rd Street Senior Vice President and General Counsel of BEA from March New York, New York 10022 1997 to present; Vice President and Legal Counsel for BEA from June 1995 to March 1997; Chief Compliance Officer, CS First Boston Investment Management from 1994 to 1995; Staff Attorney, Division of Enforcement, U.S. Securities and Exchange Commission from 1991 to 1994; Associate, Morgan, Lewis & Bockius from 1989 to 1991; Officer of other investment companies advised by BEA. Janna Manes, Esq. (30) Assistant Secretary 466 Lexington Avenue Vice President of Warburg; Associated with Warburg since New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr & Gallagher from 1993 to 1996; Officer of other investment companies advised by Warburg.
38 96 Michael A. Pignataro (38) Assistant Secretary 153 East 53rd Street Vice President of BEA from December 1995 to present; New York, New York 10022 Assistant Vice President and Chief Administrative Officer for Investment Companies of BEA from 1989 to December 1995; Officer of other investment companies advised by BEA. Rocco A. Del Guercio (35) Assistant Treasurer Administrative Officer for BEA-advised investment companies from June 1996 to the present; Assistant Treasurer, Bankers Trust Corp. -- Fund Administration from March 1994 to June 1996; Mutual Fund Accounting Supervisor, Dreyfus Corporation from April 1987 to March 1994; Officer of other investment companies advised by BEA. Wendy S. Setnicka ( 33) Assistant Treasurer Assistant Vice President of BEA from January 1997 to the present; Administrative Officer for Investment Companies of BEA from November 1993 to the present; Supervisor of Fund Accounting and Administration at Reich & Tang LP from June 1989 to November 1993; Officer of other investment companies advised by BEA.
The Funds pay directors who are not "affiliated persons" (as defined in the 1940 Act) of its Adviser, co-administrators or distributors an annual fee of $500 and $250 for each meeting of the Board attended by him for his services as a Director, and is reimbursed for expenses incurred in connection with his attendance at Board meetings. Each member of the Audit Committee receives an annual fee of $250, and the Chairman of the Audit Committee receives an annual fee of $325. Directors' Total Compensation:
Total Compensation from the Name of Director The Fund+ Fund and the Fund Complex++ ---------------- --------- --------------------------- John L. Furth* None None Arnold M. Reichman* None None Richard N. Cooper [insert] [insert] Jack W. Fritz [insert] [insert] Jeffrey E. Garten [insert] [insert] Alexander B. Trowbridge [insert] [insert]
39 97 + Amounts shown are estimates of payments to be made for the remaining period of the fiscal year ending August 31, 1998 pursuant to existing arrangements. ++ A Fund Complex means two or more investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, or have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any other investment company. Each Director serves as a Director or Trustee of [insert] investment companies in the Fund Complex. * Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg and, accordingly, receive no compensation from the Fund or any other investment company in the Fund Complex. Portfolio Managers The Portfolio Managers of the European Equity Fund are Susan E. Boland and Patricia Maxwell-Arnot. Ms. Boland joined BEA in 1996, and is a Senior Vice President. From 1995-1996, Ms. Boland was a Director and Portfolio Manager of Barran & Partners Limited, and from 1992 to 1995, she was a Partner and European Portfolio Manager for Teton Partners. Ms. Boland was also a Portfolio Manager and Analyst with Fidelity Management & Research Company from 1985-1991. Ms. Maxwell-Arnot joined CSAM in 1995, and is a Managing Director. From 1984-1994, Ms. Maxwell-Arnot was a Director at Lazard Brothers (London). The Portfolio Managers of the Central and Eastern Europe Fund are Glenn Wellman and Isabel Knight. Mr. Wellman joined CSAM in 1993, and is a Managing Director. From 1987-1993, Mr. Wellman was a Managing Director and Chief Investment Officer of Alliance Capital Limited. Ms. Knight joined CSAM in 1997, and is a Director. From 1995-1997, she was a Senior Fund Manager for emerging Europe with Foreign & Colonial Emerging Markets, and from 1992-1995, she was a Portfolio Manager for Morgan Stanley Asset Management. Control Persons and Principal Holders of Securities CSAM will hold all of the shares of each Fund on the date each Fund's Registration Statement become effective. Investment Advisers and Co-Administrators BEA, located at One Citicorp Center, 153 East 53rd Street, New York, New York 10022, serves as investment adviser to each Fund pursuant to separate written agreements (the "Advisory Agreements"). BEA is a diversified investment adviser, managing global equity, fixed-income and derivative securities accounts for corporate pension and profit-sharing plans, state pension funds, union funds, endowments and other charitable institutions. BEA currently manages approximately $35 billion in assets, and is a member of CSAM and a subsidiary of Credit Suisse Group, one of the world's leading banks. BEA is a registered investment adviser under the Investment Advisers Act of 1940, as amended. As an investment adviser, BEA emphasizes a global investment strategy. BEA currently acts as investment adviser for eleven other investment companies registered under the 1940 Act. They are: BEA Strategic Global Income Fund, Inc., BEA Income Fund, Inc., The Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund, Inc., The First Israel Fund, Inc., The Indonesia Fund, 40 98 Inc., The Latin America Equity Fund, Inc., The Latin America Investment Fund, Inc., and The Portugal Fund, Inc. In addition, BEA acts as sub-adviser to certain portfolios of thirteen other registered investment companies or portfolios: American Odyssey Funds, Inc. (Global High Yield Bond Fund), American United Life (Conservative Investor Portfolio, Moderate Investor Portfolio and Aggressive Investor Portfolio), Frank Russell Investment Company (Fixed Income III Fund and Multi-strategy Bond Fund), Panorama (LifeSpan Balanced Account, LifeSpan Capital Appreciation Account and LifeSpan Diversified Income Account), SEI Institutional Managed Trust (High Yield Bond Fund), AGA Series Trust (Credit Suisse Growth and Income Fund), Touchstone International Equity Fund and Touchstone Variable Annuity International Equity Fund. CSAM, located at Beaufort House, 15 St. Botolph Street, GB-London EC3A 7JJ, serves as sub-investment adviser to each Fund pursuant to separate written agreements (the "Advisory Agreements"). CSAM is a wholly owned, indirectly held, subsidiary of Credit Suisse Group. CSAM is a registered investment adviser under the Investment Advisers Act of 1940, and currently manages $35 billion in assets. CSAM has offices in Budapest, Moscow, Prague, Warsaw, Frankfurt, Milan, Paris, Sydney, Tokyo and Zurich (these offices are not registered with the U.S. Securities and Exchange Commission). For the services provided by BEA to the European Equity Fund, the Fund pays a fee calculated at an annual rate of 1.00% of the Fund's average daily net assets computed daily and payable quarterly (out of which BEA pays CSAM for its sub-investment advisory services). For the services provided by BEA to the Central and Eastern Europe Fund, the Fund pays a fee calculated at an annual rate of 1.25% of the Fund's average daily net assets computed daily and payable quarterly (out of which BEA pays CSAM for its sub-investment advisory services). BEA and CSAM may voluntarily waive a portion of their fees from time to time and temporarily limit the expenses to be borne by a Fund. Under the Advisory Agreements, neither BEA nor CSAM will be liable for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the matters to which the Advisory Agreements relate. The Advisory Agreements for the Funds were approved on July 20, 1998 by vote of the Funds' Board of Directors, including a majority of those directors who are not parties to the Advisory Agreements or interested persons (as defined in the 1940 Act) of such parties. The Advisory Agreements were also approved by each Fund's initial shareholder. The BEA Advisory Agreements are terminable by vote of the Funds' Board of Directors or by the holders of a majority of the outstanding voting securities of the relevant Fund, and at any time without penalty, on 60 days' written notice to BEA. The BEA Advisory Agreements may also be terminated by BEA on 90 days' written notice to a fund. The BEA Advisory Agreements terminate automatically in the event of an assignment. The CSAM Sub-Advisory Agreements are terminable by BEA on 60 days' written notice to the Fund and CSAM, by vote of the Funds' Board of Directors or by the holders of a majority of the outstanding voting securities of the relevant Fund on 60 days' written notice to BEA and CSAM, or by CSAM upon 60 days' written notice to a Fund and BEA. The CSAM Sub-Advisory Agreements terminate automatically in the event of an assignment. 41 99 Counsellors Funds Service, Inc. ("Counsellors Service"), a wholly owned subsidiary of Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC Bank serve as co-administrators to each Fund pursuant to separate written agreements. Counsellors Service provides shareholder liaison services to each Fund including responding to shareholder inquiries and providing information on shareholder investments. Counsellors Service also performs a variety of other services, including furnishing certain executive and administrative services, acting as liaison between the Funds and their various service providers, furnishing certain corporate secretarial services, which include preparing materials for meetings of the Board, assisting with proxy statements and annual and semiannual reports, assisting in the preparation of tax returns and monitoring and developing certain compliance procedures for the Funds. As compensation, the Common Shares of each Fund pay Counsellors Service a fee calculated at an annual rate of .10% of the Common Shares' average daily net assets. Counsellors Service provides co-administration services to the BEA Institutional Funds without compensation. PFPC calculates each Fund's net asset value, provides all accounting services for each Fund and assists in related aspects of each Fund's operations. As compensation, each Fund pays PFPC a fee calculated at an annual rate of .12% of a Fund's first $250 million in average daily net assets, .10% of the next $250 million in average daily net assets, .08% of the next $250 million in average daily net assets, and .05% of average daily net assets over $750 million, subject in each case to a minimum annual fee and exclusive of out-of-pocket expenses. Each class of Shares of a Fund bears its proportionate share of fees payable to BEA, CSAM and PFPC in the proportion that its assets bear to the aggregate assets of a Fund at the time of calculation. These fees are calculated at an annual rate based on a percentage of a Fund's average daily net assets. Each Fund's co-administrators may voluntarily waive a portion of their fees from time to time and temporarily limit the expenses to be borne by a Fund. Custodians and Transfer Agents Brown Brothers Harriman & Co. ("BBH") acts as custodian for each Fund and also acts as the custodian for each Fund's foreign securities pursuant to a written Custodian Agreement (the "Custodian Agreement"). BBH will (i) maintain a separate account or accounts in the name of each Fund, (ii) hold and transfer portfolio securities on account of each Fund, (iii) accept receipts and disbursements of money on behalf of each Fund, (iv) collect and receive all income and other payments and distributions for the account of each Fund's portfolio securities and (v) make periodic reports to the Board concerning each Fund's custodial arrangements. BBH is authorized to select one or more foreign banking institutions and foreign securities depositories to serve as sub-custodian on behalf of the Funds, provided that BBH remains responsible for the performance of all its duties under the Custodian Agreement and holds the Funds harmless from the negligent acts and omissions of any sub-custodian. For its services to the Funds under the Custodian Agreement, BBH receives a fee which is calculated based upon each Fund's average daily gross assets, exclusive of transaction charges and out-of-pocket expenses, which are also charged to the Funds. BBH's principal business address is 40 Water Street, Boston, Massachusetts 02109. 42 100 State Street Bank and Trust Company ("State Street") will serve as each Fund's shareholder servicing, transfer and dividend disbursing agent pursuant to a Transfer Agency and Service Agreement, under which State Street (i) issues and redeems shares of the Funds, (ii) addresses and mails all communications by the Funds to record owners of each Fund shares, including reports to shareholders, dividend and distribution notices and proxy material for meetings of shareholders, (iii) maintains shareholder accounts and, if requested, sub-accounts and (iv) makes periodic reports to the Board concerning the transfer agent's operations with respect to the Funds. State Street has delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility for most shareholder servicing functions. State Street's principal business address is 225 Franklin Street, Boston, Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive, North Quincy, Massachusetts 02171. Organization of the Funds Each Fund's Charter authorizes the Board to issue three billion full and fractional shares of capital stock, $.001 par value per share, of which one billion shares are designated Common Shares, one billion shares are designated Institutional Shares and one billion are designated Advisor Shares. The Funds currently offer Common and Institutional Shares. Shareholders of each Fund in the class, upon liquidation, will participate ratably in the Fund's net assets. Shares do not have cumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Directors can elect all Directors. Shares are transferable, but have no preemptive, conversion or subscription rights. Investors in each Fund are entitled to one vote for each full share held and fractional votes for fractional shares held. Shareholders of each Fund will vote in the aggregate except where otherwise required by law and except that each class will vote separately on certain matters pertaining to its distribution and shareholder servicing arrangements. There will normally be no meetings of investors for the purpose of electing members of the Board unless and until such time as less than a majority of the members holding office have been elected by investors. Any Director of a Fund may be removed from office upon the vote of shareholders holding at least a majority of the relevant Fund's outstanding shares, at a meeting called for that purpose. A meeting will be called for the purpose of voting on the removal of a Board member at the written request of holders of 10% of the outstanding shares of a Fund. Distribution and Shareholder Servicing Counsellors Securities serves as distributor of the shares of each Fund. Counsellors Securities is a wholly owned subsidiary of Warburg, and is located at 466 Lexington Avenue, New York, New York 10017-3147. Common Shares. Each 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 each Fund will pay Counsellors Securities, in consideration for Services (as defined below), a fee calculated at an annual rate of .25% of the average daily net assets of the Common Shares of each Fund. Services performed by Counsellors Securities include (i) the 43 101 sale of the Common Shares, as set forth in the 12b-1 Plan ("Selling Services"), (ii) ongoing servicing and/or maintenance of the accounts of Common Shareholders of a Fund, as set forth in the 12b-1 Plan ("Shareholder Services"), and (iii) sub-transfer agency services, subaccounting services or administrative services related to the sale of the Common Shares, as set forth in the 12b-1 Plan ("Administrative Services" and collectively with Selling Services and Administrative Services, "Services") including, without limitation, (a) payments reflecting an allocation of overhead and other office expenses of Counsellors Securities related to providing Services; (b) payments made to, and reimbursement of expenses of, persons who provide support services in connection with the distribution of the Common Shares including, but not limited to, office space and equipment, telephone facilities, answering routine inquiries regarding a Fund, and providing any other Shareholder Services; (c) payments made to compensate selected dealers or other authorized persons for providing any Services; (d) costs relating to the formulation and implementation of marketing and promotional activities for the Common Shares, including, but not limited to, direct mail promotions and television, radio, newspaper, magazine and other mass media advertising, and related travel and entertainment expenses; (e) costs of printing and distributing prospectuses, statements of additional information and reports of the Funds to prospective shareholders of the Funds; and (f) costs involved in obtaining whatever information, analyses and reports with respect to marketing and promotional activities that the Funds may, from time to time, deem advisable. Pursuant to the 12b-1 Plan, Counsellors Securities will provide each Fund's Board with periodic reports of amounts expended under the 12b-1 Plan and the purpose for which the expenditures were made. Advisor Shares. Each Fund may, in the future, enter into agreements ("Agreements") with institutional shareholders of record, broker-dealers, financial institutions, depository institutions, retirement plans and financial intermediaries ("Institutions") to provide certain distribution, shareholder servicing, administrative and/or accounting services for their clients or customers (or participants in the case of retirement plans) ("Customers") who are beneficial owners of Advisor Shares. Agreements will be governed by a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The Distribution Plan requires the Board, at least quarterly, to receive and review written reports of amounts expended under the Distribution Plan and the purpose for which such expenditures were made. An Institution with which a Fund has entered into an Agreement with respect to its Advisor Shares may charge a Customer one or more of the following types of fees, as agreed upon by the Institution and the Customer, with respect to the cash management or other services provided by the Institution: (i) account fees (a fixed amount per month or per year); (ii) transaction fees (a fixed amount per transaction processed); (iii) compensation balance requirements (a minimum dollar amount a Customer must maintain in order to obtain the services offered); or (iv) account maintenance fees (a periodic charge based upon the percentage of assets in the account or of the dividend paid on those assets). Services provided by an Institution to Customers are in addition to, and not duplicative of, the services to be provided under each Fund's co-administration and distribution and shareholder servicing arrangements. A Customer of an Institution should read the Prospectus and this Statement of Additional Information in conjunction with the Agreement and other literature describing the services and related fees that would be provided by the Institution to its Customers prior to any 44 102 purchase of Fund shares. Prospectuses are available from a Fund's distributor upon request. No preference will be shown in the selection of a Fund's portfolio investments for the instruments of Institutions. General. The Distribution Plan and the 12b-1 Plan will continue in effect for so long as their continuance is specifically approved at least annually by each Board, including a majority of the Directors who are not interested persons of a Fund and who have no direct or indirect financial interest in the operation of the Distribution Plans or the 12b-1 Plans, as the case may be ("Independent Directors"). Any material amendment of the Distribution Plan or 12b-1 Plan would require the approval of the Board in the same manner. Neither the Distribution Plan nor the 12b-1 Plan may be amended to increase materially the amount to be spent thereunder without shareholder approval of the relevant class of shares. The Distribution Plan or 12b-1 Plan may be terminated at any time, without penalty, by vote of a majority of the Independent Directors or by a vote of a majority of the outstanding voting securities of the relevant class of shares of each Fund. Institutional Shares. The Institutional Shares will be distributed under the name "BEA Institutional Funds." Counselors Securities serves without compensation as distributor of the Institutional Shares. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION The offering price of each Fund's shares is equal to the per share net asset value of the relevant class of shares of a Fund. Under the 1940 Act, the Funds may suspend the right of redemption or postpone the date of payment upon redemption for any period during which the NYSE is closed, other than customary weekend and holiday closings, or during which trading on the NYSE is restricted, or during which (as determined by the SEC) an emergency exists as a result of which disposal or fair valuation of portfolio securities is not reasonably practicable, or for such other periods as the SEC may permit. (A Fund may also suspend or postpone the recordation of an exchange of its shares upon the occurrence of any of the foregoing conditions.) If a Board determines that conditions exist which make payment of redemption proceeds wholly in cash unwise or undesirable, a Fund may make payment wholly or partly in securities or other investment instruments which may not constitute securities as such term is defined in the applicable securities laws. If a redemption is paid wholly or partly in securities or other property, a shareholder would incur transaction costs in disposing of the redemption proceeds. The Funds will comply with Rule 18f-1 promulgated under the 1940 Act with respect to redemptions in kind. As stated in the Prospectus, with respect to the Central and Eastern Europe Fund only, a short-term trading fee of 1.0% of the amount of shares redeemed will be deducted from the redemption amount if a shareholder sells shares of the Central and Eastern Europe Fund after holding them less than six months. This fee, which is currently being waived, is paid to the Central and Eastern Europe Fund to offset costs associated with short-term shareholder trading. It does not apply to shares acquired through reinvestment of 45 103 distributions. If a shareholder purchased shares of the Central and Eastern Europe Fund on different days, any shares purchased through reinvestment of distributions would be redeemed first, followed by the shares of the Central and Eastern Europe Fund held the longest. Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the "Plan") is available to the holders of Common Shares of each Fund who wish to receive specific amounts of cash periodically. Withdrawals may be made under the Plan by redeeming as many Common Shares of a Fund as may be necessary to cover the stipulated withdrawal payment. To the extent that withdrawals exceed dividends, distributions and appreciation of a shareholder's investment in a Fund, there will be a reduction in the value of the shareholder's investment and continued withdrawal payments may reduce the shareholder's investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the Funds. EXCHANGE PRIVILEGE Investors can exchange their Fund Common Shares for Common Shares of other Warburg Pincus Funds. Investors in the BEA Institutional Funds can exchange their shares for those of other BEA Institutional Funds. The exchange privilege enables shareholders to acquire shares in a fund with a different investment objective when they believe that a shift between funds is an appropriate investment decision. Subject to the restrictions on exchange purchases contained in the Prospectus and any other applicable restrictions, this privilege is available to shareholders residing in any state in which the Common Shares, Institutional Shares or Advisor Shares being acquired, as relevant, may legally be sold. Prior to any exchange, the investor should obtain and review a copy of the current prospectus of the relevant class of a Fund into which an exchange is being considered. Shareholders may obtain a prospectus of the relevant class of a Fund into which they are contemplating an exchange by calling (800) 927-2874 (Common Shares) or (800) 401-22033 (Institutional Shares). Subject to the restrictions described above, upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value of the relevant class and the proceeds are invested on the same day, at a price as described above, in shares of the relevant class of a Fund being acquired. The exchange privilege may be modified or terminated at any time upon 30 days' notice to shareholders. 46 104 ADDITIONAL INFORMATION CONCERNING TAXES The following is a summary of the material United States federal income tax considerations regarding the purchase, ownership and disposition of shares in the Funds. Each prospective shareholder is urged to consult his own tax adviser with respect to the specific federal, state, local and foreign tax consequences of investing in the Funds. The summary is based on the laws in effect on the date of this Statement of Additional Information, which are subject to change. The Funds and Their Investments Each Fund intends to qualify to be treated as a regulated investment company each taxable year under the Code. To so qualify, a Fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities, loans and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (b) diversify its holdings so that, at the end of each quarter of a Fund's taxable year, (i) at least 50% of the market value of a Fund's assets is represented by cash, securities of other regulated investment companies, United States government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of a Fund's assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the securities (other than United States government securities or securities of other regulated investment companies) of any one issuer or any two or more issuers that a Fund controls and are determined to be engaged in the same or similar trades or businesses or related trades or businesses. Each Fund expects that all of its foreign currency gains will be directly related to its principal business of investing in stocks and securities. As a regulated investment company, each Fund will not be subject to United States federal income tax on its net investment income (i.e., income other than its net realized long- and short-term capital gains) and its net realized long- and short-term capital gains, if any, that it distributes to its shareholders, provided that an amount equal to at least 90% of the sum of its investment company taxable income (i.e., 90% of its taxable income minus the excess, if any, of its net realized long-term capital gains over its net realized short-term capital losses (including any capital loss carryovers), plus or minus certain other adjustments as specified in the Code) and its net tax-exempt income for the taxable year is distributed, but will be subject to tax at regular corporate rates on any taxable income or gains that it does not distribute. Furthermore, each Fund will be subject to a United States corporate income tax with respect to such distributed amounts in any year that it fails to qualify as a regulated investment company or fails to meet this distribution requirement. Any dividend declared by a Fund in October, November or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed to have been received by each shareholder on December 31 of such calendar year and to have been paid by a Fund not later than such December 31, provided that such dividend is actually paid by a Fund during January of the following calendar year. 47 105 Each Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income. Each Board will determine annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). Each Fund currently expects to distribute any excess annually to its shareholders. However, if a Fund retains for investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses and capital loss carryovers, it will be subject to a corporate tax (currently at a rate of 35%) on the amount retained. In that event, each Fund will designate such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for United Stares federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by a Fund on the undistributed amount against their United States federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for United States federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder's income. Organizations or persons not subject to federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by a Fund upon filing appropriate returns or claims for refund with the Internal Revenue Service (the "IRS"). Even if a Fund makes such an election, it is possible that a Fund may incur an excise tax as a result of not having distributed net capital gains. The Code imposes a 4% nondeductible excise tax on each Fund to the extent a Fund does not distribute by the end of any calendar year at least 98% of its net investment income for that year and 98% of the net amount of its capital gains (both long-and short-term) for the one-year period ending, as a general rule, on October 31 of that year. For this purpose, however, any income or gain retained by a Fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from the previous year. Each Fund anticipates that it will pay such dividends and will make such distributions as are necessary in order to avoid the application of this tax. With regard to a Fund's investments in foreign securities, exchange control regulations may restrict repatriations of investment income and capital or the proceeds of securities sales by foreign investors such as each Fund and may limit a Fund's ability to pay sufficient dividends and to make sufficient distributions to satisfy the 90% and excise tax distribution requirements. If, in any taxable year, a Fund fails to qualify as a regulated investment company under the Code, it would be taxed in the same manner as an ordinary corporation and distributions to its shareholders would not be deductible by a Fund in computing its taxable income. In addition, in the event of a failure to qualify, each Fund's distributions, to the extent derived from each Fund's current or accumulated earnings and profits would constitute dividends (eligible for the corporate dividends-received deduction) which are taxable to shareholders as ordinary income, even though those distributions might otherwise (at least in part) have been treated in the shareholders' hands as long-term capital gains. If a Fund fails to 48 106 qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. In addition, if a Fund failed to qualify as a regulated investment company for a period greater than one taxable year, a Fund may be required to recognize any net built-in gains (the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized if it had been liquidated) in order to qualify as a regulated investment company in a subsequent year. Each Fund's short sales against the box, if any, and transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies) will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Funds (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to a Funds and defer Fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require each Fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out) and (b) may cause each Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. Each Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of a Fund as a regulated investment company. Passive Foreign Investment Companies. If a Fund purchases shares in certain foreign investment entities, called "passive foreign investment companies" (a "PFIC"), it may be subject to United States federal income tax on a portion of any "excess distribution" or gain from the disposition of such shares even if such income is distributed as a taxable dividend by a Fund to its shareholders. Additional charges in the nature of interest may be imposed on a Fund in respect of deferred taxes arising from such distributions or gains. Any tax paid by a Fund as a result of its ownership of shares in a PFIC will not give rise to any deduction or credit to a Fund or any shareholder. If a Fund were to invest in a PFIC and elected to treat the PFIC as a "qualified electing fund" under the Code, in lieu of the foregoing requirements, a Fund might be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified election fund, even if not distributed to a Fund, and such amounts would be subject to the 90% and excise tax distribution requirements described above. In order to make this election, each Fund would be required to obtain certain annual information from the passive foreign investment companies in which it invests, which may be difficult or not possible to obtain. If a Fund were able to make the election described in this paragraph, a Fund would not be able to treat any portion of the long-term capital gains included in income pursuant to the election as eligible for the 20% maximum capital gains rate. On October 9, 1997, the Ways and Means Committee of the U.S. Congress approved technical corrections legislation that would treat PFICs as pass-through entities for purposes of applying the 20% rate to the portion of a PFIC's long-term gain attributable to assets held more than 18 months. Recently, legislation was enacted that provides a mark-to-market election for 49 107 regulated investment companies effective for taxable years beginning after December 31, 1997. This election would result in a Fund being treated as if it had sold and repurchased all of the PFIC stock at the end of each year. In this case, each Fund would report gains as ordinary income and would deduct losses as ordinary losses to the extent of previously recognized gains. The election, once made, would be effective for all subsequent taxable years of a Fund, unless revoked with the consent of the IRS. By making the election, each Fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions of PFIC company stock. Each Fund may have to distribute this "phantom" income and gain to satisfy its distribution requirement and to avoid imposition of the 4% excise tax. Each Fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the effect of these rules. Dividends and Distributions. Dividends of net investment income and distributions of net realized short-term capital gains are taxable to a United States shareholder as ordinary income, whether paid in cash or in shares. Distributions of net-long-term capital gains, if any, that a Fund designates as capital gains dividends are taxable as long-term capital gains, whether paid in cash or in shares and regardless of how long a shareholder has held shares of a Fund. Dividends and distributions paid by a Fund (except for the portion thereof, if any, attributable to dividends on stock of U.S. corporations received by the Fund) will not qualify for the deduction for dividends received by corporations. Distributions in excess of a Fund's current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital, to the extent of a shareholder's basis in his shares of a Fund, and as a capital gain thereafter (if the shareholder holds his shares of the Fund as capital assets). Shareholders receiving dividends or distributions in the form of additional shares should be treated for United States federal income tax purposes as receiving a distribution in the amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount. Investors considering buying shares just prior to a dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If a Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in a Fund's gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date a Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, each Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case. Sales of Shares. Upon the sale or exchange of his shares, a shareholder will 50 108 realize a taxable gain or loss equal to the difference between the amount realized and his basis in his shares. Such gain or loss will be treated as capital gain or loss, if the shares are capital assets in the shareholder's hands, and will be long-term capital gain or loss if the shares are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in a Fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Any loss realized by a shareholder on the sale of a Fund share held by the shareholder for six months or less will be treated for United States federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received by the shareholder with respect to such share. Backup Withholding. Each Fund may be required to withhold, for United States federal income tax purposes, 31% of the dividends and distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Certain shareholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a shareholder's United States federal income tax liabilities. Notices. Shareholders will be notified annually by each Fund as to the United States federal income tax status of the dividends, distributions and deemed distributions attributable to undistributed capital gains (discussed above in "The Funds and Their Investments") made by the Fund to its shareholders. Furthermore, shareholders will also receive, if appropriate, various written notices after the close of a Fund's taxable year regarding the United States federal income tax status of certain dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the Funds to its shareholders during the preceding taxable year. Other Taxation Distributions also may be subject to additional state, local and foreign taxes depending on each shareholder's particular situation. THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING THE FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUNDS. 51 109 DETERMINATION OF PERFORMANCE From time to time, each Fund may quote the total return of its Common Shares, Institutional Shares and/or Advisor Shares in advertisements or in reports and other communications to shareholders. These figures are calculated by finding the average annual compounded rates of return for the one-, five- and ten- (or such shorter period as the relevant class of shares has been offered) year periods that would equate the initial amount invested to the ending redeemable value according to the following formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a hypothetical investment of $1,000; "T" is average annual total return; "n" is number of years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year periods (or fractional portion thereof). Total return or "T" is computed by finding the average annual change in the value of an initial $1,000 investment over the period and assumes that all dividends and distributions are reinvested during the period. Each Fund may advertise, from time to time, comparisons of the performance of its Common Shares, Institutional Shares and/or Advisor Shares with that of one or more other mutual funds with similar investment objectives. Each Fund may advertise average annual calendar year-to-date and calendar quarter returns, which are calculated according to the formula set forth in the preceding paragraph, except that the relevant measuring period would be the number of months that have elapsed in the current calendar year or most recent three months, as the case may be. Investors should note that this performance may not be representative of a Fund's total return in longer market cycles. The performance of a class of a Fund's shares will vary from time to time depending upon market conditions, the composition of a Fund's portfolio and operating expenses allocable to it. As described above, total return is based on historical earnings and is not intended to indicate future performance. Consequently, any given performance quotation should not be considered as representative of performance for any specified period in the future. Performance information may be useful as a basis for comparison with other investment alternatives. However, a Fund's performance will fluctuate, unlike certain bank deposits or other investments which pay a fixed yield for a stated period of time. Any fees charged by Institutions or other institutional investors directly to their customers in connection with investments in Fund shares are not reflected in a Fund's total return, and such fees, if charged, will reduce the actual return received by customers on their investments. In its reports, investor communications or advertisements, each Fund may include: (i) its total return performance; (ii) its performance compared with various indexes or other mutual funds; (iii) published evaluations by nationally recognized ranking services and financial publications; (iv) updates concerning its strategies and portfolio investments; (v) information about its goals, risk factors and expenses including comparisons with other mutual funds; (vi) analysis of its investments by industry, country, credit quality and other characteristics; (vii) a discussion of the risk/return continuum relating to different investments; (viii) the potential impact of adding foreign stocks to a domestic portfolio and (ix) portfolio manager quotations and commentary. 52 110 INDEPENDENT ACCOUNTANTS AND COUNSEL PricewaterhouseCoopers LLP ("Pricewaterhouse"), with principal offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as the independent accountant for each Fund. The statements of assets and liabilities of each Fund, as of [insert], 1998, that appear in this Statement of Additional Information have been audited by Pricewaterhouse, whose report thereon appears elsewhere herein and has been included herein in reliance upon the report of such firm of independent accountants given upon their authority as experts in accounting and auditing. Willkie Farr & Gallagher serves as counsel for each Fund as well as counsel to Counsellors Securities and Counsellors Service. FINANCIAL STATEMENTS Each Fund's financial statement follows the Report of Independent Accountants. 53 111 APPENDIX DESCRIPTION OF RATINGS Commercial Paper Ratings Commercial paper rated A-1 by Standard and Poor's Ratings Services ("S&P") indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign designation. Capacity for timely payment on commercial paper rated A-2 is satisfactory, but the relative degree of safety is not as high as for issues designated A-1. The rating Prime-1 is the highest commercial paper rating assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related supporting institutions) are considered to have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 (or related supporting institutions) are considered to have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Corporate Bond Ratings The following summarizes the ratings used by S&P for corporate bonds: AAA - This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to pay interest and repay principal. AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from AAA issues only in small degree. A - Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB - This is the lowest investment grade. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Although it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB, B and CCC - Debt rated BB and B are regarded, on balance, as predominately speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB represents a lower degree of speculation than B, and CCC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. A-1 112 BB - Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB rating. B - Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. CCC - Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC - This rating is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. C - This rating is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. Additionally, the rating CI is reserved for income bonds on which no interest is being paid. Such debt is rated between debt rated C and debt rated D. To provide more detailed indications of credit quality, the ratings may be modified by the addition of a plus or minus sign to show relative standing within this major rating category. D - Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. The following summarizes the ratings used by Moody's for corporate bonds: Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or exceptionally stable margin and principal is secure. 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. A-2 113 Aa - Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A - Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa - Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba - Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B - Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers (1, 2 and 3) with respect to the bonds rated "Aa" through "B." The modifier 1 indicates that the bond being rated ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower end of its generic rating category. Caa - Bonds that are rated Caa are of poor standing. These issues may be in default or present elements of danger may exist with respect to principal or interest. Ca - Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C - Bonds which are rated C comprise the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. A-3 114 PART C OTHER INFORMATION Item 23. Exhibits Exhibit No. Description of Exhibit (a) Articles of Incorporation. (b) By-Laws. (c) Registrant's Forms of Stock Certificates.* (d) (1) Investment Advisory Agreement.* (2) Sub-Advisory Agreement* (e) Distribution Agreement.* (f) Not applicable.* (g) Custodian Agreement with Brown Brothers Harriman & Co.* (h) (1) Transfer Agency and Service Agreement.* (2) Co-Administration Agreement with Counsellors Funds Service, Inc.* (3) Co-Administration Agreement with PFPC Inc.* (i) (1) Opinion and Consent of Willkie Farr & Gallagher, counsel to the Fund.* (2) Opinion and Consent of Venable, Baetjer and Howard, LLP, Maryland counsel to the Fund.* (j) Consent of PricewaterhouseCoopers LLP, Independent Accountants.* (k) Not applicable. (l) Purchase Agreement.* (m) (1) Shareholder Servicing and Distribution Plan.* (2) Distribution Plan.* (3) Distribution Agreement* (4) Fund/SERV Agreement* (n) Not applicable. (o) Form of 18f-3 Plan.* - -------- * To be filed by amendment. 115 Item 24. Persons Controlled by or Under Common Control with Registrant All of the outstanding shares of common stock of Registrant on the date Registrant's Registration Statement becomes effective will be owned by Credit Suisse Asset Management Limited ("Credit Suisse"), a corporation formed under English law. Item 25. Indemnification Registrant, officers and directors of BEA Associates ("BEA"), Credit Suisse, Counsellors Securities Inc. ("Counsellors Securities") and of Registrant are covered by insurance policies indemnifying them for liability incurred in connection with the operation of Registrant. These policies provide insurance for any "Wrongful Act" of an officer, director or trustee. Wrongful Act is defined as breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by an officer, director or trustee in connection with the operation of Registrant. Insurance coverage does not extend to (a) conflicts of interest or gain in fact any profit or advantage to which one is not legally entitled, (b) intentional non-compliance with any statute or regulation or (c) commission of dishonest, fraudulent acts or omissions. Insofar as it related to Registrant, the coverage is limited in amount and, in certain circumstances, is subject to a deductible. Under Article VIII of the Articles of Incorporation (the "Articles"), the Directors and officers of Registrant shall not have any liability to Registrant or its stockholders for money damages, to the fullest extent permitted by Maryland law. This limitation on liability applies to events occurring at the time a person serves as a Director or officer of Registrant whether or not such person is a Director or officer at the time of any proceeding in which liability is asserted. No provision of Article VIII shall protect or purport to protect any Director or officer of Registrant against any liability to Registrant or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Registrant shall indemnify and advance expenses to its currently acting and its former Director to the fullest extent that indemnification of Directors and advancement of expenses to Directors is permitted by the Maryland General Corporation Law. Registrant shall indemnify and advance expenses to its officers to the same extent as its Directors and to such further extent as is consistent with such law. The Board of Directors may, through a by-law, resolution or agreement, make further provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law. 116 Article V of the By-Laws further limits the liability of the Directors by providing that any person who was or is a party or is threatened to be made a party in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is a current or former director or officer of Registrant, or is or was serving while a director or officer of Registrant at the request of Registrant as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by Registrant against judgments, penalties, fines, excise taxes, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding to the full extent permissible under the Maryland General Corporation Law, the 1993 Act and the 1940 Act, as such statutes are now or hereafter in force, except that such indemnity shall not protect any such person against any liability to Registrant or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of this office. Item 26. Business and Other Connections of Investment Adviser BEA acts as investment adviser to the Registrant. BEA renders investment advice to a wide variety of individual and institutional clients. Credit Suisse acts as sub-adviser to the Registrant. Credit Suisse renders investment advice and provides full-service private equity programs to clients. The list required by this Item 26 of officers and directors of BEA and Credit Suisse, together with their other business, profession, vocation or employment of a substantial nature during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by BEA (SEC File No. 801-377170), and to Schedules A and D of Form ADV filed by Credit Suisse (SEC File No. 801-40177). Item 27. Principal Underwriter (a) Counsellors Securities will act as distributor for Registrant, as well as for Warburg Pincus Balanced Fund; Warburg Pincus Capital Appreciation Fund; Warburg Pincus Cash Reserve Fund; Warburg Pincus Central and Eastern Europe Fund; Warburg Pincus Emerging Growth Fund; Warburg Pincus Emerging Markets Fund; Warburg Pincus Emerging Markets II Fund; Warburg Pincus European Equity Fund; Warburg Pincus Fixed Income Fund; Warburg Pincus Global Fixed Income Fund; Warburg Pincus Global Post-Venture Capital Fund; Warburg Pincus Global Telecommunications Fund; Warburg Pincus Growth & Income Fund; Warburg Pincus Health Sciences Fund; Warburg Pincus High Yield Fund; Warburg Pincus Institutional Fund; Warburg Pincus Intermediate Maturity Government Fund; Warburg Pincus International Equity Fund; Warburg Pincus International Growth 117 Fund; Warburg Pincus International Small Company Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus Japan OTC Fund; Warburg Pincus Long-Short Equity Fund; Warburg Pincus Long-Short Market Neutral Fund; Warburg Pincus Major Foreign Markets Fund; Warburg Pincus Money Market Fund; Warburg Pincus Municipal Bond Fund; Warburg Pincus New York Intermediate Municipal Fund; Warburg Pincus New York Tax Exempt Fund; Warburg Pincus Post-Venture Capital Fund; Warburg Pincus Select Economic Value Equity Fund; Warburg Pincus Small Company Growth Fund; Warburg Pincus Small Company Value Fund; Warburg Pincus Strategic Global Fixed Income Fund; Warburg Pincus Strategic Value Fund; Warburg Pincus Tax Free Money Market Fund; Warburg Pincus Trust; Warburg Pincus Trust II; Warburg Pincus U.S. Core Fixed Income Fund and Warburg Pincus U.S. Core Equity Fund. (a) For information relating to each director, officer or partner of Counsellors Securities, reference is made to Form BD (SEC File No. 8-32482) filed by Counsellors Securities under the Securities Exchange Act of 1934. (b) None. Item 28. Location of Accounts and Records 1) Warburg, Pincus Central and Eastern Europe Fund, Inc. 466 Lexington Avenue New York, New York 10017-3147 (Fund's Articles of Incorporation, By-Laws and minute books) 2) BEA Associates One Citicorp Center 153 East 53rd Street New York, New York 10022 (records relating to its function as investment adviser) 3) Credit Suisse Asset Management Limited. 15 St. Botolph Street GB-London EC3A 7JJ (records relating to its functions as sub-adviser) 4) PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 (records relating to its functions as co-administrator) 118 5) Counsellors Funds Service, Inc. 466 Lexington Avenue New York, New York 10017-3147 (records relating to its functions as co-administrator) 6) State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 (records relating to its functions as transfer agent and dividend disbursing agent) 7) Boston Financial Data Services, Inc. 2 Heritage Drive North Quincy, Massachusetts 02171 (records relating to its functions as transfer agent and dividend disbursing agent) 8) Brown Brothers Harriman & Co. 40 Water Street Boston, Massachusetts 02109 (records relating to its functions as custodian) 9) Counsellors Securities Inc. 466 Lexington Avenue New York, New York 10017-3147 (records relating to its functions as distributor) Item 29. Management Services Not applicable. Item 30. Undertakings. Not Applicable. 119 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York, on the 20th day of July, 1998. WARBURG, PINCUS CENTRAL AND EASTERN EUROPE FUND, INC. By:/s/Eugene L. Podsiadlo ---------------------- Eugene L. Podsiadlo President Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: Signature Title Date /s/John L. Furth Chairman of the July 20, 1998 - ---------------- Board of Directors John L. Furth /s/Eugene L. Podsiadlo President July 20, 1998 - ---------------------- Eugene L. Podsiadlo Vice President and July 20, 1998 /s/Howard Conroy Chief Financial - ---------------- Officer Howard Conroy Treasurer and July 20, 1998 /s/Daniel S. Madden Chief Accounting - ------------------- Officer Daniel S. Madden /s/Richard N. Cooper Director July 20, 1998 - -------------------- Richard N. Cooper /s/Jack W. Fritz Director July 20, 1998 - ---------------- Jack W. Fritz /s/Jeffrey E. Garten Director July 20, 1998 - -------------------- Jeffrey E. Garten /s/Arnold M. Reichman Director July 20, 1998 - --------------------- Arnold M. Reichman /s/Alexander B. Trowbridge Director July 20, 1998 - -------------------------- Alexander B. Trowbridge 120 INDEX TO EXHIBITS Exhibit No. Description of Exhibit (a) Articles of Incorporation (b) By-Laws. EX-99.A 2 ARTICLES OF INCORPORATION 1 ARTICLES OF INCORPORATION OF WARBURG, PINCUS CENTRAL AND EASTERN EUROPE FUND, INC. ARTICLE I INCORPORATOR The undersigned, Yvette M. Garcia, whose post office address is c/o Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099, being at least 18 years of age, does hereby act as an incorporator and forms a corporation under the Maryland General Corporation Law. ARTICLE II NAME The name of the corporation is Warburg, Pincus Central and Eastern Europe Fund, Inc. (the "Corporation"). ARTICLE III PURPOSES AND POWERS To conduct and carry on the business of an investment company. (1) To hold, invest and reinvest its assets in securities and other investments or to hold part or all of its assets in cash. (2) To issue and sell shares of its capital stock in such amounts, on such terms and conditions, for such purposes and for such amount or kind of consideration as may now or hereafter be permitted by law. (3) To redeem, purchase or acquire in any other manner, hold, dispose of, resell, transfer, reissue or cancel (all without the vote or consent of the stockholders of the Corporation) shares of its capital stock, in any manner and to the extent now or hereafter permitted by law and by this Charter. (4) To do any and all additional acts and to exercise any and all additional powers or rights as may be necessary, incidental, appropriate or desirable for the accomplishment of all or any of the foregoing purposes. (5) The Corporation shall be authorized to exercise and enjoy all of the powers, rights and privileges granted to, or 2 conferred upon, corporations by the Maryland General Corporation Law now or hereafter in force, and the enumeration of the foregoing shall not be deemed to exclude any powers, rights or privileges so granted or conferred. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT AGENT The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Company Incorporated, 32 South Street, Baltimore, Maryland 21202. The name and address of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Company Incorporated, a Maryland corporation, 32 South Street, Baltimore, Maryland 21202. -2- 3 ARTICLE V CAPITAL STOCK (1) (A) The total number of shares of capital stock that the Corporation shall have authority to issue is three billion (3,000,000,000) shares, of the par value of one tenth of one cent ($.001) per share and of the aggregate par value of three million dollars ($3,000,000), all of which three billion (3,000,000,000) shares are designated Common Stock. (B) (i) One billion (1,000,000,000) shares of Common Stock have been divided into and classified initially as a series of Common Stock, designated "Common Shares." (ii) One billion (1,000,000,000) shares of Common Stock have been divided into and classified initially as a series of Common Stock, designated "Advisor Shares." (iii) One billion (1,000,000,000) shares of Common Stock have been divided into and classified initially as a series of Common Stock, designated "Institutional Shares." (C) Each Common Share will have the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as every other share of Common Stock, except that, subject to the provisions of any governing order, rule or regulation issued pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"): (i) Common Shares will share equally with Common Stock other than Common Shares ("Non-Common Shares") in the income, earnings and profits derived from investment and reinvestment of the assets belonging to the Corporation and will be charged equally with Non-Common Shares with the liabilities and expenses of the Corporation, except that Common Shares will bear the expense of payments made pursuant to any agreements entered into by the Corporation pursuant to any shareholder services plan and/or distribution plan adopted by the Corporation with respect to Common Shares; (ii) On any matter submitted to a vote of shareholders of the Corporation that pertains -3- 4 to the agreements or expenses described in clause (C)(i) above (or to any plan adopted by the Corporation relating to said agreements or expenses), only Common Shares will be entitled to vote, except that if said matter affects Non-Common Shares, Non-Common Shares will also be entitled to vote, and in such case Common Shares will be voted in the aggregate together with such Non-Common Shares and not by series except where otherwise required by law. Common Shares will not be entitled to vote on any matter that does not affect Common Shares (except where otherwise required by law) even though the matter is submitted to a vote of the holders of Non-Common Shares; and (iii) The Board of Directors of the Corporation in its sole discretion may determine whether a matter affects a particular class or series of Corporation shares. (D) Each Institutional Share will have the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as every other share of Common Stock, except that, subject to the provisions of any governing order, rule or regulation issued pursuant to the 1940 Act: (i) Institutional Shares will share equally with Common Stock other than Institutional Shares ("Non-Institutional Shares") in the income, earnings and profits derived from investment and reinvestment of the assets belonging to the Corporation and will be charged equally with Non-Institutional Shares with the liabilities and expenses of the Corporation, except that Institutional Shares will bear the expense of payments made pursuant to any agreements entered into by the Corporation pursuant to any shareholder services plan and/or distribution plan adopted by the Corporation with respect to Institutional Shares; (ii) On any matter submitted to a vote of shareholders of the Corporation that pertains to the agreements or expenses described in clause (D)(i) above (or to any plan adopted by the Corporation relating to said agreements or expenses), only Institutional Shares will be entitled to vote, except that if said matter affects Non-Institutional -4- 5 Shares, Non-Institutional Shares will also be entitled to vote, and in such case Institutional Shares will be voted in the aggregate together with such Non-Institutional Shares and not by series except where otherwise required by law. Institutional Shares will not be entitled to vote on any matter that does not affect Institutional Shares (except where otherwise required by law) even though the matter is submitted to a vote of the holders of Non-Institutional Shares; and (iii) The Board of Directors of the Corporation in its sole discretion may determine whether a matter affects a particular class or series of Corporation shares. (E) Each Advisor Share will have the same preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption as every other share of Common Stock, except that, subject to the provisions of any governing order, rule or regulation issued pursuant to the 1940 Act: (i) Advisor Shares will share equally with Common Stock other than Advisor Shares ("Non-Advisor Shares") in the income, earnings and profits derived from investment and reinvestment of the assets belonging to the Corporation and will be charged equally with Non-Advisor Shares with the liabilities and expenses of the Corporation, except that Advisor Shares will bear the expense of payments made pursuant to any agreements entered into by the Corporation pursuant to any shareholder services plan and/or distribution plan adopted by the Corporation with respect to Advisor Shares; (ii) On any matter submitted to a vote of shareholders of the Corporation that pertains to the agreements or expenses described in clause (E)(i) above (or to any plan adopted by the Corporation relating to said agreements or expenses), only Advisor Shares will be entitled to vote, except that if said matter affects Non-Advisor Shares, Non-Advisor Shares will also be entitled to vote, and in such case Advisor Shares will be voted in the aggregate together with such Non-Advisor Shares and not by series except where otherwise required by law. Advisor Shares -5- 6 will not be entitled to vote on any matter that does not affect Advisor Shares (except where otherwise required by law) even though the matter is submitted to a vote of the holders of Non-Advisor Shares; and (iii) The Board of Directors of the Corporation in its sole discretion may determine whether a matter affects a particular class or series of Corporation shares. (2) Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. A fractional share shall not, however, have the right to receive a certificate evidencing it. (3) All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of this Charter and the By-Laws of the Corporation. (4) No holder of stock of the Corporation by virtue of being such a holder shall have any preemptive or other right to purchase or subscribe for any shares of the Corporation's capital stock or any other security that the Corporation may issue or sell (whether out of the number of shares authorized by this Charter or out of any shares of the Corporation's capital stock that the Corporation may acquire) other than a right that the Board of Directors in its discretion may determine to grant. (5) The Board of Directors shall have authority by resolution to classify or to reclassify, as the case may be, any authorized but unissued shares of capital stock from time to time by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the capital stock. (6) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of a greater proportion of the votes of all classes or of any class of stock of the Corporation, such action shall be effective and valid if taken or authorized by the affirmative vote of a majority of the total number of votes entitled to be cast thereon, except as otherwise provided in this Charter. (7) The presence in person or by proxy of the holders of one-third of the shares of stock of the Corporation entitled to vote (without regard to class) shall constitute a quorum at any meeting of the stockholders, except with respect to any matter which, under applicable statutes or regulatory requirements, requires approval by a separate vote of one or more classes of stock, in which case the presence in person -6- 7 or by proxy of the holders of one-third of the shares of stock of each class required to vote as a class on the matter shall constitute a quorum. ARTICLE VI REDEMPTION Each holder of shares of the Corporation's capital stock shall be entitled to require the Corporation to redeem all or any part of the shares of capital stock of the Corporation standing in the name of the holder on the books of the Corporation, and all shares of capital stock issued by the Corporation shall be subject to redemption by the Corporation, at the redemption price of the shares as in effect from time to time as may be determined by or pursuant to the direction of the Board of Directors of the Corporation in accordance with the provisions of Article VII, subject to the right of the Board of Directors of the Corporation to suspend the right of redemption or postpone the date of payment of the redemption price in accordance with provisions of applicable law. Without limiting the generality of the foregoing, the Corporation shall, to the extent permitted by applicable law, have the right at any time to redeem the shares owned by any holder of capital stock of the Corporation (i) if the redemption is, in the opinion of the Board of Directors of the Corporation, desirable in order to prevent the Corporation from being deemed a "personal holding company" within the meaning of the Internal Revenue Code of 1986, as amended, or (ii) if the value of the shares in the account maintained by the Corporation or its transfer agent for any class of stock for the stockholder is below an amount determined from time to time by the Board of Directors of the Corporation (the "Minimum Account Balance") and the stockholder has been given notice of the redemption and has failed to make additional purchases of shares in an amount sufficient to bring the value in his account to at least the Minimum Account Balance before the redemption is effected by the Corporation. Payment of the redemption price shall be made in cash by the Corporation at the time and in the manner as may be determined from time to time by the Board of Directors of the Corporation unless, in the opinion of the Board of Directors, which shall be conclusive, conditions exist that make payment wholly in cash unwise or undesirable; in such event the Corporation may make payment wholly or partly by securities or other property included in the assets belonging or allocable to the class of the shares for which redemption is being sought, the value of which shall be determined as provided herein. The Board of Directors may establish procedures for redemption of shares. ARTICLE VII BOARD OF DIRECTORS (1) The number of directors constituting the Board of Directors shall be one or such other number as may be set forth in the -7- 8 By-Laws or determined by the Board of Directors pursuant to the By-Laws. The number of Directors shall at no time be less than the minimum number required under the Maryland General Corporation Law. Arnold M. Reichman has been appointed director of the Corporation to hold office until the first annual meeting of stockholders or until his successor is elected and qualified. (2) In furtherance, and not in limitation, of the powers conferred by the Maryland General Corporation Law, the Board of Directors is expressly authorized: (i) To make, alter or repeal the By-Laws of the Corporation, except where such power is reserved by the By-Laws to the stockholders, and except as otherwise required by the 1940 Act. (ii) From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders. No stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by resolution of the Board of Directors or of the stockholders. (iii) Without the assent or vote of the stockholders, to authorize the issuance from time to time of shares of the stock of any class of the Corporation, whether now or hereafter authorized, and securities convertible into shares of stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable. (iv) Without the assent or vote of the stockholders, to authorize and issue obligations of the Corporation, secured and unsecured, as the Board of Directors may determine, and to authorize and cause to be executed mortgages and liens upon the real or personal property of the Corporation. (v) Notwithstanding anything in this Charter to the contrary, to establish in its absolute discretion the basis or method for determining the value of the assets belonging to any class, the value of the liabilities -8- 9 belonging to any class and the net asset value of each share of any class of the Corporation's stock. (vi) To determine in accordance with generally accepted accounting principles and practices what constitutes net profits, earnings, surplus or net assets in excess of capital, and to determine what accounting periods shall be used by the Corporation for any purpose; to set apart out of any funds of the Corporation reserves for such purposes as it shall determine and to abolish the same; to declare and pay any dividends and distributions in cash, securities or other property from surplus or any other funds legally available therefor, at such intervals as it shall determine; to declare dividends or distributions by means of a formula or other method of determination, at meetings held less frequently than the frequency of the effectiveness of such declarations; and to establish payment dates for dividends or any other distributions on any basis, including dates occurring less frequently than the effectiveness of declarations thereof. (vii) In addition to the powers and authorities granted herein and by statute expressly conferred upon it, the Board of Directors is authorized to exercise all powers and do all acts that may be exercised or done by the Corporation pursuant to the provisions of the laws of the State of Maryland, this Charter and the By-Laws of the Corporation. (3) Any determination made in good faith, and in accordance with applicable law and generally accepted accounting principles and practices, if applicable, by or pursuant to the direction of the Board of Directors, with respect to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which the reserves or charges have been created has been paid or discharged or is then or thereafter required to be paid or discharged), as to the value of any security owned by the Corporation, the determination of the net asset value of shares of any class -9- 10 of the Corporation's capital stock, or as to any other matters relating to the issuance, sale or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors regarding whether any transaction constitutes a purchase of securities on "margin," a sale of securities "short," or an underwriting of the sale of, or a participation in any underwriting or selling group in connection with the public distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No provision of this Charter shall be effective to (i) require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the 1940 Act, or of any valid rule, regulation or order of the Securities and Exchange Commission under those Acts or (ii) protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTICLE VIII INDEMNIFICATION AND LIMITATION OF LIABILITY (1) To the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the Corporation shall have any liability to the Corporation or its stockholders for money damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the Corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. (2) The Corporation shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors and advancement of expenses to directors is permitted by the Maryland General Corporation Law. The Corporation shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with such law. The Board of Directors may, through a by-law, resolution or agreement, make further provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law. -10- 11 (3) No provision of this Article VIII shall be effective to protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (4) References to the Maryland General Corporation Law in this Article VIII are to the law as from time to time amended. No amendment to this Charter shall affect any right of any person under this Article VIII based on any event, omission or proceeding prior to such amendment. The term "Charter" as used herein shall have the meaning set forth in the Maryland General Corporation Law and includes these Articles of Incorporation and all amendments thereto. ARTICLE IX AMENDMENTS The Corporation reserves the right from time to time to make any amendment to its Charter, now or hereafter authorized by law, including any amendment that alters the contract rights, as expressly set forth in this Charter, of any outstanding stock, and all rights at any time conferred upon the stockholders of the Corporation by its Charter are granted subject to the provisions of this Article and the reservation of the right to amend the Charter herein contained. IN WITNESS WHEREOF, I have adopted and signed these Articles of Incorporation and do hereby acknowledge that the adoption and signing are my act. /s/ Yvette M. Garcia -------------------- Yvette M. Garcia Incorporator Dated the 24th day of July, 1998 -11- EX-99.B 3 BY-LAWS 1 BY-LAWS OF WARBURG, PINCUS CENTRAL AND EASTERN EUROPE FUND, INC. A Maryland Corporation ARTICLE I STOCKHOLDERS SECTION 1. Annual Meetings. No annual meeting of the stockholders of the Warburg, Pincus Central and Eastern Europe Fund, Inc. (the "Corporation") shall be held in any year in which the election of directors is not required to be acted upon under the Investment Company Act of 1940, as amended (the "1940 Act"), unless otherwise determined by the Board of Directors. An annual meeting may be held at any place within the United States as may be determined by the Board of Directors and as shall be designated in the notice of the meeting, at the time specified by the Board of Directors. Any business of the Corporation may be transacted at an annual meeting without being specifically designated in the notice unless otherwise provided by statute, the Corporation's Charter or these By-Laws. SECTION 2. Special Meetings. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Corporation's Charter, may be held at any place within the United States, and may be called at any time by the Board of Directors or by the President, and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors or at the request in writing of stockholders entitled to cast at least 10% (ten percent) of the votes entitled to be cast at the meeting upon payment by such stockholders to the Corporation of the reasonably estimated cost of preparing and mailing a notice of the meeting (which estimated cost shall be provided to such stockholders by the Secretary of the Corporation). Notwithstanding the foregoing, unless requested by stockholders entitled to cast a majority of the votes entitled to be cast at the meeting, a special meeting of the stockholders need not be called at the request of stockholders to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding 12 (twelve) months. A written request shall state the purpose or purposes of the proposed meeting. SECTION 3. Notice of Meetings. Written or printed notice of the purpose or purposes and of the time and place of every meeting of the stockholders shall be given by the Secretary of the Corporation to each stockholder of record entitled to vote at the meeting, by placing the notice in the mail at least 10 (ten) days, but not more than 90 (ninety) days, prior to the date 2 designated for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by the stockholder to the Corporation for the purpose of notice. The notice of any meeting of stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of the actions or the election of persons as the Board of Directors may select. Notice of any meeting of stockholders shall be deemed waived by any stockholder who attends the meeting in person or by proxy, or who before or after the meeting submits a signed waiver of notice that is filed with the records of the meeting. SECTION 4. Quorum. Except as otherwise provided by statute or by the Corporation's Charter, the presence in person or by proxy of stockholders of the Corporation entitled to cast at least one-third of the votes to be cast shall constitute a quorum at each meeting of the stockholders and all questions shall be decided by majority of the votes cast (except with respect to the election of directors, which shall be by a plurality of votes cast). In the absence of a quorum, the stockholders present in person or by proxy, by majority vote and without notice other than by announcement, may adjourn the meeting from time to time as provided in Section 5 of this Article I until a quorum shall attend. The stockholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. The absence from any meeting in person or by proxy of holders of the number of shares of stock of the Corporation in excess of a majority that may be required by Maryland law, the 1940 Act, or any other applicable statute, the Corporation's Charter or these By-Laws, for action upon any given matter shall not prevent action at the meeting on any other matter or matters that may properly come before the meeting, so long as there are present, in person or by proxy, holders of the number of shares of stock of the Corporation required for action upon such other matter or matters. SECTION 5. Adjournment. Any meeting of the stockholders may be adjourned from time to time, without notice other than by announcement at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum shall be present, any action may be taken that could have been taken at the meeting originally called. A meeting of the stockholders may not be adjourned without further notice to a date more than 120 (one hundred twenty) days after the original record date determined pursuant to Section 9 of this Article I. SECTION 6. Organization. At every meeting of the stockholders, the Chairman of the Board, or in his absence or inability to act (or if there is none), the President, or in his absence or inability to act, a Vice President, or in the absence or inability to act of the Chairman of the Board, the President and all the Vice Presidents, a chairman chosen by the stockholders shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, a person -2- 3 appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes of the meeting. SECTION 7. Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. SECTION 8. Voting. Except as otherwise provided by statute or the Corporation's Charter, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of stock standing in his name on the records of the Corporation as of the record date determined pursuant to Section 9 of this Article I. Each stockholder entitled to vote at any meeting of stockholders may authorize another person to act as proxy for the stockholder by, (a) signing a writing authorizing another person to act as proxy, or (b) any other means permitted by law. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, and shall state the number of shares voted. SECTION 9. Fixing of Record Date. The Board of Directors may set a record date for the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date for a particular meeting shall be not more than 90 (ninety) nor fewer than 10 (ten) days before the date of the meeting. All persons who were holders of record of shares as of the record date of a meeting, and no others, shall be entitled to vote at such meeting and any adjournment thereof. SECTION 10. Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting or at any adjournment of the meeting. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote at the meeting shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at the meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each share, the number of shares represented at the meeting, the existence of a quorum and -3- 4 the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do those acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote at the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders of the Corporation. SECTION 11. Consent of Stockholders in Lieu of Meeting. Except as otherwise provided by statute or the Corporation's Charter, any action required to be taken at any meeting of stockholders, or any action that may be taken at any meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if the following are filed with the records of stockholders' meetings: (a) a unanimous written consent that sets forth the action and is signed by each stockholder entitled to vote on the matter; and (b) a written waiver of notice and any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at the meeting. SECTION 12. Notice of Stockholder Business. (a) At any annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual or special meeting business must be, (i), (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) subject to the provisions of Section 13 of this Article I, otherwise properly brought before the meeting by a stockholder, and (ii) a proper subject under applicable law for stockholder action. (b) For business to be properly brought before an annual or special meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, any such notice must be delivered to or mailed and received at the principal executive offices of the Corporation not later than 60 (sixty) days prior to the date of the meeting; provided, however, that if less than 70 (seventy) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, any such notice by a stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which notice of the date of the annual or special meeting was given or such public disclosure was made. -4- 5 (c) Any such notice by a stockholder shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting, (i) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the annual or special meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the capital stock of the Corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. (d) Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual or special meeting except in accordance with the procedures set forth in this Section 12. The chairman of the annual or special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 12, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be considered or transacted. SECTION 13. Stockholder Business not Eligible for Consideration. (a) Notwithstanding anything in these By-Laws to the contrary, any proposal that is otherwise properly brought before an annual or special meeting by a stockholder will not be eligible for consideration by the stockholders at such annual or special meeting if such proposal is substantially the same as a matter properly brought before such annual or special meeting by or at the direction of the Board of Directors of the Corporation. The chairman of such annual or special meeting shall, if the facts warrant, determine and declare that a stockholder proposal is substantially the same as a matter properly brought before the meeting by or at the direction of the Board of Directors, and, if he should so determine, he shall so declare to the meeting and any such stockholder proposal shall not be considered at the meeting. (b) This Section 13 shall not be construed or applied to make ineligible for consideration by the stockholders at any annual or special meeting any stockholder proposal required to be included in the Corporation's proxy statement relating to such meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule thereto. -5- 6 ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers. Except as otherwise provided in the Corporation's Charter, the business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the stockholders by law, by the Corporation's Charter or by these By-Laws. SECTION 2. Number of Directors. The number of directors shall be fixed from time to time by resolution of the Board of Directors adopted by a majority of the entire Board of Directors; provided, however, that the number of directors shall in no event be fewer than one nor more than fifteen. Any vacancy created by an increase in directors may be filled in accordance with Section 7 of this Article II. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term unless the director is specifically removed pursuant to Section 6 of this Article II at the time of the decrease. A director need not be a stockholder of the Corporation, a citizen of the United States or a resident of the State of Maryland. SECTION 3. Election and Term of Directors. The term of office of each director shall be from the time of his election and qualification until his successor shall have been elected and shall have qualified, or until his death, or until his resignation or removal as provided in these By-Laws, or as otherwise provided by statute or the Corporation's Charter. SECTION 4. Director Nominations. (a) Only persons who are nominated in accordance with the procedures set forth in this Section 4 shall be eligible for election or re-election as directors. Nominations of persons for election or re-election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation who is entitled to vote for the election of such nominee at the meeting and who complies with the notice procedures set forth in this Section 4. (b) Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice delivered in writing to the Secretary of the Corporation. To be timely, any such notice by a stockholder must be delivered to or mailed and received at the principal executive offices of the Corporation not later than 60 (sixty) days prior to the meeting; provided, however, that if less than 70 (seventy) days' notice or prior public disclosure of the date of the -6- 7 meeting is given or made to stockholders, any such notice by a stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was given or such public disclosure was made. (c) Any such notice by a stockholder shall set forth, (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the capital stock of the Corporation which are beneficially owned by such person, and (D) any other information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors pursuant to Regulation 14A under the Exchange Act or any successor regulation thereto (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected and whether any person intends to seek reimbursement from the Corporation of the expenses of any solicitation of proxies should such person be elected a director of the Corporation); and (ii) as to the stockholder giving the notice, (A) the name and address, as they appear on the Corporation's books, of such stockholder, and (B) the class and number of shares of the capital stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (d) If a notice by a stockholder is required to be given pursuant to this Section 4, no person shall be entitled to receive reimbursement from the Corporation of the expenses of a solicitation of proxies for the election as a director of a person named in such notice unless such notice states that such reimbursement will be sought from the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 4. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded for all purposes. SECTION 5. Resignation. A director of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman of the Board or to the President or the Secretary of the Corporation. Any resignation shall take effect at the time specified in it or, should the time when it is to become effective not be specified in it, immediately upon its receipt. Acceptance of a resignation -7- 8 shall not be necessary to make it effective unless the resignation states otherwise. SECTION 6. Removal of Directors. Any director of the Corporation may be removed by the stockholders with or without cause at any time by a vote of a majority of the votes entitled to be cast for the election of directors. SECTION 7. Vacancies. Subject to the provisions of the 1940 Act, any vacancies in the Board of Directors, whether arising from death, resignation, removal or any other cause except an increase in the number of directors, shall be filled by a vote of the majority of the Board of Directors then in office even though that majority is less than a quorum, provided that no vacancy or vacancies shall be filled by action of the remaining directors if, after the filling of the vacancy or vacancies, fewer than two-thirds of the directors then holding office shall have been elected by the stockholders of the Corporation. A majority of the entire Board as calculated prior to Board expansion may fill a vacancy which results from an increase in the number of directors. In the event that at any time a vacancy exists in any office of a director that may not be filled by the remaining directors, a special meeting of the stockholders shall be held as promptly as possible and in any event within 60 (sixty) days, for the purpose of filling the vacancy or vacancies. Any director elected or appointed to fill a vacancy shall hold office until a successor has been chosen and qualifies or until his earlier death, resignation or removal. SECTION 8. Place of Meetings. Meetings of the Board may be held at any place that the Board of Directors may from time to time determine or that is specified in the notice of the meeting. SECTION 9. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at the time and place determined by the Board of Directors. SECTION 10. Special Meetings. Special meetings of the Board of Directors may be called by two or more directors of the Corporation or by the Chairman of the Board or the President. SECTION 11. Notice of Special Meetings. Notice of each special meeting of the Board of Directors shall be given by the Secretary as hereinafter provided. Each notice shall state the time and place of the meeting and shall be delivered to each director, either personally or by telephone, facsimile transmission or other standard form of telecommunication, at least 24 (twenty-four) hours before the time at which the meeting is to be held, or by first-class mail, postage prepaid, addressed to the director at his residence or usual place of business, and mailed at least 3 (three) days before the day on which the meeting is to be held. -8- 9 SECTION 12. Waiver of Notice of Meetings. Notice of any special meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver of notice that is filed with the records of the meeting or who shall attend the meeting. SECTION 13. Quorum and Voting. One-third (but not fewer than two unless there be only one director) of the members of the entire Board of Directors shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at the meeting, and except as otherwise expressly required by statute, the Corporation's Charter, these By-Laws, the 1940 Act, or any other applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present may adjourn the meeting to another time and place until a quorum shall be present. Notice of the time and place of any adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless the time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. SECTION 14. Organization. The Board of Directors may, by resolution adopted by a majority of the entire Board, designate a Chairman of the Board, who shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to act or if there is none, the President, or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside at the meeting. The Secretary, or, in his absence or inability to act, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof. SECTION 15. Committees. The Board of Directors may designate one or more committees of the Board of Directors, each consisting of 2 (two) or more directors. To the extent provided in the resolution, and permitted by law, the committee or committees shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it. Any committee or committees shall have the name or names determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. -9- 10 SECTION 16. Written Consent of Directors in Lieu of a Meeting. Subject to the provisions of the 1940 Act, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the records of the Board's or such committee's meetings. SECTION 17. Telephone Conference. Members of the Board of Directors or any committee of the Board may participate in any Board or committee meeting by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. SECTION 18. Compensation. Each director shall be entitled to receive compensation, if any, as may from time to time be fixed by the Board of Directors, including a fee for each meeting of the Board or any committee thereof, regular or special, he attends. Directors may also be reimbursed by the Corporation for all reasonable expenses incurred in traveling to and from the place of a Board or committee meeting. ARTICLE III OFFICERS, AGENTS AND EMPLOYEES SECTION 1. Number and Qualifications. The officers of the Corporation shall be a President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one or more Vice Presidents and may also appoint any other officers, agents and employees it deems necessary or proper. Any two or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Officers shall be elected by the Board of Directors, each to hold office until his successor shall have been duly elected and shall have qualified, or until his death, or until his resignation or removal as provided in these By-Laws. The Board of Directors may from time to time elect, or designate to the President the power to appoint, such officers (including one or more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents as may be necessary or desirable for the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of -10- 11 his resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary. Any resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. Acceptance of a resignation shall not be necessary to make it effective unless the resignation states otherwise. SECTION 3. Removal of Officer, Agent or Employee. Any officer, agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate the power of removal as to agents and employees not elected or appointed by the Board of Directors. Removal shall be without prejudice to the person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. SECTION 4. Vacancies. A vacancy in any office whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office that shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to the office. SECTION 5. Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors, but this power may be delegated to any officer with respect to other officers under his control. SECTION 6. Bonds or Other Security. If required by the Board, any officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in an amount and with any surety or sureties as the Board may require. SECTION 7. President. The President shall be the chief executive officer of the Corporation. In the absence or inability of the Chairman of the Board to act (or if there is none), the President shall preside at all meetings of the stockholders and of the Board of Directors. The President shall have, subject to the control of the Board of Directors, general charge of the business and affairs of the Corporation, and may employ and discharge employees and agents of the Corporation, except those elected or appointed by the Board, and he may delegate these powers. SECTION 8. Vice President. Each Vice President shall have the powers and perform the duties that the Board of Directors or the President may from time to time prescribe. SECTION 9. Treasurer. Subject to the provisions of any contract that may be entered into with any custodian pursuant to authority granted by the Board of Directors, the Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or provide for the custody -11- 12 of the Corporation's funds and securities; he shall have full authority to receive and give receipts for all money due and payable to the Corporation, and to endorse checks, drafts and warrants, in its name and on its behalf and to give full discharge for the same; he shall deposit all funds of the Corporation, except those that may be required for current use, in such banks or other places of deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors or the President. SECTION 10. Secretary. The Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors or the President. SECTION 11. Delegation of Duties. In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may confer for the time being the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE IV STOCK SECTION 1. Stock Certificates. Each holder of stock of the Corporation shall be entitled upon specific written request to such person as may be designated by the Corporation to -12- 13 have a certificate or certificates, in a form approved by the Board, representing the number of shares of stock of the Corporation owned by him; provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the Chairman of the Board, President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in office at the date of issue. SECTION 2. Books of Account and Record of Stockholders. There shall be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed 12 (twelve) months and the consideration received by the Corporation for each such share. SECTION 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for the shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of the share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions and to vote as the owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. SECTION 4. Regulations. The Board of Directors may make any additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. -13- 14 SECTION 5. Stolen, Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of its theft, loss, destruction or mutilation and the Corporation may issue a new certificate of stock in the place of any certificate issued by it that has been alleged to have been stolen, lost or destroyed or that shall have been mutilated. The Board may, in its discretion, require the owner (or his legal representative) of a stolen, lost, destroyed or mutilated certificate to give to the Corporation a bond in a sum, limited or unlimited, and in a form and with any surety or sureties, as the Board in its absolute discretion shall determine or to indemnify the Corporation against any claim that may be made against it on account of the alleged theft, loss, destruction or the mutilation of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board of Directors, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the Maryland General Corporation Law. SECTION 6. Fixing of Record Date for Dividends, Distributions, etc. The Board may fix, in advance, a date not more than 90 (ninety) days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. SECTION 7. Information to Stockholders and Others. Any stockholder of the Corporation or his agent may inspect and copy during the Corporation's usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual statements of its affairs and voting trust agreements on file at its principal office. ARTICLE V INDEMNIFICATION AND INSURANCE SECTION 1. Indemnification of Directors and Officers. Any person who was or is a party or is threatened to be made a party in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is a current or former director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, partner, -14- 15 trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by the Corporation against judgments, penalties, fines, excise taxes, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding to the full extent permissible under the Maryland General Corporation Law, the Securities Act of 1933, as amended (the "Securities Act"), and the 1940 Act, as such statutes are now or hereafter in force, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office ("disabling conduct"). SECTION 2. Advances. Any current or former director or officer of the Corporation claiming indemnification within the scope of this Article V shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permissible under the Maryland General Corporation Law, the Securities Act and the 1940 Act, as such statutes are now or hereafter in force; provided however, that the person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written undertaking to repay any such advance unless it is ultimately determined that he is entitled to indemnification, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; or (c) a majority of a quorum of directors of the Corporation who are neither "interested persons" as defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. SECTION 3. Procedure. At the request of any current or former director or officer, or any employee or agent whom the Corporation proposes to indemnify, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the Maryland General Corporation Law, the Securities Act and the 1940 Act, as such statutes are now or hereafter in force, whether the standards required by this Article V have been met; provided, however, that indemnification shall be made only following: (a) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was -15- 16 not liable by reason of disabling conduct; or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct by, (i) the vote of a majority of a quorum of disinterested non-party directors, or (ii) an independent legal counsel in a written opinion. SECTION 4. Indemnification of Employees and Agents. Employees and agents who are not officers or directors of the Corporation may be indemnified, and reasonable expenses may be advanced to such employees or agents, in accordance with the procedures set forth in this Article V to the extent permissible under the 1940 Act, the Securities Act and Maryland General Corporation Law, as such statutes are now or hereafter in force, to the extent, consistent with the foregoing, as may be provided by action of the Board of Directors or by contract. SECTION 5. Other Rights. The indemnification provided by this Article V shall not be deemed exclusive of any other right, in respect of indemnification or otherwise, to which those seeking such indemnification may be entitled under any insurance or other agreement, vote of stockholders or disinterested directors or otherwise, both as to action by a director or officer of the Corporation in his official capacity and as to action by such person in another capacity while holding such office or position, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 6. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, against any liability asserted against and incurred by him in any such capacity, or arising out of his status as such, provided that no insurance may be obtained by the Corporation for liabilities against which it would not have the power to indemnify him under this Article V or applicable law. SECTION 7. Constituent, Resulting or Surviving Corporations. For the purposes of this Article V, references to the "Corporation" shall include all constituent corporations absorbed in a consolidation or merger as well the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of a constituent corporation or is or was serving at the request of a constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under this Article V with respect to the -16- 17 resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. ARTICLE VI SEAL The seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, the words "Corporate Seal" and "Maryland" and any emblem or device approved by the Board of Directors. The seal may be used by causing it or a facsimile to be impressed or affixed or in any other manner reproduced, or by placing the word "(seal)" adjacent to the signature of the authorized officer of the Corporation. ARTICLE VII FISCAL YEAR The Corporation's fiscal year shall be fixed by the Board of Directors. ARTICLE VIII AMENDMENTS These By-Laws may be amended or repealed by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors, subject to the requirements of the 1940 Act. As adopted, July 20, 1998 -17- -----END PRIVACY-ENHANCED MESSAGE-----