<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on December 3, 1998
Securities Act File No. 333-15419
Investment Company Act File No. 811-07901
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No.___ [ ]
Post-Effective Amendment No.3 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [x]
Amendment No.5 [x]
(Check appropriate box or boxes)
Warburg, Pincus Health Sciences 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 Health Sciences 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
Approximate Date of Proposed Public Offering: February 1, 1999
<PAGE> 2
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 3
Subject to Completion, dated December 3, 1998
PROSPECTUS
Common Class
February 1, 1999
WARBURG PINCUS
BALANCED FUND
B
WARBURG PINCUS
GROWTH & INCOME FUND
B
WARBURG PINCUS
CAPITAL APPRECIATION FUND
B
WARBURG PINCUS
HEALTH SCIENCES FUND
As with all mutual funds, the Securities and Exchange
Commission has not approved these funds, nor has it passed
upon the adequacy or accuracy of this Prospectus. It is a
criminal offense to state otherwise.
[Warburg Pincus Funds Logo]
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 4
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................... .................... 4
Goals and Principal Strategies.................. 4
Investor Profile................................ 4
A Word About Risk............................... 5
PERFORMANCE SUMMARY............... ................ 6
Year-by-Year Total Returns...................... 6
Average Annual Total Returns.................... 7
INVESTOR EXPENSES................ ................. 8
Fees and Fund Expenses.......................... 8
Example......................................... 9
THE FUNDS IN DETAIL............... ................ 10
The Management Firm............................. 10
Multi-Class Structure........................... 10
Fund Information Key............................ 11
BALANCED FUND.................. ................... 12
GROWTH & INCOME FUND............... ............... 16
CAPITAL APPRECIATION FUND............ ............. 18
HEALTH SCIENCES FUND............... ............... 20
MORE ABOUT RISK................. .................. 22
Introduction.................................... 22
Types of Investment Risk........................ 22
Certain Investment Practices.................... 25
MEET THE MANAGERS................ ................. 28
ABOUT YOUR ACCOUNT................ ................ 30
Share Valuation................................. 30
Buying and Selling Shares....................... 30
Account Statements.............................. 31
Distributions................................... 31
Taxes........................................... 31
OTHER INFORMATION................ ................. 33
About the Distributor........................... 33
FOR MORE INFORMATION............... ............... back cover
</TABLE>
3
<PAGE> 5
KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGY
<S> <C> <C>
BALANCED FUND Maximum total return - Invests in equity and
Risk factors: (through a combination of fixed-income securities
Market risk long-term growth of - Focuses stock investments on
Interest-rate risk capital, and current large U.S. companies
income) consistent with - Uses both growth and value
preservation of capital investment criteria (seeks
"growth at a reasonable price")
- Favors intermediate-term,
investment-grade bonds
GROWTH & INCOME FUND Long-term growth of - Invests primarily in equity
Risk factors: capital, income and a securities
Market risk reasonable current return - Focuses on large U.S. companies
- Analyzes such factors as
price-to-earnings and
price-to-book ratios, using a
value investment style
CAPITAL APPRECIATION Long-term capital - Invests primarily in equity
FUND appreciation securities of U.S. companies
Risk factors: - Seeks sectors and companies that
Market risk will outperform the overall
market
- Looks for themes or patterns
associated with growth
companies, such as significant
fundamental changes, generation
of a large free cash flow or
company share buyback programs
HEALTH SCIENCES FUND Capital appreciation - Invests mainly in equity
Risk factors: securities of U.S. companies
Market risk - Emphasizes the health services,
Sector concentration pharmaceuticals and
Legal risk medical-devices industries
Regulatory risk - Can invest in companies of any
size
- Uses a top-down investment
approach among four categories
of health-sciences companies --
buyers, providers, suppliers and
innovators
</TABLE>
INVESTOR PROFILE
These funds are designed for investors who:
-are investing for long-term goals that may include college or retirement
-are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
-are investing for total return, growth and income, or capital appreciation
-want to diversify their portfolios into common stocks
They may NOT be appropriate if you:
-are investing for a shorter time horizon
-are uncomfortable with an investment that will fluctuate in value
-are looking primarily for income
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
4
<PAGE> 6
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to your fund. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
All funds
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
Balanced Fund
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.
SECTOR CONCENTRATION
Health Sciences Funds
A fund that invests more than 25% of its net assets in a group of related
industries (market sector) is subject to increased risk.
-Fund performance will largely depend upon the sector's performance, which may
differ in direction and degree from that of the overall stock market.
-Financial, economic, business, political and other developments affecting the
sector will have a greater effect on the fund.
LEGAL RISK
Health Sciences Fund
Lawsuits or other legal proceedings against the issuer of a security may
adversely affect the issuer, the market value of the security, or a fund's
performance.
REGULATORY RISK
Health Sciences Fund
Governments, agencies or other regulatory bodies may adopt or change laws or
regulations that could adversely affect the issuer, the market value of the
security, or a fund's performance.
Because the Health Sciences Fund involves a high level of risk, you should
consider it only for the aggressive portion of your portfolio. The Health
Sciences Fund may not be appropriate for everyone.
5
<PAGE> 7
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these funds. The bar chart shows you how each fund's
performance has varied from year to year for up to ten years. The table compares
each fund's performance over time to that of a broadly based securities market
index and other indexes, if applicable. As with all mutual funds, past
performance is not a prediction of
the future.
YEAR-BY-YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19.55% 3.09% 25.13% 7.51% 10.73% 1.32% 31.55% 12.88% 16.37%
BALANCED FUND
Best Quarter: 10.42% (Q3 95)
Worst Quarter: -6.18% (Q3 90)
Inception date: 10/6/88
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20.74% 4.03% 13.01% 8.55% 35.79% 7.58% 20.42% -1.20% 30.25%
GROWTH & INCOME FUND
Best Quarter: 17.93% (Q3 93)
Worst Quarter: -5.18% (Q3 96)
Inception date: 10/6/88
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.79% -5.47% 26.29% 7.61% 15.87% -2.86% 38.10% 23.27% 31.39%
CAPITAL APPRECIATION FUND
Best Quarter: 14.34% (Q2 97)
Worst Quarter: -12.23% (Q3 90)
Inception date: 8/17/87
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
27.35%
HEALTH SCIENCES FUND
Best Quarter: 17.78% (Q2 97)
Worst Quarter: -3.80% (Q1 97)
Inception date: 12/31/96
</TABLE>
6
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
BALANCED FUND(1) XX.xx% XX.xx% XX.xx% XX.xx% 10/6/88
S&P 500 XX.xx% XX.xx% XX.xx% XX.xx%
LEHMAN INTERMEDIATE
GOVERNMENT/CORPORATE BOND
INDEX XX.xx% XX.xx% XX.xx% XX.xx%
GROWTH & INCOME FUND(2) XX.xx% XX.xx% XX.xx% XX.xx% 10/6/88
S&P 500 XX.xx% XX.xx% XX.xx% XX.xx%
CAPITAL APPRECIATION FUND XX.xx% X.xx% XX.xx% XX.xx% 8/17/87
S&P 500 XX.xx% XX.xx% XX.xx% XX.xx%
HEALTH SCIENCES FUND XX.xx% XX.xx% 12/31/96
S&P 500 XX.xx% XX.xx% XX.xx% XX.xx%
[LIPPER HEALTH/BIOTECHNOLOGY
FUNDS INDEX] XX.xx% XX.xx% XX.xx% XX.xx%
</TABLE>
(1) Warburg Pincus assumed management of the fund on September 30, 1994.
(2) Warburg Pincus assumed management of the fund on January 1, 1992.
UNDERSTANDING PERFORMANCE
-TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and capital
gains (if any) were reinvested in additional shares. The change in value
can be stated either as a cumulative return or as an average annual rate
of return.
-A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
-An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
-Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
7
<PAGE> 9
INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GROWTH & CAPITAL HEALTH
BALANCED INCOME APPRECIATION SCIENCES
FUND FUND FUND FUND
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE NONE NONE NONE
Deferred sales charge "load" NONE NONE NONE NONE
Sales charge "load" on reinvested
distributions NONE NONE NONE NONE
Redemption fees NONE NONE NONE NONE
Exchange fees NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(deducted from fund assets)
Management fee .90% .25% .70% 1.00%
Distribution and service (12b-1)
fee xx% NONE NONE xx%
Other expenses xx% xx% xx% xx%
TOTAL ANNUAL FUND OPERATING
EXPENSES* xx% xx% xx% xx%
</TABLE>
* Actual fees and expenses for the fiscal year ended October 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses for
some funds during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
GROWTH & CAPITAL HEALTH
EXPENSES AFTER WAIVERS AND BALANCED INCOME APPRECIATION SCIENCES
REIMBURSEMENTS FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management fee xx% xx% xx% xx%
Distribution and service (12b-1)
fee xx% NONE NONE xx%
Other expenses xx% xx% xx% xx%
TOTAL ANNUAL FUND OPERATING
EXPENSES xx% xx% xx% xx%
</TABLE>
8
<PAGE> 10
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table on the opposite page (before fee waivers and
expense reimbursements and credits), and you close your account at the end of
each of the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
BALANCED FUND $xx $xx $xx $xx
GROWTH & INCOME FUND $xx $x $xx $xx
CAPITAL APPRECIATION FUND $xx $xx $xx $xx
HEALTH SCIENCES FUND $xx $xx $xx $xx
</TABLE>
9
<PAGE> 11
THE FUNDS IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET
MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
- - Investment adviser for the funds
- - Responsible for managing each fund's assets according to its goal and strategy
- - A professional investment advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
- - Currently manages approximately $xx billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this prospectus.
MULTI-CLASS STRUCTURE
This prospectus offers Common Class shares of the funds. Common Class shares
are no-load.
Each of the funds except the Health Sciences Fund offers Advisor Class shares
described in separate prospectuses. Advisor Class shares are available through
financial-services firms.
10
<PAGE> 12
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. Percentages of fund assets are based on total assets unless
indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the fund's
day-to-day management.
INVESTOR EXPENSES
Actual fund expenses for the 1998 fiscal year. Future expenses may be higher
or lower.
-MANAGEMENT FEE The fee paid to the investment adviser for providing investment
advice to the fund. Expressed as a percentage of average net assets after
waivers.
-DISTRIBUTION AND SERVICE (12b-1) FEES Fees paid by the fund to the distributor
for making shares of the fund available to you. Expressed as a percentage of
average net assets.
-OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets after
waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
-TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital gain distributions.
-PORTFOLIO TURNOVER An indication of trading frequency.
The funds may sell securities without regard to the length of time they have
been held. A high turnover rate may increase the fund's transaction costs and
negatively affect its performance. Portfolio turnover may also result in
capital-gain distributions that could raise your income tax liability.
The Annual Report includes the auditor's report, along with the fund's
financial statements. It is available free upon request.
11
<PAGE> 13
BALANCED FUND
GOAL AND STRATEGY
The Balanced Fund seeks to maximize total return (through a combination of
long-term growth of capital, and current income) consistent with preservation of
capital. To pursue this goal, the fund allocates its assets among a diversified
mix of equity and fixed-income securities. At least 25% of fund assets will be
in securities of each type, and it is anticipated that more than 25% of fund
assets will usually be in fixed-income securities, although the relative
weightings of equity and fixed-income securities will shift over time.
In choosing equity securities, the fund's portfolio managers seek to identify
companies that are attractively valued relative to their projected growth rates.
Because it includes elements of growth and value investment styles, this
approach can be described as a "blended approach" or "growth at a reasonable
price." The fund focuses on large U.S. companies comparable in size to those in
the S&P 500. [As of March 31, 1998, market capitalizations of S&P 500 companies
ranged from $483 million to $282 billion.]
For its fixed-income investments, the fund favors investment-grade debt
securities with between three and 10 years left to maturity. The Board of
Directors may change the fund's goal without shareholder approval.
PORTFOLIO INVESTMENTS
The fund's equity holdings may include:
-common stocks
-securities convertible into common stocks
-securities such as rights and warrants, whose values are based on common
stocks
Fixed-income investments will consist primarily of:
-corporate bonds, debentures and notes
-non-convertible preferred stocks
-government, bank and commercial obligations
-asset-backed and mortgage-backed securities
This fund may invest up to:
-10% of net assets in debt securities rated from BB/Ba to C (junk bonds)
-15% of assets in zero-coupon bonds
-15% of assets in foreign securities
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
-market risk
-interest-rate risk
The value of your investment will fluctuate in response to stock and bond
market movements.
12
<PAGE> 14
The fund's fixed-income holdings are intended to reduce its volatility and
downside risk. Of course, this is not guaranteed.
Fixed-income investments are generally considered less risky than stocks,
although their risk can vary widely depending upon factors such as issuer and
maturity. In the long run, the fund may produce more modest returns than riskier
funds as a trade-off for this potentially lower risk.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
Brian S. Posner and Scott T. Lewis manage the fund's equity portion. Dale C.
Christensen manages the fixed-income portion. You can find out more about the
fund's managers in "Meet the Managers."
INVESTOR EXPENSES
Management fee xx%
Distribution and service
(12b-1) fee xx%
All other expenses xx%
Total expenses xx%
13
<PAGE> 15
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97(1) 8/97 8/96 8/95 8/94
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of
period $14.24 $11.94 $11.12 $11.01 $11.71
Investment activities:
Net investment income .03 0.23 0.16 0.21 0.41
Net gains or losses on investments
and foreign currency related items
(both realized and unrealized) 0.15 2.46 0.94 1.72 0.32
Total from investment activities 0.19 2.69 1.10 1.93 0.74
Distributions:
From net investment income (.05) (0.24) (0.13) (0.31) (0.46)
From realized capital gains -- (0.15) (0.15) (1.51) (0.98)
Total distributions (.05) (0.39) (0.28) (1.82) (1.44)
Net asset value, end of period $14.38 $14.24 $11.94 $11.12 $11.01
Total return 1.30%(2) 23.03% 9.99% 21.56% 6.86%(3)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s
omitted) $38,294 $38,926 $30,853 $5,342 $808
Ratio of expenses to average net
assets(4) 1.35%(5) 1.35% 1.53% 1.53% 0%
Ratio of net income to average net
assets 1.38%(5) 1.76% 1.66% 2.30% 3.76%
Decrease reflected in above
operating expense ratios due to
waivers/reimbursements
Portfolio turnover rate 15%(2) 120% 108% 107% 32%
</TABLE>
(1) For the two months ended October 31, 1997.
(2) Non annualized.
(3) Sales load not reflected in total return. The sales load was estimated
effective August 31, 1994.
(4) Without the waiver of advisory and administration fees and without the
reimbursement of certain operating expenses, the ratios of expenses to average
net assets for the Warburg Pincus Balanced Fund would have been % for the
year ended October 31, 1998, 2.03% (annualized) for the two months ended October
31, 1997 and 1.90%, 2.43%, 6.04% and 5.46% for the years ended August 31, 1997,
1996, 1995 and 1994, respectively.
(5) Annualized.
14
<PAGE> 16
[This page is intentionally left blank.]
15
<PAGE> 17
GROWTH & INCOME FUND
GOAL AND STRATEGY
The Growth & Income Fund seeks long-term growth of capital, income and a
reasonable current return. To pursue this goal, it invests primarily in equity
securities of value companies.
Value companies are companies whose earnings power or asset value does not
appear to be reflected in the current stock price. As a result, value companies
look underpriced according to financial measurements of their intrinsic worth or
business prospects. These measurements include price-to-earnings, price-to-book
and debt-to-equity ratios. The portfolio manager determines value based upon
research and analysis, taking all relevant factors into account.
This fund expects to focus on large U.S. companies with market
capitalizations of $1 billion or more, although it may invest in companies of
any size.
The fund pursues its income objective by investing in dividend-paying equity
securities. However, the fund's dividend distribution will vary and may be low.
The Board of Directors may change the fund's goal without shareholder approval.
PORTFOLIO INVESTMENTS
Normally this fund invests substantially all of its assets in equity
securities, including:
-common stocks
-securities convertible into common stocks
-securities such as rights and warrants, whose values are based on common
stocks
It may also invest in preferred stocks and non-convertible debt securities
such as bonds, debentures and notes.
This fund may invest up to:
-10% of net assets in debt securities rated from BB/Ba to C (junk bonds)
-15% of assets in real-estate investment trusts (REITs)
-20% of assets in foreign securities
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factor is:
-market risk
The value of your investment will fluctuate in response to stock market
movements. The amount of income you receive from the fund also will fluctuate.
The fund's emphasis on large-company value stocks may reduce its volatility
and downside risk. Of course, this is not guaranteed. Value stocks in theory are
already underpriced, and large-company stocks tend to be less volatile than
small-company stocks. However, a value stock may never reach what the manager
believes is its full value, or may even go down in price. In the long run, the
fund may produce more modest returns than riskier stock funds as a trade-off for
this potentially lower risk.
"More About Risk" details certain other investment practices the fund may
16
<PAGE> 18
use. Please read that section carefully
before you invest.
PORTFOLIO MANAGEMENT
Brian S. Posner manages the fund's investment portfolio. You can find out
more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee xx%
All other expenses xx%
Total expenses xx%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97(1) 8/97 8/96 8/95 8/94
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning
of period $18.44 $14.90 $16.40 $14.56 $16.72
Investment activities:
Net investment income 0.02 0.14 0.11 0.22 0.08
Net gains or losses on
investments (both realized
and unrealized) 0.14 3.54 (0.66) 1.98 1.81
Total from investment
activities 0.16 3.67 (0.55) 2.21 1.89
Distributions:
From net investment income (0.04) (0.13) (0.14) (0.18) (0.08)
From realized capital
gains -- -- (0.81) (0.18) (3.98)
Total distributions (.04) (0.13) (0.95) (0.37) (4.05)
Net asset value, end of
period $18.56 $18.44 $14.90 $16.40 $14.56
Total return .85%(2) 24.78% (3.54%) 15.62% 14.41%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000s omitted) $608,205 $601,159 $727,627 $1,038,193 $410,658
Ratio of expenses to
average net assets(3) 1.18%(4) 1.15% 1.21% 1.22% 1.28%
Ratio of net income to
average net assets .75%(4) .80% .69% 1.64% .41%
Decrease reflected in
above operating expense
ratios due to
waivers/reimbursements
Portfolio turnover rate 19%(2) 148% 94% 109% 150%
</TABLE>
(1) For the two months ended October 31, 1997.
(2) Non annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the Fund's net
expense ratio.
(4) Annualized.
17
<PAGE> 19
CAPITAL APPRECIATION FUND
GOAL AND STRATEGY
This fund seeks long-term capital appreciation. To pursue its goal, the fund
invests primarily in a broadly diversified portfolio of stocks and other equity
securities of U.S. companies.
Warburg Pincus seeks to identify growth opportunities for the fund. We look
for sectors and companies that we believe will outperform the overall market. We
also look for themes or patterns that we generally associate with growth
companies, such as:
-significant fundamental changes, including changes in senior management
-generation of a large free cash flow
-proprietary products and services
-company share buyback programs
The portfolio manager selects growth companies whose stocks appear to be
available at a reasonable price relative to projected growth.
PORTFOLIO INVESTMENTS
This fund will ordinarily invest substantially all of its assets--but no less
than 80% of assets--in the following types of equity securities:
-common stocks
-warrants
-securities convertible into or exchangeable for common stocks
-depositary receipts relating to equity securities
The fund may invest up to 20% of assets in foreign securities. To a limited
extent, it may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factor is:
-market risk
The value of your investment will fluctuate in response to stock market
movements.
Different types of stocks (such as "growth" vs. "value" stocks) tend to shift
in and out of favor depending on market and economic conditions. Accordingly,
the fund's performance may sometimes be lower or higher than that of other types
of funds (such as those emphasizing value stocks).
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
18
<PAGE> 20
PORTFOLIO MANAGEMENT
Susan L. Black manages the fund's investment portfolio. You can find out more
about her in "Meet the Managers."
INVESTOR EXPENSES
Management fee xx%
All other expenses xx%
Total expenses xx%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $17.95 $16.39 $14.29 $15.32
Investment activities:
Net investment income 0.11 0.08 0.04 0.04
Net gains or losses on investments
(both realized and unrealized) 4.93 3.53 3.08 0.17
Total from investment activities 5.04 3.61 3.12 0.21
Distributions:
From net investment income (0.10) (0.01) (0.04) (0.05)
From realized capital gains (1.80) (2.04) (0.98) (1.19)
Total distributions (1.90) (2.05) (1.02) (1.24)
Net asset value, end of period $21.09 $17.95 $16.39 $14.29
Total return 30.98% 24.67% 24.05% 1.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s
omitted)(1) $587,091 $407,707 $235,712 $159,346
Ratio of expenses to average net
assets 1.01% 1.04% 1.12% 1.05%
Ratio of net income to average net
assets .54% .59% .31% .26%
Decrease reflected in above
operating expense ratios due to
waivers/reimbursements .00% .00% .00% .01%
Portfolio turnover rate 238.11% 170.69% 146.09% 51.87%
</TABLE>
(1) Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the Common
Shares' expenses by %, .01% and .01% for the years ended October 31, 1998,
1997 and 1996, respectively. The Common Shares' operating expense ratio after
reflecting these arrangements were %, 1.00% and 1.03% for the years ended
October 31, 1998, 1997 and 1996, respectively.
19
<PAGE> 21
HEALTH SCIENCES FUND
GOAL AND STRATEGY
The Health Sciences Fund seeks capital appreciation. To pursue this goal, it
invests in equity and debt securities of health-sciences companies.
The health sciences consist of health care, medicine and the life sciences.
Health-sciences companies are principally engaged in research and development,
production, or distribution of health-sciences products or services. The fund
may invest in companies of any size.
Under normal market conditions, the fund will invest at least:
-65% of assets in equity and debt securities of health-sciences companies,
including small and medium-size companies
-25% of assets in the health-services, pharmaceuticals and medical-devices
industries combined
As part of a top-down investment approach, the portfolio managers divide
health-sciences companies into four major categories--buyers, providers,
suppliers and innovators. The managers seek to identify the most promising sub-
categories and individual companies within these categories.
When its assets reach $150 million, the fund will be closed to new investors.
Existing shareholders will be permitted to continue investing in the fund. After
six months, the fund will evaluate whether to reopen to new investors.
PORTFOLIO INVESTMENTS
This fund intends to invest at least 80% of assets in equity securities of
health-sciences companies. Equity holdings may consist of:
-common and preferred stocks
-warrants
-securities convertible into or exchangeable for common stocks
This fund may invest up to:
-20% of assets in debt securities, including those rated below investment grade
(junk bonds)
-35% of assets in foreign securities
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
-market risk
-sector concentration
-legal and regulatory risks
The value of your investment will fluctuate in response to stock market
movements. Fund performance will largely depend upon a limited number of
industries, which may perform differently from (or be more volatile than) the
overall stock market.
To the extent that the fund invests in smaller companies and foreign
securities, it takes on further risks that could hurt its performance. Start-up
and other small companies may have less-experienced management, limited product
lines, unproven track records or inadequate
20
<PAGE> 22
capital reserves. Their securities may carry increased market, information and
liquidity risks. Risks associated with foreign securities include currency,
information and political risks. These risks are defined in "More About Risk."
That section also details other investment practices the fund may use. Please
read "More About Risk" carefully before
you invest.
PORTFOLIO MANAGEMENT
Susan L. Black and Patricia F. Widner manage the fund's investment portfolio.
You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES
Management fee xx%
Distribution and
service (12b-1) fee xx%
All other expenses xx%
Total expenses xx%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97(1)
<S> <C> <C>
PER-SHARE DATA
- ------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00
- ------------------------------------------------------------------------------------
Investment activities:
Net investment income (0.02)
Net gains or losses on investments (both realized and
unrealized) 2.24
- ------------------------------------------------------------------------------------
Total from investment activities 2.22
- ------------------------------------------------------------------------------------
Distributions:
From net investment income 0.00
From realized capital gains 0.00
- ------------------------------------------------------------------------------------
Total distributions 0.00
- ------------------------------------------------------------------------------------
Net asset value, end of period $12.22
- ------------------------------------------------------------------------------------
Total return 22.20%(2)
- ------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Net assets, end of period (000s omitted)(3) $18,246
Ratio of expenses to average net assets 1.59%(4)
Ratio of net income to average net assets (.24%)(4)
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 1.83%
Portfolio turnover rate 159.57%(2)
- ------------------------------------------------------------------------------------
</TABLE>
(1) For the Period December 31, 1996 (Commencement of Operations) through
October 31, 1997.
(2) Non annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the fund's
expense ratio.
(4) Annualized.
21
<PAGE> 23
MORE ABOUT RISK
INTRODUCTION
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this prospectus.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
-HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
-SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the fund is directly exposed to 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.
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
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
22
<PAGE> 24
values, while a fall in interest rates
typically causes a rise in values.
LEGAL RISK Lawsuits or other legal proceedings against the issuer of a
security may adversely affect the issuer, the market value of the security, or a
fund's performance.
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 or forego an investment opportunity. Any of
these could have a negative effect on fund management or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less developed securities markets (and
related transaction, registration and custody practices) that could subject the
fund to losses from fraud, negligence, and delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital
controls or punitive taxes, or nationalize a company or industry. Any of these
actions could have a severe effect on security prices and impair a fund's
ability to bring its capital or income back to the U.S. Other political risks
include economic policy changes, social and political instability, military
action and war.
PREPAYMENT RISK Securities with
high stated interest rates may be prepaid prior to maturity. During periods of
falling interest rates, a fund would generally have to reinvest the proceeds at
lower rates.
REGULATORY RISK Governments, agencies or other regulatory bodies may adopt or
change laws or regulations that could adversely affect the issuer, the market
value of the security, or a fund's performance.
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' adviser is working to address the Year
2000 issue relating to the change from "99" to "00" on January 1, 2000 and have
obtained assurances from service providers that they are taking similar steps.
The adviser is working on the Year 2000 issue pursuant to a plan designed to
address potential problems and progress is proceeding according to the plan. The
adviser anticipates the
23
<PAGE> 25
completion of testing of internal systems
in early 1999, and is developing contingency plans intended to address any
unexpected service problems. However, there can be no assurance that these
efforts will be sufficient, and any noncompliant computer systems could hurt key
fund operations, such as shareholder servicing, pricing and trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world -- including companies
or governmental entities in which the fund invests and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a fund holding or on markets or
economies is negative, it could seriously affect the fund's performance.
24
<PAGE> 26
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
- - Permitted without limitation; does not indicate
actual use
20% Italic type (e.g., 20%) represents an investment
limitation as a percentage of NET fund assets; does
not indicate actual use
20% Roman type (e.g., 20%) represents an investment
limitation as a percentage of TOTAL fund assets; does
not indicate actual use
- -- Permitted, but not expected to be used to a
significant extent
- --- Not permitted
</TABLE>
<TABLE>
<CAPTION>
GROWTH & CAPITAL HEALTH
BALANCED INCOME APPRECIATION SCIENCES
<S> <C> <C> <C> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30% 10% 30%
- --------------------------------------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable a fund to hedge against or speculate on future
changes in currency values, interest rates or stock indexes.
Futures obligate the fund (or give it the right, in the case
of options) to receive or make payment at a specific future
time based on those future changes.* Correlation, currency,
hedged exposure, interest-rate, market, speculative exposure
risks.** -- -- -- --
- --------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, information,
liquidity, market, political, valuation risks. 15% 20% 20% 35%
- --------------------------------------------------------------------------------------------------------
INVESTMENT-GRADE DEBT SECURITIES Debt securities rated
within the four highest grades (AAA/Aaa through BBB/Baa) by
Standard & Poor's or Moody's Rating Service, and unrated
securities of comparable quality. Credit, interest-rate,
market risks. -- -- 20% 20%
- --------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Debt securities backed by pools
of mortgages, including passthrough certificates and other
senior classes of collateralized mortgage obligations
(CMOs). Credit, extension, interest-rate, liquidity,
prepayment risks. -- -- 20% 20%
- --------------------------------------------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities [and
convertible securities] rated below the fourth-highest grade
(BBB/Baa) by Standard & Poor's or Moody's Rating Service,
and unrated securities of comparable quality. Commonly
referred to as junk bonds. Credit, information,
interest-rate, liquidity, market, valuation risks. 10% 10% --- 20%
- --------------------------------------------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security, currency or index of
securities at a fixed price within a certain time period. A
fund may purchase or sell (write) both put and call options
for hedging or speculative purposes.* Correlation, credit,
hedged exposure, liquidity, market, speculative exposure
risks. -- -- -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
GROWTH & CAPITAL HEALTH
BALANCED INCOME APPRECIATION SCIENCES
<S> <C> <C> <C> <C>
REAL-ESTATE INVESTMENT TRUSTS (REITS) Pooled investment
vehicles that invest primarily in income-producing real
estate or real-estate related loans or interests. Credit,
interest-rate, market risks. --- 15% --- ---
- ---------------------------------------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15% 15% 10% 15%
- ---------------------------------------------------------------------------------------------------------
SECTOR CONCENTRATION Investing more than 25% of a fund's net
assets in a group of related industries (market sector).
Performance will largely depend upon the sector's
performance, which may differ in direction and degree from
that of the overall stock market. Financial, economic,
business, political and other developments affecting the
sector will have a greater effect on the fund. --- --- --- -
- ---------------------------------------------------------------------------------------------------------
SECURITIES LENDING Lending portfolio securities to financial
institutions; a fund receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. -- -- -- --
- ---------------------------------------------------------------------------------------------------------
SHORT SALES Selling borrowed securities with the intention
of repurchasing them for a profit on the expectation that
the market price will drop. Liquidity, market, speculative
exposure risks. 10% 10% --- 10%
- ---------------------------------------------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's
assets in investments such as money market obligations and
investment-grade debt securities for defensive purposes.
Although intended to avoid losses in adverse market,
economic, political or other conditions, defensive tactics
might be inconsistent with a fund's principal investment
strategies and prevent a fund from achieving its goal. -- -- -- --
- ---------------------------------------------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. 15% 15% 10% 15%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
GROWTH & CAPITAL HEALTH
BALANCED INCOME APPRECIATION SCIENCES
<S> <C> <C> <C> <C>
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. 20% 20% --- 20%
- ----------------------------------------------------------------------------------------------------------
ZERO-COUPON BONDS Debt securities that pay no cash income to
holders until maturity and are issued at a discount from
maturity value. At maturity, the entire return comes from
the difference between purchase price and maturity value.
Interest-rate, market risks. 15% --- --- ---
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* The funds are not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
** Each fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
27
<PAGE> 29
MEET THE MANAGERS
[Susan Black Photo]
SUSAN L. BLACK, CFA, CIC
Managing Director
-Portfolio Manager,
Capital Appreciation Fund
since December 1994
-Co-Portfolio Manager,
Health Sciences Fund
since fund inception
-With Warburg Pincus since 1985
[Dale C. Christensen PHOTO]
DALE C. CHRISTENSEN, CFA, CIC
Managing Director
-Co-Portfolio Manager,
Balanced Fund
since September 1994
-With Warburg Pincus since 1989
[Brian S. Posner Photo]
BRIAN S. POSNER
Managing Director
-Portfolio Manager,
Growth & Income Fund
since January 1997
-Co-Portfolio Manager
Balanced Fund
since March 1998
-Joined Warburg Pincus in 1997
-Portfolio Manager with
Fidelity Investments,
1987-1996
Job titles indicate position with the adviser.
28
<PAGE> 30
[Patricia F. Widner Photo]
PATRICIA F. WIDNER
Senior Vice President
BCo-Portfolio Manager,
Health Sciences Fund
since fund inception
BWith Warburg Pincus since 1991
BHealth care analyst/venture capitalist with Citibank/CCM, 1985-1991
BHealth care industry experience, 1977-1985
[Scott T. Lewis Photo]
SCOTT T. LEWIS
Vice President
BCo-Portfolio Manager,
Balanced Fund
since March 1998
BWith Warburg Pincus since 1986
29
<PAGE> 31
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the Common Class's total assets, less its
liabilities, by the number of Common Class shares outstanding.
Each fund values its securities based on market quotations when it calculates
its NAV. If market quotations are not readily available, securities and other
assets are valued by another method that the Board believes accurately reflects
fair value. Debt obligations that will mature in 60 days or less are valued on
the basis of amortized cost, unless the Board determines that using this method
would not reflect an investment's value.
Some fund securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the funds do not compute their prices. This could
cause the value of a fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
BUYING AND
SELLING SHARES
The accompanying Shareholder
Guide explains how to invest directly with the funds. You will find information
about purchases, redemptions, exchanges and services.
Each fund is open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. ET), your transaction will be priced at that day's NAV. If
we receive it after that time, it will be priced at the next business day's NAV.
FINANCIAL SERVICES FIRMS
You can also buy and sell fund shares through a variety of financial-services
firms such as banks, brokers and financial advisors. The funds have authorized
these firms (and other intermediaries that the firms may designate) to accept
orders. When an authorized firm or its designee has received your order, it is
considered received by the fund and will be priced at the next-computed NAV.
Financial-services firms may charge transaction fees or other fees that you
could avoid by investing directly with the fund. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain features of the fund, such as the minimum
initial or subsequent investment amounts, may
be modified.
Some of the firms through which the funds are available include:
BCharles Schwab & Co., Inc. Mutual Fund OneSource(R) service
BFidelity Brokerage Services, Inc. FundsNetwork(TM) Program
BWaterhouse Securities, Inc.
30
<PAGE> 32
ACCOUNT STATEMENTS
In general, you will receive account statements as follows:
- - after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- - after any changes of name or address of the registered owner(s)
- - otherwise, every quarter
You will receive annual and semiannual financial reports.
DISTRIBUTIONS
As a fund investor, you are entitled
to your share of the fund's net income
and gains on its investments. The fund
passes these earnings along to its shareholders as distributions.
Each fund earns dividends from stocks and interest from bond, money market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital gain distributions.
The Balanced and Growth & Income funds distribute net income quarterly. The
Capital Appreciation and Health Sciences funds distribute net income annually.
Each of the funds typically distributes capital gains annually, usually in
December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
TAXES
As with any investment, you should consider how your investment in a fund
will be taxed. 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.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable. Fund distributions are taxed based on the
length of time the fund holds its assets, regardless of how long you have held
fund shares. Distributions from a fund's long-term capital gains are taxed as
capital gains; distributions from other sources are generally taxed as ordinary
income. The funds will mostly make capital gains distributions.
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
31
<PAGE> 33
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.
32
<PAGE> 34
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
Counsellors Securities Inc., a wholly owned subsidiary of Warburg Pincus, is
responsible for:
- - making the funds available to you
- - account servicing and maintenance
- - sub-transfer agency services, sub-accounting services, and administrative
services related to sale of the Common Class
As part of their business strategies, the Balanced and Health Sciences funds
each have adopted a Rule 12b-1 shareholder servicing and distribution plan to
compensate Counsellors Securities for the above services. Under the plan,
Counsellors Securities receives fees at an annual rate of 0.25% of average daily
net assets of the fund's Common Class. Because the fees are paid out of a fund's
assets on an 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.
Certain financial-services firms may receive service fees from the
distributor, the adviser or their affiliates for providing recordkeeping or
other services in connection with investments in the funds. Financial-services
firms may also be reimbursed for marketing costs. The service fee may be up to
0.35% per year (0.40% for certain retirement plan programs) of the value of fund
accounts maintained by the firm. The funds may reimburse part of the service fee
at rates they would normally pay to the transfer agent for providing the
services.
33
<PAGE> 35
More information about these funds is available free upon request, including
the following:
SHAREHOLDER GUIDE
Explains how to buy and sell shares. The Shareholder Guide is incorporated by
reference into (is legally part of )
this prospectus.
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the fund's manager discussing
market conditions and investment strategies that significantly affected fund
performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI) which provides more
detail about the funds is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference, and
other information. You can also obtain copies by visiting the SEC's Public
Reference Room in Washington, DC (phone 800-SEC-0330) or by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, DC
20549-6009.
Please contact Warburg Pincus Funds to obtain, without charge, the SAI and
Annual and Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-WARBURG
(800-927-2874)
BY MAIL:
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBERS:
Warburg Pincus Balanced Fund 811-07517
Warburg Pincus Growth & Income Fund 811-07515
Warburg Pincus Capital
Appreciation Fund 811-05041
Warburg Pincus Health Sciences Fund 811-07901
FOR MORE INFORMATION
LOGO
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPUSL-1-0299
<PAGE> 36
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
is not permitted.
SUBJECT TO COMPLETION, DATED December 3, 1999
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
WARBURG PINCUS BALANCED FUND
WARBURG PINCUS GROWTH & INCOME FUND
WARBURG PINCUS CAPITAL APPRECIATION FUND
WARBURG PINCUS HEALTH SCIENCES FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Balanced Fund (the "Balanced Fund"), Warburg Pincus Growth &
Income Fund (the "Growth & Income Fund"), Warburg Pincus Capital Appreciation
Fund (the "Capital Appreciation Fund") and Warburg Pincus Health Sciences Fund
(the "Health Sciences Fund," and collectively with the Balanced Fund, the Growth
& Income Fund and the Capital Appreciation Fund, the "Funds") that is contained
in the combined Prospectus for the Common Shares of the Funds and the
Prospectuses for the Advisor Shares of the Funds, each dated _____ __, 1999.
Each Fund's audited annual report dated October 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses. Copies of the Prospectuses and the Annual
Report can be obtained by writing or telephoning:
Common Shares Advisor Shares
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 4906
Boston, Massachusetts 02205-9030 Grand Central Station
800-WARBURG New York, NY 10163
Attn: Institutional Services
800-222-8977
<PAGE> 37
TABLE OF CONTENTS
<TABLE>
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Page
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INVESTMENT OBJECTIVES AND POLICIES........................................ 1
Options, Futures and Currency Exchange Transactions........... 1
Securities Options...................................... 1
Securities Index Options................................ 4
OTC Options............................................. 5
Futures Activities...................................... 5
Currency Exchange Transactions.......................... 7
Hedging Generally....................................... 9
Asset Coverage for Forward Contracts, Options,
Futures and Options on Futures....................... 10
U.S. Government Securities.................................... 11
Money Market Obligations...................................... 12
Convertible Securities........................................ 13
Debt Securities............................................... 13
Securities of Other Investment Companies...................... 15
Lending of Portfolio Securities............................... 15
Foreign Investments........................................... 16
Short Sales................................................... 18
Warrants...................................................... 19
Depositary Receipts........................................... 19
Non-Publicly Traded and Illiquid Securities................... 19
Borrowing..................................................... 21
Reverse Repurchase Agreements................................. 21
When-Issued Securities and Delayed-Delivery Transactions...... 22
Strategies Available to the Balanced Fund and the Growth &
Income Fund...................................................... 22
Mortgage-Backed Securities.................................... 22
Asset-Backed Securities....................................... 23
Strategy Available to the Growth & Income Fund...................... 24
REITs......................................................... 24
Strategies Available to the Balanced Fund........................... 25
Municipal Obligations......................................... 25
Zero Coupon Securities........................................ 27
Strategies Available to the Balanced Fund and the Health
Sciences Fund.................................................... 27
Emerging Growth and Small Companies; Unseasoned Issuers....... 27
Dollar Rolls.................................................. 27
Strategies Available to the Health Sciences Fund.................... 28
Securities of Health Sciences Companies....................... 28
Short Sales (excluding Short Sales "Against the Box")......... 29
INVESTMENT RESTRICTIONS................................................... 30
All Funds........................................................... 30
Balanced and Growth & Income Funds.................................. 30
</TABLE>
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<TABLE> Page
<S> <C>
Capital Appreciation Fund........................................... 32
Health Sciences Fund................................................ 34
PORTFOLIO VALUATION....................................................... 36
PORTFOLIO TRANSACTIONS.................................................... 36
PORTFOLIO TURNOVER........................................................ 40
MANAGEMENT OF THE FUNDS................................................... 40
Officers and Board of Directors/Trustees............................ 40
Directors/Trustees' Total Compensation.............................. 44
Portfolio Managers of the Funds..................................... 44
Balanced Fund................................................. 44
Growth & Income Fund.......................................... 45
Capital Appreciation Fund..................................... 45
Health Sciences Fund.......................................... 45
Investment Adviser and Co-Administrators............................ 46
Custodians and Transfer Agent....................................... 47
Organization of the Funds........................................... 47
Capital Appreciation Fund..................................... 47
Balanced Fund, Growth & Income Fund and Health Sciences
Fund....................................................... 48
All Funds..................................................... 48
ORGANIZATION OF THE FUNDS.....................Error! Bookmark not defined.
Distribution and Shareholder Servicing.............................. 49
Common Shares................................................. 49
All Funds, Advisor Shares..................................... 50
General....................................................... 51
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 51
Automatic Cash Withdrawal Plan...................................... 51
EXCHANGE PRIVILEGE........................................................ 52
ADDITIONAL INFORMATION CONCERNING TAXES................................... 52
The Funds and Their Investments..................................... 53
Passive Foreign Investment Companies................................ 55
Dividends and Distributions......................................... 56
Sales of Shares..................................................... 56
Foreign Taxes....................................................... 57
Backup Withholding.................................................. 57
Notices............................................................. 57
Special Tax Matters Relating to the Balanced Fund................... 58
Other Taxation...................................................... 58
DETERMINATION OF PERFORMANCE.............................................. 58
INDEPENDENT ACCOUNTANTS AND COUNSEL....................................... 61
FINANCIAL STATEMENTS...................................................... 62
APPENDIX - DESCRIPTION OF RATINGS......................................... A-1
</TABLE>
(ii)
<PAGE> 39
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objective and policies in the Prospectuses. There are no assurances
that the Funds will achieve their investment objectives.
The investment objective of the Balanced Fund is maximum total
return through a combination of long-term growth of capital and current income
consistent with preservation of capital.
The investment objectives of the Growth & Income Fund are long-term
growth of capital and income and a reasonable current return.
The investment objective of the Capital Appreciation Fund is
long-term capital appreciation.
The investment objective of the Health Sciences Fund is capital
appreciation.
Unless otherwise indicated, all of the Funds are permitted to engage
in the following investment strategies.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may write covered call options and,
except in the case of the Capital Appreciation Fund, covered put options on
securities, and may purchase such options, that are traded on exchanges, as well
as over-the-counter ("OTC"). Each of the Capital Appreciation and Health
Sciences Funds may write such securities options on up to 25% of the net asset
value of the stock and debt securities in its portfolio. In addition, the
Capital Appreciation Fund may utilize up to 2% of its assets to purchase U.S.
exchange-traded and OTC options. The Health Sciences Fund may utilize up to 10%
of its assets to purchase U.S. or foreign, exchange-traded or OTC options.
Each Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options it has written. A put option embodies the right
of its purchaser to compel the writer of the option to purchase from the option
holder an underlying security at a specified price for a specified time period
or at a specified time. In contrast, a call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price for a specified time period or at a
specified time.
The potential loss associated with purchasing an option is limited
to the premium paid, and the premium would partially offset any gains achieved
from its use. However, for an option writer the exposure to adverse price
movements in the underlying security or index is potentially unlimited during
the exercise period. Writing securities options may result in substantial losses
to a Fund, force the sale or purchase of portfolio
<PAGE> 40
securities at inopportune times or at less advantageous prices, limit the amount
of appreciation the Fund could realize on its investments or require the Fund to
hold securities it would otherwise sell.
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). A Fund that
writes call options 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 the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which a Fund may write covered call options. For example, if the Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Fund may write (i) in-the-money call
options when Warburg Pincus Asset Management, Inc., each Fund's investment
adviser
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<PAGE> 41
("Warburg"), expects that the price of the underlying security will remain flat
or decline moderately during the option period, (ii) at-the-money call options
when Warburg expects that the price of the underlying security will remain flat
or advance moderately during the option period and (iii) out-of-the-money call
options when Warburg expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this lower
price, the amount of any realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and in-the-money put options
(the reverse of call options as to the relation of exercise price to market
price) may be used in the same market environments that such call options are
used in equivalent transactions. To secure its obligation to deliver the
underlying security when it writes a call option, each Fund will be required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the 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 the Fund realizes a profit or loss will depend upon whether
the amount received in the closing sale transaction is more or less than the
premium the Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. A Fund may engage in a closing purchase
transaction to realize a profit, to prevent an underlying security with respect
to which it has written an option from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). The obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction (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, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or a Fund effects a closing
purchase transaction. A Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an
3
<PAGE> 42
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 Warburg, are considered to be investment grade. If,
as a covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security and would continue to be at market risk on the security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options a Fund will be
able to purchase on a particular security.
Securities Index Options. Each Fund may (in the case of each of the
Capital Appreciation Fund and the Health Sciences Fund, with respect to up to
10% of its total assets) purchase exchange-listed and OTC put and call options
on securities indexes, and may also write such options. A securities index
measures the movement of a certain group of securities by assigning relative
values to the securities included in the index, fluctuating with changes in the
market values of the securities included in the index. Some securities index
options are based on a broad market index, such as the NYSE Composite Index, or
a narrower market index such as the Standard & Poor's 100. Indexes may also be
based on a particular industry or market segment.
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 stock 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
4
<PAGE> 43
the exercise price of the option times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Securities index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. Each Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Fund were to
purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while OTC or dealer options do not. Consequently, a Fund will generally be able
to realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when a Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. Although each Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the 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
the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair a Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
Futures Activities. Each Fund may enter into 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 futures contracts are standardized contracts for the future
delivery of a non-U.S. currency, an interest rate sensitive security or, in the
case of index futures contracts or certain other futures contracts, a cash
settlement with reference to a specified multiplier times the change in the
index. An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract.
These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates
5
<PAGE> 44
and/or market conditions and increasing return. Aggregate initial margin and
premiums (discussed below) required to establish positions other than those
considered to be "bona fide hedging" by the CFTC will not exceed 5% of the
Fund's net asset value after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into. Although the Funds
are limited in the amount of assets that may be invested in futures
transactions, there is no overall limit on the percentage of Fund assets that
may be at risk with respect to futures activities.
Each Fund reserves the right to engage in transactions involving
futures contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may be
at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Securities indexes are capitalization weighted
indexes which reflect the market value of the securities represented in the
indexes. A securities index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or liquid securities acceptable to
the broker, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to 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 the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or securities
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." A Fund will also incur brokerage costs in connection with
entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although each
Fund intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist at
any particular time. Most
6
<PAGE> 45
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the day. It is possible
that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions at an advantageous price and subjecting the
Fund to substantial losses. In such event, and in the event of adverse price
movements, the Fund would be required to make daily cash payments of variation
margin. In such situations, if a Fund had insufficient cash, it might have to
sell securities to meet daily variation margin requirements at a time when it
would be disadvantageous to do so. In addition, if the transaction is entered
into for hedging purposes, in such circumstances the Fund may realize a loss on
a futures contract or option that is not offset by an increase in the value of
the hedged position. Losses incurred in futures transactions and the costs of
these transactions will affect a Fund's performance.
Options on Futures Contracts. Each Fund may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of 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 a variety of factors not applicable to investment in
U.S. securities, and the Fund may incur costs in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. A Fund
will conduct its currency exchange transactions (i) on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market, (ii) through entering
into futures contracts or options on such contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options.
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<PAGE> 46
Risks associated with currency forward contracts and purchasing currency options
are similar to those described herein for futures contracts and securities and
stock index options. In addition, the use of currency transactions could result
in losses from the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events. The Capital
Appreciation and Health Sciences Funds will only engage in currency exchange
transactions for hedging purposes.
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 enter into an offsetting
transaction. If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. 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.
A decline in the U.S. dollar value of a foreign currency in which a
Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in the U.S.
dollar value of non-dollar denominated securities it holds, a Fund may purchase
foreign currency put options. If the value of the foreign currency does decline,
a Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in
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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 the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Fund against a price
decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, each Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will
realize a gain or loss depends upon movements in the level of securities prices
in the stock market generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a particular security.
The risk of imperfect correlation increases as the composition of a Fund's
portfolio varies from the composition of the index. In an effort to compensate
for imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect
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the Fund's net investment results if market movements are not as anticipated
when the hedge is established. Securities index futures transactions may be
subject to additional correlation risks. First, all participants in the futures
market are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which would distort the normal
relationship between the securities index and futures markets. Secondly, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may cause
temporary price distortions. Because of the possibility of price distortions in
the futures market and the imperfect correlation between movements in the
securities index and movements in the price of securities index futures, a
correct forecast of general market trends by Warburg still may not result in a
successful hedging transaction.
Each Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to predict correctly
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect a Fund's
performance.
To the extent that a Fund engages in the strategies described above,
the Fund may experience losses greater than if these strategies had not been
utilized. In addition to the risks described above, these instruments may be
illiquid and/or subject to trading limits, and a Fund may be unable to close out
a position without incurring substantial losses, if at all. The Funds are also
subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. Each Fund will comply with guidelines established by the Securities
and Exchange Commission (the "SEC") and other applicable regulatory bodies with
respect to coverage of forward currency contracts, options written by the Fund
on securities and indexes; and currency, interest rate and security index
futures contracts and options on these futures contracts. These guidelines may,
in certain instances, require that the Fund segregate cash or liquid securities
with its custodian or a designated sub-custodian to the extent the Fund's
obligations with respect to these strategies are not otherwise "covered" through
ownership of the underlying security or financial instrument or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
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For example, a call option written by a Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a Fund on an index
may require the Fund to own portfolio securities that correlate with the index
or to segregate assets (as described above) equal to the excess of the index
value over the exercise price on a current basis. A put option written by a Fund
may require the Fund to segregate assets (as described above) equal to the
exercise price. 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 the
Fund. If a Fund holds a futures or forward contract, the Fund could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. 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
U.S. Government Securities. The obligations issued or guaranteed by
the U.S. government in which a Fund may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities ("U.S. Government Securities"). Included among direct
obligations of the United States are Treasury Bills, Treasury Notes and Treasury
Bonds, which differ in terms of their interest rates, maturities and dates of
issuance. Treasury Bills have maturities of less than one year, Treasury Notes
have maturities of one to 10 years and Treasury Bonds generally have maturities
of greater than 10 years at the date of issuance. Included among the obligations
issued by agencies and instrumentalities of the United States are instruments
that are supported by the full faith and credit of the United States (such as
certificates issued by the Government National Mortgage Association ("GNMA"));
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); and instruments
that are supported by the credit of the instrumentality (such as Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds).
Other U.S. Government Securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan Administration, Export-Import Bank of the United States, Small
Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund will invest in obligations issued by such an
instrumentality only if Warburg determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
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Money Market Obligations. Each Fund is authorized to invest, under
normal market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five year
or less remaining to maturity) money market obligations and for temporary
defensive purposes may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign, domestic savings and loans and similar institutions) that
are high quality investments; commercial paper rated no lower than A-2 by
Standard & Poor's Ratings Services ("S&P") or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or the equivalent from another major rating service
or, if unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agreements with
respect to the foregoing.
Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to a Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or Warburg. As a
shareholder in any mutual fund, a Fund will bear its ratable share of the mutual
fund's expenses, including management fees, and will remain subject to payment
of the Fund's management fees and other expenses with respect to assets so
invested.
Repurchase Agreements. The Funds may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Fund seeks to assert this right. Warburg, acting under the supervision of the
Fund's Board of Directors/Trustees (the "Board"), monitors the creditworthiness
of those bank and non-bank dealers with which each Fund enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the Investment Company Act of 1940, as amended (the "1940 Act").
Convertible Securities. Convertible securities in which a Fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of
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this feature, convertible securities enable an investor to benefit from
increases in the market price of the underlying common stock. Convertible
securities provide higher yields than the underlying equity securities, but
generally offer lower yields than non-convertible securities of similar quality.
The value of convertible securities fluctuates in relation to changes in
interest rates like bonds and, in addition, fluctuates in relation to the
underlying common stock. In the case of the Balanced and Growth & Income Funds,
up to 10% of the Fund's net assets may be invested in convertible securities
rated below investment grade at the time of purchase (as low as C by Moody's or
D by S&P) or deemed by Warburg to be of equivalent quality. Subsequent to
purchase by a Fund, convertible securities may cease to be rated or a rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require sale of such securities, although Warburg will consider such event
in its determination of whether the Fund should continue to hold the securities.
Debt Securities. Each Fund may invest in debt securities and
preferred stocks (in the case of the Capital Appreciation Fund and the Health
Sciences Fund, with respect to up to 20% of the Fund's total assets). When
Warburg believes that a defensive posture is warranted, a Fund may invest
temporarily without limit in investment grade debt obligations and in domestic
and foreign money market obligations, including repurchase agreements. Debt
obligations of corporations in which the Funds may invest include corporate
bonds, debentures, debentures convertible into common stocks and notes. The
interest income to be derived may be considered as one factor in selecting debt
securities for investment by Warburg. The market value of debt obligations may
be expected to vary depending upon, among other factors, interest rates, the
ability of the issuer to repay principal and interest, any change in investment
rating and general economic conditions. Because the market value of debt
obligations can be expected to vary inversely to changes in prevailing interest
rates, investing in debt obligations may provide an opportunity for capital
appreciation when interest rates are expected to decline. The success of such a
strategy is dependent upon Warburg's ability to accurately forecast changes in
interest rates. Subsequent to its purchase by a Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Fund should continue to hold the securities.
Below Investment Grade Securities. Each Fund, other than the Capital
Appreciation Fund, may invest in debt securities rated below investment grade,
including convertible debt securities. A security will be deemed to be
investment grade if it is rated within the four highest grades by Moody's or S&P
or, if unrated, is determined to be a comparable quality by Warburg. Bonds rated
in the fourth highest grade may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. A Fund's holdings of debt securities rated below investment grade
(commonly referred to as "junk bonds") may be rated as low as C by Moody's or D
by S&P at the time of purchase, or may be unrated securities considered to
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be of equivalent quality. Securities that are rated C by Moody's comprise the
lowest rated class and can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Debt rated D by S&P is in default
or is expected to default upon maturity or payment date.
While the market values of medium- and lower-rated securities and
unrated securities of comparable quality tend to react less to fluctuations in
interest rate levels than do those of higher-rated securities, the market values
of certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
medium- and lower-rated securities and unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon. A
Fund may have difficulty disposing of certain of these securities because there
may be a thin trading market. Because there is no established retail secondary
market for many of these securities, the Funds anticipate that these securities
could be sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market for these securities does exist, it
generally is not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market, as well as adverse publicity and investor
perception with respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular issues when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories
is also more volatile than that of higher quality securities. Factors adversely
impacting the market
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value of these securities will adversely impact a Fund's net asset value. A Fund
will rely on the judgment, analysis and experience of Warburg in evaluating the
creditworthiness of an issuer. In this evaluation, in addition to relying on
ratings assigned by Moody's or S&P, Warburg will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. Interest rate trends and specific
developments which may affect individual issuers will also be analyzed.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether a Fund should continue to hold the securities. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. A Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings of such securities. At times, adverse publicity regarding
lower-rated securities has depressed the prices for such securities to some
extent.
Not more than 10% of each of the Balanced Fund's and the Growth &
Income Fund's net assets, and not more than 20% of the Health Sciences Fund's
total assets, may be invested in securities rated below investment grade.
Securities of Other Investment Companies. Each Fund may invest in
securities of other investment companies to the extent permitted under the 1940
Act. Presently, under the 1940 Act, a Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Lending of Portfolio Securities. Each Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). In the case of the Capital Appreciation
Fund and the Health Sciences Fund, these loans, if and when made, may not exceed
20% of the Fund's total assets taken at value. No Fund will lend portfolio
securities to its investment adviser, any sub-investment adviser or their
affiliates unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. Government Securities, which are maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Any gain or loss in the market price of the securities loaned
that might occur during the term of the loan would be for the account of the
Fund. From time to time, a Fund may return a part of the interest earned from
the investment of collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Fund and that is acting as a
"finder."
By lending its securities, a 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
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of interest paid by the borrower when U.S. Government Securities are used as
collateral. Each Fund will adhere to the following conditions whenever its
portfolio securities are loaned: (i) the Fund must receive at least 100% cash
collateral or equivalent securities of the type discussed in the preceding
paragraph from the borrower; (ii) the borrower must increase such collateral
whenever the market value of the securities rises above the level of such
collateral; (iii) the Fund must be able to terminate the loan at any time; (iv)
the Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (v) the Fund may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Board must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon a Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.
There is no current intention by each Fund to lend portfolio
securities.
Foreign Investments. The Balanced, Growth & Income, Capital
Appreciation and Health Sciences Funds may invest up to 15%, 20%, 20% and 35% of
total assets, respectively, in the securities of foreign issuers. Investors
should recognize that investing in foreign companies involves certain risks,
including those discussed below, which are in addition to those associated with
investing in U.S. issuers. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payments positions. The Funds may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many, if not all, of
the foregoing considerations apply to such investments as well.
Foreign Currency Exchange. Since the Funds may be investing in
securities denominated in currencies of non-U.S. countries, and since the Funds
may temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Funds may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect
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the exchange rates of their currencies. The Funds may use hedging techniques
with the objective of protecting against loss through the fluctuation of the
valuation of foreign currencies against the U.S. dollar, particularly the
forward market in foreign exchange, currency options and currency futures.
Euro Conversion. The planned introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in the
Economic and Monetary Union presents unique risks and uncertainties for
investors in those countries, including (i) whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; (ii) the creation of suitable clearing and settlement payment
schemes for the euro; (iii) the legal treatment of outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; (iv) the fluctuation of the euro relative to non-euro currencies
during the transition period from January 1, 1999 to December 31, 2000 and
beyond; and (v) whether the interest rate, tax and labor regimes of the European
countries participating in the euro will converge over time. Further, the
conversion of the currencies of other Economic and Monetary Union countries,
such as the United Kingdom, and the admission of other countries, including
Central and Eastern European countries, to the Economic and Monetary Union could
adversely affect the euro. These or other factors may cause market disruptions
before or after the introduction of the euro and could adversely affect the
value of foreign securities and currencies held by the Funds.
Information. Many of the foreign securities held by a Fund will not
be registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
the securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign companies are
generally subject to financial reporting standards, practices and requirements
that are either not uniform or less rigorous than those applicable to U.S.
companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
Foreign Markets. Securities of some foreign companies are less
liquid and their prices are more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays
between the trade and settlement dates of securities purchased or sold.
Increased Expenses. The operating expenses of a Fund, to the extent
it invests in foreign securities, may be higher than that of an investment
company investing exclusively in U.S. securities, since the expenses of the
Funds, such as the cost of converting foreign currency into U.S. dollars, the
payment of fixed brokerage commissions on foreign exchanges, custodial costs,
valuation costs and communication costs, may be higher than those
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costs incurred by other investment companies not investing in foreign
securities. In addition, foreign securities may be subject to foreign government
taxes that would reduce the net yield on such securities.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those
countries. The relative performance of various countries' fixed income markets
historically has reflected wide variations relating to the unique
characteristics of each country's economy. Year-to-year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign government securities in which each of the Funds may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Short Sales "Against the Box." In a short sale, a Fund (other than
the Capital Appreciation 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. A Fund may engage in a short sale if at
the time of the short sale the Fund owns or has the right to obtain without
additional cost an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box." It may be
entered into by a Fund to, for example, lock in a sale price for a security the
Fund does not wish to sell immediately. If a Fund engages in a short sale, the
collateral for the short position will be segregated in an account with the
Fund's custodian or qualified sub-custodian. In the case of the Balanced, Growth
& Income and Health Sciences Funds, no more than 10% of a Fund's net assets
(taken at current value) may be held as collateral for short sales against the
box at any one time.
A Fund may make a short sale as a hedge, when it believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund (or a security convertible or exchangeable for such security).
In such case, any future losses in the Fund's long position should be offset by
a gain in the short position and, conversely, any gain in the long position
should be reduced by a loss in the short position. The extent to which such
gains or losses are reduced will depend upon the amount of the security sold
short relative to the amount the Fund owns. There will be certain additional
transaction costs associated with short sales against the box, but a Fund 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
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securities (as a "constructive sale") on the date it effects the short sale.
However, such constructive sale treatment may not apply if the Fund closes out
the short sale with securities other than the appreciated securities held at the
time of the short sale and if certain other conditions are satisfied.
Uncertainty regarding the tax consequences of effecting short sales may limit
the extent to which a Fund may effect short sales.
Warrants. Each Fund may invest up to 15% (10% in the case of the
Capital Appreciation Fund) of its net assets in warrants. Each Fund may purchase
warrants issued by domestic and foreign companies to purchase newly created
equity securities consisting of common and preferred stock. Warrants are
securities that give the holder the right, but not the obligation to purchase
equity issues of the company issuing the warrants, or a related company, at a
fixed price either on a date certain or during a set period. The equity security
underlying a warrant is authorized at the time the warrant is issued or is
issued together with the warrant.
Investing in warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and, thus, can be
a speculative investment. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and price
movements in the underlying security are generally magnified in the price
movements of the warrant. This leveraging effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment.
This leveraging increases an investor's risk, however, in the event of a decline
in the value of the underlying security and can result in a complete loss of the
amount invested in the warrant. In addition, the price of a warrant tends to be
more volatile than, and may not correlate exactly to, the price of the
underlying security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will generally
expire without value. The value of a warrant may decline because of a decline in
the value of the underlying security, the passage of time, changes in interest
rates or in the dividend or other policies of the company whose equity underlies
the warrant or a change in the perception as to the future price of the
underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Depositary Receipts. The assets of each Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs (CDRs)
and IDRs (GDRs) are typically issued by non-U.S. banks and trust companies and
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in U.S. securities markets, and EDRs (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European and non-U.S.
securities markets, respectively.
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Non-Publicly Traded and Illiquid Securities. Each Fund may invest up
to 15% of its net assets (10% of total assets in the case of the Capital
Appreciation Fund) in non-publicly traded and illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market, time deposits maturing in more than seven days, certain Rule 144A
Securities (as defined below) and repurchase agreements which have a maturity of
longer 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. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Companies whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days without
borrowing. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act for resales of certain securities to qualified institutional buyers. Warburg
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
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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 and 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).
This investment practice could have the effect of increasing the
level of illiquidity in the Funds to the extent that qualified institutional
buyers become uninterested for a time in purchasing Rule 144A Securities. The
Board of each Fund will carefully monitor any investments by the Fund in Rule
144A Securities. The Boards may adopt guidelines and delegate to Warburg the
daily function of determining and monitoring the liquidity of Rule 144A
Securities, although each Board will retain ultimate responsibility for any
determination regarding liquidity.
Borrowing. Each Fund may borrow up to 30% of its total assets (10%
of total assets in the case of the Capital Appreciation Fund) 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, so long as there is asset
coverage of at least 300% for all borrowings of the Fund. Additional investments
(including roll-overs) will not be made when borrowings exceed 5% of a Fund's
total assets. Although the principal of such borrowings will be fixed, the
Fund's assets may change in value during the time the borrowing is outstanding.
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.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements with member banks of the Federal Reserve System and
certain non-bank dealers. Reverse repurchase agreements involve the sale of
securities held by the Fund pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with an approved custodian containing cash or liquid
securities having a value not less than the repurchase price (including accrued
interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). The Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities the Fund has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
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obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Reverse repurchase agreements that are accounted for as financings are
considered to be borrowings under the 1940 Act.
There is no current intention by each Fund to enter into reverse
repurchase agreements.
When-Issued Securities and Delayed-Delivery Transactions. Each Fund
(other than the Capital Appreciation Fund) may use up to 20% of its total assets
to purchase securities on a "when-issued" basis or purchase or sell securities
for delayed delivery (i.e., payment or delivery occur beyond the normal
settlement date at a stated price and yield). In these transactions, payment for
and delivery of the securities occur beyond the regular settlement dates,
normally within 30-45 days after the transaction. The Fund will enter into a
when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage, but may sell the securities before the
settlement date if Warburg deems it advantageous to do so. The payment
obligation and the interest rate that will be received on when-issued and
delayed-delivery securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on such securities
may be higher or lower than the yields available in the market on the dates when
the investments are actually delivered to the buyers. When-issued securities may
include securities purchased on a "when, as and if issued" basis, under which
the issuance of the security depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case, the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
the Fund engages in when-issued or delayed-delivery transactions, it relies on
the other party to consummate the trade. Failure of the seller to do so may
result in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
There is no current intention by the Capital Appreciation Fund or
the Health Sciences Fund to purchase when-issued securities and enter into
delayed-delivery transactions.
Strategies Available to the Balanced Fund and the Growth & Income Fund
Mortgage-Backed Securities. A Fund may invest in mortgage-backed
securities issued by U.S. government entities, such as GNMA, FNMA or FHLMC. In
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addition, a Fund may invest in mortgage-backed securities sponsored by U.S. and
foreign issuers as well as non-governmental issuers. Non-government issued
mortgage-backed securities may offer higher yields than those issued by
government entities, but may be subject to greater price fluctuations.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. Although there may be
government or private guarantees on the payment of interest and principal of
these securities, the guarantees do not extend to the securities' yield or
value, which are likely to vary inversely with fluctuations in interest rates,
nor do the guarantees extend to the yield or value of the Fund's shares. These
securities generally are "pass-through" instruments, through which the holders
receive a share of all interest and principal payments from the mortgages
underlying the securities, net of certain fees. Some mortgage-backed securities,
such as collateralized mortgage obligations ("CMOs"), make payments of both
principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond).
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. At present, pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-backed securities. Conversely, in periods of rising rates the
rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting a Fund's
yield.
The rate of interest on mortgage-backed securities is lower than
the interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the
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servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Asset-Backed Securities. A Fund may also invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, pools of consumer loans on assets such as motor vehicle installment sales,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest ultimately
depend on payments in respect of the underlying loans by individuals and may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which a Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized. The remaining maturity of any asset-backed
security a Fund invests in will be 397 days or less. A Fund may purchase
asset-backed securities that are unrated.
Strategy Available to the Growth & Income Fund
REITs. The Growth & Income Fund may invest up to 15% of its total
assets in real estate investment trusts ("REITs"), which are pooled investment
vehicles that invest primarily in income-producing real estate or real estate
related loans or interests. Like regulated investment companies such as the
Fund, REITs are not taxed on income distributed to shareholders provided they
comply with several requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). By investing in a REIT, the Fund will indirectly bear its
proportionate share of any expenses paid by the REIT in addition to the expenses
of the Fund.
Investing in REITs involves certain risks. A REIT may be affected by
changes in the value of the underlying property owned by such REIT or by the
quality of any credit extended by the REIT. REITs are dependent on management
skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by
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borrowers, self-liquidation, the possibilities of failing to qualify for the
exemptions from the 1940 Act. REITs are also subject to interest rate risks.
Strategies Available to the Balanced Fund
Municipal Obligations. The Balanced Fund may invest up to 15% of its
total assets in obligations that are issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies, instrumentalities, and authorities
("Municipal Obligations") to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. The interest on
Municipal Obligations, in the opinion of bond counsel or counsel to the issuer,
as the case may be, is exempt from regular federal income tax. The two principal
types of Municipal Obligations, in terms of the source of payment of debt
service on the bonds, are general obligation bonds and revenue securities, and
the Fund may hold both in any proportion. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source
but not from the general taxing power.
Among other instruments, the Balanced Fund may purchase short-term
tax anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short term loans. Such notes are issued with a short term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that the ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields,
while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by the
Balanced Fund, an issue of Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. Warburg will consider such an event in determining whether the Balanced
Fund should continue to hold the obligation. See the Appendix attached hereto
for further information concerning the rating of Moody's and S&P and their
significance.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, the laws, if any, which may be
enacted by Congress or state legislatures
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extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. There is also the possibility that as the result
of litigation or other conditions the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their, Municipal
Obligations may be materially affected.
To the extent the Fund's assets are concentrated in Municipal
Obligations that are payable from the revenues of economically related projects
or facilities or whose issuers are located in the same state, the Fund will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such states or projects or facilities to a greater extent than it
would be if its assets were not so concentrated.
Private Activity Bonds; Alternative Minimum Tax Bonds. The Fund may
invest in "Alternative Minimum Tax Bonds," which are certain private activity
bonds issued after August 7, 1986 to finance certain non-governmental
activities. While the income from Alternative Minimum Tax Bonds is exempt from
regular federal income tax, it is a tax preference item for purposes of the
federal individual and corporate "alternative minimum tax." The alternative
minimum tax is a special tax that applies to a limited number of taxpayers who
have certain adjustments or tax preference items. Available returns on
Alternative Minimum Tax Bonds acquired by the Fund may be lower than those from
other Municipal Obligations acquired by a Fund due to the possibility of
federal, state and local alternative minimum or minimum income tax liability on
Alternative Minimum Tax Bonds.
Variable Rate Notes. Municipal Obligations purchased by the Fund may
include variable rate demand notes ("VRDNs") issued by industrial development
authorities and other governmental entities. VRDNs are tax exempt Municipal
Obligations that provide for a periodic adjustment in the interest rate paid on
the notes. The interest rates are adjustable at intervals ranging from daily to
up to every six months at a prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
While there may be no active secondary market with respect to a
particular VRDN purchased by the Fund, the Fund may, upon notice as specified in
the note, demand payment of the principal of and accrued interest on the note at
any time or during specified periods not exceeding one year (depending on the
instrument involved) and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Fund to dispose of the VRDN involved, in the event the issuer of the note
defaulted on its payment obligations and during the periods that the Fund is not
entitled to exercise its demand rights. The Fund could, for this or other
reasons, suffer a loss to the extent of the default plus any expenses involved
in an attempt to recover the investment.
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VRDNs are frequently not rated by credit rating agencies, but
unrated notes purchased by the Fund will have been determined by Warburg to be
of comparable quality at the time of the purchase to rated instruments
purchasable by the Fund. Warburg monitors the continuing creditworthiness of
issuers of such notes to determine whether the Fund should continue to hold such
notes.
Zero Coupon Securities. The Balanced Fund may invest up to 15% of
its total assets in "zero coupon" U.S. Treasury, foreign government and U.S. and
foreign corporate convertible and nonconvertible debt securities, which are
bills, notes and bonds that have been stripped of their unmatured interest
coupons and custodial receipts or certificates of participation representing
interests in such stripped debt obligations and coupons. A zero coupon security
pays no interest to its holder prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and will be
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make current
distributions of interest. The Balanced Fund anticipates that it will not
normally hold zero coupon securities to maturity. Redemption of shares of the
Fund that require it to sell zero coupon securities prior to maturity may result
in capital gains or losses that may be substantial. Federal tax law requires
that a holder of a zero coupon security accrue a portion of the discount at
which the security was purchased as income each year, even though the holder
receives no interest payment on the security during the year. Such accrued
discount will be includible in determining the amount of dividends the Balanced
Fund must pay each year and, in order to generate cash necessary to pay such
dividends, the Balanced Fund may liquidate portfolio securities at a time when
it would not otherwise have done so.
Strategy Available to the Balanced Fund and the Health Sciences Fund
Emerging Growth and Small Companies; Unseasoned Issuers. Investments
in emerging growth and small- and medium-sized companies, as well as 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 and accounting standards, illiquidity of securities and markets,
higher brokerage commissions and fees and greater market risk in general. In
addition, securities of emerging growth and small- and medium-sized companies
and unseasoned issuers may involve greater risks since these securities may have
limited marketability and, thus, may be more volatile.
Strategy Available to the Capital Appreciation Fund and the Health Sciences
Fund
Dollar Rolls. A Fund also may enter into "dollar rolls," in which
the Fund sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund would forego principal and interest paid on such securities.
The Fund would be compensated by the difference between the current sale price
and the forward price for the future purchase,
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as well as by the interest earned on the cash proceeds of the initial sale. At
the time the Fund enters into a dollar roll transaction, it will place in a
segregated account maintained with an approved custodian cash or liquid
securities having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the account to ensure that its value is
maintained.
There is no current intention by each Fund to enter into dollar
rolls.
Strategies Available to the Health Sciences Fund
Securities of Health Sciences Companies. The Fund's investment
objective is capital appreciation. The Fund is a diversified management
investment company. The Fund intends to invest at least 80% of its total assets
in equity securities of health sciences companies, and under normal market
conditions will invest at least 65% of its assets in equity and debt securities
of health sciences companies. Equity securities are common stocks, preferred
stocks, warrants and securities convertible into or exchangeable for common
stocks. Health sciences companies are companies that are principally engaged in
the research, development, production or distribution of products or services
related to health care, medicine or the life sciences (collectively termed
"health sciences"). A company is considered to be "principally engaged" in
health sciences when at least 50% of its assets are committed to, or at least
50% of its revenues or operating profits are derived from, the activities
described in the previous sentence. A company will also be considered
"principally engaged" in health sciences if, in the judgment of Warburg, the
company has the potential for capital appreciation primarily as a result of
particular products, technology, patents or other market advantages in a health
sciences business and (a) the company holds itself out to the public as being
primarily engaged in a health sciences business, and (b) a substantial
percentage of the company's expenses are related to a health sciences business
and these expenses exceed revenues from non-health sciences businesses.
Warburg believes that health sciences companies can be divided into
four major categories: (1) Buyers, notably HMOs; (2) Providers, including
doctors and group practices, and also services, including hospitals and nursing
homes; (3) Suppliers, including pharmaceuticals, equipment and devices; and (4)
Innovators, including biotechnology, gene therapy and drug delivery systems.
Warburg believes that active management of the Fund's portfolio among these
categories provides more diversification than a focus on any one category. The
Fund may invest in a variety of businesses in these categories, which may
include:
Alternative Site Health Care Delivery
Biotechnology
Dental Products
Diagnostic and Therapeutic Laboratory Supplies and Equipment
Environmental Products and Services
Health Care Information Systems
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Health Care, Life Sciences, Pharmaceutical and Dental Products
Distribution
Health Care REITs
Hospital Management
Hospital Supply and Medical Device Technology
Long-Term Care, Sub-Acute Care, Rehabilitation Services and Home
Health Care
Managed Care: HMOs
Managed Care: Specialty Cost Containment
Medical, Diagnostic and Biochemical Research and Development
Nutrition and Food
Personal Care and Cosmetics
Pharmaceuticals (including Generics)
Physician Practice Management
Retail Drug and Other Health Stores
Vendors to Health Sciences Companies
The Fund intends to concentrate its investments in health sciences
companies in three industries: services, pharmaceuticals and medical devices.
The Fund will, under normal market conditions, invest at least 25% of its total
assets in the aggregate in these three industries. This policy may expose the
Fund to greater risk than a health sciences fund that invests more broadly among
industries.
Because the Fund will focus its investments in securities of
companies that are principally engaged in the health sciences, the value of its
shares will be especially affected by factors relating to the health sciences,
resulting in greater volatility in share price than may be the case with funds
that invest in a wider range of industries.
Companies engaged in biotechnology, drugs and medical devices are
affected by, among other things, limited patent duration, intense competition,
obsolescence brought about by rapid technological change and regulatory
requirements. In addition, many health sciences companies are smaller and less
seasoned, suffer from inexperienced management, offer limited product lines (or
may not yet offer products), and may have persistent losses or erratic revenue
patterns. Securities of these smaller companies may have more limited
marketability and, thus, may be more volatile. Because small companies normally
have fewer shares outstanding than larger companies, it may be more difficult
for the Fund to buy or sell significant amounts of such shares without an
unfavorable impact on prevailing prices. There is also typically less publicly
available information concerning smaller companies than for larger, more
established ones.
Other health sciences companies, including pharmaceutical companies,
companies undertaking research and development, and operators of health care
facilities and their suppliers are subject to government regulation, product or
service approval and, with respect to medical devices, the receipt of necessary
reimbursement codes, which could have a significant effect on the price and
availability of such products and services,
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and may adversely affect the revenues of these companies. These companies are
also susceptible to product liability claims and competition from manufacturers
and distributors of generic products. Companies engaged in the ownership or
management of health care facilities receive a substantial portion of their
revenues from federal and state governments through Medicare and Medicaid
payments. These sources of revenue are subject to extensive regulation and
government appropriations to fund these expenditures are under intense scrutiny.
Numerous federal and state legislative initiatives are being considered that
seek to control health care costs and, consequently, could affect the
profitability and stock prices of companies engaged in the health sciences.
Health sciences companies are generally subject to greater
governmental regulation than other industries at both the state and federal
levels. Changes in governmental policies may have a material effect on the
demand for or costs of certain products and services. A health sciences company
must receive government approval before introducing new drugs and medical
devices or procedures. This process may delay the introduction of these products
and services to the marketplace, resulting in increased development costs,
delayed cost-recovery and loss of competitive advantage to the extent that rival
companies have developed competing products or procedures, adversely affecting
the company's revenues and profitability. Expansion of facilities by health care
providers is subject to "determinations of need" by the appropriate government
authorities. This process not only increases the time and cost involved in these
expansions, but also makes expansion plans uncertain, limiting the revenue and
profitability growth potential of health care facilities operators, and
negatively affecting the price of their securities.
Certain health sciences companies depend on the exclusive rights or
patents for the products they develop and distribute. Patents have a limited
duration and, upon expiration, other companies may market substantially similar
"generic" products which have cost less to develop and may cause the original
developer of the product to lose market share and/or reduce the price charged
for the product, resulting in lower profits for the original developer.
Because the products and services of health sciences companies
affect the health and well-being of many individuals, these companies are
especially susceptible to product liability lawsuits. The share price of a
health sciences company can drop dramatically not only as a reaction to an
adverse judicial ruling, but also from the adverse publicity accompanying
threatened litigation.
Short Sales (excluding Short Sales "Against the Box"). The Fund may
from time to time sell securities short. A short sale is a transaction in which
the Fund sells securities it does not own in anticipation of a decline in the
market price of the securities. The current market value of the securities sold
short (excluding short sales "against the box") will not exceed 10% of the
Fund's assets.
To deliver the securities to the buyer, the Fund must arrange
through a broker to borrow the securities and, in so doing, the Fund becomes
obligated to replace
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<PAGE> 69
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund will make a profit or incur a loss as a
result of a short sale depending on whether the price of the securities
decreases or increases between the date of the short sale and the date on which
the Fund purchases the security to replace the borrowed securities that have
been sold. The amount of any loss would be increased (and any gain decreased) by
any premium or interest the Fund is required to pay in connection with a short
sale.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by cash or liquid securities deposited as
collateral with the broker. In addition, the Fund will place in a segregated
account with its custodian or a qualified subcustodian an amount of cash or
liquid securities equal to the difference, if any, between (i) the market value
of the securities sold at the time they were sold short and (ii) any cash or
liquid securities deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level so that (a) the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (b) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
INVESTMENT RESTRICTIONS
All Funds. Certain investment limitations of each Fund may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares ("Fundamental Restrictions"). Such majority is defined as the
lesser of (i) 67% or more of the shares present at the meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares. If a
percentage restriction (other than the percentage limitation set forth in No. 2
of the Capital Appreciation Fund and No. 1 of each of the Balanced, Growth &
Income and Health Sciences Funds) is adhered to at the time of an investment, a
later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of a Fund's assets will
not constitute a violation of such restriction.
Balanced and Growth & Income Funds. The investment limitations numbered
1 through 11 are Fundamental Restrictions. Investment limitations numbered 12
though 15 may be changed by a vote of the Board at any time.
The Balanced and Growth & Income Funds may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements and any other
transactions constituting borrowing by the Fund may not exceed 30% of the value
of the Fund's total assets at the time of such borrowing and only if after such
borrowing there is assets coverage of at least 300% for all borrowings of
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<PAGE> 70
the Fund. For purposes of this restriction, the entry into options, futures
contracts and options on futures contracts shall not constitute borrowing.
2. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer or more than 10% of the outstanding voting securities of such issuer
would be owned by the Fund, except that this 5% limitation does not apply to
U.S. government securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
3. Make loans, except that the Fund may purchase or hold fixed-income
securities, lend portfolio securities and enter into repurchase agreements in
accordance with its investment objectives, policies and limitations.
4. Underwrite any securities issued by others except to the extent that
the investment in restricted securities and the sale of securities or the
purchase of securities directly from the issuer in accordance with the Fund's
investment objectives, policies and limitations may be deemed to be
underwriting.
5. Purchase or sell real estate, except that the Fund may invest in (a)
securities secured by real estate, mortgages or interests therein or (b) issued
by companies which invest in real estate or interests therein.
6. Make short sales of securities or maintain a short position, except
that the Fund may maintain short positions in options on currencies, securities
and stock indexes, futures contracts and options on futures contracts and enter
into short sales "against the box."
7. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in options, futures
contracts and options on futures contracts 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 and options on futures contracts, currencies, securities or
indexes.
9. Pledge, mortgage or hypothecate its assets, except (a) to the extent
necessary to secure permitted borrowings and (b) to the extent related to the
deposit of assets in escrow in connection with collateral and initial or
variation margin arrangements with respect to options, futures contracts, and
options on futures contracts and in amounts not in excess of 125% of the dollar
amount borrowed.
10. 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.
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<PAGE> 71
11. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
12. Make investments for the purpose of exercising control or
management.
13. 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.
14. Invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in securities of companies that invest in or
sponsor oil, gas or mineral exploration or development programs.
15. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 15%
of the value of the Fund's total assets.
With regard to investment limitation No. 10, relating to a Fund's
holdings of illiquid securities, the Fund will monitor the liquidity of its
portfolio on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained. Particularly,
the Board will check routinely the value of illiquid securities in its portfolio
and should the value of such securities approach 15% of the net assets of the
Fund's portfolio, the Board will take action to reduce the Fund's holdings of
illiquid securities in an orderly fashion to maintain adequate liquidity. In no
event, however, will a Fund purchase an illiquid security if doing so would
result in more than 15% of the Fund's net assets being invested in illiquid
securities.
Capital Appreciation Fund. The investment limitations numbered 1
through 11 are Fundamental Restrictions. Investment limitations 12 through 14
may be changed by a vote of the Board at any time.
The Capital Appreciation Fund may not:
1. 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.
2. Borrow money or issue senior securities except that the Fund may (a)
borrow from banks for temporary or emergency purposes, and not for leveraging,
and then in amounts not in excess of 10% of the value of the Fund's total assets
at the time of such borrowing and (b) enter into futures contracts; or mortgage,
pledge or hypothecate any assets except in connection with any bank borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing. Whenever
borrowings described in (a) exceed
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<PAGE> 72
5% of the value of the Fund's total assets, the Fund will not make any
additional investments (including roll-overs). For purposes of this restriction,
(a) the deposit of assets in escrow in connection with the purchase of
securities on a when-issued or delayed-delivery basis and (b) collateral
arrangements with respect to initial or variation margin for futures contracts
will not be deemed to be pledges of the Fund's assets.
3. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
4. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities and enter into
repurchase agreements.
5. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed-income securities
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
6. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in (a)
fixed-income securities secured by real estate, mortgages or interests therein,
(b) securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs and (c) futures contracts and related
options.
7. Make short sales of securities or maintain a short position.
8. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase put and call options
on securities, (b) write covered call options on securities, (c) purchase and
write put and call options on stock indices and (d) enter into options on
futures contracts.
9. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as otherwise permitted under the 1940 Act.
10. Purchase more than 10% of the voting securities of any one issuer,
more than 10% of the securities of any class of any one issuer or more than 10%
of the outstanding debt securities of any one issuer; provided that this
limitation shall not apply to investments in U.S. government securities.
11. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in
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<PAGE> 73
connection with futures contracts or related options will not be deemed to be a
purchase of securities on margin.
12. Invest more than 10% of the value of the Fund's total assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days and (b) time deposits maturing in more than seven
calendar days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 10%
of the value of the Fund's net assets.
14. Invest in oil, gas or mineral leases.
Health Sciences Fund. The investment limitations numbered 1 through 9
are Fundamental Restrictions. Investment limitations 10 through 13 may be
changed by a vote of the Board at any time.
The Health Sciences Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets at the time of such borrowing. For purposes of this restriction,
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry except that the Fund will invest at least 25% of its total assets in
the health services, pharmaceuticals and medical devices industries; 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.
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<PAGE> 74
4. Make loans, except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and structured
securities, lend portfolio securities and enter into repurchase agreements.
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
indexes, and options on futures contracts, securities, currencies or indexes,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the purchase of securities on a
forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities which
may be illiquid because of legal or contractual restrictions on resale or
securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater than
seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
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PORTFOLIO VALUATION
The following is a description of the procedures used by a 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 over-the-counter market will be valued at the most recent sale
as of the time the valuation is made or, in the absence of sales, at the mean
between the highest bid and and lowest asked quotations. Options or 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. In determining the market value of
portfolio investments, each Fund may employ outside organizations (each, a
"Pricing Service") which may use a matrix, formula or other objective method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of each Fund under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board.
Amortized cost involves valuing a portfolio instrument at its initial cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. Securities, options, futures contracts and other assets for which
market quotations are not available and certain other assets of each Fund 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.
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 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 may not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities used in such calculation. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service as of 12:00
noon (Eastern time). If such quotations are not available, the rate of exchange
will be determined in good faith pursuant to consistently applied procedures
established by the Board.
PORTFOLIO TRANSACTIONS
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Fund's investment program to achieve its investment
objective. Purchases
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and sales of newly issued portfolio securities are usually principal
transactions without brokerage commissions effected directly with the issuer or
with an underwriter acting as principal. Other purchases and sales may be
effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the price
of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality. No brokerage commissions are typically paid on
purchases and sales of U.S. Government Securities.
Warburg will select specific portfolio investments and effect
transactions for each Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis.
Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934, as
amended) to a Fund and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving both the Fund and its other clients and,
conversely, research or other services obtained by the placement of business of
other clients may be useful to Warburg in carrying out its obligations to a
Fund. Research may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and government
officials; comparative performance evaluation
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<PAGE> 77
and technical measurement services and quotation services; and products and
other services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and accessories
that deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to Warburg's own
research program. The fees to Warburg under its advisory agreement with the Fund
are not reduced by reason of its receiving any brokerage and research services.
For the fiscal year ended October 31, 1998, $_________, $_________,
$_________, and $_________ of total brokerage commissions for the Balanced Fund,
Growth & Income Fund, Capital Appreciation Fund and Health Sciences Fund,
respectively, was paid to brokers and dealers who provided such research and
other services. Research received from brokers or dealers is supplemental to
Warburg's own research program.
The following table details amounts paid by each Fund in commissions to
broker-dealers for execution of portfolio transactions during the indicated
fiscal years or periods.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund Year/Period Ended Commissions
- --------------------------------------------------------------------------------
<S> <C> <C>
Balanced Fund August 31, 1996 $ 61,926
August 31, 1997 $ 87,403
October 31, 1997 $ 14,333
October 31, 1998
- --------------------------------------------------------------------------------
Growth & Income Fund August 31, 1996 $ 2,898,813
August 31, 1997 $ 3,350,811
October 31, 1997 $ 279,210
October 31, 1998
- --------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $ 1,510,431
October 31, 1997 $ 3,338,918
October 31, 1998
- --------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 66,762
October 31, 1998
- --------------------------------------------------------------------------------
</TABLE>
The increase in commission payments by the Capital Appreciation Fund in
the 1996 and 1997 fiscal years was attributable to the increased size of the
Fund and increased equity investments.
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The table below shows the amount of outstanding repurchase agreements
that each Fund had, as of October 31, 1998, with Goldman, Sachs & Co., one of
the regular broker-dealers of each Fund.
<TABLE>
<S> <C>
----------------------------------------------
Balanced Fund $_________
----------------------------------------------
Growth & Income Fund $_________
----------------------------------------------
Capital Appreciation Fund $_________
----------------------------------------------
Health Sciences Fund $_________
----------------------------------------------
</TABLE>
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg. Such other investment clients may invest in the same securities as a
Fund. When purchases or sales of the same security are made at substantially the
same time on behalf of such other clients, transactions are averaged as to price
and available investments allocated as to amount, in a manner which Warburg
believes to be equitable to each client, including the Funds. In some instances,
this investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or sold for the Fund. To the extent
permitted by law, securities may be aggregated with those 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.
Any portfolio transaction for a Fund may be executed through
Counsellors Securities Inc., located at 466 Lexington Avenue, New York, New York
10017, each Fund's distributor and a wholly-owned subsidiary of Warburg
("Counsellors Securities"), if, in Warburg's judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act. No portfolio transactions have been executed through
Counsellors Securities since the commencement of the Funds' operations.
In no instance will portfolio securities be purchased from or sold to
Warburg or Counsellors Securities or any affiliated person of such companies. In
addition, a Fund will not give preference to any institutions with whom the Fund
enters into distribution or shareholder servicing agreements concerning the
provision of distribution services or support services.
Transactions for a Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, a Fund will deal directly with the dealers who make a
market in the securities involved, except in those
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circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve brokerage
commissions. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options.
Each Fund may participate, if and when practicable, in bidding for the
purchase of securities for the Fund's portfolio directly from an issuer in order
to take advantage of the lower purchase price available to members of such a
group. A Fund will engage in this practice, however, only when Warburg, in its
sole discretion, believes such practice to be otherwise in the Fund's interest.
PORTFOLIO TURNOVER
Each Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. 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 a Fund could result in high
portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. To the extent that its portfolio is
traded for the short-term, a Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an issuer's
stock instead of long-term investments based on fundamental valuation of
securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of a Fund may be higher than mutual funds having
similar objectives that do not utilize these strategies.
It is not possible to predict the Funds' portfolio turnover rates. High
portfolio turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. The Balanced Fund's portfolio turnover policy is the same for both the
common stock and non-common stock portions of its portfolio. Each Fund's
portfolio turnover rate is set forth on the table under the caption "Financial
Highlights" in the Prospectuses.
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MANAGEMENT OF THE FUNDS
Officers and Board of Directors/Trustees
Except in the case of the Capital Appreciation Fund, the business and
affairs of the Funds are managed by the Board of Directors in accordance with
the laws of the State of Maryland. The business and affairs of the Capital
Appreciation Fund are managed by a Board of Trustees in accordance with the laws
of the Commonwealth of Massachusetts. Each Board elects officers who are
responsible for the day-to-day operations of the Fund and who execute policies
authorized by the Board. Under each Fund's Charter, the Board may classify or
reclassify any unissued shares of each Fund into one or more additional classes
by setting or changing in any one or more respects their relative rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Board may similarly classify or reclassify any
class of its shares into one or more series and, without shareholder approval,
may increase the number of authorized shares of each Fund.
The names (and ages) of each Fund's Directors/Trustees and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper* (64) Director/Trustee
Harvard University Professor at Harvard University;
1737 Cambridge Street National Intelligence Counsel from June
Cambridge, MA 02138 1995 until January 1997; Director or Trustee of CircuitCity
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/Trustee
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and operators of radio
stations); Director of Advo, Inc. (direct mail advertising);
Director/Trustee of other investment companies advised by
Warburg.
John L. Furth* (68) Chairman of the Board
466 Lexington Avenue Chief Executive Officer and Director
New York, New York 10017-3147 of Warburg; Associated with Warburg since 1970; Chairman of
the Board and officer of other
</TABLE>
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
42
<PAGE> 81
<TABLE>
<S> <C>
investment companies advised by Warburg;
Director/Trustee of other investment
companies advised by Warburg.
Jeffrey E. Garten (52) Director/Trustee
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke Professor in the Practice of
International Trade and Finance; Undersecretary of
Commerce for International Trade from November 1993 to
October 1995; Professor at Columbia University from
September 1992 to November 1993; Director/Trustee of
other investment companies advised by Warburg.
Thomas A. Melfe (67) Director/Trustee
1251 Avenue of the Americas Partner in the law firm of Piper & Marbury,
29th Floor L.L.P.; Partner in the law firm of Donovan
New York, New York 10020-1104 Leisure Newton & Irvine from April 1984 to April 1998;
Chairman of the Board, Municipal Fund for New York
Investors, Inc.; Director/Trustee of other
investment companies advised by Warburg.
Arnold M. Reichman* (50) Director/Trustee
466 Lexington Avenue Managing Director; Chief Operating Officer and
**6 New York, New York 10017-3147 Assistant Secretary of Warburg; Associated with Warburg
since 1984; Officer of Counsellors Securities;
Director/Trustee of other investment companies
advised by Warburg.
Alexander B. Trowbridge (69) Director/Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from January 1990 to
November 1996; Director or Trustee of New England Mutual
Life Insurance Co., ICOS Corporation (biopharmaceuticals),
WMX Technologies, Inc. (solid and hazardous waste collection
and disposal), The Rouse Company (real estate development),
Harris Corp. (electronics and communications equipment), The
Gillette Co. (personal care products) and Sun Company Inc.
(petroleum refining and marketing);
</TABLE>
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
43
<PAGE> 82
<TABLE>
<S> <C>
Director/Trustee of other investment companies advised
by Warburg.
*6 moved from here; text not shown
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1991; Vice President of
Citibank, N.A. from 1987 to 1991; Officer of Counsellors
Securities and of other investment companies advised by
Warburg.
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg,
New York, New York 10017-3147 Associated with Warburg since 1984; Officer of
Counsellors Securities and of other investment
companies advised by Warburg.
Eugene P. Grace (47) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since April 1994; Attorney-at-law from
September 1989 to April 1994; life insurance agent,
New York Life Insurance Company from 1993 to 1994;
Officer of Counsellors Securities and of other
investment companies advised by Warburg.
Howard Conroy, CPA (45) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1992; Officer of other investment companies
advised by Warburg.
Daniel S. Madden, CPA (33) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1995; Associated with BlackRock Financial
Management, Inc. from September 1994 to October
1996; Associated with BEA Associates from April 1993
to September 1994; Associated with Ernst &
Young LLP from 1990 to 1993; Officer of other
investment companies advised by Warburg.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1996; Associated with the law firm of Willkie
Farr & Gallagher from 1993 to 1996;
</TABLE>
44
<PAGE> 83
<TABLE>
<S> <C>
Officer of other investment companies advised by Warburg.
</TABLE>
No employee of Warburg or PFPC Inc., each Funds' co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Fund for
acting as an officer or director of the Fund. Each Director who is not a
director, trustee, officer or employee of Warburg, PFPC or any of their
affiliates receives an annual fee of $500, and $250 ($1,000 in the case of the
Capital Appreciation Fund) for each meeting of the Board attended by him for his
services as Director and is reimbursed for expenses incurred in connection with
his attendance at Board meetings.
Directors/Trustees' Total Compensation
(for the fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
All
Investment
Growth & Capital Health Companies
Name of Director/Trustee Balanced Income Appreciation Sciences Managed by
Fund Fund Fund Fund Warburg*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John L. Furth** None None None None None
- ------------------------------------------------------------------------------------------------
Arnold M. Reichman** None None None None None
- ------------------------------------------------------------------------------------------------
Richard N. Cooper $1,750 $1,750 $2,000 $1,500 $73,250
- ------------------------------------------------------------------------------------------------
Donald J. Donahue*** $1,750 $1,750 $2,000 $1,500 $44,500
- ------------------------------------------------------------------------------------------------
Jack W. Fritz $1,750 $1,750 $2,000 $1,500 $73,250
- ------------------------------------------------------------------------------------------------
Jeffrey E. Garten N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Thomas A. Melfe $1,750 $1,750 $2,000 $1,500 $44,500
- ------------------------------------------------------------------------------------------------
Alexander B. Trowbridge $1,750 $1,750 $2,000 $1,500 $73,250
- ------------------------------------------------------------------------------------------------
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 39 investment
companies advised by Warburg, except for Mr. Melfe, who also serves as a
Director/Trustee of 38 investment companies advised by Warburg.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg, and, accordingly, receive no compensation from any Fund or any
other investment company advised by Warburg.
*** Mr. Donahue resigned as a Director/Trustee of each Fund effective
February 6, 1998.
As of January 30, 1999] Directors or officers of the Funds as a group
owned less than 1% of the outstanding shares of each Fund. As of that date, the
following shareholders beneficially owned 5% or more of each Fund's outstanding
shares.
45
<PAGE> 84
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Balanced Fund
Growth & Income Fund
Capital Appreciation Fund
Health Sciences Fund
</TABLE>
Portfolio Managers of the Funds
Balanced Fund. Brian S. Posner, Scott T. Lewis and Dale C. Christensen
serve as Co-Portfolio Managers of the Balanced Fund. Mr. Brian S. Posner is also
the Portfolio Manager of the Growth & Income Fund, the Growth & Income Portfolio
of the Warburg Pincus Trust and the Value Portfolio of the Warburg Pincus
Institutional Fund, Inc. Prior to joining Warburg, Mr. Posner was employed from
1987 to 1996 by Fidelity Investments, where, most recently, he was the vice
president and portfolio manager of the Fidelity Equity-Income II Fund. Mr.
Posner received an undergraduate degree from Northwestern University and his
M.B.A. in finance from the University of Chicago.
Mr. Lewis is also a Vice President and a research analyst at Warburg.
Prior to joining Warburg, Mr. Lewis was an assistant portfolio manager at Bench
Corporation from 1984 to 1985 and a trader at Atlanta/Sosnoff Management Corp.
from 1984 to 1985 and a trader at E.F. Hutton & Co. from 1982 to 1984. Mr. Lewis
received his M.B.A. and B.S. degrees from New York University.
Mr. Christensen is also the Co-Portfolio Manager of Warburg Pincus
Fixed Income Fund, Warburg Pincus Global Fixed Income Fund, Warburg Pincus
Intermediate Maturity Government Fund and Warburg Pincus New York Intermediate
Municipal Fund, the Global Fixed Income Portfolios of Warburg Pincus
Institutional Fund, Inc. and Warburg Pincus Trust II and the Fixed Income
Portfolio of Warburg Pincus Trust. He also directs the fixed income group at
Warburg, which he joined in 1989, providing portfolio management for
institutional clients around the world. Mr. Christensen was a vice president in
the International Private Banking division at Citicorp from 1984 to 1989. Prior
to that, Mr. Christensen was a fixed income portfolio manager at CIC Asset
Management from 1982 to 1984. Mr. Christensen earned a B.S. in Agriculture from
the University of Alberta and a B.Ed. in Mathematics from the University of
Calgary, both located in Canada.
Growth & Income Fund. Mr. Posner (described above) is also the
Portfolio Manager of the Growth & Income Fund.
Capital Appreciation Fund. Ms. Susan L. Black, Portfolio Manager of the
Capital Appreciation Fund, is also Co-Portfolio Manager of the Health Sciences
Fund.
46
<PAGE> 85
Ms. Black is a Managing Director of Warburg as well as the Director of Research
and a Senior Portfolio Manager of the Institutional Growth Equity product. From
1961 until 1973, Ms. Black was employed by Argus Research, first as a securities
analyst, then as director of research. From 1973 until 1977 and from 1978 until
1979 Ms. Black was a vice president of research at Drexel Burnham Lambert. From
1977 until 1978 Ms. Black was a vice president of research at Donaldson, Lufkin
& Jenrette. From 1979 until 1985 Ms. Black was a partner at Century Capital
Associates. Ms. Black joined Warburg in 1985. Ms. Black received a B.A. degree
from Mount Holyoke College.
Health Sciences Fund. Ms. Susan L. Black (described above) is also
Co-Portfolio Manager of the Health Sciences Fund.
Ms. Patricia F. Widner, Co-Portfolio Manager of the Health Sciences
Fund, is a Vice President of Research at Warburg, which she joined in 1991 as
the healthcare securities analyst for the firm. From 1985 to 1991, she was a
vice president and securities analyst, investing in the securities of venture
capital and small capitalization healthcare companies, for Citibank Investment
Management, which changed its name in 1988 to Chancellor Capital Management.
From 1984 to 1985, Ms. Widner served as a marketing director at Whittaker Health
Services, a start-up HMO which later was sold to The Travelers Group. In 1984,
Ms. Widner was employed by Merrill Lynch as an investment banker specializing in
not-for-profit hospitals. Between 1979 and 1982, she was a practicing dietitian
and a sales representative for Abbott Laboratories. Ms. Widner received a B.S.
from Marymount College, an M.B.A. from The Wharton School, University of
Pennsylvania and completed the Registered Dietitian program at Peter Bent
Brigham Hospital in Boston, Massachusetts.
Investment Adviser and Co-Administrators
Warburg, located at 466 Lexington Avenue, New York, New York
10017-3147, serves as investment adviser to each Fund pursuant to a written
agreement (the "Advisory Agreement"). Counsellors Funds Service, Inc.
("Counsellors Service") and PFPC both serve as co-administrators to each Fund
pursuant to separate written agreements (the "Counsellors Service
Co-Administration Agreement" and the "PFPC Co-Administration Agreement,"
respectively). Each class of shares of a Fund bears its proportionate share of
fees payable to Warburg, Counsellors Service and PFPC in the proportion that its
assets bear to the aggregate assets of the Fund at the time of calculation.
These fees are calculated at an annual rate based on a percentage of a Fund's
average daily net assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year/ Period Gross Net
Fund Ended Advisory Fee Waiver Advisory Fee
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund August 31, 1996 $170,672 $145,632 $ 25,040
---------------------------------------------------------
August 31, 1997 $319,264 $140,469 $178,795
---------------------------------------------------------
October 31, 1997 $ 60,121 $ 35,238 $ 24,883
---------------------------------------------------------
October 31, 1998
- -----------------------------------------------------------------------------
</TABLE>
47
<PAGE> 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year/ Period Gross Net
Fund Ended Advisory Fee Waiver Advisory Fee
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund August 31, 1996 $7,914,238 0 $7,914,238
---------------------------------------------------------
August 31, 1997 $4,637,851 0 $4,637,851
---------------------------------------------------------
October 31, 1997 $ 901,812 0 $ 901,812
---------------------------------------------------------
October 31, 1998
- -------------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $2,323,788 0 $2,323,788
---------------------------------------------------------
October 31, 1997 $3,847,872 0 $3,847,872
---------------------------------------------------------
October 31, 1998
- -------------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 124,333 $124,333 0
---------------------------------------------------------
October 31, 1998
- -------------------------------------------------------------------------------------
</TABLE>
PFPC and Counsellors Service earned the following amounts in
co-administration fees.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Fund Year PFPC Counsellors Service
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund August 31, 1996 $ 28,445 $ 18,949
($4,713 with waiver)
----------------------------------------------------------------------
August 31, 1997 $ 53,211 $ 35,474
----------------------------------------------------------------------
October 31, 1997 $ 10,020 $ 6,680
----------------------------------------------------------------------
October 31, 1998
- ---------------------------------------------------------------------------------------------------
Growth & Income Fund August 31, 1996 $1,645,362 $992,718
----------------------------------------------------------------------
August 31, 1997 $ 927,570 $555,880
----------------------------------------------------------------------
October 31, 1997 $ 180,362 $109,797
----------------------------------------------------------------------
October 31, 1998
- ---------------------------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $ 332,684 $332,684
----------------------------------------------------------------------
October 31, 1997 $ 535,580 $549,696
----------------------------------------------------------------------
October 31, 1998
- ---------------------------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 12,433* $ 12,433
----------------------------------------------------------------------
October 31, 1998
- ---------------------------------------------------------------------------------------------------
</TABLE>
Fully Waived
Custodians and Transfer Agent
PNC Bank, National Association ("PNC") and State Street Bank and Trust
Company serve as custodians of each Funds' U.S. and non-U.S. assets,
respectively, pursuant to separate custodian agreements (the "Custodian
Agreements"). Under the Custodian Agreements, PNC and State Street each (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds and
transfers portfolio securities on account of the Fund, (iii) makes receipts and
disbursements of money on behalf of the Fund, (iv) collects and receives all
income and other payments and distributions for the account of the Fund's
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Fund's custodial arrangements. PNC may delegate its duties under
its Custodian Agreement with the Fund to a wholly owned direct or indirect
subsidiary of PNC or PNC Bank Corp. upon notice to the Fund and upon the
satisfaction of certain other conditions. With the approval of the Board, State
Street is authorized to select one or more foreign banking
48
<PAGE> 87
institutions and foreign securities depositories to serve as sub-custodian on
behalf of the Fund. PNC is an indirect, wholly owned subsidiary of PNC Bank
Corp. and its principal business address is 1600 Market Street, Philadelphia,
Pennsylvania 19103. The principal business address of State Street is 225
Franklin Street, Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing, transfer and
dividend disbursing agent of each Fund pursuant to a Transfer Agency and Service
Agreement, under which State Street (i) issues and redeems shares of the Fund,
(ii) addresses and mails all communications by the Fund to record owners of Fund
shares, including reports to shareholders, dividend and distribution notices and
proxy material for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board concerning the transfer agent's operations with respect to the Fund. State
Street has delegated to Boston Financial Data Services, Inc., an affiliate of
State Street ("BFDS"), responsibility for most shareholder servicing functions.
BFDS's principal business address is 2 Heritage Drive, North Quincy,
Massachusetts 02171.
Organization of the Funds
Capital Appreciation Fund. The Fund's Agreement and Declaration of
Trust (the "Trust Agreement") authorizes the Board to issue an unlimited number
of full and fractional shares of common stock, $.001 par value per share, of
which an unlimited number are designated "Common Shares" and an unlimited number
are designated "Advisor Shares."
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Capital
Appreciation Fund. However, the Trust Agreement disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Fund or a Trustee. The Trust Agreement provides for indemnification from the
Fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations, a
possibility that Warburg believes is remote and immaterial. Upon payment of any
liability incurred by the Fund, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way so as to avoid, as
far as possible, ultimate liability of the shareholders for liabilities of the
Fund.
Balanced Fund, Growth & Income Fund and Health Sciences Fund. Each
Fund's charter authorizes the Board to issue three billion full and fractional
shares of common stock, $.001 par value per share, of which one billion shares
are designated "Common Shares" and two billion shares are designated "Advisor
Shares" in the case of the Balanced and Growth & Income Funds and one billion
shares are designated "Common Shares" and one billion shares are designated
"Advisor Shares" in the case of the Health Sciences Fund.
49
<PAGE> 88
All Funds. All shareholders of a Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors/Trustees can elect all Directors/Trustees. Shares
are transferable but have no preemptive, conversion or subscription rights.
Investors in a Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Shareholders of a Fund will
vote in the aggregate except where otherwise required by law and except that
each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the governing 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. Lionel I.
Pincus may be deemed to be a controlling person of the Balanced Fund and the
Growth and Income Fund because he may be deemed to possess or share investment
power over shares owned by clients of Warburg.
The Funds are open-end management investment companies within the
meaning of the 1940 Act. The Balanced and Growth & Income Funds were
incorporated on January 29, 1996, under the laws of the State of Maryland. The
Capital Appreciation Fund was organized on January 20, 1987 under the laws of
The Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." The Health Sciences Fund was incorporated on
October 31, 1996 under the laws of the State of Maryland. Each of the Funds is
diversified. Each Fund (except the Health Sciences Fund) offers two classes of
shares, Common Shares and Advisor Shares. Unless otherwise indicated, references
to a "Fund" apply to each class of shares of that Fund.
The Balanced Fund and the Growth & Income Funds were incorporated under
the names Warburg, Pincus Balanced Fund, Inc. and Warburg, Pincus Growth &
Income Fund, Inc., respectively. On May 3, 1996, each of the Balanced and Growth
& Income Funds acquired all of the assets and liabilities of the investment
portfolio of the RBB Fund with a similar name. On February 26, 1992, the Capital
Appreciation Fund amended its Agreement and Declaration of Trust to change its
name from "Counsellors Capital Appreciation Fund" to "Warburg, Pincus Capital
Appreciation Fund." The Health Sciences Fund was incorporated under the name
"Warburg, Pincus Health Sciences Fund, Inc."
Distribution and Shareholder Servicing
Common Shares. The Balanced Fund and the Health Sciences Fund have each
entered into a Shareholder Servicing and Distribution Plan (the "12b-1 Plan"),
pursuant
50
<PAGE> 89
to Rule 12b-1 under the 1940 Act, pursuant to which the Fund will pay
Counsellors Securities, in consideration for Services (as defined below), a fee
calculated at an annual rate of .25% of the average daily net assets of the
Common Shares of the Fund. Services performed by Counsellors Securities include
(i) the sale of the Common Shares, as set forth in the 12b-1 Plan ("Selling
Services"), (ii) ongoing servicing and/or maintenance of the accounts of Common
Shareholders of the Fund, as set forth in the 12b-1 Plan ("Shareholder
Services"), and (iii) sub-transfer agency services, subaccounting services or
administrative services related to the sale of the Common Shares, as set forth
in the 12b-1 Plan ("Administrative Services" and collectively with Selling
Services and Administrative Services, "Services") including, without limitation,
(a) payments reflecting an allocation of overhead and other office expenses of
Counsellors Securities related to providing Services; (b) payments made to, and
reimbursement of expenses of, persons who provide support services in connection
with the distribution of the Common Shares including, but not limited to, office
space and equipment, telephone facilities, answering routine inquiries regarding
the Fund, and providing any other Shareholder Services; (c) payments made to
compensate selected dealers or other authorized persons for providing any
Services; (d) costs relating to the formulation and implementation of marketing
and promotional activities for the Common Shares, including, but not limited to,
direct mail promotions and television, radio, newspaper, magazine and other mass
media advertising, and related travel and entertainment expenses; (e) costs of
printing and distributing prospectuses, statements of additional information and
reports of the Fund to prospective shareholders of the Fund; and (f) costs
involved in obtaining whatever information, analyses and reports with respect to
marketing and promotional activities that the Fund may, from time to time, deem
advisable.
Pursuant to the 12b-1 Plan, Counsellors Securities provides the Board
with periodic reports of amounts expended under the 12b-1 Plan and the purpose
for which the expenditures were made.
For the period or year ended October 31, 1998, the Balanced Fund and
the Health Sciences Fund Common Shares paid the following amounts pursuant to
the 12b-1 Plan, all of which was spent on advertising, marketing communications
and public relations.
<TABLE>
<CAPTION>
---------------------------------------
Fund Payment
---------------------------------------
<S> <C>
Balanced Fund $______
---------------------------------------
Health Sciences Fund $______
---------------------------------------
</TABLE>
All Funds, Advisor Shares. The Balanced, Growth & Income, Capital
Appreciation and the Health Sciences Fund (which currently does not offer
Advisor Shares) have entered into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, retirement plans and financial intermediaries ("Institutions") to
provide certain distribution, shareholder servicing, administrative and/or
accounting services for their clients or customers (or
51
<PAGE> 90
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, pursuant to
which the Fund will pay in consideration for services, a fee calculated at an
annual rate of .50% of the average daily net assets of the Advisor Shares of the
Fund. The Distribution Plan requires the Board, at least quarterly, to receive
and review written reports of amounts expended under the Distribution Plan and
the purposes for which such expenditures were made. The Funds' Advisor Shares
paid Institutions the following fees for the years or periods ended October 31,
1998, all of which were paid to Institutions:
<TABLE>
<CAPTION>
---------------------------------------
Fund Payment
---------------------------------------
<S> <C>
Balanced Fund $______
---------------------------------------
Growth & Income Fund $______
---------------------------------------
Capital Appreciation Fund $______
---------------------------------------
</TABLE>
In addition to the 12b-1 fees payable by a Fund, Warburg or Counsellors
Securities may pay Service Organizations a fee of up to .10% (the "Service Fee")
of the average annual value of accounts with the Fund maintained by such Service
Organizations for services provided or expenses incurred by the Service
Organization that are not covered by an Agreement under the Fund's Distribution
Plan. A portion of the Service Fee paid may be reimbursed by the Fund. The
Service Fee payable to any particular Service Organization is determined based
upon a number of factors, including the nature and quality of services provided,
the operations processing requirements of the relationship and the standardized
fee schedule of the Service Organization.
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 relevant Prospectus and this
Statement of Additional Information in conjunction with the Agreement and other
literature describing the services and related fees that would be provided by
the Institution to its Customers prior to any purchase of Fund shares.
Prospectuses are available from each Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
General. The Distribution Plans and the 12b-1 Plans will continue in
effect for so long as its continuance is specifically approved at least annually
by each Fund's
52
<PAGE> 91
Board, including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Distribution Plans or the 12b-1 Plans, as the case may be ("Independent
Directors"). Any material amendment of the Distribution Plans or the 12b-1 Plans
would require the approval of the Board in the same manner. Neither the
Distribution Plans nor the 12b-1 Plans may be amended to increase materially the
amount to be spent thereunder without shareholder approval of the relevant class
of shares. Each Distribution Plan and the 12b-1 Plan may be terminated at any
time, without penalty, by vote of a majority of the Independent Directors or by
a vote of a majority of the outstanding voting securities of the relevant class
of shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per share net
asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If the 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. Each Fund will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Plan") is available to shareholders who wish to receive specific amounts of
cash periodically. Withdrawals may be made under the Plan by redeeming as many
shares of the relevant Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by Warburg is
available to investors in each Fund. A Common Shareholder may exchange Common
Shares of a Fund for Common Shares of another Fund or for Common Shares of
another Warburg Pincus fund at their respective net asset values. An Advisor
Shareholder may exchange
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<PAGE> 92
Advisor Shares of a Fund for Advisor Shares of another Warburg Pincus fund at
their respective net asset values. If an exchange request is received by Warburg
Pincus Funds or their agent prior to the close of regular trading on the NYSE,
the exchange will be made at each Fund's net asset value determined at the end
of that business day. Exchanges will be effected without a sales charge but must
satisfy the minimum dollar amount necessary for new purchases. The Fund may
refuse exchange purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any
state in which the shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange shares of a
Fund for shares in another Warburg Pincus Fund should review the prospectus of
the other fund prior to making an exchange. For further information regarding
the exchange privilege or to obtain a current prospectus for another Warburg
Pincus Fund, an investor should contact Warburg Pincus Funds at (800) 927-2874.
Each Fund reserves the right to refuse exchange purchases by any person
or group if, in Warburg's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when a Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. Each Fund reserves the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
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 each Fund. 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 a Fund. The summary is based on the laws in effect
on the date of this Statement of Additional Information, which are subject to
change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a regulated
investment company each taxable year under the Code. To so qualify, a Fund must,
among other things: (a) derive at least 90% of its gross income in each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) diversify its holdings so
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<PAGE> 93
that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of
the market value of the Fund's assets is represented by cash, securities of
other regulated investment companies, United States government securities and
other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Fund's assets and not greater
than 10% of the outstanding voting securities of such issuer and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
U.S. Government Securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers that the Fund controls
and are determined to be engaged in the same or similar trades or businesses or
related trades or businesses. Each Fund expects that all of its foreign currency
gains will be directly related to its principal business of investing in stocks
and securities.
As a regulated investment company, 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. Any dividend declared by a Fund in October, November or December of
any calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions, including amounts derived from interest on tax-exempt
obligations, would be taxable to shareholders to the extent of current and
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of each
Fund will determine annually whether to distribute any net realized long-term
capital gains in excess of net realized short-term capital losses (including any
capital loss carryovers). Each Fund currently expects to distribute any excess
annually to its shareholders. However, if a Fund retains for investment an
amount equal to all or a portion of its net long-term capital gains in excess of
its net short-term capital losses and capital loss carryovers, it will be
subject to a corporate tax (currently at a rate of 35%) on the amount retained.
In that event, the Fund will designate such retained amounts as undistributed
capital gains in a notice to its shareholders who (a) will be required to
include in income for United Stares federal income tax purposes, as long-term
capital gains,
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<PAGE> 94
their proportionate shares of the undistributed amount, (b) will be entitled to
credit their proportionate shares of the 35% tax paid by the Fund on the
undistributed amount against their United States federal income tax liabilities,
if any, and to claim refunds to the extent their credits exceed their
liabilities, if any, and (c) will be entitled to increase their tax basis, for
United States federal income tax purposes, in their shares by an amount equal to
65% of the amount of undistributed capital gains included in the shareholder's
income. Organizations or persons not subject to federal income tax on such
capital gains will be entitled to a refund of their pro rata share of such taxes
paid by 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 it 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 the Fund does not distribute by the end of any calendar year at least 98%
of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by 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 each 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 the Fund and
may limit the Fund's ability to pay sufficient dividends and to make sufficient
distributions to satisfy the 90% and excise tax distribution requirements.
If, in any taxable year, a Fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement,
it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits, would constitute dividends (eligible for the
corporate dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the shareholders' hands as long-term capital gains.
If a Fund fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in order to
qualify again as a regulated investment company. In addition, if the Fund failed
to qualify as a regulated investment company for a period greater than one
taxable year, the Fund may be required to recognize any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
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<PAGE> 95
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 Fund (i.e., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the Fund and defer
Fund losses. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also (a) will require 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 the Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. Each Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in short sales against the box or acquires any foreign
currency, forward contract, option, futures contract or hedged investment in
order to mitigate the effect of these rules and prevent disqualification of the
Fund as a regulated investment company.
Passive Foreign Investment Companies
If a Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), it may be subject to
United States federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. If a Fund were to invest in a PFIC and
elected to treat the PFIC as a "qualified electing fund" under the Code, in lieu
of the foregoing requirements, the Fund might be required to include in income
each year a portion of the ordinary earnings and net capital gains of the
qualified electing fund, even if not distributed to the Fund, and such amounts
would be subject to the 90% and excise tax distribution requirements described
above. In order to make this election, the Fund would be required to obtain
certain annual information from the passive foreign investment companies in
which it invests, which may be difficult or not possible to obtain.
Alternatively, a Fund may make a mark-to-market election that will
result in a Fund being treated as if it had sold and repurchased all of the PFIC
stock at the end of each year. In this case, the Fund would report gains as
ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for all
subsequent taxable years of the Fund, unless revoked with the consent of the
IRS. By making the election, a 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. The Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. The Fund will make the appropriate tax elections if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
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<PAGE> 96
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 the 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 the Fund, and as a capital gain
thereafter (if the shareholder holds his shares of the Fund as capital assets).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or capital
gain distribution should be aware that, although the price of shares just
purchased at that time may reflect the amount of the forthcoming distribution,
such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (a)
the date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized and his
basis in his shares. Such gain or loss will be treated as capital gain or loss,
if the shares are capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for one year or less. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced, including replacement through the reinvesting of
dividends and capital gains distributions in a Fund, within a 61-day period
beginning 30 days before and ending 30 days after the disposition of the shares.
In such a case, the basis of the shares acquired will be increased to reflect
the disallowed loss. Any loss realized by a shareholder on the sale of a
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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.
Foreign Taxes
Income received by a Fund from non-U.S. sources may be subject to
withholding and other taxes imposed by other countries. Because it is not
expected that more than 50 percent of the value of a Fund's total assets at the
close of its taxable year will consist of stock and securities of non-U.S.
corporations, it is not expected that a Fund will be eligible to elect to "pass
through" to the Fund's shareholders the amount of foreign income and similar
taxes paid by the Fund. In the absence of such an election, the foreign taxes
paid by a Fund will reduce its investment company taxable income, and
distributions of investment company taxable income received by the Fund from
non-US sources will be treated as United States source income.
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
Fund to its shareholders during the preceding taxable year.
Special Tax Matters Relating to the Balanced Fund
The investment by the Balanced Fund in zero coupon securities may
create special tax consequences. Zero coupon securities do not make interest
payments; however, a portion of the difference between a zero coupon security's
maturity value and its purchase price is imputed as income to the Fund each year
even though the Fund receives no cash distribution until maturity. Under the
U.S. federal tax laws applicable to mutual funds, the Fund will not be subject
to tax on this income if it pays dividends to
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its shareholders substantially equal to all the income received from, or imputed
with respect to, its investments during the year, including its zero coupon
securities. These dividends will ordinarily constitute taxable income to
shareholders of the Fund.
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 A FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at (800) 927-2874.
With respect to a Funds' Common and Advisor Shares, the Funds' average
annual total returns for the indicated periods ended October 31, 1998 were as
follows (performance figures calculated without waiver by a Fund's service
provider(s), if any, are noted in italics):
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TOTAL RETURN
Common Shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
From Commencement of
Operations or Ten-Year
Fund One-Year Five-Year (commencement date)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced __% (__%) __% (__%) __% (__%)
(10/6/88)
- ---------------------------------------------------------------------------------------------------------------
Growth & Income __% __% __% (__%)
(10/6/88)
- ---------------------------------------------------------------------------------------------------------------
Capital Appreciation __% __% __%
(8/17/87)
- ---------------------------------------------------------------------------------------------------------------
Health Sciences N/A N/A __%+ (__%)+
(12/31/96)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
+Non-annualized.
Advisor Shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
From Commencement of
Operations
Fund One-Year Five-Year (commencement date)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced __% (__%) ___ __% (__%)
(7/31/95)
- ---------------------------------------------------------------------------------------------------------------
Growth & Income __% ___ __%
(5/15/95)
- ---------------------------------------------------------------------------------------------------------------
Capital Appreciation __% ___% __%
(8/17/87)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
+Non-annualized.
These total return figures show the average percentage change in value
of an investment in a Fund from the beginning of the measurement period to the
end of the measurement period. The figures reflect changes in the price of the
Fund's shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in shares of
the Fund. Total return will be shown for recent one-, five- and ten-year
periods, and may be shown for other periods as well (such as from commencement
of the Fund's operations or on a year-by-year, quarterly or current year-to-date
basis).
These figures are calculated by finding the average annual compounded
rates of return for the one-, five- and ten- (or such shorter period as the
relevant class of shares has been offered) year periods that would equate the
initial amount invested to the ending redeemable value according to the
following formula: P (1 + T)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
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<PAGE> 100
are reinvested during the period. Investors should note that this performance
may not be representative of a Fund's total return over longer market cycles.
When considering average total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that each Fund seeks long-term appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. A Fund may also advertise aggregate total return figures for
various periods, representing the cumulative change in value of an investment in
the relevant Fund for the specific period (again reflecting changes in share
prices and assuming reinvestment of dividends and distributions). Aggregate and
average total returns may be shown by means of schedules, charts or graphs and
may indicate various components of total return (i.e., change in value of
initial investment, income dividends and capital gain distributions).
A Fund may advertise, from time to time, comparisons of the performance
of its Common Shares and/or Advisor Shares with that of one or more other mutual
funds with similar investment objectives. A Fund may advertise average annual
calendar year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph, except that the
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the Fund's total
return in longer market cycles.
A Fund may also advertise its yield. Yield is calculated by annualizing
the net investment income generated by the Fund over a specified thirty-day
period according to the following formula:
YIELD = 2[( a-b + 1)(6) -1]
---
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
The yield for the Common Shares of the Balanced Fund for the thirty-day
period ended October 31, 1998 was ____% and for the Advisor Shares was ____%.
The yield for the Common Shares of the Growth & Income Fund for the
thirty-day period ended October 31, 1998 was ____% and for the Advisor Shares
was ____%.
The performance of a class of Fund shares will vary from time to time
depending upon market conditions, the composition of a Fund's portfolio and
operating expenses allocable to it. As described above, total return is based on
historical earnings and is
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<PAGE> 101
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 addition, reference may be made in advertising a class of Fund
shares to opinions of Wall Street economists and analysts regarding economic
cycles and their effects historically on the performance of small companies,
both as a class and relative to other investments. A Fund may also discuss its
beta, or volatility relative to the market, and make reference to its relative
performance in various market cycles in the United States.
Each Fund may compare its performance with (i) that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar investment services that monitor the performance of mutual funds or as
set forth in the publications listed below; (ii) in the case of the Balanced and
Growth & Income Funds, with the S&P 500 Index; in the case of the Capital
Appreciation Fund, with appropriate indexes prepared by Frank Russell Company
relating to securities represented in the Fund, the S&P Midcap 400 Index and the
S&P Index; and in the case of the Health Sciences Fund, various unmanaged
indexes, developed and maintained by S&P, relating to the securities of health
sciences companies; or (iii) other appropriate indexes of investment securities
or with data developed by Warburg derived from such indexes. A Fund may include
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney,
The Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various time periods. In addition,
each Fund may from time to time compare the expense ratio of its Common Shares
to that of any investment companies with similar objectives and policies, based
on data generated by Lipper Analytical Services, Inc. or similar investment
services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Fund may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, a Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market industry benchmarks. Each Fund may also discuss measures of
risk, the continuum of risk and return relating to different investments and the
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potential impact of foreign stocks on a portfolio otherwise composed of domestic
securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund. The financial statements that are incorporated by
reference into this Statement of Additional Information have been audited by PwC
and have been incorporated by reference 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 Warburg and Counsellors Securities.
MISCELLANEOUS
As of January 30, 1998, the name, address and percentage of ownership
of each person that owns of record 5% or more of each Fund's outstanding shares
were as follows:
___________ Fund
Common Shares Advisor Shares
Mr. Lionel I. Pincus, Chief Executive Officer of Warburg, may be deemed
to have beneficially owned [___%, ___%, ____% and ___%] of the Common Shares
outstanding of each of the Balanced, Growth & Income, Capital Appreciation and
Health Sciences Funds, respectively, including shares owned by clients for which
Warburg has investment discretion and by companies that Warburg may be deemed to
control. Mr. Pincus disclaims ownership of these shares and does not intend to
exercise voting rights with respect to these shares.
FINANCIAL STATEMENTS
Each Fund's audited annual report dated October 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference with respect to all information
regarding the relevant Fund included therein. Each Fund will furnish without
charge a copy of the annual reports upon request by calling the Fund at
1-800-927-2874.
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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.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P for
short-term notes:
SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus sign designation.
SP-2 - Loans bearing this designation evidence a satisfactory capacity
to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of high
quality with margins of protection ample although not so large as in the
preceding group.
A-1
<PAGE> 104
Corporate Bond and Municipal Obligations Ratings
The following summarizes the ratings used by S&P for corporate bonds
and Municipal Obligations:
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.
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.
A-2
<PAGE> 105
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 and Municipal Obligations:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
A-3
<PAGE> 106
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-4
<PAGE> 107
PART C
OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
a Articles of Incorporation.(1)
b(1) By-Laws.(1)
(2) Amendment to By-Laws.(2)
c Registrant's Forms of Stock Certificates.(3)
d Investment Advisory Agreement.(3)
e Distribution Agreement.(3)
f Not applicable.
g(1) Custodian Agreement with PNC Bank, National
Association.(3)
(2) Custodian Agreement with State Street Bank & Trust
Company.(4)
h(1) Transfer Agency and Service Agreement.(3)
(2) Co-Administration Agreement with Counsellors Funds
Service, Inc.(3)
</TABLE>
- ----------
1 Incorporated by reference to the corresponding exhibit in the Fund's
Registration Statement on Form N-1A filed on November 1, 1996 (Securities
Act No. 333-15419).
2 Incorporated by reference to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement dated February 23, 1998 (Securities
Act File No. 333-15419).
3 Incorporated by reference to the Registrant's Pre-Effective Amendment No.
1 to its Registration Statement on Form N-1A filed with the Securities and
Exchange Commission on December 17, 1996 (Securities Act File No.
333-15419).
4 Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit to the
Registration Statement on Form N-14 of Warburg, Pincus Major Foreign
Markets Fund, Inc. (formerly known as Warburg, Pincus Managed EAFE(R)
Countries Fund, Inc. filed on November 5, 1997 (Securities Act File No.
333-39611).
<PAGE> 108
<TABLE>
<S> <C>
(3) Co-Administration Agreement with PFPC Inc.(3)
i(1) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Fund.(5)
(2) Opinion and Consent of Venable, Baetjer and Howard,
LLP, Maryland counsel to the Fund.(3)
j Consent of PricewaterhouseCoopers, LLP Independent
Accountants.(5)
k Not applicable.
l Purchase Agreement.(3)
m(1) Shareholder Servicing and Distribution Plan.(4)
(2) Distribution Plan.(4)
n Financial Data Schedule.(5)
o Rule 18f-3 Plan.(5)
</TABLE>
Item 24. Persons Controlled by or Under Common Control with Registrant
From time to time, Warburg Pincus Asset Management, Inc. ("Warburg")
may be deemed to control the Fund and other registered investment companies it
advises through its beneficial ownership of more than 25% of the relevant fund's
shares on behalf of discretionary advisory clients. Warburg has seven
wholly-owned subsidiaries: Counsellors Securities Inc., a New York corporation;
Counsellors Funds Service Inc., a Delaware corporation; Counsellors Agency Inc.,
a New York corporation; Warburg, Pincus Investments International (Bermuda),
Ltd., a Bermuda corporation; Warburg Pincus Asset Management International,
Inc., a Delaware corporation; Warburg Pincus Asset Management (Japan), Inc., a
Japanese corporation and Warburg Pincus Asset Management (Dublin) Limited, an
Irish corporation.
Item 25. Indemnification
Registrant and officers and directors of Warburg, Counsellors
Securities Inc. ("Counsellors Securities") and Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of
- ----------
5 To be filed by amendment.
<PAGE> 109
Registrant. Discussion of this coverage is incorporated by reference to Item 27
of Part C of Registrant's Registration Statement, filed on December 17, 1996.
Item 26. Business and Other Connections of Investment Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus Asset
Management Holdings, Inc., acts as investment adviser to the Registrant. Warburg
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 26 of officers and directors of Warburg,
together with information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by Warburg (SEC File No.
801-07321).
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 & 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
High Yield Fund; Warburg Pincus Institutional Fund; Warburg Pincus Intermediate
Maturity Government Fund; Warburg Pincus International Equity Fund; Warburg
Pincus International Growth Fund; Warburg Pincus International Small Company
Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus Japan Small Company Fund;
Warburg Pincus Long-Short Equity Fund; Warburg Pincus Long-Short Market Neutral
Fund; Warburg Pincus Major Foreign Markets Fund; Warburg Pincus 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 Trust; Warburg
Pincus Trust II; Warburg Pincus U.S. Core Equity Fund; Warburg Pincus U.S. Core
Fixed Income Fund; Warburg Pincus WorldPerks Money Market Fund and Warburg
Pincus WorldPerks Tax Free Money Market Fund.
(b) For information relating to each director, officer or
partner of Counsellors Securities, reference is made to Form BD (SEC File No.
8-32482) filed by Counsellors Securities under the Securities Exchange Act of
1934.
<PAGE> 110
(c) None.
<PAGE> 111
Item 28. Location of Accounts and Records
(1) Warburg, Pincus Health Sciences Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, By-Laws and minute books)
(2) Warburg Pincus Asset Management, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as investment adviser)
(3) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as Co-administrator)
(4) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as Co-administrator)
(5) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian, transfer
agent and dividend disbursing agent)
(6) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer agent and
dividend disbursing agent)
(7) PNC Bank, National Association
1600 Market Street
Philadelphia, Pennsylvania 19103
(records relating to its functions as custodian)
(8) 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.
<PAGE> 112
Item 30. Undertakings.
(a) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the latest annual report to shareholders
for the Fund, upon request and without charge.
(b) Registrant hereby undertakes to call a meeting of its
shareholders for the purpose of voting upon the question of removal of a
director or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares. Registrant
undertakes further, in connection with the meeting, to comply with the
provisions of Section 16(c) of the 1940 Act relating to communications with the
shareholders of certain common-law trusts.
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State of
New York, on the 3rd day of December, 1998.
WARBURG, PINCUS HEALTH SCIENCES FUND, INC.
By: /s/Eugene L. Podsiadlo
--------------------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act, this Amendment 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 Board December 3, 1998
- --------------------------- of Directors
John L. Furth
/s/ Eugene L. Podsiadlo President December 3, 1998
- ---------------------------
Eugene L. Podsiadlo
/s/ Howard Conroy Vice President and December 3, 1998
- --------------------------- Chief Financial Officer
Howard Conroy
/s/ Daniel S. Madden Treasurer and Chief December 3, 1998
- --------------------------- Accounting Officer
Daniel S. Madden
/s/ Richard N. Cooper Director December 3, 1998
- ---------------------------
Richard N. Cooper
/s/ Jack W. Fritz Director December 3, 1998
- ---------------------------
Jack W. Fritz
/s/ Jeffrey E. Garten Director December 3, 1998
- ---------------------------
Jeffrey E. Garten
/s/ Thomas A. Melfe Director December 3, 1998
- ---------------------------
Thomas A. Melfe
/s/ Arnold M. Reichman Director December 3, 1998
- ---------------------------
Arnold M. Reichman
/s/ Alexander B. Trowbridge Director December 3, 1998
- ---------------------------
Alexander B. Trowbridge
