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Rule 497(c)
Investment Company Act File No. 811-6670
Securities Act File No. 033-47880
PROSPECTUS
April 16, 1997
WARBURG PINCUS INSTITUTIONAL FUND, INC.
[ ] INTERNATIONAL EQUITY PORTFOLIO
[ ] MANAGED EAFE'r' COUNTRIES PORTFOLIO
[ ] EMERGING MARKETS PORTFOLIO
[ ] SMALL COMPANY GROWTH PORTFOLIO
[ ] GLOBAL FIXED INCOME PORTFOLIO
[ ] VALUE PORTFOLIO
[Logo]
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The Fund is designed for institutional investors although, at its discretion,
the Fund may permit shares to be purchased by individuals, as well as
institutions, who meet the minimum investment requirements.
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PROSPECTUS April 16, 1997
Warburg Pincus Institutional Fund, Inc. (the 'Fund') is an open-end management
investment company that consists of six managed investment funds (the
'Portfolios'):
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of non-United States issuers.
MANAGED EAFE'r' COUNTRIES PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of issuers having their principal business
activities and interests in foreign countries included in the Morgan Stanley
Capital International EAFE'r' Index.
EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of non-United States issuers consisting of
companies in emerging securities markets.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing primarily in
equity securities of small-sized domestic companies.
GLOBAL FIXED INCOME PORTFOLIO seeks to maximize total investment return
consistent with prudent investment management while preserving capital by
investing in investment grade fixed income securities of issuers throughout the
world, including United States issuers.
VALUE PORTFOLIO seeks total return by investing primarily in equity securities
of large-sized domestic companies.
International investment entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. Investment in small companies, including
emerging growth companies and companies in 'special situations,' also entails
special risks. See 'Risk Factors and Special Considerations.'
This Prospectus briefly sets forth certain information about the Fund and the
Portfolios that investors should know before investing. Investors are encouraged
to read this Prospectus carefully and retain it for future reference. Additional
information about the Fund and the Portfolios has been filed with the Securities
and Exchange Commission (the 'SEC') in a document entitled 'Statement of
Additional Information.' The SEC maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference and other information regarding the Fund. The Statement of Additional
Information is also available upon request and without charge by calling the
Fund at (800) 369-2728. Information regarding the status of shareholder accounts
may also be obtained by calling the Fund at (800) 369-2728. The Statement of
Additional Information, as amended or supplemented from time to time, bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENTS IN
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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THE FUND'S EXPENSES_____________________________________________________________
<TABLE>
<CAPTION>
Managed
International EAFE'r' Emerging Small Company Global Fixed
Equity Countries Markets Growth Income Value
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------- --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on
Purchases
(as a percentage of
offering price)............ 0 0 0 0 0 0
Annual Portfolio Operating
Expenses
(as a percentage of average net
assets)
Management Fees.............. .63% .63% .28% .24% .15% .20%
12b-1 Fees................... 0 0 0 0 0 0
Other Expenses............... .32% .32% .97% .75% .45% .55%
--- --- --- --- --- ---
Total Portfolio Operating
Expenses (after fee
waivers)`D'................ .95% .95% 1.25% .99% .60% .75%
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption
at the end of each time period:
1 year...................... $ 10 $10 $13 $10 $ 6 $ 8
3 years..................... $ 30 $30 $40 $30 $19 $24
5 years..................... $ 53 n.a. n.a. $55 n.a. n.a.
10 years..................... $117 n.a. n.a. $121 n.a. n.a.
</TABLE>
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`D' Management Fees, Other Expenses and Total Operating Expenses for the
International Equity Portfolio and the Small Company Growth Portfolio are
based on actual expenses for the fiscal year ended October 31, 1996, net of
any fee waivers or expense reimbursements. Without such waivers and/or
reimbursements, Management Fees would have equalled .80% and .90%, Other
Expenses would have equalled .34% and .78% and Total Portfolio Operating
Expenses would have equalled 1.14% and 1.68% for the International Equity
and Small Company Growth Portfolios, respectively. Absent waiver of fees by
the Fund's investment adviser and co-administrator, Management Fees for the
Managed EAFE'r' Countries Portfolio, the Emerging Markets Portfolio, the
Global Fixed Income Portfolio and the Value Portfolio would equal .80%,
1.00%, .65% and .75%, respectively, Other Expenses would equal .34%, 1.02%,
.51% and .58%, respectively, and Total Portfolio Operating Expenses would
equal 1.18%, 2.25%, 1.28% and 1.33%, respectively. Other Expenses for the
Managed EAFE'r' Countries, Emerging Markets, Global Fixed Income and Value
Portfolios are based on annualized estimates of expenses for the fiscal year
ending October 31, 1997, net of any fee waivers or expense reimbursements.
The Fund's investment adviser and co-administrator are under no obligation
to continue these waivers, except for the Managed EAFE'r' Countries,
Emerging Markets, Small Company Growth and Value Portfolios, for which the
investment adviser has undertaken to limit Total Portfolio Operating
Expenses to the limits shown in the table above through December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. Institutions also may
charge their clients fees in connection with investments in a Portfolio's
shares, which fees are not reflected in the table. This example should not be
considered a representation of past or future expenses; actual expenses may be
greater or less than those shown. Moreover, while the table assumes a 5% annual
return, a Portfolio's actual performance will vary and may result in an actual
return greater or less than 5%.
2
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FINANCIAL HIGHLIGHTS`D'`D'
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The following information for the four fiscal years or period ended October
31, 1996 has been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report dated December 18, 1996 is incorporated by reference into the
Statement of Additional Information. The information for the period September 1,
1992 (commencement of operations) through October 31, 1992 has been audited by
Ernst & Young LLP, whose report was unqualified. Further information about the
performance of the International Equity, Small Company Growth and Emerging
Markets Portfolios is contained in the Fund's annual report, dated October 31,
1996, copies of which may be obtained without charge by calling the Fund at
(800) 369-2728.
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 1, 1992
For the Year Ended October 31, (Commencement of
------------------------------------------------------ Operations) through
1996 1995 1994 1993 October 31, 1992
-------- ------------ -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................ $ 15.10 $ 16.34 $ 13.49 $ 9.62 $ 10.00
-------- ------------ -------- -------- ------
Income from Investment
Operations
Net Investment Income......... .26 .15 .17 .10 .02
Net Gains (Loss) from
Securities and Foreign
Currency Related Items (both
realized and unrealized).... 1.28 (.64) 2.87 3.87 (.40)
-------- ------------ -------- -------- ------
Total from Investment
Operations.................. 1.54 (.49) 3.04 3.97 (.38)
-------- ------------ -------- -------- ------
Less Distributions
Dividends (from net investment
income)..................... (.50) (.18) (.07) (.10) .00
Distributions (from capital
gains)...................... .00 (.57) (.12) .00 .00
-------- ------------ -------- -------- ------
Total Distributions......... (.50) (.75) (.19) (.10) .00
-------- ------------ -------- -------- ------
NET ASSET VALUE, END OF
PERIOD........................ $ 16.14 $ 15.10 $ 16.34 $ 13.49 $ 9.62
-------- ------------ -------- -------- ------
-------- ------------ -------- -------- ------
Total Return................... 10.48% (2.83%) 22.62% 41.61% (3.80%)*
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000s)........................ $937,443 $507,759 $331,297 $109,280 $18,613
Ratios to Average Daily Net
Assets:
Operating expenses............ .95% .95% .95% .95% .95%*
Net investment income......... 1.05% 1.20% .59% .75% 1.22%*
Decrease reflected in above
operating expense ratios due
to waivers/reimbursements... .19% .23% .29% .44% .85%*
Portfolio Turnover Rate........ 29.91% 39.70% 19.34% 19.40% 8.25%`D'
Average Annual Commission
Rate#......................... $ .0154 -- -- -- --
</TABLE>
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`D' Non-Annualized.
* Annualized.
# Calculated by dividing the total amount of commissions paid by the number
of shares purchased and sold during the period for which there was a
commission charge.
`D'`D' No financial highlights have been presented with respect to the Managed
EAFE'r' Countries Portfolio, the Global Fixed Income Portfolio or the
Value Portfolio, which had not commenced operations as of October 31,
1996. The audited statement of assets and liabilities of the Global Fixed
Income Portfolio as of January 23, 1997, together with the report of
Coopers & Lybrand L.L.P., appear in the Statement of Additional
Information. The unaudited statements of assets and liabilities of the
Managed EAFE'r' Countries and Value Portfolios as of April 1, 1997 also
appear in the Statement of Additional Information.
3
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EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 30, 1996
(Commencement of
Operations) through
October 31, 1996
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................... $ 10.00
------
Income from Investment Operations
Net Investment Income............................................... .01
Net Gains (Losses) on Securities (both realized and unrealized)..... (.15)
------
Total from Investment Operations.................................... (.14)
------
NET ASSET VALUE, END OF PERIOD......................................... $ 9.86
------
------
Total Return........................................................... (1.40%)`D'
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)....................................... $ 29,698
Ratios to Average Daily Net Assets:
Operating expenses.................................................. 1.25%*
Net investment income............................................... 1.75%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements............................................ 2.18%*
Portfolio Turnover Rate............................................. 2.39%`D'
Average Annual Commission Rate#........................................ $ .0120
</TABLE>
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`D' Non-Annualized.
* Annualized.
# Calculated by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charge.
SMALL COMPANY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the Period
December 29, 1995
(Commencement of
Operations) through
October 31, 1996
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................... $ 10.00
------
Income from Investment Operations
Net Investment Income............................................... (.01)
Net Gains (Losses) on Securities (both realized and unrealized)..... 2.93
------
Total from Investment Operations.................................... 2.92
------
NET ASSET VALUE, END OF PERIOD......................................... $ 12.92
------
------
Total Return........................................................... 29.20%`D'
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)....................................... $ 96,827
Ratios to Average Daily Net Assets:
Operating expenses.................................................. .99%*
Net investment income............................................... (.18%)*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements............................................ .69%*
Portfolio Turnover Rate............................................. 57.38%`D'
Average Annual Commission Rate#........................................ $ .0560
</TABLE>
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`D' Non-Annualized.
* Annualized.
# Calculated by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charge.
4
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INVESTMENT OBJECTIVES AND POLICIES
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Set forth below is a description of the investment objective and policies of
each Portfolio. The investment objective of a Portfolio is a fundamental policy
and may not be changed without the approval of the holders of a majority of the
outstanding voting securities of that Portfolio. Any investment involves risk
and, therefore, there can be no assurance that a Portfolio will achieve its
investment objective. See 'Special Risk Considerations and Certain Investment
Strategies' for descriptions of certain types of investments the Portfolios may
make.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is long-term
capital appreciation. The Portfolio pursues its investment objective by
investing, under normal market conditions, substantially all of its assets --
but no less than 65% of its total assets -- in common stocks and securities
convertible into or exchangeable for common stocks of non-United States issuers.
The Portfolio may invest in emerging, as well as developed, markets. The
Portfolio will invest, under normal market conditions, in at least three
countries other than the United States. The Portfolio, which is a diversified
portfolio, intends to hold securities of many corporations located in a number
of foreign countries. The Portfolio may from time to time invest a significant
portion of its assets in a single country, such as Japan, which may involve
special risks.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within international economies
and markets through increased earning power and improved utilization or
recognition of assets. Investments may be made in equity securities of companies
of any size, whether traded on or off a national securities exchange.
In appropriate circumstances, such as when a direct investment by the
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the '1940 Act'), invest in the
securities of closed-end investment companies that invest in foreign securities.
When Warburg, Pincus Counsellors, Inc., the Portfolios' investment adviser
('Warburg'), believes that a conservative or defensive posture is warranted, the
Portfolio may invest temporarily without limit in equity and debt securities of
U.S. issuers and money market obligations (described below).
MANAGED EAFE'r' COUNTRIES PORTFOLIO
The Managed EAFE'r' Countries Portfolio's investment objective is long-term
capital appreciation. The Portfolio pursues its investment objective by
investing, under normal market conditions, at least 65% of its total assets in
5
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common stocks, warrants and securities convertible into or exchangeable for
common stocks of companies, wherever organized, having their principal business
activities and interests in countries ('EAFE Countries') represented, from time
to time, in the Morgan Stanley Capital International Europe, Australasia and Far
East (EAFE'r') Index (the 'EAFE Index')*. The EAFE Index currently includes the
following 20 European and Pacific Basin countries: Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia,
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
United Kingdom. The Portfolio currently intends to invest at least 90% of its
assets in companies in EAFE Index-included countries.
Determinations as to whether an issuer has its principal business activities
and interests in an EAFE Country will be made by Warburg based on publicly
available information and inquiries made to the issuers. In making such
determinations, Warburg will consider the following factors: (i) whether the
issuer's principal securities trading market is in an EAFE Country; (ii) whether
the issuer derives at least 50% of its revenues or earnings, either alone or on
a consolidated basis, from goods produced or sold, investments made or services
performed in an EAFE Country, or has at least 50% of its assets situated in one
or more EAFE Countries; or (iii) whether the issuer is organized under the laws
of, and has a principal office in, an EAFE Country.
The Portfolio is not an index fund and will not seek to match the performance
or country or industry weightings of the EAFE Index. The Portfolio will not
invest in U.S. companies except for temporary defensive purposes, in which case
the Portfolio may invest without limit in equity and debt securities of U.S.
issuers and money market obligations (described below).
The Portfolio will invest, under normal circumstances, in at least three
countries other than the United States. The Portfolio, which is a diversified
portfolio, intends to hold securities of many corporations located in a number
of foreign countries, although from time to time a significant portion of the
Portfolio's assets may be invested in a single country, such as Japan. The
Portfolio intends to invest principally in the securities of companies with
opportunities for growth within international economies and markets. Investments
may be made in equity securities of companies of any size, whether traded on or
off a national securities exchange.
EMERGING MARKETS PORTFOLIO
The Emerging Markets Portfolio's investment objective is growth of capital.
The Portfolio is a non-diversified portfolio that pursues its investment
- ------------
*The EAFE Index is the exclusive property of Morgan Stanley & Co. Incorporated
and is a service mark of Morgan Stanley Group Inc. which has been licensed for
use by the Fund on behalf of the Managed EAFE'r' Countries Portfolio. Capital
International S.A., an international investment management company fully owned
by The Capital Group Companies, Inc. of Los Angeles, has full responsibility for
the management and maintenance of the EAFE Index. Morgan Stanley & Co.
Incorporated has no responsibility for, or influence over, the decisions of
inclusion or deletion within the EAFE Index.
6
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objective by investing primarily in equity securities of non-United States
issuers consisting of companies in emerging securities markets. An investment in
the Portfolio may involve a greater degree of risk than investment in other
mutual funds that seek capital growth by investing in larger, more developed
markets.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of issuers in Emerging Markets (as defined
below), and the Portfolio intends to acquire securities of many issuers located
in a number of foreign countries. The Portfolio will not necessarily seek to
diversify investments on a geographical basis or on the basis of the level of
economic development of any particular country and the Emerging Markets in which
the Portfolio invests will vary from time to time. However, the Portfolio will
at all times, except during temporary defensive periods, maintain investments in
at least three countries outside the United States. An equity security of an
issuer in an Emerging Market is defined as common stock and preferred stock
(including convertible preferred stock); bonds, notes and debentures convertible
into common or preferred stock; stock purchase warrants and rights; equity
interests in trusts and partnerships; and depositary receipts of an issuer: (i)
the principal securities trading market for which is in an Emerging Market; (ii)
which derives at least 50% of its revenues or earnings, either alone or on a
consolidated basis, from goods produced or sold, investments made or services
performed in an Emerging Market, or which has at least 50% of its assets
situated in one or more Emerging Markets; or (iii) that is organized under the
laws of, and with a principal office in, an Emerging Market. Determinations as
to whether an issuer is an Emerging Markets issuer will be made by Warburg,
based on publicly available information and inquiries made to the issuers.
As used in this Prospectus, an Emerging Market is any country (i) which is
generally considered to be an emerging or developing country by the World Bank
and the International Finance Corporation (the 'IFC') or by the United Nations,
(ii) which is included in the IFC Investable Index or the Morgan Stanley Capital
International Emerging Markets Index, or (iii) which has a gross national
product ('GNP') per capita of $2,000 or less, in each case at the time of the
Portfolio's investment. Among the countries which Warburg currently considers to
be Emerging Markets are the following: Algeria, Angola, Antigua, Argentina,
Armenia, Azerbaijan, Bangladesh, Barbados, Barbuda, Belarus, Belize, Bhutan,
Bolivia, Botswana, Brazil, Bulgaria, Cambodia, Chile, People's Republic of
China, Republic of China (Taiwan), Colombia, Cyprus, Czech Republic, Dominica,
Ecuador, Egypt, Estonia, Georgia, Ghana, Greece, Grenada, Guyana, Hong Kong,
Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan, Kazakhstan,
Kenya, Republic of Korea (South Korea), Latvia, Lebanon, Lithuania, Malawi,
Malaysia, Mauritius, Mexico, Moldova, Mongolia, Montserrat, Morocco, Mozambique,
Myanmar (Burma), Namibia, Nepal, Nigeria, Pakistan, Panama, Papua New Guinea,
Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia,
7
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Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Sri Lanka, St. Kitts
and Nevis, St. Lucia, St. Vincent and the Grenadines, Swaziland, Tanzania,
Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine,
Uruguay, Uzbekistan, Venezuela, Vietnam, Yugoslavia, Zambia and Zimbabwe. Among
the countries that will not be considered Emerging Markets are: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland,
United Kingdom and the United States.
The Portfolio may invest in securities of companies of any size, whether
traded on or off a national securities exchange. Portfolio holdings may include
emerging growth companies, which are small- or medium-sized companies that have
passed their start-up phase and that show positive earnings and prospects for
achieving profit and gain in a relatively short period of time.
In appropriate circumstances, such as when a direct investment by the
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
1940 Act, invest in the securities of closed-end investment companies that
invest in foreign securities. As a shareholder in a closed-end investment
company, the Portfolio will bear its ratable share of the investment company's
expenses, including management fees, and will remain subject to payment of the
Portfolio's administration fees and other expenses with respect to assets so
invested.
SMALL COMPANY GROWTH PORTFOLIO
The Small Company Growth Portfolio's investment objective is capital growth.
The Portfolio is a non-diversified portfolio that will pursue its investment
objective by investing primarily in a portfolio of equity securities of small
market capitalization domestic companies (i.e., companies having stock market
capitalizations of $1 billion or less at the time of initial purchase, 'small
companies'). The Portfolio intends to invest at least 90% of its total assets in
common stocks or warrants of small companies that present attractive
opportunities for capital growth and, under normal market conditions, will
invest at least 65% of its total assets in such securities. The Portfolio is not
required to dispose of securities of issuers whose market capitalizations grow
to exceed $1 billion after acquisition by the Portfolio. The Portfolio will
invest primarily in companies whose securities are traded on domestic stock
exchanges or in the domestic over-the-counter market, but may invest up to 20%
of its assets in foreign securities. Small companies may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth progress owing to factors such as management changes or
development of new technology, products or markets or may be companies providing
products or services with a high unit volume growth rate. The Portfolio's
investments will be made on the basis of
8
<PAGE>
their equity characteristics, and securities ratings generally will not be a
factor in the selection process.
The Portfolio may also invest in securities of emerging growth companies,
which can be either small companies or medium-sized companies that have passed
their start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time. Emerging
growth companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors.
Although there is no intention of doing so during the coming year, the
Portfolio is authorized to engage in reverse repurchase agreements and dollar
rolls.
GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio's investment objective is to maximize total
investment return consistent with prudent investment management while preserving
capital. The Portfolio is a non-diversified portfolio that will seek to achieve
its objective by investing, under normal market conditions, substantially all of
its assets -- but no less than 65% of its total assets -- in bonds, debentures
and notes of United States and foreign issuers, denominated in U.S. dollars or
in other currencies or multi-currency units such as European Currency Units
('ECUs'). These debt obligations include obligations issued or guaranteed by the
United States government or a foreign government, its agencies or
instrumentalities, securities of supranational entities, Eurobonds and corporate
bonds. Up to 5% of the Portfolio's net assets may be rated below investment
grade at the time of the investment but not lower than 'B' by Standard & Poor's
Ratings Services ('S&P') or Moody's Investors Service, Inc. ('Moody's').
Warburg's approach to multicurrency fixed-income management is strategic and
value-based. Warburg's assessment of the bond markets and currencies is based on
an analysis of real interest rates. Current nominal yields of securities are
adjusted for inflation prevailing in each currency sector using an analysis of
past and projected inflation rates. The Portfolio's aim is to invest in bond
markets that offer attractive real returns relative to inflation.
Warburg invests largely in medium-term securities (i.e., those with a
remaining maturity of between three and five years) and responds to changing
interest rate levels by shortening or lengthening portfolio maturity through
investment in longer- or shorter-term instruments. For example, Warburg responds
to high levels of real interest rates through a lengthening in portfolio
maturity. Accordingly, while the bulk of the Portfolio is expected to be
invested in medium-term securities, Warburg is not restricted to any maximum or
minimum time to maturity in purchasing portfolio securities. Current and
historical yield spreads among the three main market segments -- the Government,
Foreign and Euro markets -- guide Warburg's selection of markets and particular
securities within those markets. The
9
<PAGE>
analysis of currencies is made independent of the analysis of markets. Value in
foreign exchange is determined by relative purchasing power parity of a given
currency. The Portfolio seeks to invest in currencies currently undervalued
based on purchasing power parity. Warburg analyzes current account and capital
account performance and real interest rates to adjust for shorter-term currency
flows.
The Portfolio will not invest 25% or more of its total assets in the
securities issued by any one foreign government, its agencies, instrumentalities
or political subdivisions and, under normal market conditions, will invest in at
least three countries, including the United States. When Warburg believes that a
conservative or defensive posture is warranted, the Portfolio may invest
temporarily without limit in securities denominated in U.S. dollars and
securities of U.S. issuers.
VALUE PORTFOLIO
The Value Portfolio's investment objective is total return. The Portfolio is
a diversified portfolio that pursues its investment objective by investing
primarily in a portfolio of equity securities of large capitalization domestic
companies that Warburg considers to be relatively undervalued. Current income is
a secondary consideration in selecting portfolio investments. The Portfolio
intends to invest at least 80% of its total assets in common stocks, preferred
stocks, warrants and other rights and securities convertible into or
exchangeable for common stocks of large companies (i.e., companies having stock
market capitalizations of $1 billion or greater at the time of initial purchase
and, under normal market conditions, will invest at least 65% of its total
assets in such securities).
The Value Portfolio's general investment policy is to invest in equity
securities that, in Warburg's opinion, are available for purchase at prices
below their intrinsic value. Warburg will determine whether a company is
undervalued based upon research and analysis, taking into account, among other
factors, price/earnings ratio, price/book ratio, price/cash flow ratio, earnings
growth, debt/capital ratio and multiples of earnings of comparable securities.
Other relevant factors, including a company's asset value, franchise value and
quality of management, will also be considered. These factors are not applied to
prospective investments in a mechanical way; rather, Warburg analyzes each
security individually, taking all relevant factors into account. The Portfolio
may invest in the securities of companies in any industry sector and will not
concentrate in any one industry. The Portfolio will invest primarily in
companies whose securities are traded on U.S. stock exchanges or in the U.S.
over-the-counter market, but may invest up to 20% of its assets in foreign
securities.
ADDITIONAL INVESTMENTS
MONEY MARKET OBLIGATIONS. Each Portfolio is authorized to invest, under
normal circumstances, in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years or less remaining to
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maturity) money market obligations, although each Portfolio intends to stay
invested in securities satisfying its investment objective to the extent
practical. In addition, on occasion, Warburg may deem it advisable to adopt a
temporary defensive posture by investing without limit in money market
obligations. These instruments consist of obligations of the U.S. government or
foreign governments, their agencies or instrumentalities; obligations of foreign
and U.S. banks; commercial paper; and money market mutual funds that invest in
the foregoing. A shareholder in the Portfolio would bear both its ratable share
of that mutual fund's expenses, as well as the Portfolio's administration fees
and other expenses with respect to assets so invested.
Repurchase Agreements. The Portfolios may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Under the terms of a typical repurchase agreement, a Portfolio
would acquire an underlying security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Portfolio to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Portfolio'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 accrued interest. A Portfolio 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 Portfolio is delayed or
prevented from exercising its right to dispose of the collateral securities.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which each
Portfolio may invest include: direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. government
agencies and instrumentalities.
ZERO COUPON SECURITIES. The Global Fixed Income Portfolio and the Emerging
Markets Portfolio may invest in 'zero coupon securities.' Zero coupon securities
pay no cash income to their holders until they mature and are issued at
substantial discounts from their value at maturity. When held to maturity, their
entire return comes from the difference between their purchase price and their
maturity value. The values of zero coupon securities may be highly volatile as
interest rates rise or fall.
DEBT SECURITIES. Each Portfolio may invest in debt securities. The interest
income to be derived may be considered as one factor in selecting debt
securities for investment by Warburg. Because the market value of debt
obligations can be expected to vary inversely to changes in prevailing interest
rates, investing in debt obligations may provide an opportunity for capital
growth when interest rates are expected to decline. The success of such a
strategy is dependent upon Warburg's ability to forecast accurately changes in
interest rates. The market value of debt obligations may also be expected to
vary depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions.
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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 of
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. Subsequent to
its purchase by the Emerging Markets Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of such securities, although
Warburg will consider such event in its determination of whether the Portfolio
should continue to hold the securities.
Emerging Markets and Value Portfolios. The Emerging Markets Portfolio and the
Value Portfolio may each invest or hold up to 35% and 10%, respectively, of its
net assets in fixed-income securities (including convertible bonds) rated below
investment grade (commonly referred to as 'junk bonds') and as low as C by
Moody's or D by S&P, or in unrated securities considered to be of equivalent
quality. Securities that are rated C by Moody's are the lowest rated class and
can be regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt rated D by S&P is in default or is expected to default
upon maturity or payment date.
Among the types of debt securities in which the Emerging Markets Portfolio
may invest are Brady Bonds, loan participations and assignments, asset-backed
securities and mortgage-backed securities:
Brady Bonds are collateralized or uncollateralized securities created through
the exchange of existing commercial bank loans to public and private Latin
American entities for new bonds in connection with certain debt restructurings.
Brady Bonds have been issued only recently and therefore do not have a long
payment history. However, in light of the history of commercial bank loan
defaults by Latin American public and private entities, investments in Brady
Bonds may be viewed as speculative.
Loan Participations and Assignments of fixed and floating rate loans arranged
through private negotiations between a foreign government as borrower and one or
more financial institutions as lenders will typically result in the Emerging
Markets Portfolio having a contractual relationship only with the lender, in the
case of a participation, or the borrower, in the case of an assignment. The
Portfolio may not directly benefit from any collateral supporting a
participation, and in the event of the insolvency of a lender will be treated as
a general creditor of the lender. As a result, the Portfolio assumes the risk of
both the borrower and the lender of a participation. The Portfolio's rights and
obligations as the purchaser of an assignment may differ from, and be more
limited than, those held by the assigning lender. The lack of a liquid secondary
market for both participations and assignments will have an adverse impact on
the value of such securities and on the Portfolio's ability to dispose of
participations or assignments.
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Asset-backed securities are collateralized by interests in pools of consumer
loans, with interest and principal payments ultimately depending on payments in
respect of the underlying loans by individuals (or a financial institution
providing credit enhancement). Because market experience in these securities is
limited, the market's ability to sustain liquidity through all phases of the
market cycle had not been tested. In addition, there is no assurance that the
security interest in the collateral can be realized. The Portfolio may purchase
asset-backed securities that are unrated.
Mortgage-backed securities are collateralized by mortgages or interests in
mortgages and may be issued by government or non-government entities.
Non-government issued mortgage-backed securities may offer higher yields than
those issued by government entities, but may be subject to greater price
fluctuations. The value of mortgage-backed securities may change due to shifts
in the market's perceptions of issuers, and regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Prepayment, which
occurs when unscheduled or early payments are made on the underlying mortgages,
may shorten the effective maturities of these securities and may lower their
returns.
WARRANTS. Each Portfolio may invest up to 10% of its total assets in
warrants. Warrants are securities that give the holder the right, but not the
obligation, to purchase equity issues of the company issuing the warrants, or a
related company, at a fixed price either on a date certain or during a set
period.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it is to be in the best interests of the relevant Portfolio and
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. In addition, to
the extent it is consistent with a Portfolio's investment objective, each
Portfolio also may engage in short-term trading. This investment approach and
the use of certain of the investment strategies described below may result in a
high portfolio turnover rate for the Portfolios. It is not possible to predict
the portfolio turnover rates for the Managed EAFE'r' Countries Portfolio, the
Global Fixed Income Portfolio and the Value Portfolio. However, the Managed
EAFE'r' Countries Portfolio's annual turnover rate should not exceed 75%, the
Global Fixed Income Portfolio may experience portfolio turnover as high as 150%
to 200% and the Value Portfolio's annual turnover rate should not exceed 150%.
High portfolio turnover rates (100% or more) may result in dealer markups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See 'Dividends, Distributions and Taxes -- Taxes' and 'Investment
Policies -- Portfolio Transactions' in the Statement of Additional Information.
All orders
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for transactions in securities or options on behalf of a Portfolio are placed by
Warburg with broker-dealers that it selects.
SPECIAL RISK CONSIDERATIONS AND
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
In attempting to achieve its investment objective, a Portfolio may engage in
one or more of the strategies set forth below. Detailed information concerning
these strategies and their related risks is contained in the Statement of
Additional Information.
CONVERTIBLE SECURITIES. Each Portfolio may invest in fixed income obligations
convertible into equity securities at either a stated price or at a stated rate.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The Global Fixed Income Portfolio does not intend to retain in
its portfolio the common stock received upon conversion of a convertible
security and will sell it as promptly as it can and in a manner which it
believes will reduce the risk to the Portfolio of loss in connection with the
sale.
Up to 5% of each of the International Equity, Managed EAFE'r' Countries,
Emerging Markets and Small Company Growth Portfolios' net assets may be held in
convertible securities rated below investment grade. Up to 5% of the Global
Fixed Income Portfolio's net assets and up to 10% of the Value Portfolio's net
assets may be invested in convertible securities rated below investment grade at
the time of purchase. 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 of comparable quality by Warburg. Securities rated in the
fourth highest grade have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
securities. Subsequent to its purchase by a Portfolio, 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 the Portfolio should continue to hold the securities.
Securities rated below investment grade are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve large
uncertainties or major risk exposures to adverse conditions. A Portfolio may
have difficulty disposing of certain lower quality obligations because there may
be a thin trading market for such securities. In addition, the market value of
lower quality securities may be more volatile than that of higher quality
securities.
FOREIGN SECURITIES. The International Equity Portfolio, Managed EAFE'r'
Countries Portfolio, Emerging Markets Portfolio and the Global Fixed Income
Portfolio will invest substantially in foreign securities, and each of the Small
Company Growth and Value Portfolios may invest up to 20% of its total assets in
the securities of foreign issuers. There are certain risks involved in
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investing in securities of companies and governments of foreign nations which
are in addition to the usual risks inherent in domestic investments. These risks
include those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards and other regulatory practices and requirements that are
often generally less rigorous than those applied in the United States. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of a Portfolio, including the withholding of dividends. Foreign
securities may be subject to foreign government taxes that would reduce the net
yield on such securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Investment in foreign
securities will also result in higher expenses due to the cost of converting
foreign currency into U.S. dollars, the payment of fixed brokerage commissions
on foreign exchanges, which generally are higher than commissions on U.S.
exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians. Certain of the above risks may
be involved with American Depositary Receipts ('ADRs'), European Depositary
Receipts ('EDRs') and International Depositary Receipts ('IDRs'), instruments
that evidence ownership of underlying securities issued by a foreign
corporation. ADRs, EDRs and IDRs may not necessarily be denominated in the same
currency as the securities whose ownership they represent. ADRs are typically
issued by a U.S. bank or trust company. EDRs (sometimes referred to as
Continental Depositary Receipts) are issued in Europe and IDRs (sometimes
referred to as Global Depositary Receipts) are issued outside the United States,
each typically by non-U.S. banks and trust companies. The risks associated with
investing in securities of non-U.S. issuers are generally heightened for
investments in securities of issuers in emerging markets.
REITS. The Value Portfolio 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 Portfolio will indirectly bear its
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proportionate share of any expenses paid by the REIT in addition to the expenses
of the Portfolio.
Investing in REITs involves certain risks. A REIT may be affected by changes
in the value of the underlying property owned by such REIT or by the quality of
any credit extended by the REIT. REITs are dependent on management skills, are
not diversified (except to the extent the Code requires), and are subject to the
risks of financing projects. REITs are subject to heavy cash flow dependency,
default by borrowers, self-liquidation, the possibilities of failing to qualify
for the exemption from tax for distributed income under the Code and failing to
maintain their exemptions from the 1940 Act. REITs are also subject to interest
rate risks.
JAPANESE INVESTMENTS. Because the International Equity and Managed EAFE'r'
Countries Portfolios may from time to time have large positions in Japanese
securities, they may be subject to general economic and political conditions in
Japan.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates. In determining
the net asset value of shares of a Portfolio, assets or liabilities initially
expressed in terms of Japanese yen will be translated into U.S. dollars at the
current selling rate of Japanese yen against U.S. dollars. As a result, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in the value of Japanese yen relative
to the U.S. dollar.
The decline in the Japanese securities markets since 1989 has contributed to
a weakness in the Japanese economy, and the impact of a further decline cannot
be ascertained. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios in comparison with those in the United States,
even after the recent market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the United States.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses,
Japan has entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
Japan has a parliamentary form of government. In 1993, a coalition government
was formed which, for the first time since 1955, did not include the Liberal
Democratic Party. Since mid-1993, there have been several changes in leadership
in Japan. What, if any, effect the current political situation will have on
prospective regulatory reforms on the economy in Japan cannot be predicted.
Recent and future developments in Japan and neighboring Asian
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countries may lead to changes in policy that might adversely affect a Portfolio
investing there. For additional information, see 'Investment Policies --
Japanese Investments' beginning at page 13 of the Statement of Additional
Information.
EMERGING MARKETS. One or more Portfolios with authority to invest outside of
the United States may invest in securities of issuers located in less developed
countries considered to be 'emerging markets.' Investing in securities of
issuers located in emerging markets involves not only the risks described below
with respect to investing in foreign securities, but also other risks, including
exposure to economic structures that are generally less diverse and mature than,
and to political systems that can be expected to have less stability than, those
of developed countries. Other characteristics of emerging markets that may
affect investment there include certain national policies that may restrict
investment by foreigners in issuers or industries deemed sensitive to relevant
national interests and the absence of developed legal structures governing
private and foreign investments and private property. The typically small size
of the markets for securities of issuers located in emerging markets and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those securities.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, each
Portfolio may, but is not required to, engage in a number of strategies
involving options, futures, forward currency contracts and, in the case of the
International Equity and Emerging Markets Portfolios, swaps. These strategies,
commonly referred to as 'derivatives,' may be used (i) for the purpose of
hedging against a decline in value of a Portfolio's current or anticipated
portfolio holdings, (ii) as a substitute for purchasing or selling portfolio
securities or (iii) to seek to generate income to offset expenses or increase
return. TRANSACTIONS THAT ARE NOT CONSIDERED HEDGING SHOULD BE CONSIDERED
SPECULATIVE AND MAY SERVE TO INCREASE A PORTFOLIO'S INVESTMENT RISK. Transaction
costs and any premiums associated with these strategies, and any losses
incurred, will affect a Portfolio's net asset value and performance. Therefore,
an investment in a Portfolio may involve a greater risk than an investment in
other mutual funds that do not utilize these strategies. A Portfolio's use of
these strategies may be limited by position and exercise limits established by
securities and commodities exchanges and the National Association of Securities
Dealers, Inc. and by the Code.
Securities Options and Stock Index Options. Each Portfolio (other than the
Emerging Markets Portfolio) may write put and call options on stock and debt
securities and will realize fees (referred to as 'premiums') for granting the
rights evidenced by the options. Each Portfolio may purchase options on stocks
and debt securities that are traded on U.S. and foreign exchanges, as well as
over-the-counter ('OTC') options. The purchaser of a put option on a security
has the right to compel the purchase by the writer of the underlying security,
while the purchaser of a call option on a security has the right to
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purchase the underlying security from the writer. In addition to purchasing and
writing options on securities, each Portfolio may purchase and write
exchange-listed and OTC put and call options on stock indexes. A stock index
measures the movement of a certain group of stocks by assigning relative values
to the common stocks included in the index.
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
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into
futures contracts and purchase and write (sell) commodity options (options on
futures contracts and on physical commodities), including, but not limited to,
foreign currency, interest rate and stock index futures contracts and put and
call options on these contracts. These contracts and options will be traded on
an exchange designated by the Commodity Futures Trading Commission (the 'CFTC')
or, if consistent with CFTC regulations, on foreign exchanges. These futures
contracts are standardized contracts for the future delivery of foreign currency
or an interest rate sensitive security or, in the case of stock index and
certain other futures contracts, are settled in cash with reference to a
specified multiplier times the change in the specified index, exchange rate or
interest rate. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited in
the amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of a Portfolio's assets that may be at risk with
respect to futures activities.
Investments in commodity options involve a relatively high degree of risk.
Prices of commodities can be influenced by a variety of global economic,
financial and political factors and may fluctuate markedly over short periods of
time. Among other things, commodities can be affected by changes in inflation,
investment speculation, changes in industrial, commercial and governmental
demand and supply and any governmental restrictions on ownership. In addition,
investments in options on physical commodities may involve higher custodial
expenses.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
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contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing or writing exchange-traded or OTC currency options. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date at a price set at the time of the contract. An option on a
foreign currency operates similarly to an option on a security. Risks associated
with currency forward contracts and purchasing currency options are similar to
those described in this Prospectus for futures contracts and securities and
stock index options. In addition, the use of currency transactions could result
in losses from the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events.
SWAPS. The International Equity and Emerging Markets Portfolios may each
enter into swaps relating to indexes, currencies and equity interests of foreign
issuers. A swap transaction is an agreement between a Portfolio and a
counterparty to act in accordance with the terms of the swap contract. Index
swaps involve the exchange by the Portfolio with another party of the respective
amounts payable with respect to a notional principal amount related to one or
more indexes. Currency swaps involve the exchange of cash flows on a notional
amount of two or more currencies based on their relative future values. An
equity swap is an agreement to exchange streams of payments computed by
reference to a notional amount based on the performance of a stock index, a
basket of stocks or a single stock. A Portfolio may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its assets, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Portfolios
may also use these transactions for speculative purposes, such as to obtain the
price performance of a security without actually purchasing the security in
circumstances where, for example, the subject security is illiquid, or is
unavailable for direct investment. Swaps have risks associated with them
including possible default by the counterparty to the transaction, illiquidity
and, where swaps are used as hedges, the risk that the use of a swap could
result in losses greater than if the swap had not been employed.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to swaps is limited to the net amount of payments that
the Portfolio is contractually obligated to make. If the counterparty to a swap
defaults, the Portfolio's risk of loss consists of the net amount of payments
that the Portfolio is contractually entitled to receive. Where swaps are entered
into for good faith hedging purposes, Warburg
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believes such obligations do not constitute senior securities under the 1940 Act
and, accordingly, will not treat them as being subject to a Portfolio's
borrowing restrictions. Where swaps are entered into for other than hedging
purposes, a Portfolio will segregate an amount of cash or liquid securities
having a value equal to the accrued excess of its obligations over its
entitlements with respect to each swap on a daily basis.
Hedging Considerations. Each Portfolio may engage in options, futures and
currency transactions for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. Each Portfolio will engage in hedging transactions only when deemed
advisable by Warburg, and successful use of hedging transactions will depend on
Warburg's ability to predict correctly movements in the hedge and the hedged
position and the correlation between them, which could prove to be inaccurate.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or trends.
Additional Considerations. To the extent that a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out an option or futures position without
incurring substantial losses, if at all. A Portfolio is also subject to the risk
of a default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities, indexes and currencies;
currency, interest rate and stock index futures contracts and options on these
futures contracts; and forward currency contracts and, in the case of the
International Equity and Emerging Markets Portfolios, swaps. The use of these
strategies may require that the Portfolio maintain cash or liquid securities in
a segregated account with its custodian or a designated sub-custodian to the
extent the Portfolio's obligations with respect to these strategies are not
otherwise 'covered' through ownership of the underlying security, financial
instrument or currency or by other portfolio positions or by other means
consistent with applicable regulatory policies. Segregated assets cannot be sold
or transferred unless equivalent assets are substituted in their place or it is
no longer necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of a Portfolio's assets could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
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RULE 144A SECURITIES. A Portfolio may purchase securities that are not
registered under the Securities Act of 1933, as amended (the 'Securities Act'),
but that can be sold to 'qualified institutional buyers' in accordance with Rule
144A under the Securities Act ('Rule 144A Securities'). A Rule 144A Security
will be considered illiquid and therefore subject to the Portfolio's 10% (15% in
the case of each of the Emerging Markets Portfolio and the Value Portfolio)
limitation on the purchase of illiquid securities unless the Fund's Board of
Directors (the 'Board') determines on an ongoing basis that an adequate trading
market exists for the security. Non-publicly traded securities (including Rule
144A Securities) may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio. In addition, companies whose securities are not publicly traded are
not subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. A Portfolio's
investment in illiquid securities is subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Portfolio's net assets could be adversely affected.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment but increases an
investor's risk in the event of a decline in the value of the underlying
security and can result in a complete loss 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.
SHORT SALES AGAINST THE BOX. Each Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an equal
amount of the securities sold short or owns preferred stock or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one 'against the box,' may be entered into by a Portfolio to, for
example, lock in a sale price for a security the Portfolio does not wish to sell
immediately or to postpone a gain or loss for federal income tax purposes. A
Portfolio will deposit, in a segregated account with its custodian or a
qualified subcustodian, the securities sold short or convertible or exchangeable
preferred stocks or debt securities in connection with short sales against the
box. Not more than 10% of a Portfolio's net assets (taken at current value) may
be held as collateral for such sales at any one time, except that the Emerging
Markets Portfolio will not be subject to such limitation. The extent to which a
Portfolio may make short sales may be
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<PAGE>
limited by Code requirements for qualification as a regulated investment
company. See 'Dividends, Distributions and Taxes' for other tax considerations
applicable to short sales.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may
utilize up to 20% of its total assets to purchase securities on a when-issued
basis and purchase or sell securities on a delayed-delivery basis. In these
transactions, payment for and delivery of the securities occurs beyond the
regular settlement dates, normally within 30-45 days after the transaction. A
Portfolio will not enter into a when-issued or delayed-delivery transaction for
the purpose of leverage, but may sell the right to acquire a when-issued
security prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction if Warburg deems it advantageous to
do so. The payment obligation and the interest rate that will be received in
when-issued and delayed-delivery transactions are fixed at the time the buyer
enters into the commitment. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the 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. A Portfolio will establish a segregated account with its custodian
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations or other securities that are acceptable as collateral to the
appropriate regulatory authority in an amount equal to the amount of its
when-issued and delayed-delivery purchase commitments, and will segregate the
securities underlying commitments to sell securities for delayed delivery.
LENDING PORTFOLIO SECURITIES. Each Portfolio is authorized to lend securities
it holds to brokers, dealers and other financial organizations. Loans of a
Portfolio's securities may not exceed 33 1/3% of the Portfolio's net assets. A
Portfolio's loans of securities will be collateralized by cash, letters of
credit or U.S. government securities which are maintained at all times in an
amount at least equal to the current market value of the loaned securities. From
time to time, a Portfolio may pay a part of the interest earned from the
investment collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Portfolio and that is acting as a
'finder.' The risks associated with loans of portfolio securities are
substantially similar to those associated with repurchase agreements. As with
any extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially.
LOWER-RATED SECURITIES. The Emerging Markets and the Value Portfolios may
invest or hold lower-rated and comparable unrated securities (commonly referred
to as 'junk bonds') which (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with
22
<PAGE>
the terms of the obligation. The market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-quality securities. In addition, medium- and
lower-rated securities and comparable unrated securities generally present a
higher degree of credit risk. 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.
The market value of securities in lower rating categories is more volatile
than that of higher quality securities. In addition, a Portfolio may have
difficulty disposing of certain of these securities because there may be a thin
trading market. The lack of liquid secondary market for certain securities may
have an adverse impact on a Portfolio's ability to dispose of particular issues
and may make it more difficult for the Portfolio to obtain accurate market
quotations for purposes of valuing the Portfolio and calculating its net asset
value.
SPECIAL SITUATION COMPANIES. The Emerging Markets Portfolio may invest in the
securities of 'special situation companies' involved in an actual or prospective
acquisition or consolidation; reorganization; recapitalization; merger,
liquidation or distribution of cash, securities or other assets; a tender or
exchange offer; a breakup or workout of a holding company; or litigation which,
if resolved favorably, would improve the value of the company's stock. If the
actual or prospective situation does not materialize as anticipated, the market
price of the securities of a 'special situation company' may decline
significantly. The Portfolio believes, however, that if Warburg analyzes
'special situation companies' carefully and invests in the securities of these
companies at the appropriate time, the Portfolio may achieve growth of capital.
There can be no assurance, however, that a special situation that exists at the
time the Portfolio makes its investment will be consummated under the terms and
within the time period contemplated.
NON-DIVERSIFIED STATUS. The Emerging Markets, Small Company Growth and Global
Fixed Income Portfolios are classified as 'non-diversified' under the 1940 Act,
which means that the Portfolio is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer. Each
Portfolio, however, intends to comply with the diversification requirements
imposed by the Code, for qualification as a regulated investment company. As a
non-diversified portfolio, each Portfolio may invest a greater proportion of its
assets in the obligations of a smaller number of issuers and, as a result, may
be subject to greater risk with respect to portfolio securities.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
The Emerging Markets and Value Portfolios may each invest up to 15% of its
net assets and each other Portfolio may invest up to 10% of its net assets in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable ('illiquid securities'), including
23
<PAGE>
(i) securities issued as part of a privately negotiated transaction between an
issuer and one or more purchasers; (ii) repurchase agreements with maturities
greater than seven days; (iii) time deposits maturing in more than seven
calendar days; and (iv) certain Rule 144A Securities. A Portfolio may borrow
from banks for temporary or emergency purposes in an amount up to 30% of its
total assets and may pledge its assets to the same extent in connection with
these borrowings. Whenever borrowings (including reverse repurchase agreements)
exceed 5% of the value of a Portfolio's total assets, the Portfolio will not
make any investments (including roll-overs). Up to 5% of the Emerging Markets
Portfolio's total assets may be invested in stand-by commitments. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that a Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. The Fund employs Warburg as investment adviser to each
Portfolio. Warburg, subject to the control of the Fund's officers and the Board,
manages the investment and reinvestment of the assets of the Portfolios in
accordance with each Portfolio's investment objective and stated investment
policies. Warburg makes investment decisions for each Portfolio and places
orders to purchase or sell securities on behalf of each such Portfolio. Warburg
also employs a support staff of management personnel to provide services to the
Fund and furnishes the Fund with office space, furnishings and equipment.
For the services provided by Warburg, the Fund pays Warburg a fee calculated
at an annual rate equal to percentages of the relevant Portfolio's average daily
net assets, as follows: International Equity Portfolio -- .80%, Managed EAFE'r'
Countries Portfolio -- .80%, Emerging Markets Portfolio -- 1.00%, Small Company
Growth Portfolio -- .90%, Global Fixed Income Portfolio -- .65% and Value
Portfolio -- .75%. Warburg and the Portfolios' co-administrators may voluntarily
waive a portion of their fees from time to time and temporarily limit the
expenses to be borne by the Portfolios.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of February 28,
1997, Warburg managed approximately $17.3 billion of assets, including
approximately $10.5 billion of investment company assets. Incorporated in 1970,
Warburg is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P.
('Warburg G.P.'), a New York general partnership, which itself is controlled by
Warburg, Pincus & Co. ('WP&Co.'), also a New York general partnership. Lionel I.
Pincus, the managing partner of WP&Co., may be deemed to control both WP&Co. and
Warburg. Warburg G.P. has no
24
<PAGE>
business other than being a holding company of Warburg and its subsidiaries.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGERS.
International Equity and Managed EAFE'r' Portfolios. The portfolio manager of
the International Equity and Managed EAFE'r' Countries Portfolios is Richard H.
King, who has been portfolio manager of the Portfolios since their inception.
Mr. King, a senior managing director of Warburg, has been with Warburg since
1989, before which time he was chief investment officer and a director at
Fiduciary Trust Company International S.A. in London. Nicholas P.W. Horsley, P.
Nicholas Edwards, Harold W. Ehrlich and Vincent J. McBride have been associate
portfolio managers of the International Equity Portfolio since joining Warburg
and of the Managed EAFE'r' Countries Portfolio since its inception.
Mr. Edwards is a managing director and has been with Warburg since August
1995, before which time he was a director at Jardine Fleming Investment
Advisers, Tokyo. Mr. Ehrlich is a managing director of Warburg and has been with
Warburg since February 1995, before which time he was a senior vice president,
portfolio manager and analyst at Templeton Investment Counsel Inc. Mr. Horsley
is a senior vice president of Warburg and has been with Warburg since 1993,
before which time he was a director, portfolio manager and analyst at Barclays
deZoete Wedd in New York City. Mr. McBride is a senior vice president of Warburg
and has been with Warburg since 1994. Prior to joining Warburg, Mr. McBride was
an international equity analyst at Smith Barney Inc. from 1993 to 1994 and at
General Electric Investment Corporation from 1992 to 1993.
Emerging Markets Portfolio. Mr. King and Mr. Horsley have been co-portfolio
managers of the Emerging Markets Portfolio since its inception. Mr. Ehrlich and
Mr. McBride have been associate portfolio managers of the Emerging Markets
Portfolio since inception.
Small Company Growth Portfolio. The co-portfolio managers of the Small
Company Growth Portfolio are Elizabeth B. Dater and Stephen J. Lurito. Ms. Dater
is a senior managing director of Warburg and has been a portfolio manager of
Warburg since 1978. Mr. Lurito is a managing director of Warburg and has been
with Warburg since 1987.
Global Fixed Income Portfolio. The co-portfolio managers of the Global Fixed
Income Portfolio are Dale C. Christensen and Laxmi C. Bhandari. Mr. Christensen
is a managing director of Warburg and has been associated with Warburg since
1989. Mr. Bhandari, also a senior vice president of Warburg, has been a
co-portfolio manager at Warburg since 1993, before which time he was a vice
president at the Paribas Corporation.
Value Portfolio. The portfolio manager of the Value Portfolio is Brian S.
Posner, who has been the portfolio manager of the Value Portfolio since its
inception. Mr. Posner, a managing director of Warburg since January 1997, was an
employee of Fidelity Investments ('Fidelity') from 1987 until December 1996. He
was the vice president and portfolio manager of the Fidelity Equity-Income II
Fund (1992-December 1996); the portfolio manager of the Fidelity Value Fund
(1990-1992); assistant portfolio manager of the
25
<PAGE>
Fidelity Equity-Income Fund (1989-1990); assistant portfolio manager of the
Fidelity Capital Appreciation Fund (1989); portfolio manager of the Fidelity
Select Property-Casualty Insurance Portfolio (1987-1990) and an equity analyst
(1987). Prior to joining Fidelity, Mr. Posner was a research associate at John
Nuveen and Co. and an analyst at Feldman Securities Corp. in Chicago.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Portfolios, including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between each Portfolio
and its various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in the
preparation of tax returns and developing and monitoring compliance procedures
for the Portfolios. As compensation, each Portfolio pays Counsellors Service a
fee calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Fund employs PFPC Inc., an indirect, wholly owned subsidiary of PNC Bank
Corp. ('PFPC'), as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolios and assists in related aspects of the Portfolios' operations. As
compensation, the International Equity Portfolio, the Managed EAFE'r' Countries
Portfolio, the Emerging Markets Portfolio and the Global Fixed Income Portfolio
each pays PFPC a fee calculated at an annual rate of .12% of the Portfolio's
first $250 million in average daily net assets, .10% of the next $250 million in
average daily net assets, .08% of the next $250 million in average daily net
assets, and .05% of average daily net assets over $750 million, and each of the
Small Company Growth and Value Portfolios will pay PFPC a fee calculated at an
annual rate of .10% of the Portfolio's first $500 million in average daily net
assets, .075% of the next $1 billion in average daily net assets, and .05% of
average daily net assets over $1.5 billion. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. Fiduciary Trust Company International ('Fiduciary') and PNC Bank,
National Association ('PNC') serve as custodians of the International Equity,
Managed EAFE'r' Countries, Global Fixed Income and Value Portfolios' assets. The
principal business address of Fiduciary is Two World Trade Center, New York, New
York 10048. Like PFPC, PNC is an indirect wholly owned subsidiary of PNC Bank
Corp., and its principal business address is 1600 Market Street, Philadelphia,
Pennsylvania 19103.
PNC also serves as custodian of the Small Company Growth Portfolio's U.S.
assets, and State Street Bank and Trust Company ('State Street') serves as
international custodian of the Portfolio's non-U.S assets. State Street also
26
<PAGE>
serves as custodian of the Emerging Markets Portfolio's assets. State Street's
principal business address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street serves as shareholder servicing agent, transfer
agent and dividend disbursing agent for the Fund. It has delegated to Boston
Financial Data Services, Inc., a 50% owned subsidiary ('BFDS'), responsibility
for most shareholder servicing functions. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities Inc. ('Counsellors Securities') serves
without compensation as distributor of the shares of each Portfolio. Counsellors
Securities is a wholly owned subsidiary of Warburg and is located at 466
Lexington Avenue, New York, New York 10017-3147. No compensation is payable by
the Fund to Counsellors Securities for distribution services.
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. In some instances, these
incentives may be offered only to certain institutions whose representatives
provide services in connection with the sale or expected sale of Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO OPEN AN ACCOUNT IN THE FUND
- --------------------------------------------------------------------------------
In order to invest in a Portfolio, an investor must first complete and sign
an account application. To obtain an account application, an investor may
telephone the Fund at (800) 369-2728. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
Attention: Institutional Funds
335 Madison Avenue, 15th Floor
New York, New York 10017
Completed and signed account applications should be mailed to Warburg Pincus
Funds at the above address.
27
<PAGE>
THE FUND IS DESIGNED FOR INSTITUTIONAL INVESTORS ALTHOUGH, IN ITS DISCRETION,
THE FUND MAY PERMIT SHARES TO BE PURCHASED BY INDIVIDUALS, AS WELL AS
INSTITUTIONS, WHO MEET THE MINIMUM INVESTMENT REQUIREMENTS.
HOW TO PURCHASE SHARES IN THE PORTFOLIOS
- --------------------------------------------------------------------------------
Shares of the Portfolios may be purchased either by mail or, with special
advance instructions, by wire. Shares of the Fund are sold without a sales
charge. The minimum initial investment in each Portfolio is as follows:
<TABLE>
<CAPTION>
Minimum Initial Minimum Subsequent
Portfolio Investment* Investment**
- ---------------------------------------- ------------------- -----------------------
<S> <C> <C>
International Equity $ 3,000,000 $50,000
Managed EAFE'r' Countries 3,000,000 50,000
Emerging Markets 2,000,000 50,000
Small Company Growth 1,000,000 None
Global Fixed Income 3,000,000 50,000
Value 1,000,000 None
</TABLE>
- ------------
* The minimum investment for any group of related persons is an aggregate of
$4,000,000.
** Certain retirement plans for which recordkeeping is performed on an omnibus
basis for multiple participants are not subject to a subsequent investment
minimum.
The investment minimums may be waived for investors maintaining advisory
accounts with Warburg or brokerage accounts with Counsellors Securities. The
Fund reserves the right to change the initial and subsequent investment minimum
requirements at any time. Existing investors will be given 15 days' notice by
mail of any increase in investment minimum requirements.
After an investor has made an initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined below. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the Portfolio in which shares are being purchased. In the interest of
economy and convenience, physical certificates representing shares of a
Portfolio are not normally issued.
BY MAIL. If the investor desires to purchase shares by mail, a check or money
order made payable to Warburg Pincus Institutional Fund, Inc. or Warburg Pincus
Funds (in U.S. currency) should be sent along with the completed account
application to Warburg Pincus Funds through its distributor, Counsellors
Securities Inc., at the address set forth above and should indicate the
Portfolio in which shares are to be purchased. Checks payable to the investor
and indorsed to the order of the Fund or Warburg Pincus Funds will not be
accepted as payment and will be returned to the sender. If payment is received
in proper form before 4:00 p.m. (Eastern time) on a day that the Fund calculates
its net asset value (a 'business day'), the purchase will be made at the
relevant Portfolio's net asset value calculated at the end of that day. If
payment is received after 4:00 p.m., the purchase will be effected at the
relevant Portfolio's net asset value determined for the next business day after
payment has been received. Checks or money orders that are not in proper form or
that are not accompanied or preceded by a complete account application will be
returned to the sender. Shares purchased by check
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<PAGE>
or money order are entitled to receive dividends and distributions beginning on
the day after payment has been received. Checks or money orders in payment for
more than one Portfolio or Warburg Pincus Fund should be accompanied by a
breakdown of amounts to be invested in each Portfolio or fund. If a check used
for the purchase does not clear, the Fund will cancel the purchase and the
investor may be liable for losses or fees incurred. For a description of the
manner of calculating each Portfolio's net asset value, see 'Net Asset Value'
below.
BY WIRE. Investors may also purchase shares in a Portfolio by wiring funds
from their banks. Telephone orders by wire will not be accepted until a
completed account application in proper form has been received and an account
number has been established. Investors should place an order with the Fund prior
to wiring funds by telephoning (800) 369-2728. Federal funds may be wired to
Counsellors Securities Inc. using the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA #0110 000 28
Attn: Mutual Funds/Custody Dept.
Warburg Pincus Institutional Fund, Inc.:
[Portfolio name]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
If a telephone order is received by the close of regular trading on the New
York Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment
by wire is received on the same day in proper form in accordance with
instructions set forth above, the shares will be priced according to the net
asset value of the relevant Portfolio on that day and are entitled to dividends
and distributions beginning on that day. If payment by wire is received in
proper form by the close of the NYSE without a prior telephone order, the
purchase will be priced according to the net asset value of the relevant
Portfolio on that day and is entitled to dividends and distributions beginning
on that day. However, if a wire in proper form that is not preceded by a
telephone order is received after the close of regular trading on the NYSE, the
payment will be held uninvested until the order is effected at the close of
business on the next business day. Payment for orders that are not received or
accepted will be returned to the prospective investor after prompt inquiry. If a
telephone order is placed and payment by wire is not received on the same day,
the Fund will cancel the purchase and the investor may be liable for losses or
fees incurred.
GENERAL. Each Portfolio reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in Warburg's opinion, they are of a
size that would disrupt the management of a Portfolio. A Portfolio may
discontinue sales of its shares if management believes that a substantial
29
<PAGE>
further increase in assets may adversely affect that Portfolio's ability to
achieve its investment objective. In such event, however, it is anticipated that
existing shareholders would be permitted to continue to authorize investment in
such Portfolio and to reinvest any dividends or capital gains distributions.
HOW TO REDEEM AND EXCHANGE SHARES IN THE PORTFOLIOS
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES. An investor in a Portfolio may redeem (sell) shares on
any day that the Portfolio's net asset value is calculated (see 'Net Asset
Value' below).
Shares of a Portfolio may either be redeemed by mail or by telephone.
Investors should realize that in using the telephone redemption and exchange
option, they may be giving up a measure of security that they may have if they
were to redeem or exchange their shares in writing. If an investor desires to
redeem shares by mail, a written request for redemption should be sent to
Warburg Pincus Funds at the address indicated above under 'How to Open an
Account in the Fund.' An investor should be sure that the redemption request
identifies the relevant Portfolio, the number of shares to be redeemed and the
investor's account number. In order to change the bank account designated to
receive the redemption proceeds, the investor must send a written request (with
signature guarantee of all investors listed on the account when such a change is
made in conjunction with a redemption request) to Warburg Pincus Funds. Each
mail redemption request must be signed by the registered owner(s) (or legal
representative(s)) exactly as the shares are registered. If an investor has
applied for the telephone redemption feature on the account application, the
investor may redeem the shares by telephone by calling the Fund at (800)
369-2728 between 9:00 a.m. and 4:00 p.m. (Eastern time) on any business day. An
investor making a telephone withdrawal should state (i) the name of the relevant
Portfolio, (ii) the account number of the Portfolio, (iii) the name of the
investor(s) appearing on the Portfolio's records, (iv) the amount to be
withdrawn and (v) the name of the person requesting the redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. The Fund
currently does not impose a service charge for effecting wire transfers but it
reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
the address shown above under 'How to Open an Account in the Fund.' Although the
Fund will redeem shares purchased by check before the check has cleared, payment
of the redemption proceeds will be delayed for 10 days from the date of
purchase. Investors should consider purchasing shares using a certified or bank
check or money order if they anticipate an immediate need for redemption
proceeds.
30
<PAGE>
If a redemption order is received by a Portfolio or its agent prior to the
close of regular trading on the NYSE, the redemption order will be effected at
the relevant Portfolio's net asset value per share as determined on that day. If
a redemption order is received after the close of trading on the NYSE, the
redemption order will be effected at the relevant Portfolio's net asset value as
next determined. Except as noted above, redemption proceeds will normally be
mailed or wired to an investor on the next business day following the date a
redemption order is effected. If, however, in the judgment of Warburg, immediate
payment would adversely affect a Portfolio, the Portfolio reserves the right to
pay the redemption proceeds within seven days after the redemption order is
effected. Furthermore, a Portfolio may suspend the right of redemption or
postpone the date of payment upon redemption (as well as suspend or postpone the
recordation of an exchange of shares) for such periods as are permitted under
the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in the account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account in a Portfolio
drops to less than $250,000, the Fund reserves the right to redeem the shares in
that account at net asset value. Prior to any redemption, the Fund will notify
an investor in writing that the account has a value of less than the minimum.
The investor will then have 60 days to make an additional investment before a
redemption will be processed by the Fund.
TELEPHONE TRANSACTIONS. In order to request redemptions by telephone,
investors must have completed and returned to Warburg Pincus Funds an account
application containing a telephone election. Unless contrary instructions are
elected, an investor will be entitled to make exchanges by telephone. Neither
the Fund nor its agents will be liable for following instructions communicated
by telephone that it reasonably believes to be genuine. Reasonable procedures
will be employed on behalf of the Fund to confirm that instructions communicated
by telephone are genuine. Such procedures include providing written confirmation
of telephone transactions, tape recording telephone instructions and requiring
specific personal information prior to acting upon telephone instructions.
EXCHANGE OF SHARES. An investor may exchange shares of one Portfolio for
shares of another Portfolio at their respective net asset values. Exchanges may
be effected by mail or by telephone in the manner described under 'Redemption of
Shares' above. If an exchange request is received by Warburg Pincus Funds or its
agent prior to the close of regular trading on the NYSE, the exchange will be
made at each Portfolio'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. Due to the costs involved in
effecting exchanges, the Fund
31
<PAGE>
reserves the right to refuse to honor more than three exchange requests by a
shareholder in any 30-day period. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is available to investors in any state in which the
shares being acquired may be legally 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. For further information regarding the exchange
privilege an investor should contact the Fund at (800) 369-2728.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued on the
Portfolio's portfolio securities for the applicable period (which includes
amortization of market discounts) less amortization of market premium and
applicable expenses. Each Portfolio declares dividends from its net investment
income and net realized short-term and long-term capital gains annually and pays
them in the calendar year in which they are declared. Net investment income
earned on weekends and when the NYSE is not open will be computed as of the next
business day. Unless an investor instructs the Fund to pay dividends or
distributions in cash, dividends and distributions will automatically be
reinvested in additional shares of the relevant Portfolio at net asset value.
The election to receive dividends in cash may be made on the account application
or, subsequently, by writing to the Fund at the address set forth under 'How to
Open an Account in the Fund' or by calling the Fund at (800) 369-2728.
The Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. Each Portfolio intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. A Portfolio, if it qualifies as a
regulated investment company, will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain. Each Portfolio expects to pay such additional dividends and to
make such additional distributions as are necessary to avoid the application of
this tax.
Dividends paid from net investment income and distributions derived from net
realized short-term capital gains are taxable to investors as ordinary income
whether received in cash or reinvested in additional Portfolio shares.
Distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, regardless of how long investors have
held Portfolio shares or whether such distributions are received in cash or
reinvested in Portfolio shares. As a general rule, an investor's gain or loss on
a sale or redemption of Portfolio shares will be a long-term capital gain or
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<PAGE>
loss if the investor has held the shares for more than one year and will be a
short-term capital gain or loss if the investor has held the shares for one year
or less. However, any loss realized upon the sale or redemption of shares within
six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period with respect to such shares. Investors
may be proportionately liable for taxes on income and gains of the Portfolios,
but investors not subject to tax on their income will not be required to pay tax
on amounts distributed to them. A Portfolio's investment activities, including
short sales of securities, will not result in unrelated business taxable income
to a tax-exempt investor. A Portfolio's dividends may qualify for the dividends
received deduction for corporations to the extent they are derived from
dividends attributable to certain types of stock issued by U.S. domestic
corporations.
Dividends and interest received by each Portfolio may be subject to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If a Portfolio qualifies as a regulated investment
company, if certain distribution requirements are satisfied and if more than 50%
of the Portfolio's total assets at the close of its fiscal year consist of stock
or securities of foreign corporations, the Portfolio may elect for U.S. income
tax purposes to treat any foreign income taxes paid by it that can be treated as
income taxes under U.S. income tax principles as paid by its shareholders. A
Portfolio may qualify for and make this election in some, but not necessarily
all, of its taxable years. If a Portfolio were to make an election, shareholders
of the Portfolio would be required to take into account an amount equal to their
pro rata portions of such foreign taxes in computing their taxable income and
then treat an amount equal to those foreign taxes as a U.S. federal income tax
deduction or as a foreign tax credit against their U.S. federal income taxes.
Shortly after any year for which it makes such an election, a Portfolio will
report to its shareholders, in writing, the amount per share of such foreign
income tax that must be included in each shareholder's gross income and the
amount which will be available for the deduction or credit. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Certain limitations will be imposed on the extent to which the credit (but not
the deduction) for foreign taxes may be claimed.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close the short sale. A
Portfolio's use of short sales may also affect the holding periods of certain
securities held by the Portfolio if such securities are 'substantially
identical' to securities used by the Portfolio to close the short sale. The
Portfolio's short selling
33
<PAGE>
activities will not result in unrelated business taxable income to a tax-exempt
investor.
GLOBAL FIXED INCOME PORTFOLIO. Zero coupon securities do not make interest
payments, although a portion of the difference between a zero coupon security's
maturity value and its purchase price is imputed as income to the Portfolio each
year even though the Portfolio receives no cash distribution until maturity.
Under the U.S. federal tax laws, the Portfolio will not be subject to tax on
this income if it pays dividends to its shareholders substantially equal to all
the income received from, or imputed with respect to, its investments during the
year, including its zero coupon securities. These dividends ordinarily will
constitute taxable income to the shareholders of the Portfolio.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of each Portfolio's prior
taxable year with respect to certain dividends and distributions which were
received from the Portfolio during the Portfolio's prior taxable year. Investors
should consult their tax advisers with specific reference to their own tax
situations, including their state and local tax liabilities.
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of each Portfolio generally changes each day.
The net asset value per share of each Portfolio is computed by dividing the
value of a Portfolio's net assets by the total number of its shares outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Debt obligations that mature in 60 days or
less from the valuation date are valued on the basis of amortized cost, unless
the Board determines that using this valuation method would not reflect the
investments' value. Securities, options and futures contracts for which market
quotations are not readily available and other assets will be valued at their
fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. Further information regarding valuation
policies is contained in the Statement of Additional Information.
34
<PAGE>
THE PORTFOLIOS' PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, a Portfolio may advertise its yield or average annual
total return over various periods of time. The yield of a Portfolio refers to
net investment income generated by the Portfolio over a specified 30-day period,
which is then annualized. Total return figures show the average percentage
change in value of an investment in a Portfolio from the beginning of the
measurement period to the end of the measurement period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gain distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. 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 Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of any
Portfolio's return over a longer market cycle. A Portfolio may also advertise
aggregate total return figures for various periods, representing the cumulative
change in value of an investment in the relevant Portfolio for the specific
period. Aggregate and average total returns may be shown by means of schedules,
charts or graphs, and may indicate various components of total return (i.e.,
change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine each
Portfolio's yield and total return. Current yield and total return figures may
be obtained by calling the Fund at (800) 369-2728.
In reports or other communications to investors or in advertising material, a
Portfolio may describe general economic and market conditions affecting the
Portfolio and may compare its performance with (i) that of other mutual funds
with similar investment objectives and policies, which may be based on the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds; (ii) in the case of the
International Equity and Managed EAFE'r' Countries Portfolios, the EAFE Index,
the Salomon Russell Global Equity Index, the FT-Actuaries World Indices (jointly
compiled by The Financial Times, Ltd., Goldman, Sachs & Co. and NatWest
Securities Ltd.) and the S&P 500 Index; in the case of the Emerging Markets
Portfolio, with the IFC Emerging Market Free Index, the IFC Investible Index and
the Morgan Stanley Capital International Emerging Markets Index; in the case of
the Small Company Growth Portfolio, with the Russell 2000 Small Stock Index and
the S&P 500 Index; in the case of the Global Fixed Income Portfolio, with the
J.P. Morgan Traded Index (an index
35
<PAGE>
of non-U.S. dollar bonds of ten countries with active bond markets), the Salomon
Brothers World Government Bond Index (a hedged, market-capitalization weighted
index designed to track major government debt markets) and the Lipper General
World Income Average (an average of funds that invest primarily in non-U.S.
dollar and U.S. dollar debt instruments); and in the case of the Value
Portfolio, with the S&P 500 Index or (iii) other appropriate indexes of
investment securities or with data developed by Warburg derived from such
indexes. A Portfolio may also include evaluations of the Portfolio 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, Inc., Mutual Fund Magazine, SmartMoney and The Wall Street Journal.
In reports or other communications to investors or in advertising, each
Portfolio may also describe the general biography or work experience of the
portfolio managers of the Portfolio and may include quotations attributable to
the portfolio managers describing approaches taken in managing the Portfolio's
investments, research methodology underlying stock selection or the Portfolio's
investment objective. In addition, a Portfolio and its portfolio managers may
render periodic updates of Portfolio activity, which may include a discussion of
significant portfolio holdings and analysis of holdings by industry, country,
credit quality and other characteristics. Each Portfolio may also discuss
measures of risk, the continuum of risk and return relating to different
investments, and the potential impact of foreign stocks on a portfolio otherwise
composed of domestic securities. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various time periods. In addition,
each Portfolio may from time to time compare its expense ratio to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. The Fund was incorporated on May 13, 1992 under the laws of the
State of Maryland under the name 'Warburg, Pincus Institutional Fund, Inc.' The
Fund's charter authorizes the Board to issue thirteen billion full and
fractional shares of capital stock, par value $.001 per share. Shares of six
series have been classified, which constitute the interests in the Portfolios.
VOTING RIGHTS. Investors in each Portfolio are entitled to one vote for each
full share owned and fractional votes for fractional shares held. Shareholders
of each Portfolio vote in the aggregate on all matters except where otherwise
required by law. There will normally be no meetings of shareholders for the
purpose of electing members of the Board unless and until such time as less than
a majority of the members holding office have been elected by shareholders. Any
Director may be removed from office upon the vote of shareholders holding at
least a majority of the Fund's outstanding shares at a meeting called for that
purpose. A meeting will be called for any purpose at
36
<PAGE>
the written request of holders of 10% of the Fund's outstanding shares. Wake
Forest University Trust may be deemed to be a controlling person of the Emerging
Markets Portfolio because its beneficial ownership of the Emerging Markets
Portfolio exceeds 25% of that Portfolio's voting securities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of the investor's account, as well as a statement after any transaction that
affects the investor's share balance or share registration (other than
reinvestment of dividends or distributions). The Fund will also send to its
investors a semiannual report and an audited annual report, each of which
includes a list of the investment securities held by each Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by a Portfolio, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Fund at (800)
369-2728.
---------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF SHARES IN ANY STATE
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
37
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund's Expenses..................................................... 2
Financial Highlights.................................................... 3
Investment Objectives and Policies...................................... 5
Portfolio Transactions and Turnover Rate................................ 13
Special Risk Considerations and Certain Investment Strategies........... 14
Investment Guidelines................................................... 23
Management of the Fund.................................................. 24
How to Open an Account in the Fund...................................... 27
How to Purchase Shares in the Portfolios................................ 28
How to Redeem and Exchange Shares in the Portfolios..................... 30
Dividends, Distributions and Taxes...................................... 32
Net Asset Value......................................................... 34
The Portfolios' Performance............................................. 35
General Information..................................................... 36
</TABLE>
[Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR WPINS-1-0497
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ...........'r'
The dagger symbol shall be expressed as .........................'D'
<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
April 16, 1997
WARBURG PINCUS INSTITUTIONAL FUND, INC.
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 369-2728
Contents
Page
Investment Objectives........................................................2
Investment Policies..........................................................2
Management Of The Fund......................................................40
Additional Purchase And Redemption Information..............................48
Exchange Privilege..........................................................49
Additional Information Concerning Taxes.....................................49
Determination Of Performance................................................52
Independent Accountants And Counsel.........................................55
Miscellaneous...............................................................55
Financial Statements........................................................57
Appendix -- Description of Ratings.........................................A-1
Statements of Assets and Liabilities.......................................A-4
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Warburg Pincus Institutional Fund, Inc.
(the "Fund") dated April 16, 1997, as amended or supplemented from time to time,
and is incorporated by reference in its entirety into that Prospectus. Because
this Statement of Additional Information is not itself a prospectus, no
investment in shares of the International Equity Portfolio, the Managed EAFE(R)
Countries Portfolio, the Emerging Markets Portfolio, the Small Company Growth
Portfolio, the Global Fixed Income Portfolio or the Value Portfolio (the
"Portfolios") should be made solely upon the information contained herein.
Copies of the Fund's Prospectus and information regarding each Portfolio's
current performance may be obtained by calling the Fund at (800) 369-2728.
Information regarding the status of shareholder accounts may also be obtained by
calling the Fund at the same number or by writing to the Fund, P.O.
Box 9030, Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVES
The investment objective of the International Equity
Portfolio, the Managed EAFE(R) Countries Portfolio and the Value Portfolio is
long-term capital appreciation. The investment objective of the Emerging Markets
Portfolio and the Small Company Growth Portfolio is capital growth. The
investment objective of the Global Fixed Income Portfolio is to maximize total
investment return consistent with prudent investment management while preserving
capital.
INVESTMENT POLICIES
The following policies supplement the descriptions of each
Portfolio's investment objective and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Portfolio (other than the Emerging
Markets Portfolio) may write covered put and call options on stock and debt
securities and each Portfolio may purchase such options that are traded on
foreign and U.S. exchanges, as well as over-the-counter ("OTC").
A Portfolio 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 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 Portfolio
as the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Portfolio as a put or call writer retains the risk of a decline in the price
of the underlying security. The size of the premiums that the Portfolio 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.
<PAGE>3
In the case of options written by a Portfolio that are deemed
covered by virtue of the Portfolio'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 Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
the Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio 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 Portfolio 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 the relevant Portfolios may write covered call options. For
example, if a Portfolio 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 Portfolio 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 Portfolio 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. The Portfolios (other than the Emerging
Markets Portfolio) may write (i) in-the-money call options when Warburg, Pincus
Counsellors, Inc., the Portfolios' investment adviser ("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, a Portfolio 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 the Portfolio
prior to the exercise of options that it has purchased or written, respectively,
of options of the same series) in which the Portfolio may realize a profit or
loss from the sale. An option position may be closed out only where
<PAGE>4
there exists a secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. When the Portfolio has
purchased an option and engages in a closing sale transaction, whether the
Portfolio 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 Portfolio
initially paid for the original option plus the related transaction costs.
Similarly, in cases where the Portfolio 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. The Portfolio 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 the Portfolio under an option it has written would be terminated
by a closing purchase transaction, but the Portfolio would not be deemed to own
an option as a result of the transaction. So long as the obligation of the
Portfolio as the writer of an option continues, the Portfolio may be assigned an
exercise notice by the broker-dealer through which the option was sold,
requiring the Portfolio to deliver the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Portfolio effects a closing purchase transaction. The Portfolio can no longer
effect a closing purchase transaction with respect to an option once it has been
assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Portfolio's ability to terminate options positions established in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that securities dealers participating in
over-the-counter transactions would fail to meet their obligations to the
Portfolio. The Portfolio, however, intends to purchase over-the-counter 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
Portfolio is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. In either case,
the Portfolio would continue to be at market risk on the security and could face
higher transaction costs, including brokerage commissions.
<PAGE>5
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
Fund or a Portfolio 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 Portfolio will be able to purchase on a particular security.
Stock Index Options. Each Portfolio may purchase and each
portfolio (other than the Emerging Markets Portfolio) may write exchange-listed
and OTC put and call options on stock indexes. A stock index measures the
movement of a certain group of stocks by assigning relative values to the common
stocks included in the index, fluctuating with changes in the market values of
the stocks included in the index. Some stock index options are based on a broad
market index, such as the NYSE Composite Index, or a narrower market index such
as the Standard & Poor's 100. Indexes may also be based on a particular industry
or market segment.
Options on stock indexes are similar to options on stock
except that (i) the expiration cycles of stock index options are monthly, while
those of stock 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 stock 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 stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the index and the
exercise price of the option times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Stock index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. The Portfolios 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 stock 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 Portfolio
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 Portfolio, the Portfolio would
lose the premium it paid for the option and the expected benefit of the
transaction.
<PAGE>6
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Portfolio 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 the Portfolio 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 Portfolio originally wrote the option. Although the Portfolios 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
Portfolios, there can be no assurance that the Portfolio 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 Portfolio. Until the Portfolio, as a covered OTC call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Portfolio's ability to
sell portfolio securities or, with respect to currency options, currencies at a
time when such sale might be advantageous. In the event of insolvency of the
other party, the Portfolio may be unable to liquidate a dealer option.
Futures Activities. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return.
A Portfolio will not enter into futures contracts and related
options for which the aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC exceed 5% of the Portfolio's net asset value after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into. The Portfolios reserve the right to engage in transactions
involving futures contracts and options on futures contracts to the extent
allowed by CFTC regulations in effect from time to time and in accordance with a
Portfolio's policies. Although each Portfolio is limited in the amount of assets
it may invest in futures transactions (as described above and in the
Prospectus), there is no overall limit on the percentage of Portfolio assets
that may be at risk with respect to futures activities. The ability of the
Portfolio to trade in futures contracts and options on futures contracts may be
limited by the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable to a regulated investment company.
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
<PAGE>7
price, date, time and place. Stock indexes are capitalization weighted indexes
which reflect the market value of the stock listed on the indexes. A stock 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 Portfolio upon
entering into a futures contract. Instead, the Portfolio is required to deposit
in a segregated account with its custodian an amount of cash or cash
equivalents, such as U.S. government securities or other liquid high-grade debt
obligations, equal to approximately 1% to 10% of the contract amount (this
amount is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio 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 Portfolio 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
stock 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." The Portfolios will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
Portfolio may elect to close the position by taking an opposite position, which
will operate to terminate the Portfolio'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 the Portfolios intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio 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 Portfolio 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 the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase
and write put and call options on foreign currency, interest rate and stock
index futures contracts and may enter
<PAGE>8
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 stock index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Portfolio.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Portfolio that are invested in foreign securities may be
affected favorably or unfavorably by changes in exchange control regulations,
and the Portfolio may incur costs in connection with conversion between various
currencies. Currency exchange transactions may be from any non-U.S. currency
into U.S. dollars or into other appropriate currencies. Each Portfolio will
conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market, (ii) through entering into
futures contracts or options on such contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed
upon by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are standardized
as to contract size and delivery date.
At or before the maturity of a forward contract, the Portfolio
may either sell a portfolio security and make delivery of the currency, or
retain the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to purchase a
second, offsetting contract. If the Portfolio retains the portfolio security and
engages in an offsetting transaction, the Portfolio, at the time of execution of
the offsetting
<PAGE>9
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. The Portfolios 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. The Portfolios' 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 Portfolio 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. A Portfolio may not 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 the Portfolio's securities are denominated will reduce the U.S. dollar
value of the securities, even if their value in the foreign currency remains
constant. The use of currency hedges does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. For example, in order to protect against
diminutions in the U.S. dollar value of securities it holds, a Portfolio may
purchase currency put options. If the value of the currency does decline, the
Portfolio will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, the Portfolio 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 the Portfolio
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, the Portfolio 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 the Portfolio's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Portfolio's investments
denominated in that currency. A currency hedge, for example, should protect a
<PAGE>10
Yen-denominated bond against a decline in the Yen, but will not protect the
Portfolio against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options and futures
transactions for other purposes, including generating current income to offset
expenses or increase return, each Portfolio 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 and futures 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 the Portfolio, an increase in the value of the futures contracts could
only mitigate, but not totally offset, the decline in the value of the
Portfolio's assets.
In hedging transactions based on an index, whether a Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. The risk of imperfect
correlation increases as the composition of the Portfolio'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
Portfolio's hedge positions may be in a greater or lesser dollar amount than the
dollar amount of the hedged position. Such "over hedging" or "under hedging" may
adversely affect the Portfolio's net investment results if market movements are
not as anticipated when the hedge is established. Stock 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 stock 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 stock index and movements in the price of
stock index futures, a correct forecast of general market trends by Warburg
still may not result in a successful hedging transaction.
A Portfolio will engage in hedging transactions only when
deemed advisable by Warburg, and successful use by the Portfolio 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 correctly
predict 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
<PAGE>11
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 the Portfolio's
performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectus, each Portfolio will comply
with guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolio on currencies, securities and indexes; and currency, interest
rate and index futures contracts and options on these futures contracts. These
guidelines may, in certain instances, require segregation by the Portfolio of
cash or liquid securities.
For example, a call option written by the Portfolio on
securities may require the Portfolio 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 the Portfolio
on an index may require the Portfolio 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 the Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio 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 Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio 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. The Portfolio may enter into fully or partially offsetting
transactions so that its net position, coupled with any segregated assets (equal
to any remaining obligation), equals its net obligation. Asset coverage may be
achieved by other means when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments. Investors should recognize that investing
in foreign companies involves certain risks, including those discussed below,
which are not typically associated with investing in U.S.
issuers.
Foreign Currency Exchange. Since the International Equity,
Managed EAFE(R) Countries, Emerging Markets and Global Fixed Income Portfolios
will, and the Small Company Growth and Value Portfolios may, be investing in
securities denominated in currencies other than the U.S. dollar, and since a
Portfolio may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, each Portfolio 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 a Portfolio's assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and
<PAGE>12
losses realized on the sale of securities and net investment income and gains,
if any, to be distributed to shareholders by a Portfolio with respect to its
foreign investments. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United States and a particular foreign country,
including economic and political developments in other countries. Of particular
importance are rates of inflation, interest rate levels, the balance of payments
and the extent of government surpluses or deficits in the United States and the
particular foreign country, all of which are in turn sensitive to the monetary,
fiscal and trade policies pursued by the governments of the United States and
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. A Portfolio may use hedging
techniques with the objective of protecting against loss through the fluctuation
of the value of foreign currencies against the U.S. dollar, particularly the
forward market in foreign exchange, currency options and currency futures. See
"Currency Transactions" and "Futures Activities" above.
Information. The majority of the foreign securities held by a
Portfolio 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 not subject to uniform financial
reporting standards, practices and requirements comparable to those applicable
to U.S.
companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Delays. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure of a Portfolio to market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on a
Portfolio's liquidity, the Portfolios will avoid investing in countries which
are known to experience settlement delays which may expose the Portfolios to
unreasonable risk of loss.
Foreign Taxes and Increased Expenses. The operating expenses
of the International Equity, Managed EAFE(R) Countries, Emerging Markets and
Global Fixed Income Portfolios, to the extent they invest in foreign securities,
can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the
<PAGE>13
Portfolios associated with foreign investing, such as custodial costs, valuation
costs and communication costs, as well as, in the case of the International
Equity, Managed EAFE(R) Countries, Emerging Markets and Global Fixed Income
Portfolios, the rate of the investment advisory fees, though similar to such
expenses of some other funds investing internationally, are higher than those
costs incurred by other investment companies.
General. In general, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. A Portfolio 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.
Japanese Investments (International Equity and Managed EAFE(R)
Countries Portfolios). From time to time depending on current market conditions,
these Portfolios may invest a significant portion of their assets in Japanese
securities. Like any investor in Japan, a Portfolio will be subject to general
economic and political conditions in the country. In addition to the
considerations discussed above, these include future political and economic
developments, the possible imposition of, or changes in, exchange controls or
other Japanese governmental laws or restrictions applicable to such investments,
diplomatic developments, political or social unrest and natural disasters.
The information set forth in this section has been extracted
from various governmental publications and other sources. The Fund makes no
representation as to the accuracy of the information, nor has the Fund attempted
to verify it. Furthermore, no representation is made that any correlation exists
between Japan or its economy in general and the performance of the Fund.
Domestic Politics. Japan has a parliamentary form of
government. The legislative power is vested in the Japanese Diet, which consists
of a House of Representatives and a House of Councillors. Members of the House
of Representatives are elected for terms of four years unless the House of
Representatives is dissolved prior to the expiration of their full elected
terms. Members of the House of Councillors are elected for terms of six years
with one-half of the membership being elected every three years. Various
political parties are represented in the Diet, including the conservative
Liberal Democratic Party ("LDP"), which until August 1993, had been in power
nationally since its formation in 1955. The LDP ceased to have a majority of the
House of Representatives in June 1993, when certain members of the House of
Representatives left the LDP and formed two new political parties. After an
election for the House of Representatives was held on July 18, 1993 and the LDP
failed to secure a majority, seven parties formed a coalition to control the
House of Representatives and chose Morihiro Hosokawa, the Representative of the
Japan New Party, to head their coalition. In April 1994, amid accusations of
financial improprieties, Prime Minister Hosokawa announced that he would resign.
Tsutomu Hata succeeded Mr. Hosokawa as prime minister and formed a new cabinet
as a minority coalition government. In June 1994, Mr. Hata yielded to political
pressure from opposition parties and resigned. He was succeeded by Social
Democratic Party
<PAGE>14
leader Tomiichi Murayama, Japan's first Socialist prime minister since 1948, who
was chosen by a new and unstable alliance between left-wing and conservative
parties, including the LDP. On September 18, 1994, 187 opposition politicians
founded a new party, the Reform Party, led by Ichiro Ozawa, to oppose the
government of Prime Minister Murayama in the next elections. Political
realignment has continued in 1995, as the Social Democrats incurred significant
losses in the July elections. In August 1995, the LDP elected Ryutaro Hashimoto,
the minister for international trade and industry, as its new leader, and in
January 1996, he became prime minister. Mr. Hashimoto dissolved the Diet, and
called a general election in October 1996, in which the LDP failed to secure a
majority. The LDP formed a new coalition with the Social Democratic Party, but
it will need to attract members from the main opposition party to attain a
working majority. The recently formed Democratic Party, which calls for serious
public sector reforms, is likely to have a strong influence on the future course
of political party developments. This continuing political instability may
hamper Japan's ability to establish and maintain effective economic and fiscal
policies, and recent and future political developments may lead to changes in
policy that might adversely affect the Fund's investments.
Economic Background. Over the past 30 years, Japan has
experienced significant economic development. During the era of high economic
growth in the 1960's and early 1970's the expansion was based on the development
of heavy industries such as steel and shipbuilding. In the 1970's Japan moved
into assembly industries which employ high levels of technology and consume
relatively low quantities of resources, and since then has become a major
producer of electrical and electronic products and automobiles. Moreover, since
the mid-1980's, Japan has become a major creditor nation. With the exception of
the periods associated with the oil crises of the 1970's, Japan has generally
experienced very low levels of inflation.
The financial sector has experienced serious difficulties
continuing through the end of 1996. Extricating financial institutions from bad
loans could impede the pace of any recovery. There can be no assurance that any
recovery will continue and will not, in fact, be reversed.
Japan is largely dependent upon foreign economies for raw
materials. For instance, almost all of its oil is imported, the majority from
the Middle East. Oil prices therefore have a major impact on the domestic
economy, as is evidenced by the current account deficits triggered by the two
oil crises of the 1970's. Oil prices have declined mainly due to a worldwide
easing of demand for crude oil. The stabilized price of oil contributed to
Japan's sizable current account surplus and stability of wholesale and consumer
prices. However, the recent increase in oil prices has put pressure on both the
trade balance and prices.
International trade is important to Japan's economy, as
exports provide the means to pay for many of the raw materials it must import.
Japan's trade surplus has increased dramatically in recent years, exceeding $100
billion per year since 1991 and reaching a record high of $145 billion in 1994.
Because of the concentration of Japanese
<PAGE>15
exports in highly visible products such as automobiles, machine tools and
semiconductors, and the large trade surpluses resulting therefrom, Japan has
entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest. In 1995, however, the trade surplus has decreased due to a drop in
exports. The reduced exports are due primarily to the strength of the yen and
the shift in production by major manufacturers to foreign countries,
particularly to other parts of Asia. In 1996, the overall trade surplus declined
by 32% from the previous year, although the monthly pace of decline slowed in
late 1996. The declining trade surplus has been accompanied by changes in the
composition of trade and trade partners. The proportion of finished products has
increased, while that of raw materials has decreased, and trade with other Asian
countries rose to comprise 44% and 37% of Japan's exports and imports,
respectively. The U.S. still constitutes Japan's largest trading partner,
accounting for 27% of Japan's exports and 23% of its imports. The trade
imbalance with the U.S. has caused friction in the past, and could adversely
affect Japan and the performance of the Fund.
The following table sets forth the composition of Japan's
trade balance, as well as other components of its current account, for the years
shown.
CURRENT ACCOUNT
<TABLE>
<CAPTION>
Trade
----------------------------------------------------------------------
Percentage Percentage
Change from Change from Trade Current
Year Exports Preceding Imports Preceding Balance Services Transfers Balance
---- ------- Year ------- Year ------- -------- --------- --------
----------- -----------
(U.S. dollars in
millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 168,290 15.7 124,003 8.8 44,257 (7,747) (1,507) 35,003
1985 174,015 3.4 118,029 (4.8) 55,986 (5,165) (1,652) 49,169
1986 205,591 18.1 112,764 (4.5) 92,827 (4,932) (2,050) 85,845
1987 224,605 9.2 128,219 13.7 96,386 (5,702) (3,669) 87,015
1988 259,765 15.7 164,753 28.5 95,012 (11,263) (4,118) 79,631
1989 269,570 3.8 192,653 16.9 76,917 (15,526) (4,234) 57,157
1990 280,374 4.0 216,846 12.6 63,528 (22,292) (5,475) 35,761
1991 306,557 9.3 203,513 (6.1) 103,044 (17,660) (12,483) 72,901
1992 330,850 7.9 198,502 (2.5) 132,348 (10,112) (4,685) 117,551
1993 351,292 6.2 209,778 5.7 141,514 (3,949) (6,117) 131,448
1994 384,176 9.4 238,232 13.6 145,944 (9,296) (7,508) 129,140
1995 429,482 11.8 297,795 25.0 131,689 (13,154) (7,737) 110,798
1996 435,715 1.5 344,563 15.7 91,152 (67,760) (9,755) 71,806
</TABLE>
Source: Bank of Japan
<PAGE>16
Economic Trends. The following table sets forth Japan's
gross domestic product for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
<TABLE>
<CAPTION>
1996* 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
(yen in billions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private...........(Y)298,786 (Y)289,045 (Y)277,676.8 (Y)270,919.4 (Y)264,824.1 (Y)255,084.2 (Y)243,628.1 (Y)228,483.2
Government..........49,106 46,824 46,108.0 44,666.4 43,257.9 41,232.0 38,806.6 36,274.8
Capital
Formation
(incl.
inventories)
Private.............. N/A 70,758 93,111.4 99,180.1 108,727.6 116,638.0 110,871.9 100,130.8
Government........... N/A 41,461 42,227.3 40,295.8 35,110.1 30,062.3 28,182.6 25,724.5
Exports of
Goods and
Services........ 48,773 45,408 44,449.2 44,243.8 47,409.4 46,809.7 45,919.9 42,351.8
Imports of
Goods and
Services........... 46,127 38,227 34,424.0 33,333.1 36,183.8 38,529.3 42,871.8 36,768.1
GDP
(Expenditures)...... 499,667 480,693 469,148.7 465,972.4 463,145.3 451,296.9 24,537.2 396,197.0
Change in GDP
from
Preceding Year
Nominal terms........ 3.9% 0.3% 0.7% 0.6% 2.6% 6.3% 7.2% 6.7%
Real Terms........... N/A 0.9% 0.5% -0.2% 1.1% 4.3% 4.8% 4.7%
</TABLE>
Source: Economic Planning Agency, Japan
- ------------------
* Average of the first, second and third quarters of 1996.
The following tables set forth certain economic indicators in
Japan for the years shown.
<TABLE>
<CAPTION>
UNEMPLOYMENT
Labor Productivity
Year Number Unemployed Percent Unemployed Index (Manufacturing)
(in millions) (Base Year: 1990)
<S> <C> <C> <C>
1985..................... 1.56 2.6 75.6
1986..................... 1.67 2.8 77.0
1987..................... 1.73 2.8 81.4
1988..................... 1.55 2.5 90.8
1989..................... 1.42 2.3 96.2
1990..................... 1.34 2.1 100.0
1991..................... 1.36 2.1 102.5
1992..................... 1.42 2.2 97.0
1993..................... 1.66 2.5 95.4
1994..................... 1.92 2.9 98.3
1995..................... 2.10 3.2 103.0
1996..................... 2.25 3.4 107.4*
</TABLE>
Source: Japan Productivity Center; Bureau of Statistics Management and
Coordination Agency
- ------------------
* Average of the first, second and third quarters of 1996.
<PAGE>17
WHOLESALE PRICE INDEX
(Base Year: 1990)
All Change from
Year Commodities Preceding Year
- ---- ----------- --------------
1985 110.4 (1.1)%
1986 100.3 (9.1)
1987 96.5 (3.8)
1988 95.6 (0.9)
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 (2.1)
1995 92.2 (0.9)
1996 92.8 0.7
Source: Bank of Japan
CONSUMER PRICE INDEX
Change from
Year General Preceding Year
- ---- ------- --------------
(Base Year: 1990)
1985 93.5 2.0%
1986 94.1 0.6
1987 94.2 0.1
1988 94.9 0.7
1989 97.0 2.3
1990 100.0 3.1
1991 103.3 3.3
(Base Year: 1995)
1992 98.2 1.8
1993 99.4 1.2
1994 100.1 0.7
1995 100.0 (0.1)
1996 100.1 0.1
Source: Bureau of Statistics Management and Coordination Agency
Currency Fluctuation. Investments by the International Equity
and the Mamaged EAFE(R) Countries Portfolios in Japanese securities will be
denominated in yen and most income received by these Portfolios from such
investments will be in yen. However, the Portfolios' net asset value will be
reported, and distributions will be made, in U.S. dollars. Therefore, a decline
in the value of the yen relative to the U.S. dollar could have an adverse
<PAGE>18
effect on the value of the Funds' Japanese investments. The following table
presents the average exchange rates of Japanese yen for U.S. dollars for the
years shown:
CURRENCY EXCHANGE RATES
Year Yen Per U.S. Dollar
---- -------------------
1985 (Y)238.47
1986 168.35
1987 144.60
1988 128.17
1989 138.07
1990 145.00
1991 134.59
1992 126.62
1993 111.18
1994 102.22
1995 94.07
1996 108.78
Source: Nikkei (Calendar Year, Closing Average, Inter-Bank Rates in Tokyo, Spot)
On February 14, 1997, the rate of exchange was 124.33 Japanese
yen per U.S. dollar.
Geological Factors. The islands of Japan lie in the western
Pacific Ocean, off the eastern coast of the continent of Asia. Japan has in the
past experienced earthquakes and tidal waves of varying degrees of severity. The
risks of such phenomena, and the damage resulting therefrom, continue to exist.
On January 17, 1995, the Great Hanshin Earthquake killed over 5,000 people and
severely damaged the port of Kobe, Japan's largest container port. The
government has announced a $5.9 billion plan to repair the port and estimates
damage to the region at approximately $120 billion. However, the long-term
economic effects of the earthquake on the Japanese economy as a whole, and on
the Funds' investments, cannot be predicted.
Securities Markets. There are eight stock exchanges in Japan.
Of these, the Tokyo Stock Exchange is by far the largest, followed by the Osaka
Stock Exchange and the Nagoya Stock Exchange. These exchanges divide the market
for domestic stocks into two sections, with newly listed companies and smaller
companies assigned to the Second Section and larger companies assigned to the
First Section.
As of the end of 1996, there were 1,293 domestic companies
listed on the Tokyo Stock Exchange, first section, and 473 listed on the second
section.
The following table sets forth the trading volume and value of
Japanese stocks on each of the eight Japanese stock exchanges for the years
shown.
<PAGE>19
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
<TABLE>
<CAPTION>
All Exchanges Tokyo Osaka Nagoya
--------------------- --------------------- -------------------- ---------------------
Year Volume Value Volume Value Volume Value Volume Value
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989........ 256,296 (Y)386,395 222,599 (Y)332,617 25,096 (Y)41,679 7,263 (Y)10,395
1990........ 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991........ 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992........ 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993........ 101,172 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1994........ 105,936 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1995........ 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1996........ 126,496 136,170 100,170 101,893 20,783 27,280 4,104 5,391
</TABLE>
<TABLE>
<CAPTION>
Kyoto Hiroshima Fukuoka Niigata Sapporo
---------------- ---------------- ---------------- ---------------- ----------------
Volume Value Volume Value Volume Value Volume Value Volume Value
- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989..... 331 (Y)443 190 (Y)235 268 (Y)330 398 (Y)475 151 (Y)221
1990..... 416 770 169 261 203 405 245 334 195 286
1991..... 220 300 125 149 122 174 181 208 113 123
1992..... 225 322 110 136 139 129 163 178 149 129
1993..... 223 340 185 178 229 225 207 226 174 170
1994..... 447 562 256 312 578 669 250 299 267 296
1995..... 641 873 286 306 404 396 295 212 336 308
1996..... 358 600 257 250 300 297 231 196 290 263
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
The following table sets forth the stock trading value of
Japanese stocks on the Tokyo Stock Exchange for the years shown.
TOKYO STOCK EXCHANGE
STOCK TRADING VALUE
<TABLE>
<CAPTION>
Year Total Daily Average High Low Turnover Ratio
(yen in millions)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1985....................... (Y) 78,711,048 (Y) 276,179 (Y) 727,316 (Y) 110,512 44.7%
1986....................... 159,836,218 572,890 1,682,060 115,244 67.2
1987....................... 250,736,971 915,098 2,382,114 221,230 80.6
1988....................... 285,521,260 1,045,865 2,768,810 192,704 70.2
1989....................... 332,616,597 1,335,810 2,796,946 392,347 61.1
1990....................... 186,666,820 758,808 1,464,920 218,205 37.7
1991....................... 110,897,491 450,803 1,531,064 151,565 29.3
1992....................... 60,110,391 243,362 686,737 97,616 18.0
1993....................... 86,889,072 353,208 1,422,760 61,747 28.3
1994....................... 87,355,567 353,666 1,114,216 123,904 25.6
1995....................... 83,563,906 335,598 1,337,999 81,884 23.1
1996....................... 101,892,634 412,521 1,362,586 154,643 28.9
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
<PAGE>20
Securities Indexes. The Tokyo Stock Price Index ("TOPIX") is a
composite index of all common stocks listed on the First Section of the Tokyo
Stock Exchange. TOPIX reflects the change in the aggregate market value of the
common stocks as compared to the aggregate market value of those stocks as of
the close on January 4, 1968.
The following table sets forth the high, low and year-end
TOPIX for the years shown.
TOPIX (Tokyo Stock Price Index)
(Jan. 4, 1968=100)
Year Year-end High Low
---- -------- ---- ---
1985 1,049.40 1,058.35 916.93
1986 1,556.37 1,583.35 1,025.85
1987 1,725.83 2,258.56 1,557.46
1988 2,357.03 2,357.03 1,690.44
1989 2,881.37 2,884.80 2,364.33
1990 1,733.83 2,867.70 1,523.43
1991 1,714.68 2,028.85 1,638.06
1992 1,307.66 1,763.43 1,102.50
1993 1,439.31 1,698.67 1,250.06
1994 1,559.09 1,712.73 1,445.97
1995 1,577.70 1,585.87 1,193.16
1996 1,470.94 1,551.76 1,448.45
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
As this index reflects, share prices of companies traded on
Japanese stock exchanges reached historical peaks (which were later referred to
as the "bubble") in 1989 and 1990. Afterwards stock prices decreased
significantly, reaching their lowest levels in the second half of 1992. There
can be no assurance that additional market corrections will not occur.
U.S. Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. Government Securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board and Student Loan Marketing
Association. Each Portfolio may also invest in instruments that
<PAGE>21
are supported by the right of the issuer to borrow from the U.S. Treasury and
instruments that are supported by the credit of the instrumentality. Because the
U.S. government is not obligated by law to provide support to an instrumentality
it sponsors, a Portfolio 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 Portfolio.
Below Investment Grade Securities. Each Portfolio may invest
in fixed income securities rated below investment grade and it is not required
to dispose of securities downgraded below investment grade subsequent to
acquisition by the Portfolio (subject to the Emerging Market Portfolio's limit
on holding below investment grade fixed-income securities). 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.
The market for medium- and lower-rated and unrated securities
is relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
A Portfolio 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 Portfolios
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 Portfolio's ability
to dispose of particular issues when necessary to meet the Portfolio'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 Portfolio to obtain
accurate market quotations for purposes of valuing the Portfolio and calculating
its net asset value.
The market value of securities in medium- and lower-rated
categories is more volatile than that of higher quality securities. Factors
adversely impacting the market value of these securities will adversely impact
the Portfolio's net asset value. The Fund will rely on
<PAGE>22
the judgment, analysis and experience of Warburg in evaluating the
creditworthiness of an issuer. In this evaluation, Warburg will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. A Portfolio 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. Recent adverse publicity regarding
lower-rated securities may have depressed the prices for such securities to some
extent. Whether investor perceptions will continue to have a negative effect on
the price of such securities is uncertain.
Securities of Other Investment Companies. Each Portfolio may
invest in securities of other investment companies to the extent permitted under
the Investment Company Act of 1940, as amended (the "1940 Act"). Presently,
under the 1940 Act, a Portfolio 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 Portfolio's
total assets and (iii) when added to all other investment company securities
held by the Portfolio, do not exceed 10% of the value of the Portfolio's total
assets.
Lending of Portfolio Securities. A Portfolio may lend
portfolio securities to brokers, dealers and other financial organizations that
meet capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 33-1/3% of a Portfolio's net assets taken at value. A Portfolio will not
lend portfolio securities to affiliates of Warburg unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. Government Securities,
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio involved. From time to time, a
Portfolio 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 Portfolio and that is acting as a "finder."
By lending its securities, the Portfolio can increase its
income by continuing to receive interest and any dividends on the loaned
securities as well as by either investing the collateral received for securities
loaned in short-term instruments or obtaining yield in the form of interest paid
by the borrower when U.S. Government Securities are used as collateral. Income
received could be used to pay a Portfolio's expenses and would increase its
total return. Each Portfolio will adhere to the following conditions whenever
its portfolio securities are loaned: (i) the Portfolio 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 Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio 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 Portfolio
<PAGE>23
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 the Portfolio's
ability to recover the loaned securities or dispose of the collateral for the
loan.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. A
Portfolio will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Warburg deems it advantageous to do so.
The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the 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 a Portfolio 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 Portfolio 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
Portfolio's commitment. It may be expected that the Portfolio'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 Portfolio
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
Portfolio's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Short Sales "Against the Box." In a short sale, the investor
sells a borrowed security and has a corresponding obligation to the lender to
return the identical security. The seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. If a Portfolio engages in a short sale, the collateral for the
short position will be maintained by the Portfolio's custodian or qualified
sub-custodian. While the short sale is open, the Portfolio will maintain in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute the Portfolio's long
position. Not more than 10% of a Portfolio's net assets (taken at current value)
may be held as collateral for such short sales at any one time, except that the
Emerging Markets Portfolio will not be subject to such limitation.
<PAGE>24
The Portfolios do not intend to engage in short sales against
the box for investment purposes. A Portfolio may, however, make a short sale as
a hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Portfolio (or a security
convertible or exchangeable for such security), or when a Portfolio wants to
sell the security at an attractive current price, but also wishes to defer
recognition of gain or loss for U.S. federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in the Portfolio'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 Portfolio owns. There will
be certain additional transaction costs associated with short sales against the
box, but the Portfolio will endeavor to offset these costs with the income from
the investment of the cash proceeds of short sales.
Depositary Receipts. The assets of a Portfolio may be invested
in the securities of foreign issuers in the form of American Depositary Receipts
("ADRs") and 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 receipts issued outside the United States.
EDRs, CDRs, IDRs and 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 securities markets and non-U.S. securities markets, respectively.
Convertible Securities. Convertible securities in which a
Portfolio may invest, including both convertible debt and convertible preferred
stock, may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities enable
an investor to benefit from increases in the market price of the underlying
common stock. Convertible securities provide higher yields than the underlying
equity securities, but generally offer lower yields than non-convertible
securities of similar quality. Like bonds, the value of convertible securities
fluctuates in relation to changes in interest rates and, in addition, also
fluctuates in relation to the underlying common stock.
Warrants. Each Portfolio may purchase warrants issued by
domestic and foreign companies to purchase newly created equity securities
consisting of common and preferred stock. 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.
<PAGE>25
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.
Illiquid Securities. Each Portfolio (other than the Emerging
Markets and Value Portfolios) may not invest more than 10% of its net assets in
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market, repurchase agreements which have a
maturity of longer than seven days and time deposits maturing in more than seven
days. The Emerging Markets and Value Portfolios may each invest up to 15% of its
net assets in such securities. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purposes of this limitation. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days without borrowing. A mutual fund might also have to register such
restricted securities 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
<PAGE>26
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc.
Warburg will monitor the liquidity of restricted securities in
a Portfolio under the supervision of the Board. In reaching liquidity decisions,
Warburg may consider, inter alia, the following factors: (i) the unregistered
nature of the security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (iv) dealer undertakings to make a
market in the security and (v) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Borrowing. Each Portfolio may borrow up to 30% of its total
assets for temporary or emergency purposes, including to meet portfolio
redemption requests so as to permit the orderly disposition of portfolio
securities or to facilitate settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when borrowings exceed 5% of
the Portfolio's net assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the borrowing
is outstanding. Each Portfolio 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.
Non-Diversified Status (Small Company Growth Portfolio,
Emerging Markets Portfolio and Global Fixed Income Portfolio). The Portfolios
are classified as non-diversified within the meaning of the 1940 Act, which
means that each Portfolio is not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. Each Portfolio's
investments will be limited, however, in order to qualify as a "regulated
investment company" for purposes of the Code. See "Additional Information
Concerning Taxes." To qualify, the Portfolio will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of a single issuer.
Zero Coupon Securities. (Emerging Markets Portfolio and Global
Fixed Income Portfolio) The Emerging Markets Portfolio and the Global Fixed
Income Portfolio may invest in "zero coupon" U.S. Treasury, foreign government
and U.S. and foreign corporate convertible and nonconvertible debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and custodial receipts or certificates of participation
representing interests in such stripped debt obligations and coupons. A zero
coupon security pays no interest to its holder prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face or par value
and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities that make
current distributions of interest. The Portfolio anticipates that
<PAGE>27
it will not normally hold zero coupon securities to maturity. Federal tax law
requires that a holder of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year, even though
the holder receives no interest payment on the security during the year. Such
accrued discount will be includible in determining the amount of dividends the
Portfolio must pay each year and, in order to generate cash necessary to pay
such dividends, the Portfolio may liquidate portfolio securities at a time when
it would not otherwise have done so
Foreign Debt Securities. (Emerging Markets Portfolio and
Global Fixed Income Portfolio) The returns on foreign debt securities reflect
interest rates and other market conditions prevailing in those countries and the
effect of gains and losses in the denominated currencies against the U.S.
dollar, which have had a substantial impact on investment in foreign fixed
income securities. The relative performance of various countries' fixed income
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Year-to-Year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign debt securities in which the Emerging Markets
Portfolio 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 debt securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
Foreign debt securities also include debt securities of
"quasi-government agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
Brady Bonds. (Emerging Markets Portfolio) The Emerging Markets
Portfolio may invest in so-called "Brady Bonds," which have been issued by Costa
Rica, Mexico, Uruguay and Venezuela and which may be issued by other Latin
American countries. Brady Bonds are issued as part of a debt restructuring in
which the bonds are issued in exchange for cash and certain of the country's
outstanding commercial bank loans. Investors should recognize that Brady Bonds
do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
<PAGE>28
and are actively traded in the over-the-counter ("OTC") secondary market for
debt of Latin American issuers.
Securities of Smaller Companies; Special Situation Companies
(Small Company Growth Portfolio). The Portfolio's investments involves
considerations that are not applicable to investing in securities of
established, larger-capitalization issuers, including reduced and less reliable
information about issuers and markets, less stringent financial disclosure
requirements, illiquidity of securities and markets, higher brokerage
commissions and fees and greater market risk in general.
The Portfolio may invest in the securities of "special
situation companies" involved in an actual or prospective acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; or litigation which, if resolved
favorably, would improve the value of the company's stock. If the actual or
prospective situation does not materialize as anticipated, the market price of
the securities of a "special situation company" may decline significantly. The
Portfolio believes, however, that if Warburg analyzes "special situation
companies" carefully and invests in the securities of these companies at the
appropriate time, the Portfolio may achieve capital growth. There can be no
assurance, however, that a special situation that exists at the time the
Portfolio makes its investment will be consummated under the terms and within
the time period contemplated.
Ratings as Investment Criteria (Global Fixed Income
Portfolio). Up to 5% of the Global Fixed Income Portfolio's net assets may be
invested in securities rated below investment grade at the time of the
investment, but not lower than "B" by Standard & Poor's Ratings Services or
Moody's Investors Service, Inc. Subsequent to its purchase by a Portfolio, an
issue of securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event will require sale
of such securities by a Portfolio, but Warburg will consider such event in its
determination of whether the Portfolio should continue to hold the securities.
Investment Policies of the Emerging Markets Portfolio Only
Loan Participations and Assignments. The Emerging Market
Portfolio may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign government (a "Borrower") and one or more
financial institutions ("Lenders"). The majority of the Emerging Markets
Portfolio's investments in Loans are expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in the
Portfolio having a contractual relationship only with the Lender, not with the
Borrower. The Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
Borrower. In connection with purchasing Participations, the Emerging Markets
Portfolio generally will have no right to enforce compliance by the Borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the Borrower, and the
<PAGE>29
Portfolio may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Portfolio will assume
the credit risk of both the Borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Under selling a
Participation, the Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the Borrower. The
Emerging Markets Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the Borrower is determined by Warburg
to be creditworthy.
When the Portfolio purchases Assignments from Lenders, the
Portfolio will acquire direct rights against the Borrower on the Loan. However,
since Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. The Portfolio may have difficulty disposing of them because there
is no liquid market for such securities. The lack of a liquid secondary market
will have an adverse impact on the value of such securities and on the
Portfolio's ability to dispose of particular Participations or Assignments when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the Borrower.
The lack of a liquid market for Participations and Assignments also may make it
more difficult for the Portfolio to assign a value to these securities for
purposes of valuing the Portfolio's portfolio and calculating its net asset
value.
Mortgage-Backed Securities. The Emerging Markets Portfolio may
invest in mortgage-backed securities, such as those issued by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
certain foreign issuers. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. The mortgages backing these securities include, among other
mortgage instruments, conventional 30-year fixed-rate mortgages, 15-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. The
government or the issuing agency typically guarantees the payment of interest
and principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Portfolio'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.
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
<PAGE>30
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the
Portfolio's yield.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, such as
GNMA, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer
receives mortgage payments from the servicer and the time the issuer makes the
payments on the mortgage-backed securities, and this delay reduces the effective
yield to the holder of such securities.
Asset-Backed Securities. The Emerging Markets Portfolio may
invest in asset-backed securities, which represent participations in, or are
secured by and payable from, assets such as motor vehicle installment sales,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which the Portfolio 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
<PAGE>31
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Because asset-backed securities are relatively
new, the market experience in these securities is limited, and the market's
ability to sustain liquidity through all phases of the market cycle has not been
tested.
Stand-By Commitments. The Emerging Markets Portfolio may
acquire "stand-by commitments" with respect to securities held in its portfolio.
Under a stand-by commitment, a dealer agrees to purchase at the Portfolio's
option specified securities at a specified price. The Portfolio's right to
exercise stand-by commitments is unconditional and unqualified. Stand-by
commitments acquired by the Portfolio may also be referred to as "put" options.
A stand-by commitment is not transferable by the Portfolio, although the
Portfolio can sell the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer
of a commitment may default on its obligation to repurchase the securities
acquired with it. The Portfolio intends to enter into stand-by commitments only
with brokers, dealers and banks that, in the opinion of Warburg, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, Warburg will periodically review relevant financial information
concerning the issuer's assets, liabilities and contingent claims. The Portfolio
will acquire stand-by commitments only in order to facilitate portfolio
liquidity and does not intend to exercise its rights under stand-by commitments
for trading purposes.
The amount payable to the Portfolio upon its exercise of a
stand-by commitment is normally (i) the Portfolio's acquisition cost of the
securities (excluding any accrued interest which the Portfolio paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Portfolio owned the securities,
plus (ii) all interest accrued on the securities since the last interest payment
date during that period.
The Portfolio expects that stand-by commitments will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Portfolio may pay for a stand-by
commitment either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus reducing the yield
to maturity otherwise available for the same securities). The total amount paid
in either manner for outstanding stand-by commitments held in the Portfolio's
portfolio will not exceed 1/2 of 1 % of the value of the Portfolio's total
assets calculated immediately after each stand-by commitment is acquired.
The Portfolio would acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a stand-by commitment would
not affect the valuation or assumed maturity of the underlying securities.
Stand-by commitments acquired by the Portfolio would be valued at zero in
determining net asset value. Where the Portfolio paid any consideration directly
or
<PAGE>32
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. Stand-by commitments would not affect the average weighted maturity
of the Portfolio's portfolio. The Portfolio currently anticipates that it will
not invest more than 5% of its net assets in stand-by commitments.
Other Investment Limitations
International Equity Portfolio, Managed EAFE(R) Countries
Portfolio and Global Fixed Income Portfolio. The investment limitations numbered
1 through 12, as applied to a Portfolio, may not be changed without the
affirmative vote of the holders of a majority of the Portfolio's outstanding
shares. Such majority is defined as the lesser of (i) 67% or more of the shares
present at the meeting, if the holders of more than 50% of the outstanding
shares of the Portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares. Investment limitations 13 through 14, as applied
to a Portfolio, may be changed by a vote of the Board at any time.
The International Equity Portfolio, the Managed EAFE(R)
Countries Portfolio and the Global Fixed Income Portfolio may not:
1. Borrow money or issue senior securities except that the
Portfolio may (a) borrow from banks for temporary or emergency purposes, and not
for leveraging, and then in amounts not in excess of 30% of the value of the
Portfolio'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. Whenever borrowings described in (a) exceed 5% of
the value of the Portfolio's total assets, the Portfolio will not make any
investments (including roll-overs). For purposes of this restriction, (a) the
deposit of assets in escrow in connection with certain of the Portfolio's
investment strategies and (b) collateral arrangements with respect to initial or
variation margin for futures contracts will not be deemed to be pledges of the
Portfolio's assets.
2. Purchase any securities which would cause 25% or more of
the value of the Portfolio's total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Portfolio may purchase or hold
publicly distributed fixed income securities, lend portfolio securities and
enter into repurchase agreements.
4. 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 Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
<PAGE>33
5. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in real estate limited
partnerships, oil, gas or mineral exploration or development programs or oil,
gas and mineral leases, except that the Portfolio may invest in (a) 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 and commodity
options. The entry into forward foreign currency exchange contracts is not and
shall not be deemed to involve investing in commodities.
6. Make short sales of securities or maintain a short
position, except that a Portfolio may maintain short positions in forward
currency contracts, options and futures contracts and make short sales "against
the box."
7. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Portfolio may (a) purchase put and call
options on securities and foreign currencies, (b) write covered call options on
securities and (c) purchase or write options on futures contracts.
8. 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.
9. Purchase securities on margin, except that the Portfolio
may obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
10. With respect to the International Equity Portfolio and the
Managed EAFE(R) Countries Portfolio only, purchase the securities of any issuer
if as a result more than 5% of the value of the Portfolio'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 Portfolio's total assets may be invested without regard to this 5%
limitation.
11. Purchase any security if as a result the Portfolio would
then have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
12. With respect to the International Equity Portfolio and the
Managed EAFE(R) Countries Portfolio only, purchase more than 10% of the voting
securities of any one issuer; provided that this limitation shall not apply to
investments in U.S. Government Securities.
13. Invest more than 10% of the value of the Portfolio'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, (a)
<PAGE>34
repurchase agreements with maturities greater than seven days and (b) time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
14. Invest in oil, gas or mineral leases.
Emerging Markets Portfolio, Small Company Growth Portfolio and
Value Portfolio. The investment limitations numbered 1 through 9 may not be
changed without the affirmative vote of the holders of a majority of the
Portfolios' outstanding shares. Such majority is defined as the lesser of (i)
67% or more of the shares present at the meeting, if the holders of more than
50% of the outstanding shares of the Portfolio are present or represented by
proxy, or (ii) more than 50% of the outstanding shares. Investment limitations
10 through 13 may be changed by a vote of the Board at any time.
The Emerging Markets Portfolio, Small Company Growth
Portfolio and Value Portfolio may not:
1. Borrow money except that the Portfolios 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 Portfolios may not exceed 30% of the value of the
Portfolios' 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 Portfolios' total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Portfolios may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Portfolios' investment objective, policies and
limitations may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Portfolios 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.
<PAGE>35
6. Make short sales of securities or maintain a short
position, except that the Portfolios may maintain short positions in forward
currency contracts, options, futures contracts and options on futures contracts
and make short sales "against the box".
7. Purchase securities on margin, except that the Portfolios
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 Portfolios may
purchase and sell futures contracts, including those relating to securities,
currencies and indexes, and options on futures contracts, securities, currencies
or indexes, and purchase and sell currencies on a forward commitment or
delayed-delivery basis and, with respect to the Emerging Markets Portfolio,
enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Portfolios' investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow and in connection with the 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 and, with respect to the
Small Company Growth Portfolio and Value Portfolio, writing covered put and call
options.
12. Invest more than 15% of each of the Emerging Markets
Portfolio's and the Value Portfolio's net assets and 10% of the Small Company
Growth Portfolio'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
Portfolios' borrowings exceed 5% of its net assets.
General. If a percentage restriction (other than the
percentage limitations set forth in each No. 1 above and the percentage
limitation set forth in No. 12 above with respect to the Emerging Markets and
Value Portfolios) 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
<PAGE>36
portfolio securities or in the amount of the Portfolio's assets will not
constitute a violation of such restriction.
Portfolio Valuation
The Prospectus discusses the time at which the net asset value
of each Portfolio is determined for purposes of sales and redemptions. The
following is a description of the procedures used by each Portfolio 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 bid and asked quotations. If there are no such
quotations, the value of the securities will be taken to be the highest bid
quotation on the exchange or market. Options 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. 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 debt obligations with 60 days or less remaining to maturity. In
determining the market value of portfolio investments, the Portfolio may employ
outside organizations (a "Pricing Service") which may use a matrix formula or
other objective method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. The procedures of Pricing Services
are reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board, which may replace a Pricing Service
at any time. Securities, options and futures contracts for which market
quotations are not available and certain other assets of the Portfolio 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 New York Stock Exchange (the "NYSE") is
open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which a Portfolio's net asset value is not
calculated. As a result, calculation of the Portfolio's net asset value may not
take place contemporaneously with the determination of the prices of certain
portfolio securities used in such calculation. Events affecting the values of
portfolio securities that occur between the time their prices are determined and
the close of regular trading on the NYSE will not be reflected in the
Portfolios' calculation of net asset value, in which case an adjustment may be
made by the
<PAGE>37
Board or its delegates. 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. 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 Portfolio's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a Portfolio 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.
Warburg will select specific portfolio investments and effect
transactions for each Portfolio and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to a
Portfolio 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 Portfolios and its other clients
and, conversely, research or other services obtained by the placement of
business of other clients may be useful to Warburg in carrying out its
obligations to the Portfolios. Research may include furnishing
<PAGE>38
advice, either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities;
furnishing seminars, information, analyses and reports concerning issuers,
industries, securities, trading markets and methods, legislative developments,
changes in accounting practices, economic factors and trends and portfolio
strategy; access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance evaluation
and technical measurement services and quotation services; and products and
other services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and accessories
that deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to Warburg's own
research program. The fees to Warburg under its advisory agreements with the
Fund are not reduced by reason of its receiving any brokerage and research
services.
During the fiscal years ended October 31, 1994, October 31,
1995 and October 31, 1996, the Fund, on behalf of the International Equity
Portfolio, paid an aggregate of approximately $612,312, $1,273,733 and
$2,347,203, respectively, in commissions to broker-dealers for execution of
portfolio transactions. The fiscal 1995 commission increases were a result of
sharp increases in the volume of share-related activity as the Portfolio
received large inflows of capital.
During the fiscal year ended October 31, 1996, the Fund, on
behalf of the Small Company Growth Portfolio and the Emerging Markets Portfolio,
paid an aggregate of approximately $69,950 and $90,762, respectively in
commissions to broker-dealers for execution of portfolio transactions. Since the
Managed EAFE(R) Countries Portfolio, the Global Fixed Income Portfolio and the
Value Portfolio had not commenced operations as of October 31, 1996, no
brokerage commissions were paid by them.
Investment decisions for each Portfolio 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
Portfolio. 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
Portfolios. In some instances, this investment procedure may adversely affect
the price paid or received by a Portfolio or the size of the position obtained
or sold for a Portfolio. To the extent permitted by law, Warburg may aggregate
the securities to be sold or purchased for a Portfolio with those to be sold or
purchased for such other investment clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to Warburg or Counsellors Securities Inc., the Fund's distributor
("Counsellors Securities"), or any affiliated person of such companies.
<PAGE>39
Transactions for the Portfolios may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Fund will deal directly with the dealers who
make a market in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale of underlying securities upon exercise of options.
Each Portfolio may participate, if and when practicable, in
bidding for the purchase of securities for the Portfolio's portfolio directly
from an issuer in order to take advantage of the lower purchase price available
to members of such a group. A Portfolio will engage in this practice, however,
only when Warburg, in its sole discretion, believes such practice to be
otherwise in the Portfolio's interest.
<PAGE>40
Portfolio Turnover
The Portfolios do not intend to seek profits through
short-term trading, but the rate of turnover will not be a limiting factor when
a Portfolio deems it desirable to sell or purchase securities. A Portfolio'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 Portfolio 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. The Small Company Growth
Portfolio's investment in special situation companies could result in high
portfolio turnover. To the extent that its portfolio is traded for the
short-term, the Portfolio will be engaged essentially in trading activities
based on short-term considerations affecting the value of an issuer's stock
instead of long-term investments based on fundamental valuation of securities.
Because of this policy, portfolio securities may be sold without regard to the
length of time for which they have been held. Consequently, the annual portfolio
turnover rate of the Small Company Growth Portfolio may be higher than mutual
funds having a similar objective that do not invest in special situation
companies.
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper (62) Director
Harvard University Professor at Harvard University; National Intelligence Council
1737 Cambridge Street from June 1995 until January 1997; Director or Trustee of
Cambridge, Massachusetts 02138 CircuitCity Stores, Inc. (retail electronics and appliances)
and Phoenix Home Mutual Life Insurance Company.
Donald J. Donahue (72) Director
27 Signal Road Chairman of Magma Copper Company from December 1987 until
Stamford, Connecticut 06902 December 1995; Chairman and Director of NAC Holdings from
September 1990 - June 1993; Director of Pioneer Companies,
Inc. (chlor-alkali chemicals) and predecessor companies since
1990 and Vice Chairman since December 1995.
</TABLE>
<PAGE>41
<TABLE>
<S> <C>
Jack W. Fritz (69) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc. (direct
mail advertising).
John L. Furth* (66) Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1970; Officer of other investment
companies advised by Warburg.
Thomas A. Melfe (65) Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton & Irvine;
New York, New York 10112 Chairman of the Board of Municipal Fund for New York Investors,
Inc.
Arnold M. Reichman* (48) Director and Executive Vice President
466 Lexington Avenue Managing Director and Assistant Secretary of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1984; Senior Vice President,
Secretary and Chief Operating Officer of Counsellors
Securities; Officer of other investment companies advised by
Warburg.
Alexander B. Trowbridge (67) Director
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business consulting)
Washington, DC 20004 from January 1990-November 1996; President of the National
Association of Manufacturers from 1980-1990; 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 who is an "interested person" of the Fund as
defined in the 1940 Act.
<PAGE>42
<TABLE>
<S> <C>
Dale C. Christensen (49) Vice President of the Fund and
466 Lexington Avenue Portfolio Manager of Global Fixed Income Portfolio
New York, New York 10017-3147 Portfolio Manager or Co-Portfolio Manager of other Warburg
Pincus Funds; Managing Director of Warburg; Associated with
Warburg since 1989; Vice President at Citibank, N.A. from
1985-1989; Vice President of Counsellors Securities; President
of other investment companies advised by Warburg.
Richard H. King (52) Vice President of the Fund and
466 Lexington Avenue Portfolio Manager of International Equity, Managed EAFE(R)and
New York, New York 10017-3147 Emerging Markets Portfolios
Portfolio Manager or Co-Portfolio Manager of other Warburg
Pincus Funds; Managing Director of Warburg since 1989;
Associated with Warburg since 1989; President of other
investment companies advised by Warburg.
Eugene L. Podsiadlo (40) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1991; Vice President of Citibank, N.A. from 1987-1991; Senior
Vice President of Counsellors Securities and officer of other
investment companies advised by Warburg.
Stephen Distler (43) Vice President
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1984; Treasurer of
Counsellors Securities; Vice President of other investment
companies advised by Warburg.
Eugene P. Grace (45) Vice President and Secretary
466 Lexington Avenue Associated with Warburg since April 1994; Attorney-at-law from
New York, New York 10017-3147 September 1989-April 1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General Counsel and
Secretary, Home Unity Savings Bank from 1991-1992; Vice
President, Chief Compliance Officer and Assistant Secretary of
Counsellors Securities; Vice President and Secretary of other
investment companies advised by Warburg.
</TABLE>
<PAGE>43
<TABLE>
<S> <C>
Howard Conroy (43) Vice President and Chief Financial Officer
466 Lexington Avenue Associated with Warburg since 1992; Associated with Martin
New York, New York 10017-3147 Geller, C.P.A. from 1990-1992; Vice President, Finance with
Gabelli/Rosenthal & Partners, L.P. until 1990; Vice President
and Chief Financial Officer of other investment companies
advised by Warburg.
Daniel S. Madden, CPA (31) Treasurer and Chief Accounting Officer
466 Lexington Avenue Associated with Warburg since 1995; Associated with BlackRock
New York, New York 10017-3147 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.
Treasurer and Chief Accounting Officer of other investment
companies advised by Warburg.
Janna Manes, Esq. (29) Assistant Secretary
466 Lexington Avenue Associated with Warburg since 1996; Associated with the law
New York, New York 10017-3147 firm of Willkie Farr & Gallagher from 1993-1996;
Assistant Secretary of other investment companies advised by
Warburg.
</TABLE>
No employee of Warburg or PFPC Inc., the Fund's
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 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.
<PAGE>44
Directors' Compensation
(for the fiscal year ended October 31, 1996)
<TABLE>
<CAPTION>
Total Total Compensation from
Name of Director Compensation from all Investment Companies
Fund Managed by Warburg*
<S> <C> <C>
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $1,750 $48,000
Donald J. Donahue $2,000 $48,000
Jack W. Fritz $1,250 $48,000
Thomas A. Melfe $2,000 $48,000
Alexander B. Trowbridge $2,000 $48,000
- ------------------------
<FN>
* Each Director also serves as a Director or Trustee of 23 other
investment companies advised by Warburg.
** Mr. Furth and Mr. Reichman are considered to be interested persons
of the Fund and Warburg, as defined under Section 2(a)(19) of the 1940 Act,
and, accordingly, receive no compensation from the Fund or any other
investment company managed by Warburg.
</FN>
</TABLE>
As of April 1, 1997, the Directors and officers of the Fund as
a group owned less than 1% of the outstanding shares of each Portfolio.
International Equity, Managed EAFE(R) Countries and Emerging
Markets Portfolios. Mr. Richard H. King, vice president of the Fund and
portfolio manager of the International Equity and Managed EAFE(R) Countries
Portfolios and co-portfolio manager of the Emerging Markets Portfolio, earned a
B.A. degree from Durham University in England. Mr. King is also portfolio
manager of Warburg Pincus International Equity Fund and the International Equity
Portfolio of Warburg Pincus Trust and a co-portfolio manager of Warburg Pincus
Emerging Markets Fund, the Emerging Markets Portfolio of Warburg Pincus Trust
and Warburg Pincus Japan OTC Fund. From 1968 to 1982, he worked at Carr Sons &
Company (Overseas), a leading international brokerage firm. He resided in the
Far East as an investment analyst from 1970 to 1977, became director, and later
relocated to the U.S. where he became founder and president of W.I. Carr
(America), based in New York. From 1982 to 1984 Mr. King was a director in
charge of the Far East equity investments at N.M. Rothschild International Asset
Management, a London merchant bank. In 1984 Mr. King became chief investment
officer and director for all international investment strategy with Fiduciary
Trust Company International S.A., in London. He managed an EAFE mutual fund
(FTIT) 1985-1986 which grew from $3 million to over $100 million during this
two-year period.
Mr. Nicholas P.W. Horsley, co-portfolio manager of the
Emerging Markets Portfolio and associate portfolio manager and research analyst
of the International Equity and Managed EAFE(R) Countries Portfolios, is also a
co-portfolio manager of Warburg Pincus Emerging Markets Fund, the Emerging
Markets Portfolio of Warburg Pincus Trust and Warburg Pincus Japan OTC Fund and
an associate portfolio manager and research analyst of
<PAGE>45
Warburg Pincus International Equity Fund and the International Equity Portfolio
of Warburg Pincus Trust. From 1981 to 1984 Mr. Horsley was a securities analyst
at Barclays Merchant Bank in London, UK and Johannesburg, RSA. From 1984 to 1986
he was a senior analyst with BZW Investment Management in London. From 1986 to
1993 he was a director, portfolio manager and analyst at Barclays deZoete Wedd
in New York City. Mr. Horsley earned B.A. and M.A. degrees with honors from
University College, Oxford.
Mr. P. Nicholas Edwards, associate portfolio manager and
research analyst of the International Equity and Managed EAFE(R) Countries
Portfolios, is also portfolio manager of Warburg Pincus Japan Growth Fund and a
co-portfolio manager and research analyst of Warburg Pincus International Equity
Fund and an associate portfolio manager and research analyst of the
International Equity Portfolio of Warburg Pincus Trust. Prior to joining Warburg
in August 1995, Mr. Edwards was a director at Jardine Fleming Investment
Advisers, Tokyo. He was a vice president of Robert Fleming Inc. in New York City
from 1988 to 1991. Mr. Edwards earned M.A. degrees from Oxford University and
Hiroshima University in Japan.
Mr. Harold W. Ehrlich, associate portfolio manager and
research analyst of the International Equity, Managed EAFE(R) Countries and
Emerging Markets Portfolios, is also an associate portfolio manager and research
analyst of Warburg Pincus International Equity Fund, Warburg Pincus Emerging
Markets Fund and the International Equity and Emerging Markets Portfolios of
Warburg Pincus Trust. Prior to joining Warburg, Mr. Ehrlich was a senior vice
president, portfolio manager and analyst at Templeton Investment Counsel Inc.
from 1987 to 1995. He was a research analyst and assistant portfolio manager at
Fundamental Management Corporation from 1985 to 1986 and a research analyst at
First Equity Corporation of Florida from 1983 to 1985. Mr. Ehrlich earned a
B.S.B.A. degree from University of Florida and earned his Chartered Financial
Analyst designation in 1990.
Mr. Vincent J. McBride, associate portfolio manager and
research analyst of the International Equity, Managed EAFE(R) Countries and
Emerging Markets Portfolios, is also an associate portfolio manager and research
analyst of Warburg Pincus International Equity Fund, Warburg Pincus Emerging
Markets Fund and the International Equity and Emerging Markets Portfolios of
Warburg Pincus Trust. Prior to joining Warburg in 1994, Mr. McBride was an
international equity analyst at Smith Barney Inc. from 1993 to 1994 and at
General Electric Investment Corporation from 1992 to 1993. He was also a
portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride earned a
B.S. degree from the University of Delaware and an M.B.A. degree from Rutgers
University.
Small Company Growth Portfolio. Ms. Elizabeth B. Dater,
co-portfolio manager of the Small Company Growth Portfolio, is also co-portfolio
manager of Warburg Pincus Emerging Growth Fund, Warburg Pincus Post-Venture
Capital Fund and the Post-Venture Capital Portfolio of Warburg Pincus Trust. She
is the former director of research for Warburg's investment management
activities. Prior to joining Warburg in 1978, she was a vice president of
Research at Fiduciary Trust Company of New York and an institutional sales
<PAGE>46
assistant at Lehman Brothers. Ms. Dater has been a regular panelist on Maryland
Public Television's "Wall Street Week" since 1976. Ms. Dater earned a B.A.
degree from Boston University in Massachusetts. Mr. Stephen J. Lurito,
co-portfolio manager of the Small Company Growth Portfolio, is also co-portfolio
manager of Warburg Pincus Emerging Growth Fund, Warburg Pincus Post-Venture
Capital Fund and the Post-Venture Capital Portfolio of Warburg Pincus Trust and
the portfolio manager of Warburg Pincus Small Company Growth Fund. Mr. Lurito,
also the research coordinator and a portfolio manager for micro-cap equity and
post-venture products, has been with Warburg since 1987. Prior to that he was a
research analyst at Sanford C. Bernstein & Company, Inc. Mr. Lurito earned a
B.A. degree from the University of Virginia and a M.B.A. from the University of
Pennsylvania.
Global Fixed Income Portfolio. Mr. Dale C. Christensen, vice
president of the Fund and portfolio manager of the Global Fixed Income
Portfolio, 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. Mr.
Christensen has also been the co-portfolio manager of Warburg Pincus Trust II
since its inception and the co-portfolio manager of Warburg Pincus Global Fixed
Income Fund, Warburg Pincus Fixed Income Fund, Warburg Pincus Intermediate
Maturity Government Fund and Warburg Pincus New York Intermediate Municipal
Fund. Mr. Christensen directs the Fixed Income Group at Warburg, which he joined
in 1989, providing portfolio management for Warburg Pincus Funds and
institutional clients around the world. Mr. Christensen was a vice president in
the International Private Banking division and the domestic pension fund
management division at Citicorp, N.A. from 1985 to 1989. Prior to that, Mr.
Christensen was a fixed income portfolio manager at CIC Asset Management from
1982 to 1984. Laxmi C. Bhandari, co-portfolio manager of the Global Fixed Income
Portfolio, earned a Ph.D in Finance and a M.B.A. from the University of Chicago,
his P.G.D.M. degree (M.B.A. equivalent) from the Indian Institute of Management,
Ahmedabad, India and B.Com. degree from Rajasthan University, India. He has also
been a co-portfolio manager of the Global Fixed Income Portfolio of Warburg
Pincus Trust II since its inception and co-portfolio manager of Warburg Pincus
Global Fixed Income Fund since joining EMW in 1993, specializing in
derivative-based products. Mr. Bhandari was a Vice President in charge of
Arbitrage Trading at the Paribas Corporation from 1991 to 1993. Prior to that
Mr. Bhandari was a Vice President of Asset Liability Management at Chemical Bank
from 1987 to 1991 and an Assistant Professor of Advanced Portfolio Management
and Advanced Corporate Finance at the University of Alberta from 1982 to 1987.
Value Portfolio. Mr. Brian S. Posner has 9 years of investment
experience. 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.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to each Portfolio,
Counsellors Funds Service, Inc. ("Counsellors Service") and PFPC serve as
co-administrators to the Fund pursuant to separate written agreements (the
"Advisory Agreements," the "Counsellors Service Co-Administration Agreements"
and the "PFPC Co-Administration Agreements," respectively). The services
provided by, and the fees payable by the Fund to, Warburg under the Advisory
Agreements, Counsellors Service under the Counsellors Service Co-Administration
Agreements and PFPC under the PFPC Co-Administration Agreements are described in
the Prospectus. See the Prospectus, "Management of the Fund." Prior to March 1,
1994, PFPC served as administrator to the Fund and Counsellors Service served as
administrative services agent to the Fund pursuant to separate written
agreements.
With respect to the International Equity Portfolio, during the
fiscal years ended October 31, 1994, October 31, 1995 and October 31, 1996,
Warburg earned $1,736,864, $3,095,950 and $5,644,429, respectively, and
voluntarily waived $542,549, $778,770 and $1,182,795, respectively, in
investment advisory fees; Counsellors Service earned $188,503, $386,993 and
$705,554, respectively; and PFPC received $259,290, $436,710 and $702,540,
<PAGE>47
respectively, in administration fees and voluntarily waived $81,358, $110,078
and $119,850 of such fees.
With respect to the Small Company Growth Portfolio and the
Emerging Markets Portfolio, during the fiscal year ended October 31, 1996,
Warburg earned $268,768 and $21,487, respectively, and voluntarily waived
$122,453 and $21,487, respectively, in investment advisory fees; Counsellors
Service earned $29,863 and $2,149, respectively; and PFPC received $29,863 and
$2,578, respectively, in administration fees and voluntarily waived $9,901 and
$2,578 of such fees.
Since the Managed EAFE(R) Countries Portfolio, the Global
Fixed Income Portfolio and the Value Portfolio had not commenced investment
operations as of October 31, 1996, no fees were paid to Warburg, PFPC or
Counsellors Service by them.
Custodians and Transfer Agent
Fiduciary Trust Company International ("Fiduciary") serves as
custodian of each of the International Equity, Managed EAFE(R) Countries, and
Global Fixed Income Portfolio's assets pursuant to separate custodian agreements
(the "Fiduciary Custodian Agreements"). Under the Fiduciary Custodian
Agreements, Fiduciary (i) maintains a separate account or accounts in the name
of each Portfolio, (ii) holds and transfers portfolio securities on account of
each Portfolio, (iii) makes receipts and disbursements of money on behalf of
each Portfolio, (iv) collects and receives all income and other payments and
distributions on account of each Portfolio's portfolio securities and (v) makes
periodic reports to the Board concerning each Portfolio's custodial
arrangements. Fiduciary is authorized to select one or more foreign or domestic
banks or trust companies and securities depositories to serve as sub-custodian
on behalf of the Portfolios. The principal business address of Fiduciary is Two
World Trade Center, New York, New York 10048.
Pursuant to separate custodian agreements (the "Custodian
Agreements"), PNC Bank, National Association ("PNC") and State Street Bank and
Trust Company ("State Street") serve as custodians of the Small Company Growth
Portfolio's U.S. and foreign assets, respectively, and State Street serves as
custodian of the Emerging Markets Portfolio's assets. Under the Custodian
Agreements, PNC and State Street each (i) maintains a separate account or
accounts in the name of the Portfolio, (ii) holds and transfers portfolio
securities for the account of the Portfolio, (iii) makes receipts and
disbursements of money on behalf of the Portfolio, (iv) collects and receives
all income and other payments and distributions on account of the Portfolio's
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Portfolio'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 institutions and
foreign securities depositaries as sub-custodian on behalf of the Portfolios.
PNC is an indirect, wholly owned subsidiary of PNC Bank Corp., and its principal
business address is 1600 Market Street, Philadelphia, Pennsylvania 19103. The
<PAGE>48
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110.
PNC also provides certain custodial services generally in
connection with purchases and sales of the International Equity, Managed EAFE(R)
Countries, and Global Fixed Income Portfolios' shares.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of the Fund pursuant to a Transfer Agency
and Service Agreement, under which State Street (i) issues and redeems shares of
each Portfolio, (ii) addresses and mails all communications by the Fund to
record owners of Portfolio 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., a 50% owned subsidiary ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, Boston, Massachusetts 02171.
Organization of the Fund
The Fund was incorporated on May 13, 1992 under the laws of
the State of Maryland under the name "Warburg, Pincus Institutional Fund, Inc."
Shares of six series have been authorized, which constitute the interests in the
Portfolios.
All shareholders of a Portfolio, upon liquidation, will
participate ratably in the Portfolio's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Portfolio's shares is equal to its
per share net asset value. Additional information on how to purchase and redeem
a Portfolio's shares and how such shares are priced is included in the
Prospectus under "Net Asset Value."
Under the 1940 Act, a Portfolio 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 Portfolio 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 Portfolio
may make payment
<PAGE>49
wholly or partly in securities or other investment instruments which may not
constitute securities as such term is defined in the applicable securities laws.
If a redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds. The Fund intends to comply with Rule 18f-1 promulgated under the 1940
Act with respect to redemptions in kind.
A Portfolio may, in certain circumstances and in its
discretion, accept securities as payment for the purchase of the Portfolio's
shares from an investor who has received such securities as redemption proceeds
from another Warburg Pincus Fund.
EXCHANGE PRIVILEGE
Shareholders of a Portfolio may exchange all or part of their
shares for shares of another Portfolio or other portfolios of the Fund organized
by Warburg in the future on the basis of their relative net asset values per
share at the time of exchange.
The exchange privilege enables shareholders to acquire shares
in a Portfolio with a different investment objective when they believe that a
shift between Portfolios is an appropriate investment decision. This privilege
is available to shareholders residing in any state in which the Portfolio's
shares being acquired may legally be sold.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed at the
then-current net asset value of the Portfolio and the proceeds are invested on
the same day, at a price as described above, in shares of the Portfolio being
acquired. Warburg reserves the right to reject more than three exchange requests
by a shareholder in any 30-day period. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and is
not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a
Portfolio.
Each Portfolio intends to continue to qualify each year, as a
"regulated investment company" under Subchapter M of the Code. If it qualifies
as a regulated investment company, a Portfolio will pay no federal income taxes
on its taxable net investment income (that is, taxable income other than net
realized capital gains) and its net realized capital gains that are distributed
to shareholders. To qualify under Subchapter M, a Portfolio must, among other
things: (i) distribute to its shareholders the sum of at least 90% of its
taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains) plus at least 90%
of its net tax exempt interest income; (ii) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities,
gains from the sale or other disposition of securities or foreign currencies,
<PAGE>50
or other income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to its business of investing in such
securities or currencies; (iii) derive less than 30% of its annual gross income
from the sale or other disposition of securities, options, futures, forward
contracts or certain other assets held for less than three months; and (iv)
diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio (a) at least 50% of the market value of the Portfolio's assets is
represented by cash, U.S. Government Securities and other securities, with those
other securities limited, with respect to any one issuer, to an amount no
greater in value than 5% of the Portfolio's total assets and to not more than
10% of the outstanding voting securities of the issuer, and (b) not more than
25% of the market value of the Portfolio's assets is invested in the securities
of any one issuer (other than U.S. Government Securities or securities of other
regulated investment companies) or of two or more issuers that the Portfolio
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses. In meeting these requirements, a
Portfolio may be restricted in the selling of securities held by the Portfolio
for less than three months and in the utilization of certain of the investment
techniques described above and in the Prospectus. As a regulated investment
company, a Portfolio will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Portfolio's taxable ordinary income for the
calendar year and at least 98% of the excess of its capital gains over capital
losses realized during the one-year period ending October 31 during such year,
together with any undistributed, untaxed amounts of ordinary income and capital
gains from the previous calendar year. The Portfolios expect to pay the
dividends and make the distributions necessary to avoid the application of this
excise tax.
A Portfolio's transactions, if any, in foreign currencies,
forward contracts, options and futures contracts (including options, futures
contracts and forward contracts on foreign currencies) will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses recognized by the Portfolio (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Portfolio, defer Portfolio losses and cause the Portfolio to be
subject to hyperinflationary currency rules. These rules could therefore affect
the character, amount and timing of distributions to shareholders. These
provisions also (i) will require a Portfolio to mark-to-market certain types of
its positions (i.e., treat them as if they were closed out) and (ii) may cause
the Portfolio 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 Portfolio will monitor
its transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (a) neither the Portfolio nor its shareholders will be treated as receiving
a materially greater amount of capital gains or distributions than actually
realized or received, (b) the Portfolio will be able to use substantially all of
its losses for the fiscal years in which the losses actually occur and (c) the
Portfolio will continue to qualify as a regulated investment company.
<PAGE>51
A shareholder of a Portfolio receiving dividends or
distributions in additional shares should be treated for federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that a shareholder receiving cash dividends or distributions receives, and
should have a cost basis in the shares received equal to that amount. Investors
considering buying shares just prior to a dividend or capital gain distribution
should be aware that, although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those who purchase just
prior to a distribution will receive a distribution that will nevertheless be
taxable to them.
A Portfolio's investments in zero coupon securities may create
special tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between zero coupon security's face value
and its purchase price is imputed as income to the Portfolio each year even
though the Portfolio receives no cash distribution until maturity. Under the
U.S. federal tax laws, the Portfolio will not be subject to tax on this income
if it pays dividends to its shareholders substantially equal to all the income
received from, or imputed with respect to, its investments during the year,
including its zero coupon securities. These dividends ordinarily will constitute
taxable income to the shareholders of the Portfolio.
Investors considering buying shares just prior to a dividend
or capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution that
will nevertheless be taxable to them. Upon the sale or exchange of shares, a
shareholder will realize a taxable gain or loss depending on the amount realized
and the basis in the shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands, and, as
described in the Prospectus, will be long-term or short-term depending on the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced,
including replacement through the reinvestment of dividends and capital gains
distributions in a Portfolio, within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the disallowed
loss.
Each shareholder will receive an annual statement as to the
federal income tax status of his dividends and distributions from the relevant
Portfolio for the prior calendar year. Furthermore, shareholders will also
receive, if appropriate, various written notices after the close of the
Portfolio's taxable year regarding the federal income tax status of certain
dividends and distributions that were paid (or that are treated as having been
paid) by the Portfolio to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he has provided a correct taxpayer identification number
and that he is not subject to "backup withholding," the shareholder may be
subject to a 31% "backup withholding" tax with respect to (i) taxable dividends
and distributions and (ii) the proceeds of any sales or repurchases of shares of
the
<PAGE>52
Portfolio. An individual's taxpayer identification number is his social security
number. Corporate shareholders and other shareholders specified in the Code are
or may be exempt from backup withholding. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's federal income tax
liability. Dividends and distributions also may be subject to state and local
taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If a Portfolio purchases shares in certain foreign entities
classified under the Code as "passive foreign investment companies" ("PFICs"),
the Portfolio may be subject to federal income tax on a portion of an "excess
distribution" or gain from the disposition of the shares, even though the income
may have to be distributed as a taxable dividend by the Portfolio to its
shareholders. In addition, gain on the disposition of shares in a PFIC generally
is treated as ordinary income even though the shares are capital assets in the
hands of the Portfolio. Certain interest charges may be imposed on either the
Portfolio or its shareholders with respect to any taxes arising from excess
distributions or gains on the disposition of shares in a PFIC.
A Portfolio may be eligible to elect to include in its gross
income its share of earnings of a PFIC on a current basis. Generally, the
election would eliminate the interest charge and the ordinary income treatment
on the disposition of stock, but such an election may have the effect of
accelerating the recognition of income and gains by the Portfolio compared to a
fund that did not make the election. In addition, information required to make
such an election may not be available to the Portfolio.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice indicating
that final regulations will provide that regulated investment companies may
elect the mark-to-market election for tax years ending after March 31, 1992 and
before April 1, 1993. Whether and to what extent the notice will apply to
taxable years of a Portfolio is unclear. If the Portfolio is not able to make
the foregoing election, it may be able to avoid the interest charge (but not the
ordinary income treatment) on disposition of the stock by electing, under
proposed regulations, each year to mark-to-market the stock (that is, treat it
as if it were sold for fair market value). Such an election could result in
acceleration of income to the Portfolio.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return and,
in the case of the Global Fixed Income Portfolio, yield in advertisements or in
reports and other communications to shareholders. The average annual total
return of the International Equity Portfolio for the fiscal year ended October
31, 1996 was 10.48% (10.30% without waivers), and for the period beginning
September 1, 1992 (inception) to October 31, 1996 was 15.03% (14.79% without
waivers). The aggregate total return of the Small Company Growth Portfolio for
the period beginning December 29, 1995 (inception) to October 31, 1996 was
29.20% (28.90% without waivers). The average aggregate total return of the
Emerging Markets Portfolio for the period
<PAGE>53
beginning September 30, 1996 (inception) to October 31, 1996 was (1.40)%
((1.60)% without waivers). A Portfolio's average annualized total return is
calculated by finding the average annual compounded rates of return for the
one-, five- and ten- (or such shorter period as the Portfolio has been offered)
year periods that would equate the initial amount invested to the ending
redeemable value according to the following formula: P (1 + T)n* = ERV. For
purposes of this formula, "P" is a hypothetical investment of $1,000; "T" is
average annual total return; "n" is number of years; and "ERV" is the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
one-, five- or ten-year periods (or fractional portion thereof). Total return or
"T" is computed by finding the average annual change in the value of an initial
$1,000 investment over the period and assumes that all dividends and
distributions are reinvested during the period.
A Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. A Portfolio 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 Portfolio's
total return in longer market cycles.
Yield is calculated by annualizing the net investment income
generated by the Portfolio 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.
A Portfolio's performance will vary from time to time
depending upon market conditions, the composition of its portfolio and operating
expenses allocable to it. As described above, total return and yield are based
on historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Portfolio's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time.
Warburg believes that a diversified portfolio of international
equity securities, when combined with a similarly diversified portfolio of
domestic equity securities, tends to have a lower volatility than a portfolio
composed entirely of domestic securities. Furthermore, international equities
have been shown to reduce volatility in single asset portfolios regardless of
whether the investments are in all domestic equities or all domestic
- ---------------
* As used in this formula, "n" is an exponent.
** As used in this formula, "6" is an exponent.
<PAGE>54
fixed-income instruments, and research indicates that volatility can be
significantly decreased when international equities are added.
To illustrate this point, the performance of international
equity securities, as measured by the Morgan Stanley Capital International
Europe, Australasia and Far East (EAFE(R)) Index (the "EAFE Index"), has equaled
or exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S & P 500 Index") in 14 of the last 25
years. The following table compares annual total returns of the EAFE Index and
the S & P 500 Index for the calendar years shown.
EAFE Index vs. S&P 500 Index
1972-1996
Annual Total Return+
Year EAFE Index S&P 500 Index
---- ---------- -------------
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975* 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 20.26
1996 4.40 34.11
- -------------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 25 years.
Source: Morgan Stanley Capital International; Bloomberg Financial Markets
<PAGE>55
The quoted performance information shown above is not intended
to indicate the future performance of the International Equity, Managed EAFE(R)
Countries or Emerging Markets Portfolios. Advertising or supplemental sales
literature relating to a Portfolio may describe the percentage decline from
all-time high levels for certain foreign stock markets. It may also describe how
the Portfolio differs from the EAFE Index in composition.
INDEPENDENT ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for the Fund. The financial statements for the
International Equity, Small Company Growth and the Emerging Markets Portfolios
that are incorporated by reference in this Statement of Additional Information
have been audited by Coopers & Lybrand, and have been included herein by
reference in reliance upon the report of such firm of independent accountants
given upon their authority as experts in accounting and auditing. The statement
of assets and liabilities for the Global Fixed Income Portfolio that accompanies
this Statement of Additional Information has also been audited by Coopers &
Lybrand, and has been included herein in reliance upon the report of such firm
of independent accountants given upon their authority as experts in accounting
and auditing.
The financial statements of the International Equity Portfolio
for the period beginning with commencement of the Portfolio through October 31,
1992 have been audited by Ernst & Young LLP ("Ernst & Young"), independent
accountants, as set forth in their report, and have been incorporated by
reference in reliance on such report and upon the authority of such firm as
experts in accounting and auditing. Ernst & Young's address is 787 7th Avenue,
New York, New York 10019.
The statements of assets and liabilities for the Managed
EAFE(R) Countries and Value Portfolios that accompany this Statement of
Additional Information are unaudited.
Willkie Farr & Gallagher serves as counsel for the Fund as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
<PAGE>56
MISCELLANEOUS
As of March 31, 1997, the names, addresses and percentage
ownership of each person that owned 5% or more of the outstanding shares of a
Portfolio are as follows:
<TABLE>
<CAPTION>
----------------------- ----------------------------------------------------------- ------------------------------
Portfolio Name and Address Percentage Owned
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
<S> <C> <C>
Small Company Growth Trustees of Amherst College 16.58%
Portfolio Amherst College, Ms. Sharon Siegel
Treasurer Office
Box 2203 P.O. Box 5000
Amherst, MA 01002-5000
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
Employee Benefit Plan Group Trust of George A. Buck 15.70%
Consulting Act Inc.
U/A DTD 5/3/1983
C/O John McGuinness
3 Chase MetroTech Ctr. Fl. 5
Brooklyn, NY 11245-0002
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
Integra Financial Pension Plan 12.31%
National City Bank
Attn. Mutual Funds
4100 W. 150th Street, Fl 3
Cleveland, OH 44135-1304
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
Oberlin College 7.27%
Attn: Bernard Gordon
Director of the Investment Office
173 W. Lorain St.
Oberlin, OH 44074-1057
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
The Chase Manhattan Bank Trustee 6.68%
Employee Benefit Plan Group of George A. Buck Consulting
Act Inc. UAD 5/3/83
C/O John McGuinness
3 Chase MetroTech Ctr. Fl. 5
Brooklyn, NY 11245-0002
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
Depauw University 5.64%
313 South Locust St.
Greencastle, IN 46135-1736
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
Strafe & Co. FAO 5.38%
Indianapolis Symphony Fdn #2
A/C 2835622617
PO Box 160
Westerville, OH 43086-0160
----------------------- ----------------------------------------------------------- ------------------------------
</TABLE>
<PAGE>57
<TABLE>
<CAPTION>
----------------------- ----------------------------------------------------------- ------------------------------
Portfolio Name and Address Percentage Owned
----------------------- ----------------------------------------------------------- ------------------------------
----------------------- ----------------------------------------------------------- ------------------------------
<S> <C> <C>
Emerging Markets Louis R. Morrell/Irene A. Comito Co-Trustees 94.95%
Portfolio Wake Forest University Trust
U/A DTD 6/25/41
P.O. Box 7354
Winston-Salem, NC. 27109-7354
----------------------- ----------------------------------------------------------- ------------------------------
</TABLE>
Mr. Lionel I. Pincus, the managing partner of Warburg Pincus &
Co., may be deemed to have beneficially owned 8.14% of the International Equity
Portfolio's shares outstanding, and 7.02% of the Small Company Growth
Portfolio's Shares outstanding, as of April 10, 1997, including shares owned by
clients for which Warburg has investment discretion and by companies that
Warburg Pincus & Co. 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
The Fund's audited annual report dated October 31, 1996, 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 International Equity Portfolio, the Small Company
Growth Portfolio and the Emerging Markets Portfolio included therein. The Fund
will furnish without charge a copy of the annual report upon request by calling
the Fund at (800) 369-2728.
The audited statement of assets and liabilities for the Global
Fixed Income Portfolio, dated as of January 23, 1997 and the Report of
Independent Accountants related thereto and the unaudited statements of assets
and liabilities for the Managed EAFE(R) Countries and Value Portfolios dated as
of April 1, 1997 accompany this Statement of Additional Information.
* * * *
The Managed EAFE(R) Countries Portfolio is not sponsored,
endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no
representation or warranty, express or implied, to the owners of the Managed
EAFE(R) Countries Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Managed EAFE(R)
Countries Portfolio particularly or the ability of the Morgan Stanley EAFE Index
to track general stock market performance. Morgan Stanley is the licensor of
certain trademarks, service marks and trade names of Morgan Stanley and of the
Morgan Stanley EAFE Index. Morgan Stanley has no obligation to take the needs of
the issuer of the Managed EAFE(R) Countries Portfolio or the owners of the
Managed EAFE(R) Countries Portfolio into consideration in determining, composing
or calculating the Morgan Stanley EAFE Index. Morgan Stanley is not responsible
for and has not participated in the determination of the timing of, prices at,
or quantities of the Managed EAFE(R) Countries Portfolio to be issued or
<PAGE>58
in the determination or calculation of the equation by which the Managed EAFE(R)
Countries Portfolio is redeemable for cash. Morgan Stanley has no obligation or
liability to owners of the Managed EAFE(R) Countries Portfolio in connection
with the administration, marketing or trading of the Managed EAFE(R) Countries
Portfolio.
MORGAN STANLEY MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
HEREBY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE EAFE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY HAVE ANY
LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY
OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES.
<PAGE>A-1
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 a plus sign designation. Capacity for timely payment
on commercial paper rated A-2 is satisfactory, but the relative degree of safety
is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC and C - Debt rated BB and B is 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
<PAGE>A-2
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 BBB rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest
<PAGE>A-3
payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
the 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.
<PAGE>A-4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Warburg, Pincus Institutional Fund, Inc. - Global Fixed
Income Portfolio
We have audited the accompanying Statement of Assets and Liabilities of
Warburg, Pincus Institutional Fund, Inc. - Global Fixed Income
Portfolio (the "Fund") as of January 23, 1997. This financial statement
is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Warburg, Pincus
Institutional Fund, Inc. - Global Fixed Income Portfolio as of January
23, 1997 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 27, 1997
<PAGE>A-5
WARBURG, PINCUS INSTITUTIONAL FUND, INC.
GLOBAL FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
as of January 23, 1997
Assets:
Cash $1,000
Deferred Organizational Costs $25,000
Deferred Offering Costs $3,000
------
Total Assets $29,000
Liabilities:
Accrued Expenses $28,000
Net Assets $1,000
=======
Net Asset Value, Redemption and Offering Price
Per Share (one billion shares authorized - $.001
par value applicable to 100 shares outstanding.) $10.00
The accompanying notes are an integral part of this
financial statement.
<PAGE>A-6
WARBURG, PINCUS INSTITUTIONAL FUND, INC.
GLOBAL FIXED INCOME PORTFOLIO
Notes to Financial Statement
January 23, 1997
1. Organization:
Warburg, Pincus Institutional Fund, Inc.-Global Fixed Income Portfolio
(the "Fund") was incorporated on May 13, 1992 under the laws of the
State of Maryland. The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
The Fund's charter authorizes its Board of Directors to issue one
billion full and fractional shares of capital stock, $.001 par value
per share. The Fund has not commenced operations except those related
to organizational matters and the sale of 100 shares (the "Initial
Shares") to Warburg, Pincus Counsellors, Inc., the Fund's investment
adviser (the ("Adviser"), on September 1, 1992.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Fund and are being
amortized over sixty months commencing with operations. In the event
any of the Initial Shares of the Fund are redeemed by any holder
thereof during the period that the Fund is amortizing its
organizational costs, the redemption proceeds payable to the holder
thereof by the Fund will be reduced by unamortized organizational costs
in the same ratio as the number of Initial Shares being redeemed bears
to the number of Initial Shares outstanding at the time of redemption.
Offering costs have been deferred and will be charged to expense during
the fund's first year of operation.
Certain officers and a director of the Fund are also officers and a
director of the Adviser. These officers and director are paid no fees
by the Fund for serving as an officer or director of the Fund.
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
MANAGED EAFE(R) COUNTRIES PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
as of April 1, 1997
(unaudited)
Assets:
Cash 0
Deferred Organizational Costs 0
-
Total Assets 0
Liabilities: 0
Net Assets 0
=
Net Asset Value, Redemption and Offering Price
Per share (1 billion shares classified for
the Managed EAFE(R) Countries Portfolio -
$.001 par value) applicable to 1 share
outstanding. $10.00
<PAGE>A-8
WARBURG PINCUS INSTITUTIONAL FUND, INC.
VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
as of April 1, 1997
(unaudited)
Assets:
Cash 0
Deferred Organizational Costs 0
-
Total Assets 0
Liabilities: 0
Net Assets 0
=
Net Asset Value, Redemption and Offering Price
Per share (1 billion shares classified for
the Value Portfolio - $.001 par value)
applicable to 1 share outstanding.
$10.00
