Warburg Pincus Advisor Funds October 31, 1998
Japan Growth Fund
Japan Small Company Fund
[LOGO]
More complete information about the funds, 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 Advisor Funds,
P.O. Box 9030, Boston, MA 02205-9030.
[LOGO]
<PAGE>
From time to time, the funds' 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.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic and political risks, and differences in
accounting methods.
The views of the funds' management are as of the date of the letters and
portfolio holdings described in this document are as of October 31, 1998; these
views and portfolio holdings may have changed subsequent to these dates. Nothing
in this document is a recommendation to purchase or sell securities.
<PAGE>
WARBURG PINCUS ADVISOR JAPAN GROWTH FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The objective of Warburg Pincus Japan Growth Fund (the "Fund") is long-term
growth of capital. The Fund pursues its objective by investing primarily in
equity securities of Japanese issuers that present attractive opportunities for
growth.
For the 12 months ended October 31, 1998, the Fund had a loss of 11.93%,
vs. losses of 15.51% for the U.S.-dollar-denominated Tokyo Stock Exchange Index
("Topix").
The period was obviously a disappointing one for investors in Japanese
equities. Stocks were weighed down heavily by concerns over Japan's struggling
economy and specific worries over the country's bad-debt-burdened banking
sector. The market was further hurt by doubts over the Japanese government's
ability and/or willingness to take sufficient remedial action to address these
issues. As a result, virtually all broad-market measures posted losses for the
12 months, and individual sectors and companies suffered substantial declines.
Set against this backdrop, Warburg Pincus Japan Growth Fund fell 11.81%
over the 12 months, a disappointing showing in absolute terms though a positive
one vs. the Fund's benchmarks. In terms of general investment strategy, the Fund
maintained fairly significant exposure to the so-called "Nifties" (large-cap,
blue-chip exporters such as Sony, TDK and Canon) throughout the period,
reflecting our view that these companies had relatively attractive
earnings-growth prospects as well as equity valuations. As a rule, this emphasis
served the Fund well, as a fair number of these stocks enjoyed solid performance
vs. the broader market. The Fund maintained limited, highly specific exposure to
companies reliant on the domestic Japanese economy for their revenues (e.g.,
retailers), in deference to the weak economic backdrop and the downward trend in
consumer spending. This, too, generally worked to the Fund's advantage, as
investors took a collectively dim view of these companies and sold shares
heavily, translating into sharp losses for many of these stocks.
One strategy that had a less-positive impact on the Fund's return was our
hedging of most of its yen exposure. The hedge, which we kept in place as a
defensive measure, served the Fund well through much of the period (i.e.,
through mid-August), as the yen fell more or less steadily in value against the
dollar. (The yen traded at approximately 120 per U.S. dollar at the beginning of
November 1997, and fell to a low of 147.25 on August 11, 1998.) From mid-August
onward, however, the yen reversed course and strengthened considerably,
finishing October at approximately 116 per dollar. This strong move in the
currency (which we viewed, and continue to view, as unsustainable) worked
decidedly to the Fund's disadvantage, given our hedging, and took a sizable toll
on its relative performance. Particularly damaging was the month of October,
when the Fund suffered a 5.81% decline, vs. a gain of over 16% for the
dollar-denominated (i.e., unhedged) Topix index.
As we head into 1999, we believe there are grounds for optimism regarding
Japanese equities, the country's current economic and financial malaise
notwithstanding. Japan's authorities have recently enacted substantive measures
1
<PAGE>
WARBURG PINCUS ADVISOR JAPAN GROWTH FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
to address the banking sector's ailments (including a $500 billion bank-
stabilization package) and revitalize the economy (including the creation of a
$195 billion stimulus package). Though these measures are admittedly less than
perfect and have been subject to criticism, they do at a minimum suggest a
fundamental shift in attitude on the part of the Japanese government and a
willingness to begin to take the steps necessary to right the situation. Japan,
it should be noted, remains the world's second-largest economy and has
sufficient resources to solve its economic problems, unlike many of its troubled
Asian neighbors. What has long been missing is the political will. Assuming this
has changed, or is changing, however, Japan's economy and financial sector
should begin to see a gradual return to health in the coming months, which would
undoubtedly create a far more favorable climate for equities.
Concurrently, there are signs of improvement in foreign-investor sentiment
toward the Japanese market (local-investor sentiment remains largely cautious),
witnessed by the growing number of global analysts and strategists who have
increased their recommended allocation to the country. The potential for a
large-scale return of overseas buyers to the market -- many global investors
have been underweighted in Japan for the past several years -- can only have
positive implications for share prices.
Perhaps the most compelling reason for investing in Japan currently,
though, is the sea change occurring in corporate governance. Japanese companies,
which historically had been largely unconcerned with their shareholders, have
begun to take tangible steps to increase shareholder value -- restructuring,
focusing on returns on equity, buying back shares, etc. -- and the trend is
accelerating. This is creating, and will no doubt continue to create, very
attractive investment opportunities for those who can pick the right companies
and are willing to set their sights beyond the immediate term.
Given this combination of factors, and the considerable amount of value to
be found currently in the market, we remain positive in our outlook on Japan,
and particularly positive on the Fund's prospects. As the Fund's since-inception
performance vs. its benchmarks and its competitive universe suggests, it is
possible to generate relatively strong performance in Japan via good security
selection, and we are encouraged by the results of our efforts toward that end
thus far. We will continue to strive to identify the best opportunities in Japan
going forward, in what we believe has promise to be a far more favorable
investment environment.
P. Nicholas Edwards
Portfolio Manager
International investing entails special risk considerations, including
currency fluctuations, lower liquidity, economic and political risks, and
differences in accounting methods. There are also risks associated with
investing in Japan, including the risk of investing in a single-country fund.
2
<PAGE>
WARBURG PINCUS ADVISOR JAPAN GROWTH FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN ADVISOR SHARES OF WARBURG PINCUS ADVISOR
JAPAN GROWTH FUND SINCE INCEPTION AS OF OCTOBER 31, 1998
The graph below illustrates a hypothetical investment of $10,000 in Advisor
Shares of Warburg Pincus Advisor Japan Growth Fund (the "Fund") from December
29, 1995 (inception) to October 31, 1998, compared to the Tokyo Stock Exchange
Index ("Topix")* for the same period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
(US$) Japan Growth Topix
- ------ ------------ --------
Dec-95 10000 10000
Jan-96 9880 9864.7
Feb-96 9650 9701.14
Mar-96 10070 10020.89
Apr-96 10770 10688.38
May-96 10640 10164.76
Jun-96 11060 10208.27
Jul-96 10460 9706.84
Aug-96 10170 9292.84
Sep-96 10350 9554.8
Oct-96 9830 8913.58
Nov-96 9840 8979.54
Dec-96 9420 8291.71
Jan-97 9180 7402.59
Feb-97 9300 7549.23
Mar-97 9260 7272.33
Apr-97 9640 7450.94
May-97 10820 8377.39
Jun-97 11370 8920.49
Jul-97 12100 8572.95
Aug-97 10930 7809.01
Sep-97 10970 7569.67
Oct-97 9890 6995.28
Nov-97 10040.33 6468.54
Dec-97 10287.32 5962.7
Jan-98 11088.7 6600.59
Feb-98 11056.55 6655.5
Mar-98 10850.89 6207.06
Apr-98 11164.48 6125.43
May-98 11012.65 5838.15
Jun-98 11023.66 5875.92
Jul-98 11901.14 5798.24
Aug-98 10860.98 5202.18
Sep-98 10005.14 5093.46
Oct.98 9430.84 5909.94
Average Annual
Total Returns
for periods ended
10/31/98
(Advisor Shares)
1 year
-11.93%
Since Inception
(12/29/95)
-4.74%
FUND
----
1 Year Total Return (10/30/97 to 10/30/98).................. -15.77%
Average Annual Total Return Since Inception (12/29/95 to
10/30/98)................................................. -2.82%
- ------------------
* The Topix is an unmanaged capitalization-weighted index (with no defined
investment objective) designed to reflect the general movement of the
Japanese stock market. The index consists of all shares listed on the First
Section of the Tokyo Stock Exchange, which is generally reserved for
Japan's larger companies.
3
<PAGE>
WARBURG PINCUS ADVISOR JAPAN SMALL COMPANY FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998
- --------------------------------------------------------------------------------
December 11, 1998
Dear Shareholder:
The objective of Warburg Pincus Japan Small Company Fund (the "Fund") is
long-term capital appreciation. The Fund pursues its objective by investing in a
portfolio of equity securities of small-sized companies located in or conducting
a majority of their business in Japan.
For the 12 months ended October 31, 1998, the Fund had a loss of 10.63%,
vs. losses of 27.55% and 25.20% for the yen- and dollar-denominated JASDAQ
indexes, respectively, and a loss of 23.54% for the Morgan Stanley Japan Small
Company Index.
The reporting period was a difficult one for Japanese equities, and
smaller-company stocks in particular. Sentiment toward the market as a whole
was generally poor throughout, reflecting growing investor concerns over the
economy and specifically the troubled financial sector. Smaller-company stocks
suffered from these and additional worries, as investors fretted over the
group's vulnerability to the weakened economy (most of Japan's smaller companies
are domestically oriented businesses) and the damaging effects of a growing
credit crunch, which continued to weigh disproportionately on smaller firms. The
resultant selling pressure left most small-cap benchmarks with losses exceeding
20% for the period, vs. somewhat more modest losses for Japan's larger-cap
issues.
Warburg Pincus Japan Small Company Fund (formerly Warburg Pincus Japan OTC
Fund) was unable to surmount this poor market environment, and finished the
period with a 10.61% loss. Nonetheless, the Fund fared considerably better than
its benchmarks. In terms of stock selection, the Fund maintained sizable
exposure to the technology area (encompassing a range of electronics and
computer-related businesses) throughout the 12 months, reflecting our view that
there was considerable value to be found there. This exposure served the Fund
well, in general, as a good percentage of these issues generated relatively
strong performance. The Fund also maintained a fair amount of exposure to the
(non-bank) financial-services sector, and our emphasis here also netted
relatively favorable results. The one noteworthy underweighting for the Fund
through the period was the retail sector, which we largely avoided due to
concerns over these companies' earnings prospects. This, too, proved helpful in
terms of relative performance, as many of these stocks suffered sharp declines.
Our currency-hedging activities -- we hedged most of the Fund's yen
exposure through the period as a defensive measure -- took a toll on the Fund's
results, as the yen ultimately strengthened against the dollar, albeit slightly.
(The yen began the period at a level of approximately 120 to the U.S. dollar. It
proceeded to weaken to 147.25 per dollar in August, but subsequently rose in
value, closing at approximately 116 on October 31, 1998.) October, which saw the
yen rally sharply, was a particularly difficult month for the Fund in relative
terms, as the Fund suffered a 1.94% decline vs. a gain of over 11% for the
dollar-denominated (i.e., unhedged) JASDAQ index.
4
<PAGE>
WARBURG PINCUS ADVISOR JAPAN SMALL COMPANY FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
Though Japan's smaller-company stocks proved a disappointing investment
through the period, and in fact have had poor results for the past several
years, we believe there is potential for improved performance going forward. The
Japanese government has recently taken significant actions to spur the economy
(including the creation of a $195 billion stimulus package) and stabilize the
ailing financial sector (including a $500 billion bank-stabilization package).
Assuming these measures are even partially effective, Japan's economy should
gradually begin to recover from its current doldrums. This would improve the
earnings prospects for Japanese businesses broadly but could have a material
impact on smaller companies, since domestic demand, the main source of smaller
companies' revenues, would likely strengthen and the financing shortage facing
these companies would simultaneously ease. Thus, with any luck, the worst of the
earnings news on Japan's small companies could soon be behind them.
There are also nascent signs of an improvement in investor sentiment toward
Japan, especially from foreign investors. (Japanese investors are generally
still cautious toward equity investments.) Indeed, even prior to the
announcement of the government's recent stimulus measures, a number of fairly
prominent global investment strategists had raised their target allocations to
the country. It seems safe to assume that if evidence of an economic recovery
begins to materialize, the trend could continue. Enhanced buying interest would
support share prices generally but could help small-cap stocks in particular,
given the relatively small size of that market segment. It is also worth noting
here that several strategists have begun to recommend the small-cap sector
specifically as a potentially attractive long-term investment, citing the
extremely depressed level of stock prices and the growth opportunities afforded
many of these companies by Japan's ongoing economic-deregulation efforts.
Given these developments, the foundation for a recovery in these stocks
would appear to be in place, hence we remain optimistic, especially over the
longer term. In the near term, however, there remains a fair amount of
uncertainty, and investors would be well served to bear that in mind before
committing new assets. Nonetheless, for those with the appropriate tolerance for
risk, and a sufficiently long-term outlook, we believe Japan's smaller companies
are an investment class well worth consideration. Within that context, we
believe the Fund is well positioned to benefit from a recovery in these
securities, and we will continue to strive to identify those companies with the
best prospects for appreciation going forward.
P. Nicholas Edwards
Portfolio Manager
International investing entails special risk considerations, including
currency fluctuations, lower liquidity, economic and political risks, and
differences in accounting methods. There are also risks associated with
investing in Japan, including the risk of investing in a single-country fund.
5
<PAGE>
WARBURG PINCUS ADVISOR JAPAN SMALL COMPANY FUND
ANNUAL INVESTMENT ADVISER'S REPORT -- OCTOBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN ADVISOR SHARES OF WARBURG PINCUS ADVISOR
JAPAN SMALL COMPANY FUND SINCE INCEPTION
AS OF OCTOBER 31, 1998
The graph below illustrates a hypothetical investment of $10,000 in Advisor
Shares of Warburg Pincus Advisor Japan Small Company Fund (the "Fund") from
September 30, 1994 (inception) to October 31, 1998, compared to the JASDAQ
Over-The-Counter Composite Index ("JASDAQ Index")* and the Morgan Stanley Japan
Small Company Index ("MSCI")** for the same time period.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Fund JASDAQ (US$) JASDAQ (Yen) MSCI
-------- ------------ ------------ --------
10000 10000 10000 10000
Oct-94 9850 9698.9 9901 10163.6
Nov-94 9150 9124.92 9126.64 9334.35
Dec-94 9630 9548.5 9472.36 9621.94
Jan-95 9000 8666.98 8669.48 9275.36
Feb-95 8610 7845.09 8030.11 8544.65
Mar-95 7860 7349.44 8419.25 8988.46
Apr-95 7840 7304.02 8603.88 9217.03
May-95 7310 6987.24 8170.25 8270.44
Jun-95 7290 6819.48 7949.73 7781.08
Jul-95 8280 7440.73 8364.87 8557.4
Aug-95 9000 7996.11 8079.96 8590.26
Sep-95 9080 8300.44 8327.77 8453.5
Oct-95 9080 8192.29 7930.04 8127.03
Nov-95 9180 8085.71 7881.82 8603.68
Dec-95 9510.28 8493.63 8149.49 9014.59
Jan-96 9645.55 8706.99 8060.33 9197.59
Feb-96 9187.73 8550.18 8046.79 8995.15
Mar-96 9333.4 9075.76 8411.15 9249.89
Apr-96 9812.03 9615.4 9085.3 10085.16
May-96 9666.36 9593.57 8783.04 9615.19
Jun-96 10197.02 9836.77 8875.96 9556.15
Jul-96 9707.98 9270.47 8597.17 8799.3
Aug-96 9406.23 8846.99 8063.11 8479.54
Sep-96 9291.78 8746.67 7773.16 8485.56
Oct-96 8792.33 8211.72 7146.1 7884.87
Nov-96 8407.34 7737.91 6729.48 7676.39
Dec-96 8240.86 7386.6 6298.12 6703.71
Jan-97 7533.31 6930.11 5650.05 6019.94
Feb-97 7283.59 6768.57 5549.7 5974.36
Mar-97 7137.92 6454.85 5159.39 5444.08
Apr-97 7408.45 6602.34 5148.3 5330.79
May-97 8063.97 6872.18 5836.16 6351.74
Jun-97 8188.83 7032.23 6081.57 6499.86
Jul-97 8365.72 6484.7 5421.05 5804.05
Aug-97 7450.07 5766.13 4744.4 5111.57
Sep-97 7127.51 5270.36 4320.58 4264.23
Oct-97 6628.06 5146.45 4235.12 4392.28
Nov-97 6232.37 4487.71 3480.42 3601.89
Dec-97 6082.79 4343.2 3305.7 2979.77
Jan-98 6667.96 5002.2 3904.37 3834.49
Feb-98 6529.93 4920.66 3854.82 4124.07
Mar-98 6210.62 4639.84 3443.36 3718.51
Apr-98 6572.07 4600.68 3445.84 3571.03
May-98 6582.59 4606.94 3290.95 3429.58
Jun-98 6720.82 4457.86 3179.38 3476.5
Jul-98 7252.44 4686.95 3212.86 3488.56
Aug-98 6582.32 4183.1 2932.38 3128.58
Sep-98 6039.93 3919.48 2849.33 2924.78
Oct-98 5922.76 3729.62 3167.86 3358.5
Average Annual
Total Returns
for periods ended
10/31/98
(Advisor Shares)
1 year
-10.63%
Since Inception
(9/30/94)
-12.02%
FUND
----
1 Year Total Return (10/30/97 to 10/30/98).................. -15.25%
Average Annual Total Return Since Inception (9/30/94 to
10/30/98)................................................. -11.82%
- ------------------
* The JASDAQ Over-The-Counter Composite Index is an unmanaged index (with no
defined investment objective) comprised of stocks traded over-the-counter
in Japan. ** The Morgan Stanley Japan Small Company Index is composed of
small-cap Japanese stocks.
6
<PAGE>
WARBURG PINCUS JAPAN GROWTH FUND
STATEMENT OF NET ASSETS
October 31, 1998
- -------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----------
COMMON STOCKS (97.5%)
Computers (13.0%)
Argotechnos 21 Corp. 12,000 $ 148,292
Fujitsu Support & Service, Inc. 35,000 1,757,111
Nidec Corp. 23,900 2,176,148
TDK Corp. 18,000 1,186,339
-----------
5,267,890
-----------
Consumer Durables (5.0%)
Naigai Co., Ltd. 165,000 152,927
Sony Corp. 14,800 939,872
Tenma Corp. 47,000 435,609
Wacoal Corp. 44,000 501,448
-----------
2,029,856
-----------
Electric Components (15.2%)
Copal Co., Ltd. 30,000 123,062
Copal Electronics Co., Ltd. 20,000 113,279
Fujitsu, Ltd. 100,000 1,064,135
Kyushu Matsushita Electric Co., Ltd. 50,000 459,123
Minebea Co., Ltd. 3,000 28,191
Nemic-Lambda K.K. 50,900 1,013,400
Nichicon Corp. 46,000 499,371
Rohm Co., Ltd. 13,000 1,149,095
Tokyo Seimitsu Co., Ltd. 54,000 1,691,460
-----------
6,141,116
-----------
Electronics (15.5%)
Advantest Corp. 19,400 1,223,670
Aiwa Co., Ltd. 35,000 865,039
Digital Electronics Corp. 36,000 639,511
Mabuchi Motor Co., Ltd. 20,000 1,304,424
Megachips Corp. 40,000 1,132,789
Tokyo Electron, Ltd. 35,000 1,138,367
-----------
6,303,800
-----------
Energy (0.6%)
Shinmei Electric Co.# 18,000 237,886
-----------
Engineering & Construction (2.1%)
Mitsui Engineering & Shipbuilding Co., Ltd. 1,000,000 866,755
-----------
See Accompanying Notes to Financial Statements.
7
<PAGE>
WARBURG PINCUS JAPAN GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- -------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
-------- -----------
COMMON STOCKS (CONT'D)
Financial Services (12.1%)
Credit Saison Co., Ltd. 44,000 $ 1,036,502
Kokusai Securities Co., Ltd. 70,000 600,722
Nomura Securities Co., Ltd. 110,000 830,712
Orix Corp. 17,000 1,218,177
Shohkoh Fund & Co., Ltd. 4,000 1,216,890
-----------
4,903,003
-----------
Food, Beverages & Tobacco (1.6%)
Pokka Corp. 100,000 648,779
-----------
Manufacturing (1.9%)
Riso Kagaju Corp. 14,000 786,945
-----------
Medical Equipment (8.0%)
Hoya Corp. 52,000 2,226,789
Kawasumi Laboratories 60,000 1,004,063
-----------
3,230,852
-----------
Pharmaceuticals (2.9%)
Takeda Chemical Industries 36,000 1,170,892
-----------
Real Estate (0.6%)
Hankyu Realty Co., Ltd. 62,000 255,393
-----------
Retail (3.1%)
Don Quijote Co., Ltd. 6,400 466,846
Shimamura Co., Ltd. 20,000 792,952
-----------
1,259,798
-----------
Telecommunications & Equipment (10.1%)
Matsushita Electric Industrial Group 25,000 1,156,389
Moshi Moshi Hotline, Inc. 15,000 553,522
Nippon Television Network Corp. 3,600 1,123,006
NTT Mobile Communications Network, Inc. 35 1,264,519
-----------
4,097,436
-----------
Transportation (5.8%)
Fuji Heavy Industries, Ltd. 140,000 696,837
Honda Motor Co., Ltd. 40,000 1,201,443
Nifco, Inc. 60,000 440,243
-----------
2,338,523
-----------
TOTAL COMMON STOCKS
(Cost $37,075,504) 39,538,924
-----------
See Accompanying Notes to Financial Statements.
8
<PAGE>
WARBURG PINCUS JAPAN GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----------
<S> <C> <C>
SHORT-TERM INVESTMENT (5.1%)
Repurchase agreement with State Street Bank & Trust Co.
dated 10/30/98 at 5.400% to be repurchased at $2,046,921 on
11/02/98. (Collaterlized 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 $2,086,931) (Cost $2,046,000) $2,046 $ 2,046,000
-----------
TOTAL INVESTMENTS AT VALUE (102.6%)
(Cost $39,121,504*) 41,584,924
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS (2.6%) (1,044,731)
-----------
NET ASSETS (100.0%) (applicable to 4,715,148 Common Shares
and 2,471 Advisor Shares) $40,540,193
===========
NET ASSET VALUE, offering and redemption price per Common
Share ($40,518,670 divided by 4,715,148) $ 8.59
===========
NET ASSET VALUE, offering and redemption price per Advisor
Share ($21,523 divided by 2,471) $ 8.71
===========
</TABLE>
- --------------------------------------------------------------------------------
# Illiquid security.
* Cost for federal income tax purposes is $39,424,095.
See Accompanying Notes to Financial Statements.
9
<PAGE>
WARBURG PINCUS JAPAN SMALL COMPANY FUND
STATEMENT OF NET ASSETS
October 31, 1998
- -------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----------
COMMON STOCKS (113.2%)
Chemicals (3.6%)
N.E. Chemcat# 28,000 $ 178,294
Takeda Chemical Industries 36,000 1,170,892
-----------
1,349,186
-----------
Communications & Media (3.7%)
Hikari Tsushin, Inc. 36,850 1,391,443
-----------
Computers (10.0%)
Argotechnos 21Corp. 12,000 148,292
Fujitsu Support & Service, Inc. 35,000 1,757,110
Nidec Corp. 20,000 1,821,044
-----------
3,726,446
-----------
Consumer Non-Durables (1.7%)
Naigai Co., Ltd. 200,000 185,366
Tenma Corp. 48,000 444,877
-----------
630,243
-----------
Electric Components (8.4%)
Copal Co., Ltd. 30,000 123,062
Copal Electronics Co., Ltd. 20,000 113,279
Nemic-Lambda K.K. 50,900 1,013,400
Tokyo Seimitsu Co., Ltd. 60,000 1,879,400
-----------
3,129,141
-----------
Electronics (14.8%)
Daitec Co., Ltd. 30,000 532,926
Digital Electronics Corp. 34,000 603,983
I.O. Data Device, Inc. 112,900 1,307,985
Mabuchi Motor Co., Ltd. 20,000 1,304,424
Megachips Corp. 40,000 1,132,789
Shinkawa, Ltd. 63,700 623,189
-----------
5,505,296
-----------
Financial Services (6.5%)
Shohkoh Fund & Co., Ltd. 8,000 2,433,780
-----------
Food, Beverages & Tobacco (1.7%)
Pokka Corp. 100,000 648,779
-----------
Leisure & Entertainment (3.9%)
People Co., Ltd. 50,000 1,458,895
-----------
See Accompanying Notes to Financial Statements.
10
<PAGE>
WARBURG PINCUS JAPAN SMALL COMPANY FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
NUMBER
OF
SHARES VALUE
------- -----------
COMMON STOCKS (CONT'D)
Manufacturing (18.0%)
Arrk Corp. 35,000 $ 165,198
Disco Corp. 60,000 1,699,184
Fujimi, Inc. 31,000 1,037,532
NBC Industries Co., Ltd. 50,000 291,779
Nissei ASB Machine Co. 135,000 833,566
Nitto Kohki Co., Ltd. 73,300 539,717
Riso Kaguku Corp. 16,000 899,366
Shinwa Co., Ltd. 26,900 415,528
Tamron 100,000 489,159
UHT Corp. 50,000 356,142
-----------
6,727,171
-----------
Medical Equipment (7.2%)
Hoya Corp. 33,000 1,413,154
Kawasumi Laboratories 76,000 1,271,813
-----------
2,684,967
-----------
Restaurants/Food Service (2.8%)
Watami Food Service Co., Ltd. 40,000 1,033,241
-----------
Retail (12.1%)
Don Quijote Co., Ltd. 15,700 1,145,233
Naigai Clothes 42,000 277,533
Ryohin Keikaku Co., Ltd. 14,000 1,513,818
Shimamura Co., Ltd. 40,000 1,585,905
-----------
4,522,489
-----------
Retail Merchandising (1.0%)
Blue Grass Co., Ltd. 100,000 377,596
-----------
Scientific Instruments (4.4%)
GL Sciences, Inc.# 100,000 1,621,948
-----------
Telecommunications & Equipment (13.4%)
Bellsystem 24, Inc. 11,000 2,114,540
Matsushita Communication Industrial Co., Ltd. 35,000 1,618,945
NTT Mobile Communications Network, Inc. 35 1,264,519
-----------
4,998,004
-----------
TOTAL COMMON STOCKS
(Cost $42,700,813) 42,238,625
-----------
See Accompanying Notes to Financial Statements.
11
<PAGE>
WARBURG PINCUS JAPAN SMALL COMPANY FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- ----------
<S> <C> <C>
SHORT-TERM INVESTMENT (1.8%)
Repurchase agreement with State Street Bank & Trust Co.
dated 10/30/98 at 5.400% to be repurchased at $658,296 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 $671,164.) (Cost $658,000) $658 $ 658,000
-----------
TOTAL INVESTMENTS AT VALUE (115.0%)
(Cost $43,358,813*) 42,896,625
LIABILITIES IN EXCESS OF OTHER ASSETS (15.0%) (5,596,936)
-----------
NET ASSETS (100.0%) (applicable to 6,701,523 Common Shares
and 121 Advisor Shares) $37,299,689
===========
NET ASSET VALUE, offering and redemption price per Common
Share ($37,299,015 divided by 6,701,523) $ 5.57
===========
NET ASSET VALUE, offering and redemption price per Advisor
Share ($674 divided by 121) $ 5.57
===========
</TABLE>
- --------------------------------------------------------------------------------
# Illiquid security.
* Also cost for federal income tax purposes.
See Accompanying Notes to Financial Statements.
12
<PAGE>
WARBURG PINCUS JAPAN FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPAN GROWTH JAPAN SMALL
FUND COMPANY FUND
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 212,551 $ 282,124
Interest 167,852 144,189
Foreign taxes withheld (31,883) (42,319)
----------- ------------
Total investment income 348,520 383,994
----------- ------------
EXPENSES:
Investment advisory 438,025 526,522
Administrative services 84,976 100,155
Audit 12,543 15,175
Custodian/Sub-custodian 16,226 19,723
Directors 10,773 11,781
Interest 6,391 9,188
Legal 20,558 63,336
Offering/Organizational costs 4,331 42,450
Registration 54,033 60,350
Shareholder servicing/distribution 87,669 105,308
Transfer agent 50,490 114,548
Miscellaneous 12,689 9,780
----------- ------------
798,704 1,078,316
Less: fees waived, expenses reimbursed and
transfer agent offsets (185,405) (341,181)
----------- ------------
Total expenses 613,299 737,135
----------- ------------
Net investment loss (264,779) (353,141)
----------- ------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENTS AND
FOREIGN CURRENCY RELATED ITEMS:
Net realized loss from security and other related
transactions (7,102,916) (12,646,910)
Net realized gain from foreign currency related items 5,755,149 6,159,309
Net change in unrealized appreciation (depreciation)
from investments and foreign currency related items (1,826,387) 3,170,952
----------- ------------
Net realized and unrealized loss from investments and
foreign currency related items (3,174,154) (3,316,649)
----------- ------------
Net decrease in net assets resulting from operations $(3,438,933) $ (3,669,790)
=========== ============
</TABLE>
See Accompanying Notes to Financial Statements.
13
<PAGE>
WARBURG PINCUS JAPAN FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPAN GROWTH FUND JAPAN SMALL COMPANY FUND
--------------------------- ---------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment loss $ (264,779) $ (214,098) $ (353,141) $ (816,043)
Net realized loss from security and other
related transactions (7,102,916) (3,584,648) (12,646,910) (29,824,743)
Net realized gain from foreign currency
related items 5,755,149 2,225,388 6,159,309 6,929,625
Net change in unrealized appreciation
(depreciation) from investments and foreign
currency related items (1,826,387) 643,764 3,170,952 4,776,152
------------ ------------ ------------ ------------
Net decrease in net assets resulting from
operations (3,438,933) (929,594) (3,669,790) (18,935,009)
------------ ------------ ------------ ------------
FROM DISTRIBUTIONS:
Distributions in excess of net investment
income
Common Shares 0 (394,010) 0 0
Distributions from realized gains
Common Shares 0 0 (510,478) (1,134,461)
Advisor Shares 0 0 (38) 0
Distributions in excess of realized gains
Common Shares 0 (91,320) 0 0
Return of Capital
Common Shares 0 0 (316,158) 0
Advisor Shares 0 0 (23) 0
------------ ------------ ------------ ------------
Net decrease in net assets from distributions 0 (485,330) (826,697) (1,134,461)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 112,575,483 43,567,995 104,180,700 83,695,394
Reinvested dividends 0 436,422 764,550 1,057,739
Net asset value of shares redeemed (93,568,000) (37,776,299) (104,779,714) (177,514,277)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
capital share transactions 19,007,483 6,228,118 165,536 (92,761,144)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets 15,568,550 4,813,194 (4,330,951) (112,830,614)
NET ASSETS:
Beginning of period 24,971,643 20,158,449 41,630,640 154,461,254
------------ ------------ ------------ ------------
End of period $ 40,540,193 $ 24,971,643 $ 37,299,689 $ 41,630,640
============ ============ ============ ============
UNDISTRIBUTED NET INVESTMENT INCOME: $ 0 $ 0 $ 0 $ 510,516
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
14
<PAGE>
WARBURG PINCUS JAPAN GROWTH FUND
FINANCIAL HIGHLIGHTS
(For an Advisor Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996**
PERIOD ENDED: ------ ------- ------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.89 $ 9.83 $10.00
------ ------- ------
INVESTMENT ACTIVITIES:
Net Investment income or loss (0.11)(a) 0.05 (0.09)
Net gains or losses on investments and foreign currency
related items (both realized and unrealized) (1.07) 0.01 (0.08)
------ ------- ------
Total from Investment activities (1.18) 0.06 (0.17)
------ ------- ------
NET ASSET VALUE, END OF PERIOD: $ 8.71 $ 9.89 $ 9.83
====== ======= ======
Total return (11.93)% 0.61% (1.70)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $ 22 $ 17 $ 1
Ratio of expenses to average net assets 2.00%@ 2.00%@ 2.00%*@
Ratio of net loss to average net assets (1.11)% (1.42)% (1.08)%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements .58% 7.25% 3.43%*
Portfolio turnover rate 75.82% 93.84% 51.72%+
</TABLE>
- --------------------------------------------------------------------------------
** For the period December 29, 1995 (commencement of operations) through
October 31, 1996.
(a) Per share information is calculated using the average shares outstanding
method.
@ Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the Advisor
Shares' expense ratio.
+ Non annualized.
* Annualized.
See Accompanying Notes to Financial Statements.
15
<PAGE>
WARBURG PINCUS JAPAN SMALL COMPANY FUND
FINANCIAL HIGHLIGHTS
(For an Advisor Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994**
PERIOD ENDED: ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.37 $ 8.45 $ 9.08 $ 9.85 $10.00
------- ------- ------- ------ ------
INVESTMENT ACTIVITIES:
Net investment income or (loss) (0.62) 0.35 (0.13) (0.02) 0.00
Net losses on investments and foreign
currency related items
(both realized and unrealized) (0.06) (2.43) (0.14) (0.75) (0.15)
------- ------- ------- ------ ------
Total from investment activities (0.68) (2.08) (0.27) (0.77) (0.15)
------- ------- ------- ------ ------
DISTRIBUTIONS:
From net investment income 0.00 0.00 (0.36) 0.00 0.00
From realized capital gains (0.07) 0.00 0.00 0.00 0.00
Return of capital (0.05) 0.00 0.00 0.00 0.00
------- ------- ------- ------ ------
Total from distributions (0.12) 0.00 (0.36) 0.00 0.00
------- ------- ------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 5.57 $ 6.37 $ 8.45 $ 9.08 $ 9.85
======= ======= ======= ====== ======
Total return (10.63)% (24.62)% (3.17)% (7.82)% (1.50)%+
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $ 1 $ 3 $ 1 $ 1 $ 1
Ratio of expenses to average net assets 2.01%@ 2.00%@ 2.01%@ 1.31% 1.18%*
Net investment income or (loss) (1.18)% (1.10)% (1.57)% (.19)% .12%*
Decrease reflected in above operating expense
ratios due to waivers/reimbursements 22.81% 6.69% .28% 1.83% 4.74%*
Portfolio turnover rate 112.68% 100.60% 95.23% 82.98% .00%
</TABLE>
- --------------------------------------------------------------------------------
** For the period September 30, 1994 (commencement of operations) through
October 31, 1994.
@ Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements resulted in a reduction to
the Advisor Shares' expenses by .01%, .00% and .01%, for the years ended
October 31, 1998, 1997 and 1996, respectively. The Advisor Shares'
operating expense ratio after reflecting these arrangements were 2.00%,
2.00% and 2.00% for the years ended October 31, 1998, 1997 and 1996,
respectively.
+ Non annualized.
* Annualized.
See Accompanying Notes to Financial Statements.
16
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Japan Funds (the "Funds") are comprised of the Warburg
Pincus Japan Growth Fund (the "Japan Growth Fund") and Warburg Pincus Japan
Small Company Fund (the "Japan Small Company Fund") which are registered under
the 1940 Act as non-diversified, open-end management investment companies.
Investment objectives for each Fund are as follows: the Japan Growth Fund
seeks long-term growth of capital and the Japan Small Company Fund seeks
long-term capital appreciation.
Both Funds offer two classes of shares, one class being referred to as
Common Shares and one class being referred to as Advisor Shares. Common and
Advisor Shares in each Fund represent an equal pro rata interest in such Fund,
except that they bear different expenses which reflect the difference in the
range of services provided to them. Common Shares for both Funds bear expenses
paid pursuant to a shareholder servicing and distribution plan adopted by each
Fund at an annual rate not to exceed .25% of the average daily net asset value
of each Fund's outstanding Common Shares. Advisor Shares for each Fund bear
expenses paid pursuant to a distribution plan adopted by each Fund at an annual
rate not to exceed .75% of the average daily net asset value of each Fund's
outstanding Advisor Shares. Advisor Shares are currently bearing expenses of
.50% of average daily net assets. Effective October 30, 1998, the Japan Small
Company Fund ceased offering its Advisor shares.
The net asset value of each Fund is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Fund'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 price. 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.
The books and records of the Funds 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
17
<PAGE>
WARBURG PINCUS JAPAN FUNDS
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 Funds 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 Funds 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.
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. Income, expenses (excluding class-specific expenses,
principally distribution, shareholder servicing fees and transfer agent fees)
and realized/unrealized gains/losses are allocated proportionately to each class
of shares based upon the relative net asset value of outstanding shares.
Effective November 1, 1998, class specific expenses no longer include transfer
agent fees; accordingly these fees will be allocated proportionately based upon
the relative net asset value of outstanding shares. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and income tax purposes.
The Funds may invest in securities of foreign countries and governments
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, future 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.
Dividends from net investment income and distributions of net realized
capital gains, if any, are declared and paid annually for all Funds. 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 each Fund's intention to
continue to qualify for and elect the tax treatment applicable to regulated
18
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONT'D)
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 organization and offering of shares have
been deferred and are being amortized over a period of five years and one year,
respectively, from the date each Fund commenced its operations.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, each Fund, along with other Warburg Funds, transfers 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 Funds' 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 statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The Funds 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 Funds received credits
or reimbursements under this arrangement as follows:
FUND AMOUNT
- ---- ------
Japan Growth $1,248
Japan Small Company 1,548
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, which is indirectly controlled by Warburg, Pincus & Co., serves as
each Fund's investment adviser. For its investment advisory services, Warburg
receives the following fees based on each Fund's average daily net assets:
FUND ANNUAL RATE
- ---- -----------
Japan Growth 1.25% of average daily net assets
Japan Small Company 1.25% of average daily net assets
19
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR -- (CONT'D)
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>
Japan Growth $438,025 $ (73,158) $364,867 $(68,959)
Japan Small Company 526,522 (288,783) 237,739 (304)
</TABLE>
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 Fund's co-administrators. For its
administrative services, CFSI currently receives a fee calculated at an annual
rate of .10% of each Fund's average daily net assets. For the year ended October
31, 1998, administrative services fees earned by CFSI were as follows:
FUND CO-ADMINISTRATION FEE
- ---- ---------------------
Japan Growth $35,042
Japan Small Company 42,122
For administrative services, PFPC receives a fee calculated at an annual
rate of .12% on each Fund's first $250 million in average daily net assets, .10%
on the next $250 million in average daily net assets, .08% on the next $250
million in average daily net assets, and .05% of the average daily net assets
over $750 million. For the year ended October 31, 1998, administrative service
fees earned and voluntarily waived by PFPC (including out of pocket) were as
follows:
NET
FUND CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
- ---- --------------------- -------- ---------------------
Japan Growth $ 49,934 $(42,040) $7,894
Japan Small Company 58,033 (50,546) 7,487
20
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR -- (CONT'D)
Counsellors Securities Inc. ("CSI"), also a wholly-owned subsidiary of
Warburg, serves as each Fund's distributor. For its shareholder servicing and
distribution services, CSI receives a fee at an annual rate of .25% of the
average daily net assets of each Fund's Common Shares pursuant to a shareholder
servicing and distribution plan adopted by each Fund pursuant to Rule 12b-1
under the 1940 Act. For its shareholder servicing and distribution services, CSI
receives a fee at an annual rate of .50%, respectively, of the average daily net
assets of the Advisor Shares of the Japan Growth Fund and the Japan Small
Company Fund pursuant to distribution plan adopted by each Fund pursuant to Rule
12b-1 under the 1940 Act. For the year ended October 31, 1998, shareholder
servicing and distribution fees earned by CSI were as follows:
SHAREHOLDER SERVICING/
FUND DISTRIBUTION FEE
- ---- ----------------------
Japan Growth
Common shares $ 87,542
Advisor shares 127
--------
$ 87,669
========
Japan Small Company
Common shares $105,301
Advisor shares 7
--------
$105,308
========
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 Deutche Bank, AG ("Deutche 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 comittment 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 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-
21
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
3. LINE OF CREDIT -- (CONT'D)
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
(33 1/3%) of the net assets of such fund. At October 31, 1998 and during the
year ended October 31, 1998, the following funds had borrowings under the lines
of credit agreement:
AVERAGE MAXIMUM LOAN
AVERAGE DAILY INTEREST DAILY LOAN OUTSTANDING
FUND LOAN BALANCE RATE % OUTSTANDING AT 10/31/98
- ---- -------------- -------- ----------- -----------
Japan Growth $ 85,241 6.520% $2,244,000 $0
Japan Small Company 166,997 6.190% 4,260,000 0
4. INVESTMENTS IN SECURITIES
For the year ended October 31, 1998, purchases and sales of investment
securities (excluding short-term investments) were as follows:
FUND PURCHASES SALES
- ---- ----------- -----------
Japan Growth $47,073,347 $24,065,306
Japan Small Company 51,639,940 43,454,278
At October 31, 1998, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
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
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
- ---- ------------ ------------ --------------
Japan Growth $5,695,143 $(3,534,314) $2,160,829
Japan Small Company 6,110,594 (6,572,782) (462,188)
22
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
5. FOWARD FOREIGN CURRENCY CONTRACTS
Each Fund may enter into forward currency contracts for the purchase or
sale of a specific foreign currency at a fixed price on a future date. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. Each
Fund will enter into forward contracts primarily for hedging purposes. Forward
currency contracts are adjusted by the daily exchange rate of the underlying
currency and any gains or losses are recorded for financial statement purposes
as unrealized until the contract settlement date or an offsetting position is
entered into.
At October 31, 1998, the Japan Growth Fund and the Japan Small Company Fund
had the following open forward foreign currency contracts:
<TABLE>
<CAPTION>
JAPAN GROWTH FUND
- -------------------------------------------------------------------------------------------------------------
UNREALIZED
FOREIGN
EXPIRATION FOREIGN CURRENCY CONTRACT EXCHANGE
FORWARD CURRENCY CONTRACT DATE TO BE SOLD AMOUNT CONTRACT VALUE GAIN/(LOSS)
------------------------- ---------- ---------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Japanese Yen 02/26/99 3,831,600,000 $28,686,082 $33,453,500 $(4,767,418)
Japanese Yen 02/26/99 185,000,000 1,583,497 1,615,225 (31,728)
Japanese Yen 02/26/99 55,000,000 489,432 480,202 9,230
Japanese Yen 02/26/99 166,000,000 1,444,735 1,449,337 (4,602)
Japanese Yen 02/26/99 98,000,000 841,274 855,633 (14,359)
Japanese Yen 02/26/99 74,500,000 643,962 650,456 (6,494)
Japanese Yen 02/26/99 71,000,000 619,330 619,897 (567)
----------- ----------- -----------
$34,308,312 $39,124,250 $(4,815,938)
=========== =========== ===========
<CAPTION>
JAPAN SMALL COMPANY FUND
- -------------------------------------------------------------------------------------------------------------
UNREALIZED
FOREIGN
EXPIRATION FOREIGN CURRENCY CONTRACT EXCHANGE
FORWARD CURRENCY CONTRACT DATE TO BE SOLD AMOUNT CONTRACT VALUE GAIN/(LOSS)
- --------------------------------- ---------- ---------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Japanese Yen 02/26/99 2,545,500,000 $19,057,423 $22,224,628 $(3,167,205)
Japanese Yen 02/26/99 558,500,000 4,180,389 4,876,234 (695,845)
Japanese Yen 02/26/99 296,400,000 2,219,892 2,587,853 (367,961)
Japanese Yen 02/26/99 538,500,000 4,030,689 4,701,615 (670,926)
Japanese Yen 02/26/99 143,000,000 1,071,161 1,248,526 (177,365)
Japanese Yen 02/26/99 200,000,000 1,711,889 1,746,190 (34,301)
Japanese Yen 02/26/99 80,000,000 711,902 698,476 13,426
Japanese Yen 02/26/99 46,000,000 400,592 401,624 (1,032)
Japanese Yen 02/26/99 65,000,000 557,988 567,512 (9,524)
Japanese Yen 02/26/99 164,000,000 1,417,582 1,431,875 (14,293)
Japanese Yen 02/26/99 129,500,000 1,129,623 1,130,658 (1,035)
----------- ----------- -----------
$36,489,130 $41,615,191 $(5,126,061)
=========== =========== ===========
</TABLE>
23
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
6. CAPITAL SHARE TRANSACTIONS
Both Funds are authorized to issue three billion full and fractional shares
of capital stock, $.001 par value per share, of which two billion shares of each
Fund are designated as Advisor Shares.
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
JAPAN GROWTH FUND
COMMON SHARES ADVISOR SHARES
-------------------------- -----------------
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------
1998 1997 1998 1997
------------ ----------- ------- -------
<S> <C> <C> <C> <C>
Shares sold 11,622,806 4,196,591 2,099 3,036
Shares issued to shareholders on reinvestment of
dividends 0 46,477 0 0
Shares redeemed (9,470,866) (3,725,607) (1,363) (1,421)
------------ ----------- ------- -------
Net increase in shares outstanding 2,151,940 517,461 736 1,615
============ =========== ======= =======
Proceeds from sale of shares $112,554,751 $43,536,325 $20,732 $31,670
Reinvested dividends 0 436,422 0 0
Net asset value of shares redeemed (93,554,214) (37,761,784) (13,786) (14,515)
------------ ----------- ------- -------
Net increase from capital share transactions $ 19,000,537 $ 6,210,963 $ 6,946 $17,155
============ =========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JAPAN SMALL COMPANY FUND
COMMON SHARES ADVISOR SHARES
----------------------------- -----------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------
1998 1997 1998 1997
------------- ------------- ------- -------
<S> <C> <C> <C> <C>
Shares sold 17,082,160 11,479,393 8 7,459
Shares issued to shareholders on reinvestment of
dividends 136,273 132,383 11 0
Shares redeemed (17,056,009) (23,316,894) (395) (7,086)
------------- ------------- ------- -------
Net increase (decrease) in shares outstanding 162,424 (11,705,118) (376) 373
============= ============= ======= =======
Proceeds from sale of shares $ 104,180,652 $ 83,642,891 $ 48 $52,503
Reinvested dividends 764,489 1,057,739 61 0
Net asset value of shares redeemed (104,777,285) (177,463,703) (2,429) (50,574)
------------- ------------- ------- -------
Net increase (decrease) from capital share
transactions $ 167,856 $ (92,763,073) $(2,320) $ 1,929
============= ============= ======= =======
</TABLE>
7. LIABILITIES
At October 31, 1998, each Fund had the following affiliated and investment
related liabilities:
<TABLE>
<CAPTION>
JAPAN SMALL
JAPAN GROWTH COMPANY
FUND FUND
------------ -----------
<S> <C> <C>
Payable for securities purchased (at value) $387,858 $634,707
Administration services fee payable 2,893 2,953
Investment advisory fee payable 21,402 5,575
Payable for fund shares redeemed 37,784 15,429
Forward contract payable 266,417 379,325
</TABLE>
24
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
8. NET ASSETS
At October 31, 1998, capital contributions, undistributed net investment
income, accumulated net realized gain (loss) from security transactions and
current period distribution have been adjusted for current period permanent
book/tax differences which arose principally from differing book/tax treatments
of foreign currency. The Japan Growth Fund and the Japan Small Company Fund
reclassified $85,041 and $48,311, respectively, from accumulated net realized
gain (loss) on foreign currency related items to undistributed net investment
income. The Japan Growth Fund and the Japan Small Company Fund reclassified
$179,738 and $304,830, respectively, from accumulated net investment loss to
capital contributions. The Japan Small Company Fund reclassified $510,516 of
book distributions from realized gains (losses) to distributions of net
investment income. In addition, the Japan Small Company Fund had a return of
capital of $316,181. Net investment income, net realized gain (loss) on
investments and net assets were not affected by this reclassification.
Net Assets at October 31, 1998, consisted of the following:
<TABLE>
<CAPTION>
JAPAN SMALL
JAPAN GROWTH COMPANY
FUND FUND
------------ ------------
<S> <C> <C>
Capital contributed, net $ 45,796,413 $73,755,119
Accumulated net realized gain (loss) from security
transactions (2,910,870) (30,880,621)
Net unrealized appreciation (depreciation) from
investments and foreign currency related items (2,345,350) (5,574,809)
------------ -----------
Net assets 40,540,193 37,299,689
============ ===========
</TABLE>
9. CAPITAL LOSS CARRYOVER
At October 31, 1998, capital loss carryovers available to offset possible
future capital gains of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS CARRYOVER CAPITAL LOSS CARRYOVER TOTAL CAPITAL LOSS
FUND EXPIRING IN 2005 EXPIRING IN 2006 CARRYOVER
- ---- ---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Japan Growth $ 623,934 $ 6,800,283 $ 7,424,217
Japan Small Company 24,405,400 11,601,282 36,006,682
</TABLE>
25
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
10. OTHER FINANCIAL HIGHLIGHTS
Each Fund currently offers one other class of shares, Common Shares,
representing equal pro rata interests in each of the respective Warburg Pincus
Japan Funds. The financial highlights for a Common Share of each Fund are as
follows:
<TABLE>
<CAPTION>
JAPAN GROWTH FUND
-------------------------------
COMMON SHARES
-------------------------------
1998 1997 1996**
PERIOD ENDED: ------- ------- -------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 9.74 $ 9.85 $ 10.00
------- ------- -------
INVESTMENT ACTIVITIES:
Net investment loss (0.07)(a) (0.07) (0.06)
Net gains or losses on investments and foreign currency
related items (both realized and unrealized) (1.08) 0.21 (0.09)
------- ------- -------
Total from investment activities (1.15) 0.14 (0.15)
------- ------- -------
DISTRIBUTIONS:
From net investment income 0.00 (0.20) 0.00
In excess of realized capital gains 0.00 (0.05) 0.00
------- ------- -------
Total distributions 0.00 (0.25) 0.00
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.59 $ 9.74 $ 9.85
======= ======= =======
Total return (11.81)% 1.47% (1.50)%+
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $40,519 $24,954 $20,157
Ratio of expenses to average net assets 1.75%@ 1.75%@ 1.76%*@
Ratio of net loss to average net assets (.76)% (1.03)% (1.03)%*
Decrease reflected in above operating expense ratios
due to waivers/reimbursements .53% .81% 1.79%*
Portfolio turnover rate 75.82% 93.84% 51.72%+
</TABLE>
- --------------------------------------------------------------------------------
** For the period December 29, 1995 (commencement of operations) through
October 31, 1996.
(a) Per share information is calculated using the average shares outstanding
method.
@ Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements resulted in a reduction to
the Common Shares' expenses by .00%, .00% and .01%, for the years ending
October 31, 1998, 1997 and for the period ending 1996, respectively. The
Common Shares' operating expense ratio after reflecting these arrangements
were 1.75%, 1.75% and 1.75% for the years ended October 31, 1998, 1997 and
for the period ending 1996, respectively.
+ Non annualized.
* Annualized.
26
<PAGE>
WARBURG PINCUS JAPAN FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1998
- --------------------------------------------------------------------------------
10. OTHER FINANCIAL HIGHLIGHTS -- (CONT'D)
<TABLE>
<CAPTION>
JAPAN SMALL COMPANY FUND
-------------------------------------------------
COMMON SHARES
-------------------------------------------------
1998 1997 1996 1995 1994**
PERIOD ENDED: ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.37 $ 8.47 $ 9.09 $ 9.85 $ 10.00
------- ------- -------- -------- -------
INVESTMENT ACTIVITIES:
Net investment loss (0.01) (1.22) (0.23) 0.00 0.00
Net losses on investments and foreign
currency related items (both realized
and unrealized) (0.67) (0.79) (0.01) (0.76) (0.15)
------- ------- -------- -------- -------
Total from investment activities (0.68) (2.01) (0.24) (0.76) (0.15)
------- ------- -------- -------- -------
DISTRIBUTIONS:
From net investment income 0.00 0.00 (0.38) 0.00 0.00
From realized capital gains (0.07) (0.09) 0.00 0.00 0.00
Return of capital (0.05) 0.00 0.00 0.00 0.00
------- ------- -------- -------- -------
Total Distributions (0.12) (0.09) (0.38) 0.00 0.00
------- ------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 5.57 $ 6.37 $ 8.47 $ 9.09 $ 9.85
======= ======= ======== ======== =======
Total return (10.61)% (23.98)% (2.79)% (7.72)% (1.50)%+
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $37,299 $41,627 $154,460 $178,568 $19,878
Ratio of expenses to average net assets 1.75%@ 1.76%@ 1.76%@ 1.41% 1.00%*
Ratio of net gain or loss to average net
assets (.84)% (1.10)% (1.22)% (.15)% .49%*
Decrease reflected in above operating
expense ratios due to
waivers/reimbursements .81% .51% .29% 1.35% 4.96%*
Portfolio turnover rate 112.68% 100.60% 95.23% 82.98% .00%
</TABLE>
- --------------------------------------------------------------------------------
** For the period September 30, 1994 (commencement of operations) through
October 31, 1994.
@ Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements resulted in a reduction to
the Common Shares' expenses by .00%, .01% and .01%, for the years ended
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were 1.75%, 1.75% and
1.75% for the years ended October 31, 1998, 1997 and 1996, respectively.
+ Non annualized.
* Annualized.
27
<PAGE>
WARBURG PINCUS JAPAN FUNDS
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 FOREIGN
INCOME MID-TERM LONG-TERM SOURCE FOREIGN TAXES
PER CAPITAL GAINS CAPITAL GAINS INCOME PAID OR WITHHELD
FUND SHARE PER SHARE PER SHARE PER SHARE PER SHARE
- ---- -------- ------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
PAYMENT DATE 12/19/97 12/19/97 12/19/97
-------- -------- -------
Japan Small Company
Common Shares $ 0.1249 $ 0.0000 $0.0000 $0.0173 $0.0082
Advisor Shares 0.1240 0.0000 0.0000 0.0191 0.0082
</TABLE>
The Japan Growth Fund 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.
28
<PAGE>
WARBURG PINCUS JAPAN GROWTH FUND AND JAPAN SMALL COMPANY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
WARBURG, PINCUS JAPAN GROWTH FUND, INC. AND
WARBURG, PINCUS JAPAN SMALL COMPANY FUND, INC.:
In our opinion, the accompanying statements of net assets 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
Warburg, Pincus Japan Growth Fund, Inc. and Warburg, Pincus Japan Small Company
Fund, Inc. (all funds collectively referred to as the "Funds") 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 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 Funds' 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
29
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
WARBURG PINCUS
ADVISOR FUNDS
COUNSELLORS
SECURITIES INC.,
DISTRIBUTOR
800-369-2728
[LOGO]
ADJPN-2-1098
