ANNUAL
REPORT
October 31, 1998
WARBURG PINCUS INSTITUTIONAL FUND, INC.
o VALUE PORTFOLIO
o SMALL COMPANY VALUE PORTFOLIO
o SMALL COMPANY GROWTH PORTFOLIO
o POST-VENTURE CAPITAL PORTFOLIO
More complete information about the fund, including charges and expenses, is
provided in the Prospectus, which must precede or accompany this document and
which should be read carefully before investing. You may obtain additional
copies by calling 800-369-2728 or by writing to Warburg Pincus, P.O. Box 4906,
Grand Central Station, New York, NY 10163.
[LOGO]
<PAGE>
From time to time, the portfolios' investment adviser and co-administrators may
waive some fees and/or reimburse some expenses, without which performance would
be lower. Waivers and/or reimbursements are subject to change.
Returns are historical and include change in share price and reinvestment of
dividends and capital gains. Past performance cannot guarantee future results.
Returns and share price will fluctuate, and redemption value may be more or less
than original cost.
The views of the portfolios' management are as of the date of the letters and
holdings described in this document are as of October 31, 1998; these views and
holdings may have changed subsequent to these dates. Nothing in this document is
a recommendation to purchase or sell securities.
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND -- VALUE PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The objective of Warburg Pincus Institutional Fund -- Value Portfolio (the
"Portfolio") is total return. The Portfolio pursues its objective by investing
primarily in the equity securities of large-capitalization domestic companies
considered to be relatively undervalued.
For the 12 months ended October 31, 1998, the Portfolio had a return of
9.76%, vs. a return of 21.98% for the S&P 500 Index*.
The reporting period was ultimately a strong one for the U.S. stock market,
though it was marked by periods of extreme volatility. Following new highs it
set in mid-July, the market suffered a severe decline, with the S&P 500 Index
plunging almost 20% by early September. The selloff was driven by a material
deterioration in actual and forecasted U.S. corporate profit trends, as well as
growing concerns over economic and political crises abroad. However, the market
did finish the period on a positive note, rallying on the heels of two Federal
Reserve interest-rate cuts.
Against this backdrop, the Portfolio lagged the S&P 500 Index by a
significant margin. The Portfolio's underperformance was largely attributable to
its limited participation in market rallies, in particular those sharp, "narrow"
rallies driven by relatively few stocks. (By illustration, the index's sharp
rise between June 1 and July 17 was powered by stocks representing the 20
largest growth companies.) And while rallies tended to be narrow, market
declines during the period were generally broad-based. All told, these trends
hampered the Portfolio. Consistent with our value philosophy, we maintained
limited exposure to the handful of large-cap growth stocks that, in fact,
accounted for the bulk of the index's advance.
We remained broadly diversified by sector during the period. That said, we
made a number of strategy changes within certain industry groups, most notably
among financial-services companies. The market's sharp decline in August and
September created some compelling valuations here among stocks we had heretofore
regarded as expensive. This prompted us to shift our focus away from insurance
and mortgage-services stocks (specifically the government sponsored enterprise
companies) and toward banking, brokerage and consumer-lending stocks. We added
names such as Lehman Brothers Holdings, American Express and Household
International, which we deemed to be oversold on investors' general concerns
regarding balance sheet risk. In our view, the valuations of these stocks did
not reflect the underlying earnings power of these companies under normal
operating conditions.
We modestly increased our exposure to the consumer area, specifically the
food, beverages & tobacco sector. We continued to find attractive buying
opportunities here, particularly among food companies in the process of
1
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WARBURG PINCUS INSTITUTIONAL FUND -- VALUE PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
restructuring their operations such as Keebler and H.J. Heinz. Elsewhere in the
consumer area, we maintained exposure to the retail sector, where our holdings
included department stores (e.g., Federated Department Stores and May Department
Stores), as well as selected specialty retailers (most notably, Consolidated
Stores and Payless ShoeSource). In very general terms, our positive view on the
prospects for retail stocks is based on the industry's improved
inventory-management skills (which has continued to enhance balance sheet
returns), combined with reasonable valuations.
Other noteworthy areas of emphasis for the Portfolio during the period
included computer stocks. Our holdings here, which included IBM and Sun
Microsystems, represented what we deemed to be undervalued stocks of companies
with attractive rates of return and good long-term earnings growth potential.
That said, we limited our exposure to other technology stocks during the period.
We viewed most software stocks as unattractive on a valuation basis, and largely
avoided commodity-type technology stocks (e.g., semiconductor stocks) due to our
concerns over weakness in commodity prices.
We also maintained some exposure to energy stocks. Our focus through the
period was on multinational, integrated oil companies whose profit growth and
free-cash generation is not heavily dependent on rising oil prices. Rather, we
continued to emphasize companies whose growth is geared to expanding production
profiles and continuous productivity enhancements. Our largest holdings here
during the period included British Petroleum and Total.
The rest of the Portfolio remained diversified across a wide range of
sectors. These included the telecommunications & equipment area, where we held a
mix of local and long-distance service providers, and health care, where we
emphasized health-maintenance-organization companies. We deemed several HMO
stocks to be attractively priced, given their reasonable valuations and higher
underlying growth rates vs. other insurance-related stocks.
Looking ahead, we believe that economic weakness abroad will continue to
cloud the earnings picture in the U.S. and threaten specific stocks. And while
the Federal Reserve's recent actions have helped calm the market, equities will
likely continue to face frequent bouts of volatility. However, we also believe
that a number of attractive investment opportunities exist from a relative-
valuation perspective. In this context, our efforts will remain concentrated on
identifying stocks we deem to have the best risk-adjusted longer-term prospects.
Brian S. Posner
Portfolio Manager
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WARBURG PINCUS INSTITUTIONAL FUND -- VALUE PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
SINCE INCEPTION AS OF OCTOBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in
Warburg Pincus Institutional Fund, Inc. -- Value Portfolio (the "Portfolio")
from June 30, 1997 (inception) to October 31, 1998, compared to the S&P 500
Index ("S&P")* for the same time period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Value Portfolio S&P 500 Index
Jun-97 10000 10000
Jul-97 10790 10794.7
Aug-97 10560.17 10190.95
Sep-97 11090.29 10748.3
Oct-97 10640.03 10390.38
Nov-97 10910.28 10870.41
Dec-97 11192.86 11057.38
Jan-98 11273.45 11179.46
Feb-98 12033.28 11984.6
Mar-98 12519.42 12598.33
Apr-98 12640.86 12725.07
May-98 12600.41 12506.84
Jun-98 12721.38 13014.87
Jul-98 12386.8 12876.65
Aug-98 10584.52 11015.2
Sep-98 10908.41 11720.94
Oct-98 11678.54 12674.21
FUND
----
1 Year Total Return (9/30/97-9/30/98)....................... -1.63%
Average Annual Total Return Since Inception
(6/30/97-9/30/98)......................................... 7.18%
- ------------------
* The S&P 500 Index is an unmanaged index (with no defined investment
objective) of common stocks, includes reinvestment of dividends, and is a
registered trademark of Standard & Poor's Corporation.
3
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY VALUE PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The objective of Warburg Pincus Institutional Fund -- Small Company Value
Portfolio (the "Portfolio") is long-term capital appreciation. The Portfolio
invests primarily in the equity securities of small-capitalization companies
that are believed to be relatively undervalued. The Portfolio considers a
"small" company to be one that has a market capitalization, measured at the time
the Portfolio purchases a security of that company, within the range of
capitalizations of companies represented in the Russell 2000 Index. As of
November 30, 1998, the Russell 2000 Index included companies with market
capitalizations between $10.3 million and $2.6 billion.
For the 12 months ended October 31, 1998, the Portfolio had a loss of
20.20%, vs. a loss of 11.84% for the Russell 2000 Index*.
The reporting period was extremely difficult for small-cap stocks, both in
absolute terms and relative to their large-cap counterparts. Weighing on the
group was a series of negative developments, most notably widening economic and
financial turmoil in emerging markets. This resulted in diminished investor
appetite for risk in all forms, including small-cap stocks, despite the group's
strong domestic bias and good earnings prospects relative to large caps. The
group did, though, end the period on a bright note, spurred by two Federal
Reserve interest-rate cuts and by growing recognition of small caps' extremely
compelling valuations relative to large-cap stocks.
Against this backdrop, the Portfolio had a sizable loss, hurt by investors'
general bearishness toward small caps. Relative to its benchmark, the Portfolio
was hampered, primarily, by its focus on stocks comprising the smaller end of
the small-cap area (the Portfolio's average market cap was roughly half that of
its benchmark through much of the period). These bore the brunt of small caps'
November-through-October decline.
We made a few noteworthy changes to the Portfolio in terms of sector
weightings as the period progressed. We increased our exposure to the financial
area, specifically the banks and savings & loan sector. We added to our position
here late in the period, when concern over turmoil in emerging markets weighed
on bank stocks broadly. In our view, certain small-cap banks were unduly
punished by this concern, given their limited exposure to emerging markets.
Elsewhere in the financial area, we maintained a sizable presence in the
financial-services sector, with a continued emphasis on insurance companies.
We also increased our exposure to utilities. We had no exposure here
through much of the period, reflecting our general concerns regarding small-cap
utilities' cash flows. We established a position here in September,
4
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WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY VALUE PORTFOLIO ANNUAL
INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
however, adding companies we believed stood to benefit from asset restructurings
and favorable regulatory developments.
Areas we de-emphasized during the 12 months included energy stocks. We had
no exposure here at the end of the period, viewing the prospects for a near-term
recovery in energy prices to be underwhelming. We also lowered our exposure to
consumer-discretionary-type companies late in the period, reflecting both
profit-taking in specific issues and our general concerns over diminished
consumer confidence. That said, we continued to find what we believed were
attractive buying opportunities within certain consumer-related areas. One stock
we added, in the auto-parts area, was Superior Industries, a manufacturer of
cast aluminum wheels. We established the position during the summer, after the
stock declined on pessimism regarding the General Motors strike and the
automotive industry broadly -- despite continued strong auto sales. Our purchase
was based on several positive factors, notably the company's solid return on
equity and after-tax net margins (significantly above that of similar
companies), as well as its debt-free balance sheet. In addition, the company has
significant cash reserves and continues to generate good cash flows. All told,
we deemed the stock, purchased at a P/E of about eight times estimated 1999
earnings (and about six times 1999 earnings with cash reserves netted out) to
represent good value.
Going forward, we are optimistic regarding the prospects for small-cap
stocks, the group's difficulties during the period notwithstanding. For one,
these issues continue to display historically compelling valuations relative to
those of large caps. In addition, small caps are not heavily reliant on export
sales, which account for almost half of large caps' revenues and which are
projected to slow significantly. These factors stand to continue to support the
rally in small caps witnessed since early October, particularly if the Federal
Reserve remains in an accommodative-to-neutral mode. That said, careful stock
selection remains critical. In this regard, we will continue to adhere to our
strict value disciplines, focusing on underfollowed, beaten down stocks of
companies with strong balance sheets and cash flows. As ever, we will strive to
identify undervalued stocks whose true worth will receive wider market
recognition over time.
Kyle F. Frey
Portfolio Manager
Investing in small companies entails special risk considerations. These are
detailed in the Prospectus, which should be read carefully before investing.
5
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WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY VALUE PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY VALUE
PORTFOLIO SINCE INCEPTION AS OF OCTOBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in Warburg
Pincus Institutional Fund, Inc. -- Small Company Value Portfolio (the
"Portfolio") from October 31, 1997 (inception) to October 31, 1998, compared to
the Russell 2000 Growth Index ("Russell")* for the same time period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Portfolio Russell 2000
--------- ------------
10000.00 10000.00
Jan-96 9850.00 9917.30
Feb-96 10360.00 10369.53
Mar-96 11280.00 10574.53
Apr-96 12500.00 11386.34
May-96 13250.00 11970.23
Jun-96 12820.00 11192.53
Jul-96 11630.00 9826.26
Aug-96 12460.00 10553.69
Sep-96 13300.00 11097.21
Oct-96 12920.00 10618.59
Nov-96 12940.00 10913.89
Dec-96 13310.00 11126.71
Jan-97 13690.00 11404.65
Feb-97 12840.00 10716.04
Mar-97 11780.00 9959.92
Apr-97 11580.00 9844.78
May-97 13150.00 11324.55
Jun-97 13730.00 11708.57
Jul-97 14370.00 12308.51
Aug-97 14799.66 12677.89
Sep-97 16519.38 13689.59
Oct-97 15890.00 12867.39
Nov-97 15599.21 12560.76
Dec-97 15508.73 12567.79
Jan-98 15218.72 12400.27
Feb-98 16498.61 13494.96
Mar-98 17397.79 14061.07
Apr-98 17197.71 14147.27
May-98 15847.69 13119.47
Jun-98 16028.36 13253.68
Jul-98 14358.20 12146.87
Aug-98 11328.62 9342.88
Sep-98 12277.96 10290.16
Oct-98 12888.17 10826.89
PORTFOLIO
---------
Aggregate Total Return Since Inception (10/31/97-9/30/98)... -20.60%
- ------------------
* The Russell 2000 Growth Index is an unmanaged index (with no defined
investment objective) of those securities in the Russell 2000 Growth Index
with a greater-than-average growth orientation. The Russell 2000 Growth
Index includes reinvestment of dividends, and is compiled by Frank Russell
Company.
6
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY GROWTH PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The object of Warburg Pincus Institutional Fund -- Small Company Growth
Portfolio (the "Portfolio") is capital growth. The Portfolio pursues its
objective by investing in equity securities of small-sized domestic companies.
The Portfolio considers a "small" company to be one that has a market
capitalization, measured at the time the Portfolio purchases a security of that
company, within the range of capitalizations of companies represented in the
Russell 2000 Index. As of November 30, 1998, the Russell 2000 Index included
companies with market capitalizations between $10.3 million and $2.6 billion.
Note: The Portfolio reopened to new investors on November 10, 1998.
For the 12 months ended October 31, 1998, the Portfolio had a loss of
18.88%, vs. a loss of 15.86% for the Russell 2000 Growth Index*.
The reporting period was extremely difficult for small-cap stocks, both in
absolute terms and relative to their large-cap counterparts. Hampering the group
was investors' aversion to risk in all forms, given an increasingly uncertain
earnings environment and a high level of stock-market volatility. This risk-
avoidance mindset was most visible between mid-July and early October, when a
confluence of negative events -- e.g., Russia's bond default -- resulted in a
market slump, one that took a disproportionate toll on small caps. The group,
though, ended the period on a bright note, buoyed by growing recognition of
small caps' historically very compelling valuations and by an unexpected Federal
Reserve interest-rate cut.
Against this backdrop, the Portfolio had a significant loss for the 12
months. Hampering the Portfolio was investors' general bearishness toward
small-cap stocks and weakness in certain areas, most specifically the technology
area.
We made a few noteworthy changes to the Portfolio during the 12 months in
terms of sector exposure. Foremost, we raised our weighting in the business-
services sector. We continued to find stocks where we deemed attractive, selling
at significant discounts to these companies' underlying growth rates. Our
increased weighting also reflected our heightened emphasis on domestically
oriented stocks, given a relatively strong U.S. economy and ongoing financial
turmoil in emerging markets. Along the same lines, we added to our position in
the leisure & entertainment and communications & media sectors, and, in the
technology area, shifted our focus toward domestically oriented software
companies.
Areas we de-emphasized during the period included commodity-sensitive
sectors such as energy, reflecting our general concerns regarding commodity
7
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WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY GROWTH PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
prices. Another sector weighting we lowered was telecommunications & equipment.
We eliminated most of our exposure here in the latter part of the period, due to
turmoil in the corporate bond market. This clouded, in our view, the near-term
prospects for most smaller-cap telecommunications companies, which tend to rely
heavily on debt financing.
Looking ahead, our outlook on the prospects for stocks of small-cap
companies remains positive, notwithstanding their poor performance for the
period. Small- cap companies continue to enjoy rapid earnings growth, both in
absolute terms and relative to larger companies. In addition, their stock
valuations remain very attractive compared to those of large caps, despite the
rally in small-cap stocks over the past two months. These factors stand to draw
ever-more attention to small caps, provided investors' aversion to risk
continues to fade. Set against this backdrop, we will continue our efforts to
identify those companies with the best potential for long-term growth.
Stephen J. Lurito
Portfolio Manager
Investing in small companies entails special risk considerations. These are
detailed in the Prospectus, which should be read carefully before investing.
8
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WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY GROWTH PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY GROWTH
PORTFOLIO SINCE INCEPTION AS OF OCTOBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in
Warburg Pincus Institutional Fund -- Small Company Growth Portfolio (the
"Portfolio") from December 29, 1995 (inception) to October 31, 1998, compared to
the Russell 2000 Growth Index for the same time period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Portfolio Russell 2000 Growth Index
--------- -------------------------
10000.00 10000.00
Jan-96 9850.00 9917.30
Feb-96 10360.00 10369.53
Mar-96 11280.00 10574.53
Apr-96 12500.00 11386.34
May-96 13250.00 11970.23
Jun-96 12820.00 11192.53
Jul-96 11630.00 9826.26
Aug-96 12460.00 10553.69
Sep-96 13300.00 11097.21
Oct-96 12920.00 10618.59
Nov-96 12940.00 10913.89
Dec-96 13310.00 11126.71
Jan-97 13690.00 11404.65
Feb-97 12840.00 10716.04
Mar-97 11780.00 9959.92
Apr-97 11580.00 9844.78
May-97 13150.00 11324.55
Jun-97 13730.00 11708.57
Jul-97 14370.00 12308.51
Aug-97 14799.66 12677.89
Sep-97 16519.38 13689.59
Oct-97 15890.00 12867.39
Nov-97 15599.21 12560.76
Dec-97 15508.73 12567.79
Jan-98 15218.72 12400.27
Feb-98 16498.61 13494.96
Mar-98 17397.79 14061.07
Apr-98 17197.71 14147.27
May-98 15847.69 13119.47
Jun-98 16028.36 13253.68
Jul-98 14358.20 12146.87
Aug-98 11328.62 9342.88
Sep-98 12277.96 10290.16
Oct-98 12888.17 10826.89
PORTFOLIO
---------
1 Year Total Return (9/30/97-9/30/98)....................... -25.67%
Average Annual Total Return (12/29/95-9/30/98).............. 7.73%
- ------------------
* The Russell 2000 Growth Index is an unmanaged index (with no defined
investment objective) of those securities in the Russell 2000 Growth Index
with a greater-than-average growth orientation. The Russel 2000 Growth
Index includes reinvestment of dividends, and is compiled by Frank Russell
Company.
9
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND -- POST-VENTURE CAPITAL PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The objective of Warburg Pincus Institutional Fund -- Post-Venture Capital
Portfolio (the "Portfolio") is long-term growth of capital. The Portfolio
pursues its objective by investing primarily in equity securities of companies
considered to be in their post-venture-capital stage of development.
For the 12 months ended October 31, 1998, the Portfolio had a loss of
17.70%, vs. losses of 15.86% for the Russell 2000 Growth Index*, 13.85% for the
Russell 2500 Growth Index** and 11.42% for the NASDAQ Industrial Index***.
The period was a highly volatile one for the types of small-cap and
aggressive-growth stocks targeted by the Portfolio. These stocks saw good
performance through mid July, but sold off heavily as investors retreated from
risk in general. This risk-avoidance mindset reflected a series of negative
developments, notably Russia's financial meltdown and widening turmoil elsewhere
in emerging markets. Small-cap and aggressive-growth stocks recovered some of
their losses at the end of the period, however. Valuations on these issues,
which were historically compelling before the group's steep decline, became much
more so by early October. This prompted investors to increasingly revisit the
group, a trend that accelerated after the Federal Reserve unexpectedly reduced
interest rates in the middle of the month.
Against this backdrop, the Portfolio suffered a sizable loss. Weighing on
the Portfolio was investors' bearishness toward smaller-cap and
aggressive-growth stocks and weakness in specific areas, most notably the
technology area.
We made a few noteworthy changes to the Portfolio as the period progressed
in terms of broad strategies. Most notably, we increased our emphasis on the
Internet as an investment theme. The Internet, in our view, has evolved from
being a purely technological phenomenon to become a viable mass-market medium,
one with enormous implications for consumers, businesses and government.
Specific stocks that stand to benefit from the Internet's growth over the longer
term include Internet-service-provider and business- and consumer-services
stocks.
In terms of sector exposure, we made several changes to the Fund worthy of
mention during the 12 months. One move we made, and one reflective of our
heightened Internet focus, was to increase our exposure to the communications &
media area. Stocks we added here included Yahoo! and America Online. We believe
these companies will continue to take advantage of their strong brand names to
expand their customer bases.
We also increased our weighting in the business-services sector, a change
partly based on our more-favorable view of the Internet. We believe many service
providers, in particular those providing distribution and fulfillment services,
will benefit from higher volumes of Internet commerce. Our higher
10
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WARBURG PINCUS INSTITUTIONAL FUND -- POST-VENTURE CAPITAL PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
weighting here also reflected our increased focus on domestically oriented
companies during the period.
One weighting we reduced was the electronics area, reflecting our general
concerns over high capacity in the industry. That said, we continued to find
stocks we believe have good long-term growth prospects. Our holdings here
included Vitesse Semiconductor, a company that went public in 1991 after
receiving venture backing from, among other groups, Mohr, Davidow Ventures, a
partnership focusing exclusively on entrepreneurial companies in the western
U.S. Vitesse manufactures integrated circuits using gallium arsenide-based (as
opposed to silicon-based) technology. As such, these circuits are relatively
high-speed, low-heat products that could see significant long-term demand growth
within, for example, the data-communications area.
Elsewhere, notable sector weightings for the Portfolio included computers,
where we had a bias toward domestically oriented software companies; financial
services, where we emphasized insurance and asset-management stocks; and retail.
One noteworthy move we made in the last area was to add to our position in
Barnes & Noble. The bookseller has continued to exhibit significant same-store
sales growth while expanding its Internet presence as well.
Going forward, our outlook on the collective prospects for stocks of post-
venture companies remains positive, the Portfolio's loss for the period
notwithstanding. (We define a post-venture capital company as one that has
received venture-capital financing either during the early stages of the
company's existence or the development of a new product or service, or as part
of a restructuring or recapitalization. The investment of venture-capital
financing, distribution of securities to venture-capital investors or initial
public offering, whichever is later, will have been made within 10 years of the
Portfolio's investment.) These companies continue to have rapid earnings growth,
both in absolute terms and relative to blue-chip-type companies, and their stock
valuations range from reasonable to very attractive. Set against this backdrop,
we will continue to devote our efforts to identifying innovative, well-financed
companies with the best long-term prospects.
Elizabeth B. Dater Stephen J. Lurito
Co-Portfolio Manager Co-Portfolio Manager
Because of the nature of the Portfolio's holdings and certain strategies it
may use, an investment in the Portfolio involves certain risks and may not be
appropriate for all investors. The Prospects contains more complete information
on the special risk considerations associated with post-venture-capital
investments. It should be read carefully before investing.
11
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WARBURG PINCUS INSTITUTIONAL FUND -- POST-VENTURE CAPITAL PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS INSTITUTIONAL FUND -- POST-VENTURE CAPITAL
PORTFOLIO SINCE INCEPTION AS OF OCTOBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in
Warburg Pincus Institutional Fund -- Post-Venture Capital Portfolio (the
"Portfolio") from October 31, 1997 (inception) to October 31, 1998, compared to
the Russell 2000 Growth Index ("R2000G"),* Russell 2500 Growth Index
("R2500G")** and the NASDAQ Industrials Index ("NASDAQ")*** for the same time
period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Portfolio R2000G R2500G NASDAQ
--------- -------- -------- --------
10000.00 10000.00 10000.00 10000.00
Nov-97 9870.00 9762.00 9846.70 9856.50
Dec-97 9739.72 9767.86 9811.74 9624.58
Jan-98 9540.05 9637.65 9683.60 9559.32
Feb-98 10419.64 10488.46 10514.94 10331.43
Mar-98 11319.90 10928.45 10905.36 10733.94
Apr-98 11150.10 10995.45 11004.49 10951.09
May-98 10399.70 10196.63 10298.11 10490.27
Jun-98 10609.78 10300.94 10373.60 10514.92
Jul-98 9310.08 9440.71 9601.18 9923.45
Aug-98 7110.11 7261.41 7419.41 7637.49
Sep-98 7690.29 7997.65 8069.94 8132.47
Oct-98 8230.15 8414.81 8614.82 8790.39
PORTFOLIO
---------
Aggregate Total Return Since Inception (10/31/97-9/30/98)... -23.10%
- ------------------
* The Russell 2000 Growth Index is an unmanaged index (with no defined
investment objective) of those securities in the Russell 2000 Growth Index
with a greater-than- average growth orientation. It includes reinvestment
of dividends, and is compiled by Frank Russell Company.
** The Russell 2500 Growth Index measures the performance of those companies
in the Russell 2500 Index with higher price-to-book values and higher
forecasted growth rates. The Russell 2500 Index is composed of the 2500
smallest companies in the Russell 3000 Index, which measures the
performance of the 3000 largest U.S. companies based on total market
capitalization. The Russell 2500 Index represents approximately 22% of the
total market capitalization of the Russell 3000 Index.
*** The NASDAQ Industrial Index measures the stock price performance of more
than 3000 industrial issues included in the NASDAQ OTC Composite Index. The
NASDAQ OTC Composite Index represents 4500 stocks traded over the counter.
12
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
STATEMENT OF NET ASSETS
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCK (89.5%)
Aerospace & Defense (5.0%)
General Dynamics Corp. 13,600 $ 804,950
Gulfstream Aerospace Corp. + 15,200 672,600
Litton Industries, Inc. + 10,000 652,500
Raytheon Co. Class A 14,700 823,200
-----------
2,953,250
-----------
Banks & Savings & Loans (3.4%)
Citigroup, Inc. 26,625 1,253,039
Washington Mutual, Inc. 20,200 756,237
-----------
2,009,276
-----------
Building & Building Materials (1.6%)
USG Corp. 19,450 927,522
-----------
Business Services (1.0%)
WPP Group PLC 68,200 339,219
WPP Group PLC ADR 4,900 243,775
-----------
582,994
-----------
Capital Equipment (4.0%)
AlliedSignal, Inc. 12,900 502,294
American Standard Co., Inc. + 12,800 408,800
Caterpillar, Inc. 3,600 162,000
Emerson Electric Co. 7,400 488,400
ITT Industries, Inc. 22,500 804,375
-----------
2,365,869
-----------
Chemicals (2.4%)
Ferro Corp. 13,350 340,425
Rhone Poulenc SA ADR Series A 12,200 569,587
Union Carbide Corp. 13,500 519,750
-----------
1,429,762
-----------
Communications & Media (0.5%)
Scripps (E.W.) Co. Class A 6,400 283,200
-----------
Computers (6.5%)
Compaq Computer Corp. 27,000 853,875
International Business Machines Corp. 12,250 1,818,359
Sun Microsystems, Inc. + 17,100 996,075
Unisys Corp. + 6,500 173,062
-----------
3,841,371
-----------
Conglomerates (3.3%)
Harsco Corp. 18,750 614,062
TRW, Inc. 14,200 808,512
United Technologies Corp. 5,600 533,400
-----------
1,955,974
-----------
Consumer Durables (3.7%)
Chrysler Corp. 15,700 755,562
Ford Motor Co. 21,500 1,166,375
Maytag Corp. 5,600 276,850
-----------
2,198,787
-----------
See Accompanying Notes to Financial Statements.
13
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----
COMMON STOCKS (CONT'D)
Consumer Non-Durables (1.4%)
Premark International, Inc. 26,300 $ 833,381
----------
Electronics (1.0%)
Dallas Semiconductor Corp. 11,300 418,100
Tektronix, Inc. 10,100 180,537
----------
598,637
----------
Energy (6.9%)
British Petroleum Co. PLC ADR 22,715 2,008,858
Burlington Resources, Inc. 14,400 593,100
Royal Dutch Petroleum Co. ADR 9,900 487,575
Total SA ADR 17,100 1,000,350
----------
4,089,883
----------
Environmental Services (1.5%)
Waste Management, Inc. 19,300 870,912
----------
Financial Services (10.8%)
American Express Co. 6,050 534,669
Associates First Capital Corp. Class A 3,559 250,909
Fannie Mae 6,700 474,444
FINOVA Group, Inc. 11,700 570,375
Household International, Inc. 8,900 325,406
Lehman Brothers Holdings, Inc. 29,700 1,126,744
MBIA, Inc. 16,300 996,337
MGIC Investment Corp. 13,500 526,500
Old Republic International Corp. 18,100 343,900
Terra Nova (Bermuda) Holdings, Ltd. Class A 11,500 319,125
The PMI Group, Inc. 17,800 897,787
----------
6,366,196
----------
Food, Beverages & Tobacco (8.3%)
Anheuser-Busch Companies, Inc. 24,400 1,450,275
Corn Products International, Inc. 12,300 350,550
Heinz (H.J.) Co. 6,100 354,562
Interstate Bakeries Corp. 3,700 92,731
Keebler Foods Co. + 19,950 573,562
Philip Morris Companies, Inc. 23,700 1,211,662
Ralston Purina Group 12,900 430,538
Sara Lee Corp. 7,500 447,656
----------
4,911,536
----------
Healthcare (4.7%)
Baxter International, Inc. 13,600 815,150
Tenet Healthcare Corp. + 15,700 438,619
Trigon Healthcare, Inc. + 24,000 900,000
Wellpoint Health Networks, Inc. + 7,900 581,638
----------
2,735,407
----------
See Accompanying Notes to Financial Statements.
14
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----
COMMON STOCKS (CONT'D)
Industrial Manufacturing & Processing (1.7%)
UNOVA, Inc. + 69,700 $ 1,006,294
-----------
Metals & Mining (1.1%)
Aluminum Company of America 8,114 643,035
-----------
Office Equipment & Supplies (0.6%)
Pitney Bowes, Inc. 6,600 363,413
-----------
Pharmaceuticals (1.2%)
Merck & Co., Inc. 5,400 730,350
-----------
Publishing (0.6%)
R.R. Donnelley & Sons, Co. 7,700 332,063
-----------
Real Estate (0.4%)
Equity Residential Properties Trust 6,100 256,200
-----------
Retail (6.6%)
CompUSA, Inc. + 19,300 267,788
Consolidated Stores Corp. + 28,800 473,400
Federated Department Stores, Inc. + 31,600 1,214,625
May Department Stores Co. 11,300 689,300
Payless ShoeSource, Inc. + 5,726 268,764
Saks, Inc. + 13,700 311,675
Sears, Roebuck and Co. 14,000 629,125
-----------
3,854,677
-----------
Telecommunications & Equipment (8.0%)
ALLTEL Corp. 6,100 285,556
Ameritech Corp. 14,500 782,094
AT&T Corp. 17,900 1,114,275
Bell Atlantic Corp. 22,918 1,217,519
BellSouth Corp. 7,900 630,519
SBC Communications, Inc. 14,400 666,900
-----------
4,696,863
-----------
Transportation (0.6%)
Burlington Northern Santa Fe Corp. 11,100 342,713
-----------
Utilities-Electric (2.7%)
Allegheny Energy, Inc. 13,600 418,200
American Electric Power Co., Inc. 8,600 420,863
DQE, Inc. 2,200 86,763
Illinova Corp. 9,000 227,813
Wisconsin Energy Corp. 13,500 413,438
-----------
1,567,077
-----------
TOTAL COMMON STOCK (Cost $49,727,776) 52,746,642
-----------
See Accompanying Notes to Financial Statements.
15
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF
SHARES VALUE
------ -----
<S> <C> <C>
PREFERRED STOCK (2.8%)
Capital Equipment (1.0%)
Ingersoll-Rand Co. Series G 0.78% (Convertible 05/15/01)
PRIDES 26,100 $ 554,625
-----------
Communications & Media (0.9%)
AirTouch Communications, Inc. Series B 6.00% (Callable
08/16/99 at $35.96) 10,900 501,400
-----------
Industrial Manufacturing & Processing (0.4%)
MediaOne Group, Inc. 4,500 242,438
-----------
Real Estate (0.5%)
Equity Residential Properties Series G 7.25% (Callable
09/15/02 at $25.91) REIT 13,600 311,950
-----------
TOTAL PREFERRED STOCK (Cost $1,586,745) 1,610,413
-----------
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
CORPORATE BONDS (0.7%)
National Semiconductor Corp. (Convertible) 6.50%,
10/01/02 (Callable 10/01/99 at $102.79) 340 275,825
Rite Aid Corp. (Convertible) 5.25%, 9/15/02 (Callable
09/15/00 at $102.10) 101 128,775
-----------
TOTAL CORPORATE BONDS (Cost $427,456) 404,600
-----------
SHORT-TERM INVESTMENTS (7.1%)
Repurchase agreement with State Street Bank & Trust Co.
dated 10/30/98 at 5.400% to be repurchased at $4,197,888
on 11/02/98. (Collateralized by a pro rata amount of U.S.
Treasury Notes ranging in par values from $21,390,000 to
$50,000,000, 3.375%-5.500%, 02/28/03-04/15/28. Pro rata
market value of collateral is $4,279,944.) (Cost
$4,196,000) 4,196 4,196,000
-----------
TOTAL INVESTMENTS AT VALUE (100.1%) (Cost $55,937,977*) 58,957,655
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1%) (47,568)
-----------
NET ASSETS (100.0%) (applicable to 5,110,466 shares
outstanding) $58,910,087
===========
NET ASSET VALUE, offering and redemption price per share
($58,910,087 divided by 5,110,466) $ 11.53
===========
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<C> <S>
ADR = American Depository Receipt
PRIDES = Preferred Redeemable Increased Dividends Equity Securities
REIT = Real Estate Investment Trust
</TABLE>
- --------------------------------------------------------------------------------
+ Non-income producing security.
* Cost for federal income tax purposes is $56,099,272.
See Accompanying Notes to Financial Statements.
16
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY VALUE PORTFOLIO
STATEMENT OF NET ASSETS
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCK (91.0%)
Banks & Savings & Loans (7.5%)
Century Bancorp, Inc. Class A 1,200 $ 23,250
Quaker City Bancorp, Inc. + 2,850 42,750
Riggs National Corp. 1,400 33,775
Texas Regional Bancshares, Inc. 1,500 34,125
-----------
133,900
-----------
Building & Building Materials (5.7%)
Cavalier Homes, Inc. 6,500 62,969
Walter Industries, Inc. + 2,800 39,200
-----------
102,169
-----------
Business Services (1.9%)
Harland (John H.) Co. 2,300 33,350
-----------
Capital Equipment (3.5%)
Avondale Industries, Inc. + 2,100 54,731
Gardner Denver, Inc. + 600 8,625
-----------
63,356
-----------
Conglomerates (1.8%)
Justin Industries, Inc. 300 4,350
Watts Industries, Inc. Class A 1,500 27,562
-----------
31,912
-----------
Consumer Durables (7.5%)
Aftermarket Technology Corp. + 3,800 23,750
La-Z-Boy, Inc. 3,000 55,125
Superior Industries International, Inc. 2,100 54,994
-----------
133,869
-----------
Consumer Non-Durables (6.4%)
Home Products International, Inc. + 6,200 62,000
St. John Knitts, Inc. 500 10,094
Standex International Corp. 1,700 41,969
-----------
114,063
-----------
Electronics (1.1%)
Exar Corp. + 1,100 18,975
-----------
Engineering & Construction (1.3%)
Gradall Industries, Inc. + 1,600 23,400
-----------
Financial Services (17.6%)
Chartwell Re Corp. 700 17,412
Commerce Group, Inc. 1,300 45,013
Delphi Financial Group, Inc. Class A + 960 44,760
HCC Insurance Holdings, Inc. 1,900 34,081
Long Beach Financial Corp. + 2,400 17,250
See Accompanying Notes to Financial Statements.
17
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY VALUE PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT'D)
NUMBER
OF
SHARES VALUE
------ -----
NAC Re Corp. 700 $ 33,906
National Western Life Insurance Co. Class A + 500 58,500
Terra Nova (Bermuda) Holdings, Ltd. Class A 2,300 63,825
-----------
314,747
-----------
Food, Beverages & Tobacco (1.9%)
Vlasic Foods International, Inc. + 1,800 33,638
-----------
Industrial Manufacturing & Processing (2.5%)
UNOVA, Inc. + 3,100 44,756
-----------
Leisure & Entertainment (2.3%)
SCP Pool Corp. + 2,950 40,931
-----------
Lodging & Restaurants (2.8%)
Ryan's Family Steak Houses, Inc. + 4,600 49,450
-----------
Metals & Mining (4.0%)
Inland Steel Industries, Inc. 1,833 33,452
Universal Stainless & Alloy Products, Inc. + 5,500 37,641
-----------
71,093
-----------
Paper & Forest Products (2.5%)
Caraustar Industries, Inc. 700 16,625
Wausau-Mosinee Paper Corp. 1,600 27,900
-----------
44,525
-----------
Real Estate (6.9%)
U.S. Restaurant Properties, Inc. 1,100 26,881
Weeks Corp. 2,100 61,031
Western Water Co. + 6,300 35,438
-----------
123,350
-----------
Retail (0.9%)
Filene's Basement Corp. + 1,700 3,241
Fingerhut Cos., Inc. 1,600 13,500
-----------
16,741
-----------
Transportation (5.2%)
Landstar Systems, Inc. + 2,000 71,000
M.S. Carriers, Inc. + 1,000 21,500
-----------
92,500
-----------
See Accompanying Notes to Financial Statements.
18
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY VALUE PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----
COMMON STOCKS (CONT'D)
Utilities-Electric (7.7%)
Commonwealth Energy System, Inc. 1,000 $ 37,312
Idacorp, Inc. 1,100 34,375
Public Service Company of New Mexico 1,700 37,506
UniSource Energy Corp. + 1,800 27,900
----------
137,093
----------
TOTAL COMMON STOCK (Cost $1,729,135) 1,623,818
----------
Par
(000)
-----
SHORT-TERM INVESTMENTS (9.3%)
Repurchase agreement with State Street Bank
& Trust Co. dated 10/30/98 at 5.400% to
be repurchased at $165,074 on 11/02/98.
(Collateralized by a pro rata amount of
U.S. Treasury Notes ranging in par values
from $21,390,000 to $50,000,000, 3.375%-5.500%,
02/28/03-04/15/28. Pro rata market value of
collateral is $168,301.) (Cost $165,000) 165 165,000
----------
TOTAL INVESTMENTS AT VALUE (100.3%)(Cost $1,894,135*) 1,788,818
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%) (4,949)
----------
NET ASSETS (100.0%) (applicable to 223,446 shares
outstanding) $1,783,869
==========
NET ASSET VALUE, offering and redemption price per
share ($1,783,869 divided by 223,446) $ 7.98
==========
- --------------------------------------------------------------------------------
+ Non-income producing security.
* Cost for federal income tax purposes is $1,918,485.
See Accompanying Notes to Financial Statements.
19
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY GROWTH PORTFOLIO
STATEMENT OF NET ASSETS
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCKS (92.5%)
Aerospace & Defense (2.0%)
Prescient Systems, Inc. (Private Placement) +# 20,000 $ 2,000,000
Tristar Aerospace Co. + 182,500 1,870,625
-----------
3,870,625
-----------
Banks & Savings & Loans (1.1%)
City National Corp. 61,300 2,095,694
-----------
Business Services (12.6%)
Acxiom Corp. + 89,340 2,244,667
CB Richard Ellis Services, Inc. + 69,900 1,363,050
Getty Images, Inc. + 124,000 1,526,750
Hypercom Corp. + 173,700 1,650,150
INSpire Insurance Solutions, Inc. + 43,800 1,095,000
Kroll-O'Gara Co. + 90,300 2,223,637
LaSalle Partners, Inc. + 59,500 1,740,375
Lason Holdings, Inc. + 33,600 1,839,600
QRS Corp. + 73,133 2,779,054
Romac International, Inc. + 106,400 1,862,000
Technology Solutions Co. + 139,575 1,674,900
Trammell Crow Co. + 80,100 1,732,162
Wilmar Industries, Inc. + 112,200 2,776,950
-----------
24,508,295
-----------
Communications & Media (6.1%)
Central European Media Enterprises, Ltd. Class A + 97,647 622,500
Granite Broadcasting Corp. + 216,600 1,110,075
Heftel Broadcasting Corp. Class A + 56,700 2,331,787
Infoseek Corp. + 47,000 1,389,437
Lycos, Inc. + 62,300 2,530,937
Metro Networks, Inc. + 70,200 2,571,075
Network Event Theater, Inc. +# 283,968 1,224,612
-----------
11,780,423
-----------
Computers (7.9%)
Advent Software, Inc. + 44,500 1,546,375
Boole & Babbage Inc. + 86,750 2,309,719
Documentum, Inc. + 23,200 788,800
JDA Software Group, Inc. + 119,400 1,134,300
Mercury Interactive Corp. + 48,200 2,000,300
National Instruments Corp. + 68,682 1,880,170
Radiant Systems, Inc. + 131,000 884,250
Transactions Systems Architects, Inc. Class A + 90,300 3,259,266
Women.com Networks +# 455,927 1,500,000
-----------
15,303,180
-----------
See Accompanying Notes to Financial Statements.
20
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY GROWTH PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT'D)
NUMBER
OF
SHARES VALUE
------ -----
Consumer Non-Durables (3.0%)
Central Garden & Pet Co. + 106,500 $ 2,103,375
Interface, Inc. 171,800 2,115,287
U.S. Home & Garden, Inc. + 347,000 1,539,812
-----------
5,758,474
-----------
Consumer Services (4.8%)
DeVRY, Inc. + 146,304 3,218,688
ITT Educational Services, Inc. + 81,400 2,416,562
Service Experts, Inc. + 59,200 1,787,100
Strayer Education, Inc. 58,700 1,995,800
-----------
9,418,150
-----------
Electronics (7.6%)
Aavid Thermal Technologies, Inc. + 89,600 1,344,000
Avant! Corp. + 125,731 2,145,285
Burr-Brown Corp. + 104,651 1,942,584
Flextronics International Ltd. + 39,400 2,046,337
Maximum Integrated Products, Inc. + 43,600 1,555,975
Uniphase Corp. + 52,300 2,588,850
Vitesse Semiconductor Corp. + 51,900 1,673,775
Xilinx, Inc. + 32,900 1,469,191
-----------
14,765,997
-----------
Energy (2.1%)
Chieftain International, Inc. + 92,700 1,819,238
Stone Energy Corp. + 67,400 2,165,225
-----------
3,984,463
-----------
Environmental Services (2.3%)
Allied Waste Industries, Inc. + 100,000 2,162,500
Casella Waste Systems, Inc. + 80,100 2,362,950
-----------
4,525,450
-----------
Financial Services (3.5%)
Amerin Corp. + 78,000 1,667,250
Enhance Financial Services Group, Inc. 57,400 1,409,888
Terra Nova Bermuda Holdings, Ltd. 79,900 2,217,225
Triad Guaranty, Inc. + 70,100 1,489,625
-----------
6,783,988
-----------
Food, Beverages & Tobacco (2.6%)
Ben & Jerry's Homemade, Inc. Class A + 112,600 2,167,550
Consolidated Cigar Holdings, Inc. + 116,900 1,344,350
Suiza Foods Corp. + 44,900 1,464,863
-----------
4,976,763
-----------
See Accompanying Notes to Financial Statements.
21
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY GROWTH PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT'D)
NUMBER
OF
SHARES VALUE
------ -----
Healthcare (7.9%)
Advance Paradigm, Inc. + 99,500 $ 3,283,500
Assisted Living Concepts, Inc. + 119,300 1,610,550
Core, Inc. + 228,400 1,427,500
Hanger Orthopedic Group, Inc. + 115,500 2,281,125
Minimed, Inc. + 45,100 2,503,050
NovaCare, Inc. + 34,400 141,900
Renal Care Group, Inc. + 97,650 2,844,056
VWR Scientific Products Corp. + 51,100 1,242,369
-----------
15,334,050
-----------
Leisure & Entertainment (8.2%)
Ambassadors International, Inc. + 76,600 1,120,275
Championship Auto Racing Teams, Inc. + 131,200 3,263,600
Coach USA, Inc. + 75,000 2,010,938
Fairfield Communities, Inc. + 154,800 1,518,975
Family Golf Centers, Inc. + 107,850 2,271,591
Premier Parks, Inc. + 142,000 3,150,625
Sunterra Corp. + 107,200 1,018,400
Vistana, Inc. + 142,600 1,586,425
-----------
15,940,829
-----------
Lodging & Restaurants (1.2%)
Bob Evans Farms, Inc. 120,100 2,364,469
-----------
Oil Services (1.8%)
Global Industries, Ltd. + 110,200 1,060,675
Petroleum Geo-Services ADR + 112,862 2,412,425
Southern Mineral Corp. + 58,875 95,672
-----------
3,568,772
-----------
Pharmaceuticals (7.7%)
Alkermes, Inc. + 112,300 2,189,850
ChiRex, Inc. + 106,500 1,624,125
Geltex Pharmaceuticals, Inc. + 51,300 1,282,500
Jones Pharma, Inc. 57,100 1,845,044
SangStat Medical Corp. + 50,400 1,045,800
Sepracor, Inc. + 50,400 3,458,700
Serologicals Corp. + 153,825 3,480,291
-----------
14,926,310
-----------
Publishing (0.9%)
Petersen Companies, Inc. Class A + 63,300 1,681,406
-----------
See Accompanying Notes to Financial Statements.
22
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY GROWTH PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCKS (CONT'D)
Retail (3.6%)
99 Cents Only Stores + 34,500 $ 1,595,625
Borders Group, Inc. + 70,400 1,786,400
Stage Stores, Inc. + 116,500 1,543,625
Whole Foods Market, Inc. + 51,700 2,071,231
------------
6,996,881
------------
Telecommunications & Equipment (2.6%)
Intermedia Communications of Florida, Inc. + 68,800 1,272,800
McLeodUSA, Inc. Class A + 63,100 2,307,094
Teledata Communications, Ltd. + 97,200 1,488,375
------------
5,068,269
------------
Transportation (3.0%)
Heartland Express, Inc. + 82,750 1,489,500
Mark VII, Inc. + 127,862 2,109,723
Simon Transportation Services, Inc. + 113,000 621,500
Swift Transportation Co., Inc. + 76,800 1,696,800
------------
5,917,523
------------
TOTAL COMMON STOCK (Cost $172,415,025) 179,570,011
------------
PAR
(000)
-----
CORPORATE BOND (1.0%)
Mansur Industries 8.25%, 02/23/03
(Cost $2,000,000) # 2,000 2,000,000
------------
SHORT-TERM INVESTMENTS (5.6%)
Repurchase agreement with State Street Bank &
Trust Co. dated 10/30/98 at 5.400% to be
repurchased at $10,799,858 on 11/02/98.
(Collateralized by pro rata amount of U.S.
Treasury Notes ranging in par values from
$21,390,000 to $50,000,000, 3.375%-5.500%,
02/28/03-04/15/28. Pro rata market value of
collateral is $11,010,961.) (Cost $10,795,000) 10,795 10,795,000
------------
TOTAL INVESTMENTS AT VALUE (99.1%)
(Cost $185,210,025*) 192,365,011
OTHER ASSETS IN EXCESS OF LIABILITIES (0.9%) 1,798,758
------------
NET ASSETS (100.0%) (applicable to 15,067,962
shares outstanding) $194,163,769
============
NET ASSET VALUE, offering and redemption price
per share ($194,163,769 divided by 15,067,962) $ 12.89
============
INVESTMENT ABBREVIATIONS
ADR = American Depository Receipt
- --------------------------------------------------------------------------------
+ Non-income producing security.
# Restricted security.
* Cost for federal income tax purposes is $185,351,740.
See Accompanying Notes to Financial Statements.
23
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- POST-VENTURE CAPITAL PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCKS (100.0%)
Aerospace & Defense (1.9%)
Gulfstream Aerospace Corp.+ 500 $ 22,125
-----------
Business Services (16.8%)
BISYS Group, Inc. + 300 13,125
Hays PLC 700 10,322
IMS Health, Inc. 200 13,300
Lason Holdings, Inc. + 500 27,375
On Assignment, Inc. + 400 13,600
Pharmaceutical Product Development, Inc. + 500 13,500
Protection One, Inc. 3,000 33,750
QRS Corp. + 400 15,200
Realty Information Group, Inc. + 1,300 10,887
Robert Half International, Inc. + 400 16,050
SunGard Data Systems, Inc. + 400 13,500
Young & Rubicam, Inc. + 400 10,450
-----------
191,059
-----------
Communications & Media (7.5%)
America Online, Inc. + 100 12,706
Central European Media Enterprises, Ltd. Class A + 900 5,737
Heftel Broadcasting Corp. + 300 12,337
Infoseek Corp.+ 500 14,781
Outdoor Systems, Inc. + 700 15,444
USA Networks, Inc. + 500 11,250
Yahoo!, Inc. + 100 13,084
-----------
85,339
-----------
Computers (9.3%)
BMC Software, Inc. + 500 24,031
Citrix Systems, Inc. + 200 14,175
Compuware Corp. + 200 10,837
Documentum, Inc. + 200 6,800
JDA Software Group, Inc. + 1,400 13,300
New Era of Networks, Inc. + 300 14,775
Transaction Systems Architects, Inc. Class A + 600 21,656
-----------
105,574
-----------
Consumer Durables (0.4%)
Furniture Brands International, Inc. + 200 4,300
-----------
Consumer Non-Durables (3.8%)
Central Garden & Pet Co. + 2,200 43,450
-----------
See Accompanying Notes to Financial Statements.
24
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- POST-VENTURE CAPITAL PORTFOLIO
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCKS (CONT'D)
Consumer Services (2.6%)
DeVRY, Inc. + 600 $ 13,200
Service Experts, Inc. + 100 3,019
Stewart Enterprises, Inc. Class A 600 13,837
--------
30,056
--------
Electronics (11.7%)
Avant! Corp. + 2,400 40,950
Linear Technology Corp. 400 23,850
Maxim Integrated Products, Inc. + 1,000 35,688
Uniphase Corp. + 400 19,800
Vitesse Semiconductor Corp. + 400 12,900
--------
133,188
--------
Energy (1.0%)
Forcenergy Gas Exploration, Inc. + 1,800 10,688
--------
Environmental Services (3.5%)
Republic Services, Inc. Class A + 600 13,125
Waste Management, Inc. 600 27,075
--------
40,200
--------
Financial Services (0.7%)
Nationwide Financial Services, Inc. 200 8,300
--------
Food, Beverages & Tobacco (0.9%)
Suiza Foods Corp. + 300 9,788
--------
Healthcare (2.3%)
NovaCare, Inc. + 300 1,238
Total Renal Care Holdings, Inc. + 1,000 24,500
--------
25,738
--------
Industrial Manufacturing & Processing (3.5%)
Mettler-Toledo International, Inc. + 1,800 39,375
--------
Leisure & Entertainment (5.7%)
Coach USA, Inc. + 2,000 53,625
Premier Parks, Inc. + 500 11,094
--------
64,719
--------
Metals & Mining (2.6%)
Metals USA, Inc. + 3,000 29,813
--------
See Accompanying Notes to Financial Statements.
25
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- POST-VENTURE CAPITAL PORTFOLIO
SCHEDULE OF INVESTMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------ -----
COMMON STOCKS (CONT'D)
Pharmaceuticals (10.2%)
Alkermes, Inc. + 2,000 $ 39,000
ChiRex, Inc. + 2,800 42,700
Medimmune, Inc. + 500 33,625
----------
115,325
----------
Publishing (1.0%)
Scholastic Corp. + 300 11,831
----------
Retail (4.4%)
Barnes & Noble, Inc. + 800 26,100
Stage Stores, Inc. + 900 11,925
Whole Foods Market, Inc. + 300 12,019
----------
50,044
----------
Telecommunications & Equipment (10.2%)
Cisco Systems, Inc. + 200 12,600
Gilat Communications, Ltd. + 2,600 19,013
Intermedia Communications of Florida, Inc. + 500 9,250
McLeodUSA, Inc. Class A + 1,200 43,875
Teledata Communications, Ltd. + 2,000 30,625
----------
115,363
----------
TOTAL INVESTMENTS AT VALUE (100.0%) (Cost $1,296,885*) $1,136,275
==========
- --------------------------------------------------------------------------------
+ Non-income producing security.
* Cost for federal income tax purposes is $1,304,770.
See Accompanying Notes to Financial Statements.
26
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. --
POST-VENTURE CAPITAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments at value (Cost $1,296,885) $1,136,275
Receivable for investment sold 68,915
Other assets 26,742
Dividends, interest, and reclaims receivable 119
----------
TOTAL ASSETS 1,232,051
----------
LIABILITIES
Payable for investments purchased 35,379
Accrued expenses payable 16,511
Other liabilities 9
----------
TOTAL LIABILITIES 51,899
----------
NET ASSETS, applicable to 143,444 shares outstanding $1,180,152
==========
NET ASSET VALUE, offering and redemption price per share
($1,180,152 divided by 143,444) $ 8.23
==========
See Accompanying Notes to Financial Statements.
27
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE SMALL COMPANY SMALL COMPANY POST-VENTURE
PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO CAPITAL PORTFOLIO
----------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 776,352 $ 51,759 $ 340,259 $ 1,826
Interest 261,866 15,099 667,349 6,078
Foreign taxes withheld (9,319) 0 0 (16)
----------- ----------- ------------ ----------
Total investment income 1,028,899 66,858 1,007,608 7,888
----------- ----------- ------------ ----------
EXPENSES:
Investment advisory 382,122 55,629 2,012,526 17,840
Administrative services 107,008 14,104 452,663 4,772
Audit 20,187 13,024 13,226 13,002
Custodian/Sub-custodian 25,315 28,028 53,717 15,204
Directors 1,785 3,425 1,330 2,715
Insurance (31) 89 3,691 21
Interest 100 3,433 667 100
Legal 7,114 4,805 28,597 271
Offering/Organizational costs 27,496 10,318 12,649 14,047
Printing 1,901 5,459 17,235 1,562
Registration 34,217 16,923 21,990 16,590
Transfer agent 1,285 6,666 1,431 1,062
Miscellaneous 625 1,200 (490) 1,026
----------- ----------- ------------ ----------
609,124 163,103 2,619,232 88,212
Less: fees waived, expenses
reimbursed and transfer agent
offsets (227,002) (101,911) (405,454) (67,939)
----------- ----------- ------------ ----------
Total expenses 382,122 61,192 2,213,778 20,273
----------- ----------- ------------ ----------
Net investment income (loss) 646,777 5,666 (1,206,170) (12,385)
----------- ----------- ------------ ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) FROM INVESTMENTS AND FOREIGN
CURRENCY RELATED ITEMS:
Net realized loss from security
and other related transactions (2,230,950) (394,793) (5,366,049) (106,357)
Net realized loss from foreign
currency related items (547) 0 0 0
Net change in unrealized
appreciation (depreciation) from
investments and foreign currency
related items 3,269,632 (105,317) (38,365,672) (160,610)
----------- ----------- ------------ ----------
Net realized and unrealized gain
(loss) from investments and
foreign currency related items 1,038,135 (500,110) (43,731,721) (266,967)
----------- ----------- ------------ ----------
Net increase (decrease) in net
assets resulting from operations $ 1,684,912 $ (494,444) $(44,937,891) $ (279,352)
=========== =========== ============ ==========
</TABLE>
See Accompanying Notes to Financial Statements.
28
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
29
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE PORTFOLIO
--------------------------------------
FOR THE PERIOD
JUNE 30, 1997
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- -------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 646,777 $ 47,540
Net realized gain (loss) from security and other related
transactions (2,230,950) 69,262
Net realized loss from foreign currency related items (547) 0
Net change in unrealized appreciation (depreciation) from
investments and foreign currency related items 3,269,632 (249,969)
-------------- ------------
Net increase (decrease) in net assets resulting from
operations 1,684,912 (133,167)
-------------- ------------
FROM DISTRIBUTIONS:
Dividends from net investment income (122,223) 0
Distributions from realized gains (79,452) 0
-------------- ------------
Net decrease in net assets from distributions (201,675) 0
-------------- ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 58,860,184 16,031,704
Reinvested dividends 201,675 0
Net asset value of shares redeemed (17,199,887) (333,659)
-------------- ------------
Net increase in net assets from capital share
transactions 41,861,972 15,698,045
-------------- ------------
Net increase (decrease) in net assets 43,345,209 15,564,878
NET ASSETS:
Beginning of period 15,564,878 0
-------------- ------------
End of period $ 58,910,087 $ 15,564,878
============== ============
UNDISTRIBUTED NET INVESTMENT INCOME: $ 605,017 $ 60,177
============== ============
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SMALL COMPANY SMALL COMPANY POST-VENTURE
VALUE PORTFOLIO GROWTH PORTFOLIO CAPITAL PORTFOLIO
- ------------------- ----------------------------------- -------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1998
- ------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
$ 5,666 $ (1,206,170) $ (825,692) $ (12,385)
(394,793) (5,366,049) (1,525,965) (106,357)
0 0 0 0
(105,317) (38,365,672) 42,310,135 (160,610)
------------ ------------ ------------ ------------
(494,444) (44,937,891) 39,958,478 (279,352)
------------ ------------ ------------ ------------
0 0 0 0
0 0 0 0
------------ ------------ ------------ ------------
0 0 0 0
------------ ------------ ------------ ------------
12,534,862 44,664,142 109,080,019 1,915,476
0 0 0 0
(10,257,549) (23,423,489) (28,004,573) (456,972)
------------ ------------ ------------ ------------
2,277,313 21,240,653 81,075,446 1,458,504
------------ ------------ ------------ ------------
1,782,869 (23,697,238) 121,033,924 1,179,152
1,000 217,861,007 96,827,083 1,000
------------ ------------ ------------ ------------
$ 1,783,869 $194,163,769 $217,861,007 $ 1,180,152
============ ============ ============ ============
$ 15,999 $ 0 $ 0 $ 1,662
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
31
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997**
PERIOD ENDED: ------- -------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 10.64 $ 10.00
------- -------
INVESTMENT ACTIVITIES:
Net investment income 0.16 0.03
Net gains on investments and foreign currency related
items (both realized and unrealized) 0.86 0.61
------- -------
Total from investment activities 1.02 0.64
------- -------
DISTRIBUTIONS:
From net investment income (0.08) 0.00
From realized capital gains (0.05) 0.00
------- -------
Total distributions (0.13) 0.00
------- -------
Net asset value, end of period $ 11.53 $ 10.64
======= =======
Total return 9.76% 6.40%+
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $58,910 $15,565
Ratio of expenses to average net assets .75%@ .75%*@
Ratio of net income to average net assets 1.27% 1.60%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements .44% 1.67%*
Portfolio turnover rate 70.74% 34.81%+
</TABLE>
- --------------------------------------------------------------------------------
** For the period June 30, 1997 (Commencement of Operations) through October 31,
1997.
+ Non-annualized.
* Annualized.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
See Accompanying Notes to Financial Statements.
32
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
PERIOD ENDED: 1998**
------
PER-SHARE DATA
Net asset value, beginning of period $10.00
------
INVESTMENT ACTIVITIES:
Net investment income 0.03
Net losses on investments (both realized and unrealized) (2.05)
------
Total from investment activities (2.02)
------
Net asset value, end of period $7.98
======
Total return (20.20)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $1,784
Ratio of expenses to average net assets .99%@
Ratio of net income to average net assets .09%
Decrease reflected in above operating expense ratios due
to waivers/reimbursements 1.65%
Portfolio turnover rate 248.40%
- --------------------------------------------------------------------------------
** For the year October 31, 1997 (commencement of operations) through October
31, 1998.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
See Accompanying Notes to Financial Statements.
33
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- SMALL COMPANY GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996**
PERIOD ENDED: -------- -------- -------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 15.89 $ 12.92 $ 10.00
-------- -------- -------
INVESTMENT ACTIVITIES:
Net investment loss (0.08) (0.05) (0.01)
Net gains or losses on investments (both realized and
unrealized) (2.92) 3.02 2.93
-------- -------- -------
Total from investment activities (3.00) 2.97 2.92
-------- -------- -------
Net asset value, end of period $ 12.89 $ 15.89 $ 12.92
======== ======== =======
Total return (18.88)% 22.99% 29.20%+
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $194,164 $217,861 $96,827
-------- -------- -------
Ratio of expenses to average net assets .99%@ .99%@ .99%*@
Ratio of net loss to average net assets (.54)% (.53)% (.18)%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements .18% .20% .69%*
Portfolio turnover rate 75.20% 91.59% 57.38%+
</TABLE>
- --------------------------------------------------------------------------------
** For the period December 29, 1995 (Commencement of Operations) through October
31, 1996.
+ Non-Annualized
* Annualized
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
See Accompanying Notes to Financial Statements.
34
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC. -- POST-VENTURE CAPITAL PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout The Period)
- --------------------------------------------------------------------------------
1998**
PERIOD ENDED: ------
PER-SHARE DATA
Net asset value, beginning of period $10.00
------
INVESTMENT ACTIVITIES:
Net investment loss (0.09)
Net losses on investments (both realized and unrealized) (1.68)
------
Total from investment activities (1.77)
------
Net asset value, end of period $8.23
======
Total return (17.70)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $1,180
Ratio of expenses to average net assets 1.25%@
Ratio of net loss to average net assets (.76)%
Decrease reflected in above operating expense ratios due
to waivers/reimbursements 4.19%
Portfolio turnover rate 98.89%
- --------------------------------------------------------------------------------
** For the year October 31, 1997 (Commencement of Operations) through October
31, 1998.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
See Accompanying Notes to Financial Statements.
35
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Warburg Pincus Institutional Fund, Inc. (the "Fund") is an open-end
management investment company and currently offers seven managed investment
funds (the "Portfolios") of which four are contained in this report: Value
Portfolio, which commenced operations on June 30, 1997, seeks total return by
investing primarily in equity securities of large-sized domestic companies;
Small Company Value Portfolio, which commenced operations on October 31, 1997,
seeks long-term capital appreciation by investing primarily in a portfolio of
equity securities of small capitalization companies; Small Company Growth
Portfolio, which commenced operations on December 29, 1995, seeks capital growth
by investing primarily in equity securities of small-sized domestic companies;
and Post-Venture Capital Portfolio, which commenced operations on October 31,
1997, seeks long-term growth of capital by investing primarily in equity
securities of issuers in their post-venture capital stage of development and
pursues an aggressive investment strategy.
The net asset value of each Portfolio is determined daily as of the close
of regular trading on the New York Stock Exchange. Each Portfolio's investments
are valued at market value, which is generally determined using the last
reported sales price. If no sales are reported, investments are generally valued
at the mean between the last reported bid and asked prices. In the absence of
market quotations, investments are generally valued at fair value as determined
by or under the direction of the Fund's Board. Short-term investments that
mature in 60 days or less are valued on the basis of amortized cost, which
approximates market value.
When a Portfolio writes or purchases a call or a put option, an amount
equal to the premium received or paid by the Portfolio is recorded as a
liability or asset, the value of which is marked-to-market daily to reflect the
current market value of the option. When the option expires, the Portfolio
realizes a gain or loss equal to the amount of the premium received or paid.
When the Portfolio exercises an option or enters into a closing transaction by
purchasing or selling an offsetting option, it realizes a gain or loss without
regard to any unrealized gain or loss on the underlying security. 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.
The books and records of the Portfolios are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate
at the end of the period. Translation gains or losses resulting from changes in
the exchange rate during the reporting period and realized gains and losses on
36
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONT'D)
the settlement of foreign currency transactions are reported in the results of
operations for the current period. The Portfolios do not isolate that portion of
realized gains and losses on investments in equity securities which are due to
changes in the foreign exchange rate from that which are due to changes in
market prices of equity securities. The Portfolios isolate that portion of
realized gains and losses on investments in debt securities which are due to
changes in the foreign exchange rate from that which are due to changes in
market prices of debt securities.
The Portfolios may invest in securities of foreign issuers which involve
certain risks in addition to those inherent in domestic investments. Such risks
generally include, among other things, fluctuations in currency exchange rates,
revaluation of currencies, adverse political and economic developments and the
imposition of other laws and restrictions. Securities of foreign issuers are
often subject to less rigorous regulatory practices and requirements than those
applied in the United States and may also be less liquid (and their prices more
volatile) than securities of comparable U.S. companies. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
many respects.
Security transactions are accounted for on a trade date basis. Interest
income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date. The cost of investments sold is determined by use of the
specific identification method for both financial reporting and income tax
purposes.
Dividends from net investment income and distributions of net realized
capital gains, if any, are declared and paid annually. However, to the extent
that a net realized capital gain can be reduced by a capital loss carryover,
such gain will not be distributed. Income and capital gain distributions are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles.
No provision is made for federal taxes as it is the Fund's intention to
have each Portfolio continue to qualify for and elect the tax treatment
applicable to regulated investment companies under the Internal Revenue Code of
1986, as amended, and make the requisite distributions to its shareholders which
will be sufficient to relieve it from federal income and excise taxes.
Costs incurred in connection with offering of shares have been deferred and
are being amortized over a period of one year from the date each Portfolio
commenced its operations.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, each Portfolio, along with the Warburg Funds, transfers
37
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONT'D)
uninvested cash balances to a pooled cash account, which is invested in
repurchase agreements secured by U.S. government securities. Securities pledged
as collateral for repurchase agreements are held by the Portfolios' custodian
bank until the agreements mature. Each agreement requires that the market value
of the collateral be sufficient to cover payments of interest and principal;
however, in the event of default or bankruptcy by the other party to the
agreement, retention of the collateral may be subject to legal proceedings.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statement and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The Portfolios have an arrangement with their transfer agent whereby
interest earned on uninvested cash balances was used to offset a portion of the
transfer agent expense. For the year ended October 31, 1998, the Portfolios
received credits or reimbursements under this arrangement as follows:
PORTFOLIO AMOUNT
- --------- ------
Value $1,677
Small Company Value 193
Small Company Growth 8,756
Post-Venture Capital 52
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, which is indirectly controlled by Warburg, Pincus & Co., serves as
each Portfolio's investment adviser. For its investment advisory services,
Warburg is entitled to receive the following fees computed daily and payable
monthly based on each Portfolio's average daily net assets:
FUND ANNUAL RATE
- ---- ---------------------------------
Value .75% of average daily net assets
Small Company Value .90% of average daily net assets
Small Company Growth .90% of average daily net assets
Post-Venture Capital 1.10% of average daily net assets
For the year ended October 31, 1998, investment advisory fees, voluntary
waivers and reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
FUND ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- ---- ------------ --------- ------------ --------------
<S> <C> <C> <C> <C>
Value $ 382,122 $(196,905) $ 185,217 $ (553)
Small Company Value 55,629 (52,149) 3,480 (43,388)
Small Company Growth 2,012,526 (396,698) 1,615,828 0
Post-Venture Capital 17,840 (17,840) 0 (48,425)
</TABLE>
38
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR -- (CONT'D)
Counsellors Funds Service, Inc. ("CFSI"), a wholly owned subsidiary of
Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC
Bank Corp. ("PNC"), serve as each Portfolio's co-administrators. For
administrative services, CFSI receives a fee calculated at an annual rate of
.10% of the Portfolios' average daily net assets. For the year ended October 31,
1998, administrative services fees earned by CFSI were as follows:
PORTFOLIO CO-ADMINISTRATION FEE
- --------- ---------------------
Value $ 50,950
Small Company Value 6,181
Small Company Growth 223,614
Post-Venture Capital 1,622
For administrative services for the Small Company Growth Portfolio, the
Value Portfolio, the Post-Venture Capital Portfolio and the Small Company Value
Portfolio, PFPC currently receives a fee calculated at an annual rate of .10% on
each Fund's first $500 million in average daily net assets, .075% on the next $1
billion in average daily net assets and .05% of average daily net assets in
excess of $1.5 billion.
For the year ended October 31, 1998, administrative service fees earned and
voluntarily waived by PFPC were as follows:
<TABLE>
<CAPTION>
NET
PORTFOLIO CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
- --------- --------------------- -------- ---------------------
<S> <C> <C> <C>
Value $ 56,058 $(27,867) $ 28,191
Small Company Value 7,923 (6,181) 1,742
Small Company Growth 229,049 0 229,049
Post-Venture Capital 3,150 (1,622) 1,528
</TABLE>
Counsellors Securities Inc. ("CSI"), also a wholly owned subsidiary of
Warburg, serves as distributor of each Portfolio's shares without compensation.
3. LINE OF CREDIT
The Funds, together with other funds advised by Warburg Pincus Asset
Management, Inc., the Funds' investment adviser ("Warburg") (collectively the
"Warburg Funds"), have established committed and uncommitted lines of credit
facilities with PNC Bank, National Association ("PNC") and an uncommitted line
of credit facility with Deutsche Bank, AG, ("Deutsche Bank") for temporary or
emergency purposes primarily relating to unanticipated fund share redemptions.
Effective December 31, 1997, the terms of the committed line of credit with PNC
was amended. Under the terms of the committed line of credit, the Warburg Funds
with access to the facility pay a commitment fee at a rate of .07% per annum on
the average daily balance of the line of credit, which is undisbursed and
uncanceled during the preceding
39
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
3. LINE OF CREDIT -- (CONT'D)
quarter. In addition, the Warburg Funds will pay interest on borrowings at the
bank's base rate plus .45%. Under the terms of the Uncommitted lines of credit,
the Warburg Funds will pay interest on borrowings at the bank's base rate plus
.55%. Aggregate borrowings for each fund under the committed and uncommitted
lines of credit with PNC may not exceed the lowest of (a) thirty-three and
one-third percent (33 1/3%) of the assets of such fund, for any fund that does
not invest at least sixty-five percent (65%) of its assets in international
equity or fixed income securities (an "International Fund") and twenty-five
percent (25%) of the assets of any fund that is an International Fund or (b) the
maximum amount permitted by such fund's investment policies and restrictions.
Aggregate borrowings for each fund under the uncommitted line of credit facility
with Deutsche Bank may not exceed thirty-three and one-third percent (33 1/3) of
the net assets of such fund. At October 31, 1998 and during the year ended
October 31, 1998, the following fund had borrowings under the line of credit
agreement:
<TABLE>
<CAPTION>
AVERAGE DAILY AVERAGE MAXIMUM DAILY LOAN OUTSTANDING
PORTFOLIO LOAN BALANCE INTEREST RATE % LOAN OUTSTANDING AT 10/31/98
- --------- ------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Small Company Value $48,455 6.62% $1,560,000 $ 0
</TABLE>
4. INVESTMENTS IN SECURITIES
Purchases and sales of investment securities for the year ended October 31,
1998 (excluding short-term investments) were as follows:
PORTFOLIO PURCHASES SALES
- --------- ------------ ------------
Value $ 72,326,899 $ 32,746,508
Small Company Value 15,030,093 12,906,166
Small Company Growth 180,557,946 160,420,878
Post-Venture Capital 2,785,366 1,382,123
At October 31, 1998, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net depreciation from
investments for those securities having an excess of cost over value (based on
cost for Federal income tax purposes) was as follows:
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION)
- --------- ------------ ------------ --------------
Value $ 5,893,766 $ (3,035,383) $ 2,858,383
Small Company Value 92,580 (222,247) (129,667)
Small Company Growth 30,210,130 (23,196,859) 7,013,271
Post-Venture Capital 75,138 (243,633) (168,495)
For the year ended October 31, 1998, purchases of the Small Company Value
Portfolio included $1,362,263 of investment securities delivered from
shareholders in exchange for 130,610 Shares.
40
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
5. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to thirteen billion full and fractional
shares of common stock of separate series having a $.001 par value per share.
Shares of nine series have been classified, four of which constitute the
interests in the Portfolios.
Transactions in shares of each Portfolio were as follows:
<TABLE>
<CAPTION>
VALUE PORTFOLIO
-------------------------------------- SMALL COMPANY
FOR THE PERIOD VALUE PORTFOLIO
JUNE 30, 1997 ----------------
FOR THE (COMMENCEMENT OF FOR THE
YEAR ENDED OPERATIONS) THROUGH YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1998
---------------- ------------------- ----------------
<S> <C> <C> <C>
Shares sold 5,143,230 1,494,737 1,249,442
Shares issued to shareholders on reinvestment of
dividends 18,726 0 0
Shares redeemed (1,515,002) (31,225) (1,026,096)
---------- ---------- ----------
Net increase in shares outstanding 3,646,954 1,463,512 223,346
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
POST-VENTURE
SMALL COMPANY GROWTH CAPITAL
PORTFOLIO PORTFOLIO
----------------------------------- ----------------
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Shares sold 2,901,804 8,212,874 189,315
Shares issued to shareholders on reinvestment of
dividends 0 0 0
Shares redeemed (1,547,500) (1,992,855) (45,971)
---------- ---------- -------
Net increase in shares oustanding 1,354,304 6,220,019 143,344
========== ========== =======
</TABLE>
6. LIABILITIES
At October 31, 1998, the Portfolios had the following liabilities:
<TABLE>
<CAPTION>
SMALL COMPANY SMALL COMPANY POST-VENTURE
VALUE VALUE GROWTH CAPITAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Payable for securities purchased (at value) $328,937 $16,461 $ 353,849 $35,379
Administration services fee payable 4,795 143 14,951 89
Investment advisory fee payable 30,724 0 101,449 0
Payable for fund shares redeemed 0 0 44,857 0
</TABLE>
7. NET ASSETS
At October 31, 1998, capital contributions, undistributed net investment
income, accumulated net realized gain/(loss) from security transactions and
current period distributions have been adjusted for current period permanent
book/tax differences. The Value Portfolio reclassified $(547), from accumulated
net realized gain/(loss) from foreign currency related items to undistributed
net investment income. The Value Portfolio, the Small Company Value Portfolio,
the Small Company Growth Portfolio and the Post-Venture Capital Portfolio
reclassified $20,833, $10,333, $1,206,170 and $14,047,
41
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
7. NET ASSETS -- (CONT'D)
respectively, from accumulated net investment income (loss) to capital
contributions.
Net assets at October 31, 1998, consisted of the following:
<TABLE>
<CAPTION>
SMALL COMPANY SMALL COMPANY POST-VENTURE
VALUE VALUE GROWTH CAPITAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Capital contributed, net $57,526,547 $ 2,267,980 $194,683,859 $ 1,445,457
Undistributed net investment income 605,017 15,999 0 1,662
Accumulated net realized gain (loss) from
security transactions (2,241,140) (394,793) (7,675,077) (106,357)
Net unrealized appreciation (depreciation)
from investments and foreign currency
related items 3,019,663 (105,317) 7,154,987 (160,610)
----------- ----------- ------------ -----------
Net assets $58,910,087 $ 1,783,869 $194,163,769 $ 1,180,152
=========== =========== ============ ===========
</TABLE>
8. CAPITAL LOSS CARRYOVER
At October 31, 1998, capital loss carryovers available to offset possible
future gains of each portfolio were as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS CARROVER
EXPIRING IN
---------------------------------- TOTAL CAPITAL
2004 2005 2006 LOSS CARRYOVER
-------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Value Portfolio $ 0 $ 0 $2,079,786 $2,079,786
Small Company Value Portfolio 0 0 370,443 370,443
Small Company Growth Portfolio 773,601 1,532,594 5,229,027 7,535,222
Post-Venture Capital Portfolio 0 0 98,472 98,472
</TABLE>
42
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
SHAREHOLDER TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Each Fund is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise its shareholders within 60 days of each Fund's fiscal year
end as to the U.S. federal tax status of distributions received by the Fund's
shareholders in respect of such fiscal year. During the fiscal year ended
October 31, 1998, the following dividends and distributions per share were paid
by each of the Funds:
<TABLE>
<CAPTION>
ORDINARY
INCOME MID-TERM LONG-TERM % OF ORDINARY INCOME
PER CAPITAL GAINS CAPITAL GAINS DIVIDEND QUALIFYING FOR
FUND SHARE PER SHARE PER SHARE DIVIDENDS RECEIVED DEDUCTION*
- ---- -------- ------------- ------------- ------------------------------
<S> <C> <C> <C> <C>
1997
-----
PAYMENT DATE 12/19/97 12/19/97 12/19/97
Value Portfolio $ 0.1391 $ 0.0000 $0.0000 31.49
</TABLE>
The Small Company Value Portfolio, the Small Company Growth Portfolio and
the Post-Venture Capital Portfolio did not pay any ordinary income dividends or
capital gain distributions during the current fiscal year. Further, the above
information was provided to calendar year taxpayers via Form 1099-DIV mailed in
January of 1998. Because the fiscal year of the Funds is not a calendar year,
another notification will be sent with respect to calendar year 1998. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their U.S. federal income tax returns, will be made in conjunction
with Form 1099-DIV and will be mailed in January 1999.
- --------------------------------------------------------------------------------
* Available to Corporate Shareholders only.
43
<PAGE>
WARBURG PINCUS INSTITUTIONAL FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
WARBURG, PINCUS INSTITUTIONAL FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments of Warburg, Pincus Institutional Fund, Inc. --
Post-Venture Capital Portfolio, and the statements of net assets of Warburg,
Pincus Institutional Fund, Inc. -- Value Portfolio, Small Company Value
Portfolio and Small Company Growth Portfolio (all portfolios collectively
referred to as the "Fund") as of October 31, 1998 and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of each portfolio of
the Fund at October 31, 1998, the results of their operations for the year then
ended, changes in their net assets for each of the two years (or periods)
presented and their financial highlights for each of the years (or periods)
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities owned at
October 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 11, 1998
44
<PAGE>
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