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[Logo]
PROSPECTUS
JUNE 20, 1995
WARBURG PINCUS TRUST
[ ] INTERNATIONAL EQUITY PORTFOLIO
[ ] SMALL COMPANY GROWTH PORTFOLIO
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WARBURG PINCUS TRUST
P.O. BOX 9036
BOSTON MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
June 20, 1995
PROSPECTUS
WARBURG, PINCUS TRUST (the 'Trust') is an open-end management investment company
that currently offers two investment funds (the 'Portfolios'):
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized domestic companies.
International investment entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain life insurance companies ('Participating Insurance
Companies') for allocation to certain of their separate accounts established for
the purpose of funding variable annuity contracts and variable life insurance
contracts (together, 'Variable Contracts'). A Portfolio may not be available in
every state due to various insurance regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus. Additional information about
each Portfolio, contained in a Statement of Additional Information, has been
filed with the Securities and Exchange Commission and is available to investors
without charge by calling the Trust at (800) 888-6878. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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THE TRUST'S EXPENSES
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<CAPTION>
INTERNATIONAL SMALL COMPANY
EQUITY PORTFOLIO GROWTH PORTFOLIO
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<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................. 0 0
Annual Fund Operating Expenses (as a percentage of average net assets) (after
expense waivers)
Management Fees.......................................................... 1.00% 0.90%
12b-1 Fees............................................................... 0 0
Other Expenses*.......................................................... 0.44% 0.35%
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Total Portfolio Operating Expenses*...................................... 1.44% 1.25%
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EXAMPLE
<S> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 year................................................................... $ 15 $ 13
3 years.................................................................. $ 46 $ 40
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* The Portfolios' investment adviser, Warburg, Pincus Counsellors, Inc.
('Counsellors'), has undertaken to reduce or otherwise limit each Portfolio's
Total Operating Expenses for its first fiscal period. In the absence of these
undertakings, Other Expenses would be equal to .75% for each Portfolio, and
Total Portfolio Operating Expenses would be equal to 1.75% and 1.65% for the
International Equity and Small Company Growth Portfolios, respectively. There
is no assurance that these undertakings will continue after December 30,
1995.
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The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. Other Expenses are based
upon estimated amounts for the first fiscal period. THE TABLE DOES NOT REFLECT
ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE VARIABLE
CONTRACTS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE PROSPECTUS OF THE
SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT. The Example should
not be considered a representation of past or future expenses; actual Portfolio
expenses may be greater or less than those shown. Moreover, while the Example
assumes a 5% annual return, each Portfolio's actual performance will vary and
may result in a return greater or less than 5%.
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INVESTMENT OBJECTIVES AND POLICIES
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation.
The SMALL COMPANY GROWTH PORTFOLIO seeks capital growth.
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See 'Certain
Investment Strategies' for descriptions of certain types of investments the
Portfolios may make.
INTERNATIONAL EQUITY PORTFOLIO. The International Equity Portfolio is a
diversified portfolio that pursues its investment objective by investing
primarily in a broadly diversified portfolio of equity securities of companies,
wherever organized, that in the judgment of Counsellors have their principal
business activities and interests outside the United States. The Portfolio will
ordinarily invest substantially all of its assets -- but no less than 65% of its
total assets -- in common stocks, warrants and securities convertible into or
exchangeable for common stocks. Generally the Portfolio will hold no less than
65% of its total assets in at least three countries other than the United
States. The Portfolio intends to be widely diversified across securities of many
corporations located in a number of foreign countries. Counsellors anticipates,
however, that the Portfolio may from time to time invest a significant portion
of its assets in a single country such as Japan, which may involve special
risks. See 'Risk Factors and Special Considerations -- Japanese Investments'
below. In appropriate circumstances, such as when a direct investment by the
International Equity Portfolio in the securities of a particular country cannot
be made or when the securities of an investment company are more liquid than the
underlying portfolio securities, the Portfolio may, consistent with the
provisions of the Investment Company Act of 1940, as amended (the '1940 Act'),
invest in the securities of closed-end investment companies that invest in
foreign securities.
The Portfolio intends to invest principally in the securities of
financially strong companies with opportunities for growth within growing
international economies and markets through increased earning power and improved
utilization or recognition of assets. Investment may be made in equity
securities of companies of any size, whether traded on or off a national
securities exchange.
SMALL COMPANY GROWTH PORTFOLIO. The Small Company Growth Portfolio is a
non-diversified portfolio that pursues its investment objective by investing in
a portfolio of equity securities of small-sized domestic companies. The
Portfolio ordinarily will invest at least 65% of its total assets in common
stocks or warrants of small-sized companies (i.e., companies having stock market
capitalizations of between $25 million and $1 billion at the time of purchase)
that represent attractive opportunities for capital growth. It is anticipated
that the Portfolio will invest primarily in companies whose securities are
traded on domestic stock exchanges or in the over-the-counter market. Small
companies may still be in the developmental stage, may be older companies that
appear to be entering a new stage of growth progress owing to factors such as
management changes or development of new technology, products or markets or may
be companies providing products or services with a high unit volume growth rate.
The Portfolio's investments will be made on the basis of their equity
characteristics and securities ratings generally will not be a factor in the
selection process.
The Portfolio may also invest in securities of emerging growth companies,
which can be either small- or medium-sized companies that have passed their
start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time. Emerging
growth companies generally stand to benefit from new products or services,
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technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value.
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The International Equity Portfolio and the Small Company
Growth Portfolio may invest up to 35% and 20%, respectively, of its total assets
in (i) investment grade debt securities (other than money market instruments)
and (ii) preferred stocks that are not convertible into common stock for the
purpose of seeking capital appreciation. The interest income to be derived may
be considered as one factor in selecting debt securities for investment by
Counsellors. Because the market value of debt obligations can be expected to
vary inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. The success of such a strategy is dependent upon
Counsellors' ability to accurately forecast changes in interest rates. The
market value of debt obligations may also be expected to vary depending upon,
among other factors, the ability of the issuer to repay principal and interest,
any change in investment rating and general economic conditions. A security will
be deemed to be investment grade if it is rated within the four highest grades
by Moody's Investors Service, Inc. ('Moody's') or Standard & Poor's Ratings
Group ('S&P') or, if unrated, is determined to be of comparable quality by
Counsellors. Bonds rated in the fourth highest grade may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. Subsequent to its purchase by
a Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Portfolio. Neither event
will require sale of such securities. Counsellors will consider such event in
its determination of whether the Portfolio should continue to hold the
securities.
When Counsellors believes that a defensive posture is warranted, each
Portfolio may invest temporarily without limit in investment grade debt
obligations and in domestic and foreign money market obligations, including
repurchase agreements, as discussed below. When such a defensive posture is
warranted, the International Equity Portfolio may also invest temporarily
without limit in securities of U.S. companies.
MONEY MARKET OBLIGATIONS. Each Portfolio is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign money
market obligations having a maturity of one year or less at the time of purchase
and, for temporary defensive purposes, may invest in these securities without
limit. These short-term instruments consist of obligations issued or guaranteed
by the United States government, its agencies or instrumentalities ('U.S.
government securities'); bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of domestic or foreign banks, domestic
savings and loans and similar institutions) that are high quality investments;
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. The Portfolios may enter into repurchase agreement
transactions on portfolio securities with member banks of the Federal Reserve
System and certain non-bank dealers. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Under the terms of a typical
repurchase agreement, a Portfolio would acquire any underlying security for a
relatively short period (usually not more
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than one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. The value of the underlying securities
will at all times be at least equal to the total amount of the purchase
obligation, including interest. The Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations or
becomes bankrupt and the Portfolio is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Portfolio seeks to assert this right. Counsellors, acting under the supervision
of the Trust's Board of Trustees (the 'Board'), monitors the creditworthiness of
those bank and non-bank dealers with which each Portfolio enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the 1940 Act.
Money Market Mutual Funds. Where Counsellors believes that it would be
beneficial to the Portfolio and appropriate considering the factors of return
and liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or
Counsellors. As a shareholder in any mutual fund, a Portfolio will bear its
ratable share of the mutual fund's expenses, including management fees, and
assets so invested will remain subject to payment of the Portfolio's advisory
and administration fees.
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by the United
States government in which a Portfolio may invest include: direct obligations of
the U.S. Treasury, obligations issued by U.S. government agencies and
instrumentalities, including instruments that are supported by the full faith
and credit of the United States, instruments that are supported by the right of
the issuer to borrow from the U.S. Treasury and instruments that are supported
by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Portfolio may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock.
PERFORMANCE OF INVESTMENT FUNDS MANAGED BY COUNSELLORS
Set forth below is certain performance data provided by Counsellors
relating to Warburg, Pincus International Equity Fund (the 'International Equity
Fund') and the International Equity Portfolio of Warburg, Pincus Institutional
Fund, Inc. (the 'Institutional International Equity Fund'; together with the
International Equity Fund, the 'Warburg Pincus Funds'), registered open-end
investment companies managed by Counsellors. The International Equity Portfolio
has substantially the same investment objective and policies and will be managed
using substantially the same investment strategies and techniques as the Warburg
Pincus Funds. Investors should not rely on the following performance data as an
indication of future performance of the Portfolio. As of May 31, 1995, the
International Equity Fund and the Institutional International Equity Fund had
net assets of approximately $2.1 billion and $383.2 million, respectively, and
overall expense ratios of 1.45% and .95%, respectively. The overall expense
ratio of the International Equity Portfolio for its first
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fiscal year will not exceed 1.44%. The Portfolio will have the same types of
expenses as the Warburg Pincus Funds, except that Variable Contract owners may
also be subject to certain additional charges and expenses attributable to the
particular Variable Contract. See 'Performance.' The Warburg Pincus Funds have
waived fees from time to time, which has resulted in
higher performance figures than would be the case had such waivers not been in
place.
The performance of the Morgan Stanley Europe, Australia and Far East
('EAFE') Index for the same periods as shown for the Warburg Pincus Funds is set
forth below. Unlike the International Equity Portfolio and the Warburg Pincus
Funds, the index, which is unmanaged, does not reflect the payment of any
expenses.
WARBURG PINCUS FUNDS
TOTAL RETURN FOR PERIODS ENDING MAY 31, 1995
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<CAPTION>
INSTITUTIONAL
INTERNATIONAL INTERNATIONAL
EQUITY FUND EQUITY FUND
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EAFE EAFE
PERFORMANCE INDEX* PERFORMANCE INDEX*
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<S> <C> <C> <C> <C>
One year..................................................... - 4.83% 4.93% - 4.50% 4.93%
Five years................................................... 9.67% 4.87% N/A N/A
From inception**
annualized.............................................. 12.45% 3.44% 16.52% 13.20%
aggregate............................................... 104.22% 22.87% 52.22% 40.62%
</TABLE>
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* The EAFE Index is an unmanaged, market value-weighted index of more than 1000
international equity securities in nineteen countries that has no defined
investment objective and is compiled by Morgan Stanley Capital International.
The index is calculated on a total return basis, which includes the
reinvestment of dividends after withholding taxes for foreigners not
benefiting from any double taxation treaty, and is stated in U.S. dollars.
** The International Equity Fund commenced investment operations on May 2, 1989,
and the Institutional International Equity Fund commenced operations on
September 1, 1992. The EAFE Index shown is measured from April 30, 1989, with
respect to the International Equity Fund, and from August 31, 1992, with
respect to the Institutional International Equity Fund.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to each Portfolios' investments, see
'Portfolio Investments' beginning at page 4 and 'Certain Investment Strategies'
beginning at page 8.
INTERNATIONAL EQUITY PORTFOLIO
JAPANESE INVESTMENTS. The International Equity Portfolio may from time to time
have a large position in Japanese securities and, as a result, would be subject
to general economic and political conditions in Japan. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of its large trade surpluses Japan has
entered a difficult phase in its relations
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with certain trading partners, particularly with respect to the United States,
with whom the trade imbalance is the greatest.
The decline in the Japanese securities markets since 1989 has contributed
to a weakness in the Japanese economy, and the impact of a further decline
cannot be ascertained. The common stocks of many Japanese companies continue to
trade at high price-earnings ratios in comparison with those in the United
States.
Japan has a parliamentary form of government. Since mid-1993, there have
been several changes in leadership in Japan. What, if any, effect the current
political situation will have on prospective regulatory reforms on the economy
cannot be predicted. For additional information, see 'Investment
Policies -- Japanese Investments' in the Statement of Additional Information.
SMALL COMPANY GROWTH PORTFOLIO
SMALL CAPITALIZATION AND EMERGING GROWTH COMPANIES. Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and, thus, may be more volatile than securities of larger,
more established companies or the market averages in general. Small-sized
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, small-sized companies are typically subject
to a greater degree of changes in earnings and business prospects than are
larger, more established companies. There is typically less publicly available
information concerning small-sized companies than for larger, more established
ones. Because small-sized companies normally have fewer shares outstanding than
larger companies, it may be more difficult for the Small Company Growth
Portfolio to buy or sell significant amounts of such shares without an
unfavorable impact on prevailing prices.
Securities of issuers in 'special situations' also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in 'special situations'
include, but are not limited to, companies involved in an acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control. Although investing in securities of emerging growth companies
or 'special situations' offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Small Company Growth Portfolio may involve a
greater degree of risk than an investment in other mutual funds that seek
capital growth by investing in better-known, larger companies.
NON-DIVERSIFIED STATUS. The Small Company Growth Portfolio is classified as
non-diversified under the 1940 Act, which means that the Portfolio is not
limited by the 1940 Act in the proportion of its assets that it may invest in
the obligations of a single issuer. The Portfolio will, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the 'Code'), for qualification as a regulated investment company. Being
non-diversified means that the Portfolio may invest a greater proportion of its
assets in the obligations of a small number of issuers and, as a result, may be
subject to greater risk with respect to portfolio securities. To the extent that
the Portfolio assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
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PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Counsellors believes it to be in the best interests of the relevant Portfolio.
The Portfolios will not consider portfolio turnover rate a limiting factor in
making investment decisions consistent with their investment objectives and
policies. While it is not possible to predict the Portfolios' portfolio turnover
rates, it is anticipated that each Portfolio's annual turnover rate should not
exceed 100%. Higher portfolio turnover rates (100% or more) may result in dealer
mark ups or underwriting commissions as well as other transaction costs,
including correspondingly higher brokerage commissions. In addition, short-term
gains realized from portfolio turnover may be taxable to shareholders as
ordinary income. See 'Dividends, Distributions and Taxes -- Taxes' below and
'Investment Policies -- Portfolio Transactions' in the Statement of Additional
Information.
All orders for transactions in securities or options on behalf of a
Portfolio are placed by Counsellors with broker-dealers that it selects,
including Counsellors Securities Inc., the Portfolios' distributor ('Counsellors
Securities'). A Portfolio may utilize Counsellors Securities in connection with
a purchase or sale of securities when Counsellors believes that the charge for
the transaction does not exceed usual and customary levels and when doing so is
consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, each
Portfolio is authorized to engage in the following investment strategies: (i)
purchasing securities on a when-issued basis and purchasing or selling
securities for delayed-delivery and (ii) lending portfolio securities. Each
Portfolio may engage in options or futures transactions for the purpose of
hedging against a decline in value of its portfolio holdings or to generate
income to offset expenses or increase return. Such transactions that are not
considered hedging should be considered speculative and may serve to increase
the Portfolio's investment risk. Detailed information concerning these
strategies and their related risks is contained below and in the Statement of
Additional Information.
FOREIGN SECURITIES. The International Equity Portfolio will ordinarily hold no
less than 65% of its total assets in foreign securities, and the Small Company
Growth Portfolio may invest up to 20% of its total assets in the securities of
foreign issuers. There are certain risks involved in investing in securities of
companies and governments of foreign nations which are in addition to the usual
risks inherent in domestic investments. These risks include those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
adverse political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers, the lack of
uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Portfolios,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or
unfa-
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vorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Investment in foreign securities will also result
in higher operating expenses due to the cost of converting foreign currency into
U.S. dollars, the payment of fixed brokerage commissions on foreign exchanges,
which generally are higher than commissions on U.S. exchanges, higher valuation
and communications costs and the expense of maintaining securities with foreign
custodians.
RULE 144A SECURITIES. The Portfolios may purchase securities that are not
registered under the Securities Act of 1933, as amended (the '1933 Act'), but
that can be sold to 'qualified institutional buyers' in accordance with Rule
144A under the 1933 Act ('Rule 144A Securities'). A Rule 144A Security will be
considered illiquid and therefore subject to each Portfolio's 15% limitation on
the purchase of illiquid securities, unless the Board determines on an ongoing
basis that an adequate trading market exists for the security. In addition to an
adequate trading market, the Board will also consider factors such as trading
activity, availability of reliable price information and other relevant
information in determining whether a Rule 144A Security is liquid. This
investment practice could have the effect of increasing the level of illiquidity
in the Portfolios to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The Board will
carefully monitor any investments by the Portfolio in Rule 144A Securities. The
Board may adopt guidelines and delegate to Counsellors the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although the
Board will retain ultimate responsibility for any determination regarding
liquidity.
Non-publicly traded securities (including Rule 144A Securities) may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio. In addition, companies
whose securities are not publicly traded are not subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded. A Portfolio's investment in illiquid securities
is subject to the risk that should the Portfolio desire to sell any of these
securities when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
WRITING PUT AND CALL OPTIONS ON SECURITIES. Each Portfolio may write covered put
and call options on up to 25% of the net asset value of the stock and debt
securities in its portfolio and will realize fees (referred to as 'premiums')
for granting the rights evidenced by the options. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price in accordance with its
terms. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price in accordance with its terms. Thus, the purchaser of a put
option written by a Portfolio has the right to compel the purchase by the
Portfolio of the underlying security at an agreed-upon price for a specified
time period or at a specified time, while the purchaser of a call option written
by a Portfolio has the right to purchase from the Portfolio the underlying
security owned by the Portfolio at the agreed-upon price for a specified time
period or at a specified time.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer an economic loss equal to the excess of the exercise price of the option
over the security's market value at the time of the option exercise, less the
premium received for writing the option. Upon the exercise of a call option
written by a Portfolio, the Portfolio may suffer an economic loss equal to
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the excess of the security's market value at the time of the option exercise
over the Portfolio's acquisition cost of the security, less the premium received
for writing the option.
A Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, a Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of a Portfolio under an option that
it has written would be terminated by a closing purchase transaction, but the
Portfolio would not be deemed to own an option as the result of the transaction.
The ability of a Portfolio to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While a Portfolio
generally will write options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options, no such secondary
market may exist or the market may cease to exist.
Option writing for each Portfolio may be limited by position and exercise
limits established by securities exchanges and the National Association of
Securities Dealers, Inc. Furthermore, a Portfolio may, at times, have to limit
its option writing in order to qualify as a regulated investment company under
the Code.
In addition to writing covered options to generate income, each Portfolio
may enter into options transactions as hedges to reduce investment risk,
generally by making an investment expected to move in the opposite direction of
a portfolio position. A hedge is designed to offset a loss on a portfolio
position with a gain on the hedge position; at the same time, however, a
properly correlated hedge will result in a gain on the portfolio position being
offset by a loss on the hedge position. Each Portfolio bears the risk that the
prices of the securities being hedged will not move in the same amount as the
hedge. A Portfolio will engage in hedging transactions only when deemed
advisable by Counsellors. Successful use by a Portfolio of options for hedging
purposes will depend on Counsellors' ability to correctly predict movements in
the direction of the security underlying the option or, in the case of stock
index options (described below), the underlying securities market, which could
prove to be inaccurate. Losses incurred in options transactions and the costs of
these transactions will affect each Portfolio's performance. Even if
Counsellors' expectations are correct, where options are used as a hedge there
may be an imperfect correlation between the change in the value of the options
and of the portfolio securities hedged.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The International Equity
Portfolio and the Small Company Growth Portfolio each may utilize up to 10% of
its assets to purchase put and call options on stocks and debt securities that
are traded on foreign as well as U.S. exchanges, as well as options that trade
over-the-counter ('OTC'), and, with respect to put options, may do so at or
about the same time that it purchases the underlying security or at a later
time.
By buying a put, a Portfolio limits its risk of loss from a decline in the
market value of the underlying security until the put expires. Any appreciation
in the value of and yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Call options may be purchased by each
Portfolio in order to acquire the underlying securities for the Portfolio at a
price that avoids any additional cost that would result from a substantial
increase in the market value of a security. Each Portfolio also may purchase put
or call options to increase its return to investors at a time when the option is
expected to increase in value due to anticipated appreciation (in the case
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of a call) or depreciation (in the case of a put) of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by a Portfolio, prior to the exercise of options that
it has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the option plus the related transaction costs.
STOCK INDEX OPTIONS. Each Portfolio may utilize up to 10% of its total assets to
purchase exchange-listed and OTC put and call options on stock indexes, and may
write put and call options on such indexes. A stock index measures the movement
of a certain group of stocks by assigning relative values to the common stocks
included in the index. Options on stock indexes are similar to options on stock
except that (i) the expiration cycles of stock index options are monthly, while
those of stock options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive a cash 'exercise settlement amount' equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise multiplied by (b) a fixed 'index multiplier.' The
discussion of options on securities above, and the related risks, is applicable
to options on securities indexes.
FUTURES CONTRACTS AND OPTIONS. Each Portfolio may enter into interest rate,
stock index and currency futures contracts and purchase and write (sell) related
options that are traded on an exchange designated by the Commodity Futures
Trading Commission (the 'CFTC') or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for 'bona fide hedging' as
defined in CFTC regulations and other permissible purposes including (i)
protecting against anticipated changes in the value of portfolio securities the
Portfolio intends to purchase and (ii) increasing return.
An interest rate futures contract is a standardized contract for the future
delivery of a specified interest rate sensitive security (such as a U.S.
Treasury Bond or U.S. Treasury Note or its equivalent) at a future date at a
price set at the time of the contract. Stock indexes are capitalization weighted
indexes which reflect the market value of the companies listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between the
value of the index at the beginning and at the end of the contract period. A
foreign currency futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified foreign
currency at a specified price, date, time and place. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time prior to the expiration date of the option.
Parties to a futures contract must make 'initial margin' deposits to secure
performance of the contract. There are also requirements to make 'variation
margin' deposits from time to time as the value of the futures contract
fluctuates. The Portfolios are not commodity pools and, in compliance with CFTC
regulations currently in effect, may enter into any futures contracts and
related options for 'bona fide hedging' purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be 'bona fide
hedging' will not exceed 5% of each Portfolio's net asset value, after taking
into account unrealized profits and unrealized losses on any such contracts.
Each Portfolio reserves the right to engage in transactions involving futures
and options thereon to the extent allowed by CFTC regulations in effect from
time
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to time and in accordance with the Portfolio's policies. Certain provisions of
the Code may limit the extent to which the Portfolio may enter into futures
contracts or engage in options transactions.
There are several risks in connection with the use of futures contracts.
Successful use of futures contracts is subject to the ability of Counsellors to
predict correctly movements in the direction of the currency, interest rate or
stock index underlying the particular futures contract or related option. These
predictions and, thus, the use of futures contracts involve skills and
techniques that are different from those involved in the management of portfolio
securities. In addition, there can be no assurance that there will be a
correlation between movements in the currencies, interest rate or index
underlying the futures contract and movements in the price of the portfolio
securities which are the subject of hedge. A decision concerning whether, when
and how to utilize futures involves the exercise of skill and judgment, and even
a well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends in foreign currencies, interest rates or stock
indexes. Losses incurred in futures transactions and the costs of these
transactions will affect the Portfolio's performance.
A further risk involves the lack of a liquid secondary market for a futures
contract and the resulting inability to close out a futures contract. Futures
and options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of the Portfolio's securities that are being hedged or the portfolio may
not be able to close a futures or options position without incurring a loss in
the event of adverse price movements.
CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates and to increase the Portfolio's income and total return. Each Portfolio
will conduct its currency exchange transactions (i) on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market, (ii) through entering
into forward contracts to purchase or sell currency, (iii) by purchasing
currency options or (iv) as described above, through entering into foreign
currency futures contracts or options on such contracts.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The use of forward
currency contracts as a hedge does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, although forward currency contracts limit
the risk of loss due to a decline in the value of a hedged currency, at the same
time they also limit any potential gain that might result should the value of
the currency increase.
Currency Options. Each Portfolio may purchase exchange-traded put and call
options on currencies. An option on a foreign currency gives the purchaser, in
return for a premium, the right to sell, in the case of a put, and buy, in the
case of a call, the underlying currency at a specified price during the term of
the option. The benefit to the Portfolio derived from purchases of foreign
currency options, like the benefit derived from other types of options, will be
reduced by the amount of the premium and
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related transaction costs. In addition, if currency exchange rates do not move
in the direction or to the extent anticipated, the Portfolio could sustain
losses on transactions in foreign currency options that would require it to
forgo a portion or all of the benefits of advantageous changes in the rates.
ASSET COVERAGE FOR FORWARD CONTRACTS, OPTIONS, FUTURES AND OPTIONS ON FUTURES.
Each Portfolio will comply with guidelines established by the Securities and
Exchange Commission (the 'SEC') designed to eliminate any potential for leverage
with respect to currency forward contracts; options written by the Portfolio on
currencies, securities and indexes; currency, interest rate and index futures
contracts and options on these futures contracts. The use of these strategies
may require that a Portfolio maintain cash or certain liquid high-grade debt
securities in a segregated account with its custodian or a designated
sub-custodian to the extent the Portfolio's obligations with respect to these
strategies are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of a Portfolio's assets could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may also enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio pursuant to its agreement to repurchase them at
a mutually agreed upon date, price and rate of interest. At the time the
Portfolio enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing cash or
liquid high-grade debt securities having a value not less than the repurchase
price (including accrued interest). The assets contained in the segregated
account will be marked-to-market daily and additional assets will be placed in
such account on any day in which the assets fall below the repurchase price
(plus accrued interest). The Portfolio's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
decision. Reverse repurchase agreements are considered to be borrowings under
the 1940 Act.
INVESTMENT GUIDELINES
Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ('illiquid securities'), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
and (iii) time deposits maturing in more than seven calendar days. In addition,
up to 5% of each Portfolio's total assets may be invested in the securities of
issuers which have been in continuous operation for less than three years, and
up to an additional 5% of its net assets may be invested in warrants. Each
Portfolio may borrow from banks for temporary or
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emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that each Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIOS
INVESTMENT ADVISERS. The Trust employs Counsellors as investment adviser to each
Portfolio. Counsellors, subject to the control of the Trust's officers and the
Board, manages the investment and reinvestment of the assets of each Portfolio
in accordance with the Portfolio's investment objective and stated investment
policies. Counsellors makes investment decisions for each Portfolio and places
orders to purchase or sell securities on behalf of the Portfolio. Counsellors
also employs a support staff of management personnel to provide services to the
Portfolios and furnishes each Portfolio with office space, furnishings and
equipment.
For the services provided by Counsellors, the International Equity
Portfolio and the Small Company Growth Portfolio will pay Counsellors a fee
calculated at an annual rate of 1.00% and .90%, respectively, of the relevant
Portfolio's average daily net assets. Although these advisory fees are higher
than that paid by most other investment companies, including money market and
fixed income funds, Counsellors believes that they are comparable to fees
charged by other mutual funds with similar policies and strategies. Counsellors
and the Trust's co-administrators may voluntarily waive a portion of their fees
from time to time and temporarily limit the expenses to be borne by a Portfolio.
Counsellors is a professional investment counselling firm which provides
investment services to investment endowment funds, foundations and other
institutions and individuals. As of May 31, 1995, Counsellors managed
approximately $10.5 billion of assets, including approximately $4.9 billion of
assets of nineteen investment companies or portfolios. Incorporated in 1970,
Counsellors is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P.
('Counsellors G.P.'), a New York general partnership. E.M. Warburg, Pincus &
Co., Inc. ('EMW') controls Counsellors through its ownership of a class of
voting preferred stock of Counsellors. Counsellors G.P. has no business other
than being a holding company of Counsellors and its subsidiaries. Counsellors'
address is 466 Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGERS. The portfolio manager of the International Equity Portfolio
is Richard H. King. Mr. King is also portfolio manager of Warburg, Pincus
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. and co-portfolio manager of Warburg, Pincus
Japan OTC Fund and Warburg, Pincus Emerging Markets Fund. Mr. King has been a
managing director of EMW since 1989. From 1984 until 1988 he was chief
investment officer and a director at Fiduciary Trust Company International S.A.
in London, with responsibility for all international equity management and
investment strategy. From 1982 to 1984 he was a director in charge of Far East
equity investments at N.M. Rothschild International Asset Management, a London
merchant bank.
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Nicholas P.W. Horsley, Harold W. Ehrlich and Vincent McBride are associate
portfolio managers and research analysts of the International Equity Portfolio.
Mr. Horsley is also co-portfolio manager of Warburg, Pincus Japan OTC Fund and
Warburg, Pincus Emerging Markets Fund. Mr. Ehrlich and Mr. McBride are associate
portfolio managers and research analysts of Warburg, Pincus Emerging Markets
Fund and, with Mr. Horsley, Warburg, Pincus International Equity Fund and the
International Equity Portfolio of Warburg, Pincus Institutional Fund, Inc. Mr.
Horsley is a senior vice president of Counsellors and has been with Counsellors
since 1993, before which time he was a director, portfolio manager and analyst
at Barclays deZoete Wedd in New York City. Mr. Ehrlich is a senior vice
president of Counsellors and has been with Counsellors since February, 1995,
before which time he was a senior vice president, portfolio manager and analyst
at Templeton Investment Counsel Inc. Mr. McBride has been with Counsellors since
1994. Prior to joining Counsellors, Mr. McBride was an international equity
analyst at Smith Barney Inc. from 1993 to 1994 and at General Electric
Investment Corporation from 1992 to 1993. From 1989 to 1992 he was a portfolio
manager/analyst at United Jersey Bank.
The portfolio managers of the Small Company Growth Portfolio are Elizabeth
B. Dater and Stephen J. Lurito. Ms. Dater and Mr. Lurito are also co-portfolio
managers of Warburg, Pincus Emerging Growth Fund. Ms. Dater is a managing
director of EMW and has been a portfolio manager of Counsellors since 1978. Mr.
Lurito is a managing director of EMW and has been with Counsellors since 1987,
before which time he was a research analyst at Sanford C. Bernstein & Company,
Inc.
CO-ADMINISTRATORS. The Trust employs Counsellors Funds Service, Inc., a wholly
owned subsidiary of Counsellors ('Counsellors Service'), as a co-administrator.
As co-administrator, Counsellors Service provides shareholder liaison services
to the Portfolios, including responding to shareholder inquiries and providing
information on shareholder investments. Counsellors Service also performs a
variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Portfolios and their
various service providers, furnishing corporate secretarial services, which
include preparing materials for meetings of the Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in other
regulatory filings as necessary and monitoring and developing compliance
procedures for the Portfolios. As compensation, each Portfolio pays to
Counsellors Service a fee calculated at an annual rate of .10% of the
Portfolio's average daily net assets.
The Trust employs PFPC Inc., an indirect, wholly owned subsidiary of PNC
Bank Corp. ('PFPC'), as a co-administrator. As a co-administrator, PFPC
calculates each Portfolio's net asset value, provides all accounting services
for the Portfolio and assists in related aspects of the Portfolio's operations.
As compensation the International Equity Portfolio pays to PFPC a fee calculated
at an annual rate of .12% of the Portfolio's first $250 million in average daily
net assets, .10% of the next $250 million in average daily net assets, .08% of
the next $250 million in average daily net assets, and .05% of average daily net
assets over $750 million, with a minimum annual fee of $42,000, and the Small
Company Growth Portfolio pays to PFPC a fee calculated at an annual rate of .10%
of the Portfolio's average daily net assets, with a minimum annual fee of
$75,000, in each case exclusive of out-of-pocket expenses. PFPC has its
principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS AND TRANSFER AGENT. PNC Bank, National Association ('PNC'), serves as
custodian of each Portfolio's U.S. assets. State Street Bank and Trust Company
('State Street') serves as international custodian of each Portfolio's non-U.S.
assets. PNC is a subsidiary of PNC
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Bank Corp. and its principal business address is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101. State Street's principal business address is
225 Franklin Street, Boston, Massachusetts 02110.
State Street also serves as shareholder servicing agent, transfer agent and
dividend disbursing agent for the Trust. It has delegated to Boston Financial
Data Services, Inc., a 50% owned subsidiary ('BFDS'), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Trust. Counsellors Securities is a wholly owned subsidiary
of Counsellors and is located at 466 Lexington Avenue, New York, New York 10017-
3147.
OTHER. From time to time Counsellors or its affiliates may compensate
Participating Insurance Companies or their affiliates or entities that provide
services to them for providing a variety of record-keeping, administrative,
marketing and/or shareholder support services with respect to investments made
in the Trust. This compensation will be based on the net asset value of shares
held by the Participating Insurance Companies' Variable Contract owners and will
vary depending on the nature, extent and quality of the services provided. Such
compensation will be paid from Counsellors' or its affiliates' own resources and
will not represent an additional expense to the Portfolios or their
shareholders.
Counsellors may, at its own expense, provide promotional incentives to
qualified recipients who support the sale of shares of a Portfolio. Qualified
recipients are securities dealers who have sold Portfolio shares or others,
including banks and other financial institutions, under special arrangements. In
some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of significant amounts of a Portfolio's shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM
SHARES IN THE PORTFOLIOS
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies. Please refer
to the prospectus of the sponsoring Participating Insurance Company separate
account for instructions on purchasing or selling a Variable Contract and on how
to select a Portfolio as an investment option for a Variable Contract.
PURCHASES. All investments in the Portfolios are credited to a Participating
Insurance Company's separate account immediately upon acceptance of an
investment by a Portfolio. Each Participating Insurance Company receives orders
from its contract owners to purchase or redeem shares of a Portfolio on any day
that the Portfolio calculates its net asset value (a 'business day'). That
night, all orders received by the Participating Insurance Company prior to the
close of regular trading on the New York Stock Exchange Inc. (the 'NYSE')
(currently 4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of one or both Portfolios during the morning of the next business day.
These orders are executed at the net asset value (described below under 'Net
Asset Value') computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the
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contract owners' orders to the Participating Insurance Company and that
Participating Insurance Company's orders to a Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Counsellors' opinion, they are of a size
that would disrupt the management of a Portfolio. A Portfolio may discontinue
sales of its shares if management believes that a substantial further increase
in assets may adversely effect that Portfolio's ability to achieve its
investment objective. In such event, however, it is anticipated that existing
Variable Contract owners would be permitted to continue to authorize investment
in such Portfolio and to reinvest any dividends or capital gains distributions.
REDEMPTIONS. Shares of a Portfolio may be redeemed on any business day.
Redemption orders which are received by a Participating Insurance Company prior
to the close of regular trading on the NYSE on any business day and transmitted
to the Trust or its specified agent during the morning of the next business day
will be processed at the net asset value computed at the close of regular
trading on the NYSE on the previous business day. Redemption proceeds will
normally be wired to the Participating Insurance Company the business day
following receipt of the redemption order, but in no event later than seven days
after receipt of such order.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. Each Portfolio declares dividends from its net investment
income annually and pays them in the calendar year in which they are declared.
Net investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of net realized long-term
and short-term capital gains are declared annually and, as a general rule, will
be distributed or paid after the end of the fiscal year in which they are
earned. Dividends and distributions will automatically be reinvested in
additional shares of the relevant Portfolio at net asset value unless a
Participating Insurance Company elects to have dividends or distributions paid
in cash.
TAXES. For a discussion of the tax status of a Variable Contract, refer to the
sponsoring Participating Insurance Company separate account prospectus.
Each Portfolio intends to qualify each year as a 'regulated investment
company' under Subchapter M of the Code. Each Portfolio is treated as a separate
entity for federal income tax purposes and, therefore, the investments and
results of the Portfolios are determined separately for purposes of determining
whether the Portfolio qualifies as a regulated investment company and for
purposes of determining net ordinary income (or loss) and net realized capital
gains (or losses). Each Portfolio intends to distribute all of its net income
and gains to its shareholders (the Variable Contracts).
Because shares of the Portfolios may be purchased only through Variable
Contracts, it is anticipated that any income dividends or capital gain
distributions from a Portfolio are taxable, if at all, to the Participating
Insurance Companies and will be exempt from current taxation of the Variable
Contract owner if left to accumulate within the Variable Contract. Generally,
withdrawals from Variable Contracts may be subject to ordinary income tax and,
if made before age 59 1/2, a 10% penalty tax.
Special Tax Matters Relating to the International Equity Portfolio.
Dividends and interest received by the International Equity Portfolio may be
subject to withholding and other taxes imposed by foreign countries. However,
tax conventions between certain countries and the United States may reduce or
eliminate such taxes. Shareholders will bear the cost of foreign
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tax withholding in the form of increased expenses to the Portfolio, but
generally will not be able to claim a foreign tax credit or deduction for
foreign taxes paid by the Portfolio by reason of the tax-deferred status of
Variable Contracts.
INTERNAL REVENUE SERVICE LIMITATIONS. Each Portfolio intends to comply with the
diversification requirements currently imposed by the Internal Revenue Service
on separate accounts of insurance companies as a condition of maintaining the
tax-deferred status of Variable Contracts. See the Statement of Additional
Information for more specific information.
NET ASSET VALUE
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Washington's Birthday, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when one of the holidays falls on a
Saturday or Sunday, respectively. The net asset value per share of each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by deducting
the Portfolio's liabilities from its assets and then dividing the result by the
total number of outstanding shares. Generally, the Portfolio's investments are
valued at market value or, in the absence of a quoted market value with respect
to any portfolio securities, at fair value as determined by or under the
direction of the Board.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges preceding the calculation of a Portfolio's net asset value, except
that when an occurrence subsequent to the time a value was so established is
likely to have changed such value, then the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
will be valued on the basis of the closing value on the date on which the
valuation is made. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter market
are valued on the basis of the bid price at the close of business on each day.
Option or futures contracts will be valued at the last sale price at 4:00 p.m.
(Eastern time) on the date on which the valuation is made, as quoted on the
primary exchange or board of trade on which the option or futures contract is
traded or, in the absence of sales, at the mean between the last bid and asked
prices. Unless the Board determines that using this valuation method would not
reflect the investments' value, short-term investments that mature in 60 days or
less are valued on the basis of amortized cost, which involves valuing a
portfolio instrument at its cost initially and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Any assets and
liabilities initially expressed in non-U.S. dollar currencies are translated
into U.S. dollars at the prevailing rate as quoted by an independent pricing
service on the date of valuation. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
Each Portfolio's performance may be quoted in advertising if accompanied by
performance of the Participating Insurance Company's separate account. From time
to time, each Portfolio may
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advertise its average annual total return over various periods of time. These
total return figures show the average percentage change in value of an
investment in the Portfolio from the beginning of the measuring period to the
end of the measuring period. The figures reflect changes in the price of the
Portfolio's shares assuming that any income dividends and/or capital gain
distributions made by the Portfolio during the period were reinvested in shares
of the Portfolio. Total return will be shown for recent one-, five-and ten-year
periods, and may be shown for other periods as well (such as from commencement
of the Portfolio's operations or on a year-by-year, quarterly or current
year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting
each Portfolio's expenses, but may not include charges and expenses attributable
to any particular Variable Contract. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer
than one year, it is important to note that the annual total return for one year
in the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of a
Portfolio's return over a longer market cycle. Each Portfolio may also advertise
its aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in share prices and assuming reinvestment of
dividends and distributions). Aggregate and average total returns may be shown
by means of schedules, charts or graphs and may indicate various components of
total return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
Investors should note that return figures are based on historical earnings
and are not intended to indicate future performance. The Statement of Additional
Information describes the method used to determine the total return. Current
total return figures may be obtained by calling (800) 888-6878.
In reports or other communications to investors or in advertising material,
a Portfolio or a Participating Insurance Company may describe general economic
and market conditions affecting the Portfolio. Performance may be compared with
(i) that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc. or similar investment services that monitor the
performance of mutual funds or as set forth in the publications listed below;
(ii) in the case of the International Equity Portfolio, with the Morgan Stanley
Capital International EAFE Index, the Salomon Russell Global Equity Index, the
FT-Actuaries World Indices (jointly compiled by The Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltds.) and the S&P 500, which are
unmanaged indexes of common stocks and, in the case of the Small Company Growth
Portfolio, with the Russell 2500; or (iii) other appropriate indexes of
investment securities or with data developed by Counsellors derived from such
indexes. A Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Morningstar, Inc. and Financial Times.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company may also
19
<PAGE>
describe the general biography or work experience of the portfolio managers of
the Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
Each Portfolio may also discuss the continuum of risk and return relating to
different investments and the potential impact of foreign stocks on a portfolio
otherwise composed of domestic securities. In addition, each Portfolio or a
Participating Insurance Company may from time to time compare its expense to
that of investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws of
The Commonwealth of Massachusetts as a business entity commonly known as a
'Massachusetts business trust.' The Trust's Declaration of Trust authorizes the
Board to issue an unlimited number of full and fractional shares of beneficial
interest, $.001 par value per share. Shares of two series have been authorized,
which constitute the interests in the Portfolios. The Board may classify or
reclassify any of its shares into one or more additional series without
shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders of
each Portfolio will have one vote for each full share held and fractional votes
for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
Under current law, a Participating Insurance Company is required to request
voting instructions from Variable Contract owners and must vote all Trust shares
held in the separate account in proportion to the voting instructions received.
For a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
members holding office have been elected by shareholders. Shareholders of record
of no less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. A meeting will be called for the purpose
of voting on the removal of a Trustee at the written request of holders of 10%
of the Trust's outstanding shares.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to Variable Contracts
offered through separate accounts of Participating Insurance Companies which may
or may not be affiliated with each other. Due to differences of tax treatment
and other considerations, the interests of various Variable Contract owners
participating in a Portfolio may conflict. The Board will monitor the Portfolios
for any material conflicts that may arise and will determine what action, if
any, should be taken. If a conflict occurs, the Board may require one or more
Participating Insurance Company separate accounts to withdraw its investments in
one or both Portfolios. As a result, a Portfolio may be forced to sell
securities at disadvantageous prices and orderly portfolio management could be
disrupted. In addition, the Board may refuse to sell shares of a Portfolio to
any Variable Contract or may suspend or terminate the offering of shares of a
Portfolio if such action is required by law or regulatory authority or is in the
best interests of the shareholders of the Portfolio.
SHAREHOLDER COMMUNICATIONS. Variable Contract owners of a Portfolio will receive
a semiannual report and an audited annual report, each of which includes a list
of the investment securities held by the Portfolio (and their market values)
20
<PAGE>
and a statement of the performance of the Portfolio.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
21
<PAGE>
TABLE OF CONTENTS
THE TRUST'S EXPENSES ..................................................... 2
INVESTMENT OBJECTIVES AND POLICIES ....................................... 3
PORTFOLIO INVESTMENTS .................................................... 4
PERFORMANCE OF INVESTMENT FUNDS
MANAGED BY COUNSELLORS ................................................ 5
RISK FACTORS AND SPECIAL
CONSIDERATIONS ........................................................ 6
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE .................................................................. 8
CERTAIN INVESTMENT STRATEGIES ............................................ 8
INVESTMENT GUIDELINES ................................................... 13
MANAGEMENT OF THE PORTFOLIOS ............................................ 14
HOW TO PURCHASE AND REDEEM SHARES IN
THE PORTFOLIOS ....................................................... 16
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 17
NET ASSET VALUE ......................................................... 18
PERFORMANCE ............................................................. 18
GENERAL INFORMATION ..................................................... 20
WPTRU-1-0695
<PAGE>
[LOGO]
WARBURG PINCUS TRUST
[ ] INTERNATIONAL EQUITY PORTFOLIO
[ ] SMALL COMPANY GROWTH PORTFOLIO
PROSPECTUS
JUNE 20, 1995
<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
June 20, 1995
------------------------
WARBURG PINCUS TRUST
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
------------------------
Contents
Page
----
Investment Objectives . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . 2
Management of the Trust . . . . . . . . . . . . . . . . 28
Additional Purchase and Redemption Information . . . . 36
Additional Information Concerning Taxes . . . . . . . . 36
Determination of Performance . . . . . . . . . . . . . 39
Auditors and Counsel . . . . . . . . . . . . . . . . . 42
Financial Statement . . . . . . . . . . . . . . . . . . 42
Appendix -- Description of Ratings . . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P.,
Independent Auditors . . . . . . . . . . . . . . . . A-3
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus of Warburg Pincus Trust (the "Trust"), dated
June 20, 1995, and is incorporated by reference in its entirety into that
Prospectus. The Trust currently offers two managed investment funds, the
International Equity Portfolio and the Small Company Growth Portfolio
(together the "Portfolios" and each a "Portfolio"). Shares of a Portfolio are
not available directly to individual investors but may be offered only to
certain life insurance companies ("Participating Insurance Companies") for
allocation to certain of their separate accounts established for the purpose
of funding variable annuity contracts and variable life insurance policies
(together "Variable Contracts"). Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of a Portfolio
should be made solely upon the information contained herein. Copies of the
Trust's Prospectus and information regarding each of the Portfolios' current
performance may be obtained by calling Warburg Pincus Funds at (800) 886-6878.
<PAGE>2
INVESTMENT OBJECTIVES
The investment objective of the International Equity Portfolio is
long-term capital appreciation. The investment objective of the Small Company
Growth Portfolio is capital growth.
INVESTMENT POLICIES
The following policies supplement the descriptions of each
Portfolio's investment objective and policies in the Prospectus.
Additional Information on Investment Practices
Foreign Investments. The International Portfolio will ordinarily
hold no less than 65% of its total assets in foreign securities, and the Small
Company Growth Portfolio may invest up to 20% of its total assets in the
securities of foreign issuers. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below,
which are not typically associated with investing in U.S. issuers. Since the
International Equity Portfolio will, and the Small Company Growth Portfolio
may, be investing in securities denominated in currencies other than the U.S.
dollar, and since a Portfolio may temporarily hold funds in bank deposits or
other money market investments denominated in foreign currencies, each
Portfolio may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. A change in the value of a foreign currency relative to the U.S.
dollar will result in a corresponding change in the dollar value of a
Portfolio's assets denominated in that foreign currency. Changes in foreign
currency exchange rates may also affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed by a Portfolio with respect to its
foreign investments.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal
and trade policies pursued by the governments of the United States and other
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a
<PAGE>3
country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies.
Many of the foreign securities held by a Portfolio will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the U.S. Securities and Exchange Commission (the "SEC"). Accordingly,
there may be less publicly available information about the securities and
about the foreign company or government issuing them than is available about a
domestic company or government entity. Foreign companies are generally not
subject to uniform financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. In addition, with respect
to some foreign countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Portfolio, political or social instability, or domestic developments which
could affect U.S. investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments positions.
Each of the Portfolios may invest in securities of foreign governments (or
agencies or instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid and their
prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the
trade and settlement dates of securities purchased or sold. Due to the
increased exposure of a Portfolio to market and foreign exchange fluctuations
brought about by such delays, and due to the corresponding negative impact on
a Portfolio's liquidity, the Portfolios will avoid investing in countries
which are known to experience settlement delays which may expose the
Portfolios to unreasonable risk of loss.
The interest payable on the Portfolios' foreign securities may be
subject to foreign withholding taxes, and the general effect of these taxes
will be to reduce a Portfolio's income. Additionally, the operating expenses
of the International Equity Portfolio can be expected to be higher than that
of an investment company investing exclusively in U.S. securities, since the
expenses of the Portfolio, such as custodial costs, valuation costs and
communication costs, as well as the rate of the investment advisory fees,
though similar to such expenses of some other international funds, are higher
than those costs incurred by other investment companies.
Japanese Investments (International Equity Portfolio). From time to
time depending on current market conditions, the International Equity
Portfolio may invest a significant portion of its assets in Japanese
securities. Like any investor in Japan, the Portfolio will be subject to
general economic and political conditions in the country. In addition to the
considerations discussed above, these include future political and economic
developments, the possible imposition of, or changes in, exchange controls or
other Japanese governmental laws or restrictions applicable to such
investments, diplomatic developments, political or social unrest and natural
disasters.
<PAGE>4
The information set forth in this section has been extracted from
various governmental publications and other sources. The International Equity
Portfolio makes no representation as to the accuracy of the information, nor
has the Portfolio attempted to verify it. In some cases, current information
is not presented and may vary substantially from the historical data shown.
Furthermore, no representation is made that any correlation exists between
Japan or its economy in general and the performance of the Portfolio.
Economic Background. Over the past 30 years Japan has experienced
significant economic development. During the era of high economic growth in
the 1960's and early 1970's the expansion was based on the development of
heavy industries such as steel and shipbuilding. In the 1970's Japan moved
into assembly industries which employ high levels of technology and consume
relatively low quantities of resources, and since then has become a major
producer of electrical and electronic products and automobiles. Moreover,
since the mid-1980's Japan has become a major creditor nation. With the
exception of the periods associated with the oil crises of the 1970's, Japan
has generally experienced very low levels of inflation. On January 17, 1995,
the Great Hanshin Earthquake severely damaged Kobe, Japan's largest container
port. The economic effects of the earthquake cannot be predicted.
Japan is largely dependent upon foreign economies for raw materials.
For instance, almost all of its oil is imported, the majority from the Middle
East. Oil prices therefore have a major impact on the domestic economy, as is
evidenced by the current account deficits triggered by the two oil crises of
the 1970's. Oil prices have declined mainly due to a worldwide easing of
demand for crude oil. The stabilized price of oil contributed to Japan's
sizeable current account surplus and stability of wholesale and consumer
prices since 1981. While Japan is working to reduce its dependence on foreign
materials, its lack of natural resources poses a significant obstacle to this
effort.
International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must import.
Japan's trade surplus has increased dramatically in recent years, exceeding
$100 billion per year since 1991 and reaching a record high of $145 billion in
1994. Because of the concentration of Japanese exports in highly visible
products such as automobiles, machine tools and semiconductors, and the large
trade surpluses resulting therefrom, Japan has entered a difficult phase in
its relations with its trading partners, particularly with respect to the
United States, with whom the trade imbalance is the greatest. The United
States and Japan have engaged in "economic framework" negotiations to help
raise United States' share in Japanese markets and reduce Japan's current
account surplus but progress in the negotiations has been hampered by recent
political upheaval in Japan. Any trade sanctions imposed upon Japan by the
United States as a result of the current friction or otherwise could adversely
impact Japan and the Portfolio's investments there.
<PAGE>5
The following table sets forth the composition of Japan's trade
balance, as well as other components of its current account, for the years
shown.
CURRENT ACCOUNT
Trade
<TABLE>
<CAPTION>
Year Exports Imports Trade Balance Current Balance
---- ------- ------- ------------- ---------------
(U.S. dollars in millions)
<S> <C> <C> <C>
1989 269,570 192,653 76,917 57,157
1990 280,374 216,846 63,528 35,761
1991 306,557 203,513 103,044 72,901
1992 330,850 198,502 132,348 117,551
1993 351,292 209,778 141,514 131,448
1994 N/A* N/A N/A N/A
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
Economic Trends. The following tables set forth Japan's gross
domestic product, wholesale price index and consumer price index for the years
shown.
GROSS DOMESTIC PRODUCT (GDP)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GDP (yen billions)
(Expenditures) 469,240 468,769 463,850 451,297 24,537 396,197
Change in GDP
from Preceding
Year
Nominal terms N/A 1.1% 2.8% 6.3% 7.2% 6.7%
Real Terms N/A 0.1% 1.1% 4.3% 4.8% 4.7%
</TABLE>
* N/A = not available.
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
<PAGE>6
WHOLESALE PRICE INDEX
<TABLE>
<CAPTION>
Change from
All Preceding
Year Commodities Year
---- ----------- -----------
(Base year: 1990)
<S> <C> <C>
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 2.1
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
Change from
Year General Preceding Year
---- ------- --------------
(Base Year: 1990)
<S> <C> <C>
1989 97.0 2.3
1990 100.0 3.1
1991 103.3 3.3
1992 105.0 1.6
1993 106.4 1.3
1994 107.1 0.7
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
Securities markets. There are eight stock exchanges in Japan. Of
these, the Tokyo Stock Exchange is by far the largest, followed by the Osaka
Stock Exchange and the Nagoya Stock Exchange. These exchanges divide the
market for domestic stocks into two sections, with newly listed companies and
smaller companies assigned to the Second Section and larger companies assigned
to the First Section.
<PAGE>7
The following table sets forth the number of Japanese companies
listed on the three major Japanese stock exchanges as of the end of 1994.
<TABLE>
<CAPTION>
NUMBER OF LISTED DOMESTIC COMPANIES
<S> <C> <C>
Tokyo Osaka Nagoya
---------------------------- ------------------------ -------------------------
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec.
---- ---- ---- ---- ---- ----
1,235 454 855 344 431 129
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
The following table sets forth the trading volume and value of
Japanese stocks on the eight Japanese stock exchanges for the years shown.
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
<TABLE>
<CAPTION>
Year Volume Value
---- ------ -----
<S> <C> <C>
1989 . . . . . . . . . . . . . . . . . . . . 256,296 386,395
1990 . . . . . . . . . . . . . . . . . . . . 145,837 231,837
1991 . . . . . . . . . . . . . . . . . . . . 107,844 134,160
1992 . . . . . . . . . . . . . . . . . . . . 82,563 80,456
1993 . . . . . . . . . . . . . . . . . . . . 101,173 106,123
1994 . . . . . . . . . . . . . . . . . . . . 105,937 114,622
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
Securities Indexes. The Tokyo Stock Price Index ("TOPIX") is a
composite index of all common stocks listed on the First Section of the Tokyo
Stock Exchange. TOPIX reflects the change in the aggregate market value of
the common stocks as compared to the aggregate market value of those stocks as
of the close on January 4, 1968.
The following table sets forth the high, low and year-end TOPIX for
the years shown.
<PAGE>8
TOPIX
(January 4, 1968=100)
<TABLE>
<CAPTION>
Year Year-end High Low
---- -------- ---- ---
<S> <C> <C> <C>
1989 2,881.37 2,884.80 2,364.33
1990 1,733.83 2,867.70 1,523.43
1991 1,714.68 2,028.85 1,638.06
1992 1,307.66 1,763.43 1,102.50
1993 1,439.31 1,698.67 1,250.06
1994 1,559.09 1,712.73 1,445.97
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
Currency Transactions. The value in U.S. dollars of the assets of each
Portfolio that are invested in foreign securities may be affected favorably or
unfavorably by changes in exchange control regulations, and the Portfolio may
incur costs in connection with conversion between various currencies. Each
Portfolio, therefore, may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates and may also engage
in currency transactions to increase income and total return. Currency
exchange transactions may be from any non-U.S. currency into U.S. dollars or
into other appropriate currencies. Each Portfolio will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market, (ii) through entering into forward contracts
to purchase or sell currency, (iii) by purchasing currency options or
(iv) through entering into foreign currency futures or options on such
contracts. If a devaluation is generally anticipated, the Portfolio may not
be able to contract to sell the currency at a price above the devaluation
level it anticipates. The cost to a Portfolio of engaging in currency
transactions varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing. Because
transactions in currency exchange are usually conducted on a principal basis,
no fees or commissions are generally involved.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by
the parties, at a price set at the time of the contract. These contracts are
entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers.
At or before the maturity of a forward contract, the Portfolio may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to purchase a
second, offsetting contract. If the Portfolio retains the portfolio security
and engages in an offsetting transaction, the Portfolio, at the time of
execution of the offsetting transaction, will incur a gain or a loss to the
extent that movement has occurred in forward contract prices.
<PAGE>9
Currency Options. Each Portfolio may purchase put and call options on
foreign currencies. Foreign currency options generally have three, six, nine
and twelve month expiration cycles. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected
to be lower than the spot price of the currency at the time the option is
exercised.
Foreign Currency Futures. As described below under "Futures
Activities," a Portfolio may enter into foreign currency futures contracts and
related options.
Currency Hedging. While the values of forward currency contracts,
currency options, currency futures and options on futures may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of a Portfolio's investments. A currency hedge, for example,
should protect a Yen-denominated bond against a decline in the Yen, but will
not protect the Portfolio against price decline if the issuer's
creditworthiness deteriorates. Because the value of a Portfolio's investments
denominated in foreign currency will change in response to many factors other
than exchange rates, a currency hedge may not be entirely successful in
mitigating changes in the value of the Portfolio's investments denominated in
that currency over time.
A decline in the dollar value of a foreign currency in which the
Portfolio's securities are denominated will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In order to protect against such diminutions in the
value of securities it holds, the Portfolio may purchase put options on the
foreign currency. If the value of the currency does decline, the Portfolio
will have the right to sell the currency for a fixed amount in dollars and
will thereby offset, in whole or in part, the adverse effect on its securities
that otherwise would have resulted. Conversely, if a rise in the dollar value
of a currency in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, the Portfolio may
purchase call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the adverse movements
in exchange rates. Although currency hedges limit the risk of loss due to a
decline in the value of a hedged currency, at the same time, they also limit
any potential gain that might result should the value of the currency
increase.
A Portfolio's currency hedging will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is
the purchase or sale of forward currency with respect to specific receivables
or payables of the Portfolio generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions. The Portfolio
may not position hedge to an extent greater than the aggregate market value
(at the time of making such sale) of the hedged securities.
<PAGE>10
Futures Activities. A Portfolio may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes
including increasing return and hedging against changes in the value of
portfolio securities due to anticipated changes in interest rates, currency
values and/or market conditions. The ability of a Portfolio to trade in
futures contracts may be limited by the requirements of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable to a regulated investment
company.
A Portfolio will not enter into futures contracts and related options
for which the aggregate initial margin and premiums required to establish
positions other than those considered to be "bona fide hedging" by the CFTC
exceed 5% of the Portfolio's net asset value after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. There is no overall limit on the percentage of a Portfolio's assets
that may be at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for the
future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. Foreign currency futures are similar to forward currency contracts,
except that they are traded on commodities exchanges and are standardized as
to contract size and delivery date. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specific financial instrument (debt security) at a
specified price, date, time and place. Stock indexes are capitalization
weighted indexes which reflect the market value of the companies listed on the
indexes. A stock index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the beginning and at the end of
the contract period. In entering into these contracts, the Portfolio will
incur brokerage costs and be required to make and maintain certain "margin"
deposits on a mark-to-market basis, as described below.
One of the purposes of entering into a futures contract may be to
protect the Portfolio from fluctuations in value of its portfolio securities
without its necessarily buying or selling the securities. Since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Portfolio, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Portfolio's
assets. No consideration is paid or received by the Portfolio upon entering
into a futures contract. Instead, the Portfolio will be required to deposit
in a segregated account with its custodian an amount of cash or cash
equivalents, such as U.S. government securities or other liquid high-grade
debt obligations, equal to approximately 1% to 10% of the contract amount
(this amount is subject to change by the exchange on which the contract is
traded, and brokers may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the
<PAGE>11
Portfolio upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in
the margin account if the Portfolio fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the currency, financial instrument or stock index underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures
contract, the Portfolio may elect to close the position by taking an opposite
position, which will operate to terminate the Portfolio's existing position in
the contract.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although
each Portfolio intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most futures exchanges
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting the Portfolio to
substantial losses. In such event, and in the event of adverse price
movements, the Portfolio would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the Portfolio's securities being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described
above, there is no guarantee that the price of the securities being hedged
will, in fact, correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
If a Portfolio has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does
not occur, the Portfolio will lose part or all of the benefit of the increased
value of securities which it has hedged because it will have offsetting losses
in its futures positions. Losses incurred in futures transactions and the
costs of these transactions will affect the Portfolio's performance. In
addition, in such situations, if the Portfolio had insufficient cash, it might
have to sell securities to meet daily variation margin requirements at a time
when it would be disadvantageous to do so. These sales of securities could,
but will not necessarily, be at increased prices which reflect the change in
currency values, interest rates or stock indexes, as the case may be.
Options on Futures Contracts. Each Portfolio may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected.
<PAGE>12
An option on a currency, interest rate or stock index futures contract,
as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
currency, interest rate or stock index futures contract at a specified
exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option is fixed
at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net
asset value of the Portfolio.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated trends in interest
rates and securities markets by Warburg, Pincus Counsellors, Inc.
("Counsellors") which could prove to be incorrect. Even if Counsellors'
expectations are correct, where options on futures are used for hedging
purposes, there may be an imperfect correlation between the change in the
value of the options and of the portfolio securities hedged.
Options on Securities. A Portfolio may purchase and write put and call
options on stocks and debt securities that are traded on foreign and U.S.
exchanges, as well as over-the-counter ("OTC") options, to the extent
permitted by the policies of state securities authorities in states where
shares of the Portfolio are qualified for offer and sale. The Portfolio may
utilize up to 10% of its assets to purchase such options and, with respect to
put options, may do so at or about the same time that it purchases the
underlying security or at a later time. In addition, each Portfolio may write
covered call options on up to 25% of the stock and debt securities in its
portfolio. Options on securities and stock indexes (described below) may be
purchased and written for hedging purposes and to increase income and total
return.
A Portfolio realizes fees (referred to as "premiums") for granting the
rights evidenced by the call options it has written. A put option embodies
the right of its purchaser to compel the writer of the option to purchase from
the option holder an underlying security at a specified price in accordance
with its terms. In contrast, a call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price in accordance with its terms.
The principal reason for writing covered call options on a security is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a
Portfolio as the writer of a covered call option
<PAGE>13
forfeits the right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the Portfolio as the call writer
retains the risk of a decline in the price of the underlying security. The
size of the premiums that the Portfolio may receive may be adversely affected
as new or existing institutions, including other investment companies, engage
in or increase their option-writing activities.
Options written by a Portfolio will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolio may write (i) in-the-money
call options when Counsellors expects that the price of the underlying
security will remain flat or decline moderately during the option period,
(ii) at-the-money call options when Counsellors expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (iii) out-of-the-money call options when Counsellors expects that
the premiums received from writing the call option plus the appreciation in
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
In any of the preceding situations, if the market price of the underlying
security declines and the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by the premium received.
To secure its obligation to deliver the underlying security when it writes a
call option, the Portfolio will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the
Options Clearing Corporation (the "Clearing Corporation") and of the
securities exchange on which the option is written.
In the case of options written by a Portfolio that are deemed covered by
virtue of the Portfolio's holding convertible or exchangeable preferred stock
or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the
Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
the Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio will have the absolute right to receive from
the issuer of the underlying security an equal number of shares to replace the
borrowed stock, but the Portfolio may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Portfolio may write covered call options. If a Portfolio writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
<PAGE>14
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or
written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised
in one or more accounts or through one or more brokers). It is possible that
a Portfolio and other clients of Counsellors and certain of its affiliates may
be considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose certain other sanctions. These limits may restrict the number of
options a Portfolio will be able to purchase on a particular security.
Prior to their expirations, put and call options purchased by a
Portfolio may be sold in closing sale transactions (sales by a Portfolio,
prior to the exercise of options that it has purchased, of options of the same
series) in which the Portfolio may realize a profit or loss from the sale. An
option position may be closed out only where there exists a secondary market
for an option of the same series on a recognized securities exchange or in the
over-the-counter market. In cases where the Portfolio has written an option,
it will realize a profit if the cost of the closing purchase transaction is
less than the premium received upon writing the original option and will incur
a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when the Portfolio has
purchased an option and engages in a closing sale transaction, whether the
Portfolio realizes a profit or loss will depend upon whether the amount
received in the closing sale transaction is more or less than the premium the
Portfolio initially paid for the original option plus the related transaction
costs. So long as the obligation of a Portfolio as the writer of an option
continues, the Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver the underlying security against payment of the exercise price. This
obligation terminates when the option expires or the Portfolio effects a
closing purchase transaction. The Portfolio can no longer effect a closing
purchase transaction with respect to an option once it has been assigned an
exercise notice.
Although a Portfolio will generally purchase or write only those options
for which Counsellors believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest will exist to create a liquid secondary market on a securities
exchange for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow or other unforeseen
events have at times rendered certain of the facilities of the Clearing
Corporation and various securities exchanges inadequate and resulted in the
institution of special procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in one or more
options. There can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing transactions
in particular options. Moreover, as discussed below, a Portfolio's ability to
terminate options positions established in the over-the-counter market
<PAGE>15
may be more limited than for exchange-traded options and may also involve the
risk that securities dealers participating in over-the-counter transactions
would fail to meet their obligations to the Portfolio.
Options as a hedge. In addition to entering into options transactions
for other purposes, including generating current income, each Portfolio may
enter into options transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite direction of a
portfolio position. A hedge is designed to offset a loss on a portfolio
position with a gain on the hedged position; at the same time, however, a
properly correlated hedge will result in a gain on the portfolio position
being offset by a loss on the hedged position. The Portfolio bears the risk
that the prices of the securities being hedged will not move in the same
amount as the hedge. The Portfolio will engage in hedging transactions only
when deemed advisable by Counsellors. Successful use by the Portfolio of
options will be subject to Counsellors' ability to predict correctly movements
in the direction of the stock underlying the option used as a hedge. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Portfolio's performance.
OTC Options. Each Portfolio may purchase OTC or dealer options or sell
covered OTC options on securities. Unlike exchange-listed options where an
intermediary or clearing corporation, such as the Clearing Corporation,
assures that all transactions in such options are properly executed, the
responsibility for performing all transactions with respect to OTC options
rests solely with the writer and the holder of those options. A listed call
option writer, for example, is obligated to deliver the underlying stock to
the clearing organization if the option is exercised, and the clearing
corporation is then obligated to pay the writer the exercise price of the
option. If a Portfolio were to purchase a dealer option, however, it would
rely on the dealer from whom it purchased the option to perform if the option
were exercised. If the dealer fails to honor the exercise of the option by
the Portfolio, the Portfolio would lose the premium it paid for the option and
the expected benefit of the transaction.
Listed options generally have a continuous liquid market while dealer
options have none. Consequently, a Portfolio will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Portfolio
writes a dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Portfolio originally wrote the option. Although
the Portfolio will seek to enter into dealer options only with dealers who
will agree to and that are expected to be capable of entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate a dealer option at a favorable price at any time
prior to expiration. The inability to enter into a closing transaction may
result in material losses to the Portfolio. Until the Portfolio, as a covered
dealer call option writer, is able to effect a closing purchase transaction,
it will not be able to liquidate securities (or other assets) used to cover
the written option until the option expires or is exercised. This requirement
may impair the Portfolio's ability to sell portfolio securities or, with
respect to currency options,
<PAGE>16
currencies at a time when such sale might be advantageous. In the event of
insolvency of the other party, the Portfolio may be unable to liquidate a
dealer option.
Stock Index Options. Each Portfolio may utilize up to 10% of its total
assets to purchase exchange-listed and OTC put and call options on stock
indexes, and may write options on such indexes, to hedge against the effects
of market-wide price movements or to increase income and total return. The
aggregate value of the securities underlying the calls or puts on stock
indexes written by a Portfolio, determined as of the date the options are
sold, when added to the value of the securities underlying the calls on stock
and debt securities written by the Portfolio, may not exceed 25% of the
Portfolio's net assets. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common stocks included in
the index, fluctuating with changes in the market values of the stocks
included in the index. Some stock index options are based on a broad market
index such as the New York Stock Exchange Inc. ("NYSE") Composite index, or a
narrower market index such as the Standard & Poor's 100. Indexes may also be
based on a particular industry or market segment.
Options on stock indexes are similar to options on stock except that (i)
the expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the index and
the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Stock Index Options as a Hedge. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the portion of a securities portfolio being hedged
correlate with price movements of the stock index selected. Because the value
of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether a Portfolio will realize a gain
or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in
the case of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use by
each Portfolio of options on stock indexes will be subject to Counsellors'
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than
<PAGE>17
predicting changes in the price of individual stocks, and there can be no
assurance that the use of these portfolio strategies will be successful.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. As described in the Prospectus, each Portfolio will comply with
guidelines established by the SEC designed to eliminate any potential for
leverage with respect to currency forward contracts; options written by the
Portfolio on securities and indexes; currency, interest rate and index futures
contracts and options on these futures contracts. These guidelines may, in
certain instances, require segregation by the Portfolio of cash or liquid
high-grade debt securities.
For example, a call option written by a Portfolio on securities may
require the Portfolio to hold the securities subject to the call (or
securities convertible into the securities without additional consideration)
or to segregate cash or liquid high-grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option
written by the Portfolio on an index may require the Portfolio to own
portfolio securities that correlate with the index or to segregate cash or
liquid high-grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. A put option written by the Portfolio
may require the Portfolio to segregate cash or liquid high-grade debt
obligations equal to the exercise price. Each Portfolio may enter into fully
or partially offsetting transactions so that its net position, coupled with
any segregated assets (equal to any remaining obligation), equals its net
obligation. The Portfolio could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold
by the Portfolio. If a Portfolio holds a futures or forward contract, the
Portfolio could purchase a put option on the same futures or forward contract
with a strike price as high or higher than the price of the contract held.
Asset coverage may be achieved by other means when consistent with applicable
regulatory policies.
U.S. Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. government securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
government securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Federal National
Mortgage Association ("FNMA"), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board and Student Loan Marketing
Association. Each Portfolio may also invest in instruments that are supported
by the right of the issuer to borrow from the U.S. Treasury and instruments
that are supported by the credit of the instrumentality. Because the U.S.
government is not obligated by law to provide support to an instrumentality it
sponsors, a Portfolio will invest in obligations issued by such an
<PAGE>18
instrumentality only if Counsellors determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Portfolio.
Securities of Other Investment Companies. Each Portfolio may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, a Portfolio may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of
such company, (ii) do not exceed 5% of the value of the Portfolio's total
assets and (iii) when added to all other investment company securities held by
the Portfolio, do not exceed 10% of the value of the Portfolio's total assets.
Lending of Portfolio Securities. A Portfolio may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Trust's Board of Trustees (the "Board"). These loans, if and when made, may
not exceed 20% of the Portfolio's total assets taken at value. A Portfolio
will not lend portfolio securities to E.M. Warburg, Pincus & Co., Inc. ("EMW")
or its affiliates unless it has applied for and received specific authority to
do so from the SEC. Loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. government securities, which are maintained at
all times in an amount equal to at least 100% of the current market value of
the loaned securities. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account
of the Portfolio involved. From time to time, a Portfolio may return a part
of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated
with the Portfolio and that is acting as a "finder."
By lending its securities, the Portfolio can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral. Although
the generation of income is not an investment objective of the Portfolios,
income received could be used to pay a Portfolio's expenses and would increase
its total return. Each Portfolio will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Portfolio must receive
at least 100% cash collateral or equivalent securities of the type discussed
in the preceding paragraph from the borrower; (ii) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (iii) the Portfolio must be able to terminate the
loan at any time; (iv) the Portfolio must receive reasonable interest on the
loan, as well as any dividends, interest or other distributions on the loaned
securities and any increase in market value; (v) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower, provided, however, that if
a material event adversely affecting the investment occurs, the Board must
terminate the loan and regain the right to vote the securities. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon the Portfolio's
ability to recover the loaned securities or dispose of the collateral for the
loan.
<PAGE>19
Repurchase Agreements. A Portfolio may enter into repurchase agreements
with member banks of the Federal Reserve System or certain non-bank dealers.
Repurchase agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under each repurchase agreement, the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements
involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon a Portfolio's ability to
dispose of the underlying securities.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may utilize up to 20% of its total assets to purchase securities on
a "when-issued" basis or purchase or sell securities for delayed delivery
(i.e., payment or delivery occur beyond the normal settlement date at a stated
price and yield). When-issued transactions normally settle within 30-45 days.
A Portfolio will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage, but may
sell the securities before the settlement date if Counsellors deems it
advantageous to do so. The payment obligation and the interest rate that will
be received on when-issued securities are fixed at the time the buyer enters
into the commitment. Due to fluctuations in the value of securities purchased
or sold on a when-issued or delayed-delivery basis, the yields obtained on
such securities may be higher or lower than the yields available in the market
on the dates when the investments are actually delivered to the buyers.
When a Portfolio agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations equal to the amount of the commitment
in a segregated account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Portfolio
may be required subsequently to place additional assets in the segregated
account in order to ensure that the value of the account remains equal to the
amount of the Portfolio's commitment. It may be expected that the Portfolio's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Portfolio engages in when-issued or delayed-delivery transactions, it
relies on the other party to consummate the trade. Failure of the seller to
do so may result in the Portfolio's incurring a loss or missing an opportunity
to obtain a price considered to be advantageous.
American, European and Continental Depositary Receipts. The assets of a
Portfolio may be invested in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe typically by non-U.S. banks and trust companies
that evidence ownership of either
<PAGE>20
foreign or domestic securities. Generally, ADRs in registered form are
designed for use in U.S. securities markets and EDRs and CDRs in bearer form
are designed for use in European securities markets.
Convertible Securities. Convertible securities in which a Portfolio may
invest, including both convertible debt and convertible preferred stock, may
be converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an
investor to benefit from increases in the market price of the underlying
common stock. Convertible securities provide higher yields than the
underlying equity securities, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, also fluctuates in relation to the underlying common stock.
Short Sales "Against the Box". In a short sale, a Portfolio sells a
borrowed security and has a corresponding obligation to the lender to return
the identical security. The Portfolio may engage in short sales if at the
time of the short sale the Portfolio owns or has the right to obtain without
additional cost an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box."
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If the Portfolio engages in a short sale, the collateral for the
short position will be maintained by the Portfolio's custodian or qualified
sub-custodian. While the short sale is open, the Portfolio will maintain in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute the Portfolio's long
position. Not more than 10% of each Portfolio's net assets (taken at current
value) may be held as collateral for such short sales at any one time.
The Portfolios do not intend to engage in short sales against the box
for investment purposes. The Portfolio may, however, make a short sale as a
hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Portfolio (or a security
convertible or exchangeable for such security), or when the Portfolio wants to
sell the security at an attractive current price, but also wishes to defer
recognition of gain or loss for U.S. federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in the Portfolio's
long position should be offset by a gain in the short position and, and,
conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which such gains or losses are reduced will
depend upon the amount of the security sold short relative to the amount the
Portfolio owns. There will be certain additional transaction costs associated
with short sales against the box, but the Portfolio will endeavor to offset
these costs with the income from the investment of the cash proceeds of short
sales.
<PAGE>21
Warrants. Each Portfolio may invest up to 5% of net assets in warrants,
provided that not more than 2% of net assets may be invested in warrants not
listed on a recognized U.S. or foreign stock exchange. Because a warrant does
not carry with it the right to dividends or voting rights with respect to the
securities which it entitles a holder to purchase, and because it does not
represent any rights in the assets of the issuer, warrants may be considered
more speculative than certain other types of investments. Also, the value of
a warrant does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised prior to
its expiration date.
Non-Publicly Traded and Illiquid Securities. A Portfolio may not invest
more than 15% of its net assets in illiquid securities, including securities
that are illiquid by virtue of the absence of a readily available market and
repurchase agreements which have a maturity of longer than seven days.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
Rule 144A adopted by the SEC allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Counsellors anticipates that the market
<PAGE>22
for certain restricted securities such as institutional commercial paper will
expand further as a result of this regulation and use of automated systems for
the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Counsellors will monitor the liquidity of restricted securities in a
Portfolio under the supervision of the Board. In reaching liquidity
decisions, Counsellors may consider, inter alia, the following factors: (i)
the unregistered nature of the security; (ii) the frequency of trades and
quotes for the security; (iii) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (iv) dealer
undertakings to make a market in the security and (v) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Borrowing. Each Portfolio may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption
requests so as to permit the orderly disposition of portfolio securities or to
facilitate settlement transactions on portfolio securities. Investments
(including roll-overs) will not be made when borrowings exceed 5% of the
Portfolio's total assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the
borrowing is outstanding. Each Portfolio expects that some of its borrowings
may be made on a secured basis. In such situations, either the custodian will
segregate the pledged assets for the benefit of the lender or arrangements
will be made with a suitable subcustodian, which may include the lender.
Special Situation Companies (Small Company Growth Portfolio). The Small
Company Growth Portfolio may invest in the securities of "special situation
companies" involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout
of a holding company; or litigation which, if resolved favorably, would
improve the value of the company's stock. If the actual or prospective
situation does not materialize as anticipated, the market price of the
securities of a "special situation company" may decline significantly. The
Portfolio believes, however, that if Counsellors analyzes "special situation
companies" carefully and invests in the securities of these companies at the
appropriate time, the Portfolio may achieve capital growth. There can be no
assurance, however, that a special situation that exists at the time the
Portfolio makes its investment will be consummated under the terms and within
the time period contemplated.
Non-Diversified Status (Small Company Growth Portfolio). The Small
Company Growth Portfolio is classified as non-diversified within the meaning
of the 1940 Act, which means that it is not limited by such Act in the
proportion of its assets that it may invest in securities of a single issuer.
The Portfolio's investments will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Code. See "Additional
Information Concerning Taxes." To qualify, the Portfolio will comply with
certain
<PAGE>23
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5%
of the market value of its total assets will be invested in the securities of
a single issuer and the Portfolio will not own more than 10% of the
outstanding voting securities of a single issuer.
Other Investment Limitations
The investment limitations numbered 1 through 10 may not be changed
without the affirmative vote of the holders of a majority of a Portfolio's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or
(ii) more than 50% of the outstanding shares. Investment limitations 11
through 17 may be changed by a vote of the Board at any time.
A Portfolio may not:
1. Borrow money except that the Portfolio may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Portfolio may not exceed 30% of the value of the
Portfolio's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. For the International Equity Portfolio only, purchase the securities
of any issuer, if as a result more than 5% of the value of the Portfolio's
total assets would be invested in the securities of such issuer, except that
this 5% limitation does not apply to U.S. government securities and except
that up to 25% of the value of the Portfolio's total assets may be invested
without regard to this 5% limitation.
4. Make loans, except that the Portfolio may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
<PAGE>24
5. Underwrite any securities issued by others except to the extent that
the investment in restricted securities and the sale of securities in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Portfolio may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Make short sales of securities or maintain a short position, except
that the Portfolio may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short
sales "against the box".
8. Purchase securities on margin, except that the Portfolio may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
9. Invest in commodities, except that the Portfolio may purchase and
sell futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis.
10. Issue any senior security except as permitted in these investment
limitations.
11. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
12. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow and in connection with the writing of covered put
and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts, and options on futures contracts.
13. Invest more than 15% of the Portfolio's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale
or securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
<PAGE>25
14. Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
15. Purchase or retain securities of any company if, to the knowledge
of the Trust, any of the Portfolio's officers or Trustees or any officer or
director of Counsellors individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially more
than 5% of the securities.
16. Invest in warrants (other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Portfolio's net assets.
17. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
Each Portfolio may make commitments more restrictive than the
restrictions listed above so as to permit the sale of Portfolio shares in
certain states. Should a Portfolio determine that any such commitment is no
longer in the best interest of the Portfolio and its shareholders, the
Portfolio will revoke the commitment by terminating the sale of Portfolio
shares in the state involved. If a percentage restriction is adhered to at
the time of an investment, a later increase or decrease in the percentage of
assets resulting from a change in the values of portfolio securities or in the
amount of the Portfolio's assets will not constitute a violation of such
restriction.
Portfolio Valuation
The Prospectus discusses the time at which the net asset value of each
Portfolio is determined for purposes of sales and redemptions. The following
is a description of the procedures used by each Portfolio in valuing its
assets.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or on a foreign securities
exchange will be valued on the basis of the closing value on the date on which
the valuation is made or, in the absence of sales, at the mean between the
closing bid and asked prices. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter
market will be valued on the basis of the bid price at the close of business
on each day, or, if market quotations for those securities are not readily
available, at fair value, as determined in good faith pursuant to consistently
applied procedures established by the Board. A security which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. In determining the
market value of portfolio investments, the Portfolio may employ outside
organizations (a "Pricing Service") which may use a matrix or formula method
that takes into consideration market indexes,
<PAGE>26
matrices, yield curves and other specific adjustments. The procedures of
Pricing Services are reviewed periodically by the officers of the Trust under
the general supervision and responsibility of the Board, which may replace any
such Pricing Service at any time. Short-term obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board. The amortized cost method of valuation may also be
used with respect to debt obligations with 60 days or less remaining to
maturity. The valuation of short sales of securities, which are not traded on
a national exchange, will be at the mean of bid and asked prices. All other
securities and other assets of the Portfolio will be valued at their fair
value as determined in good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its delegates may value a
security at fair value if it determines that such security's value determined
by the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which the NYSE is open for trading). In addition, securities
trading in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in various
foreign markets on days which are not business days in New York and days on
which the Portfolio's net asset value is not calculated. Because of the need
to obtain prices as of the close of trading on various exchanges throughout
the world, calculation of the Portfolio's net asset value may not take place
contemporaneously with the determination of the prices of certain portfolio
securities used in such calculation. All assets and liabilities initially
expressed in foreign currency values will be converted into U.S. dollar values
at the prevailing rate as quoted by a Pricing Service. If such quotations are
not available, the rate of exchange will be determined in good faith pursuant
to consistently applied procedures established by the Board. Events affecting
the values of portfolio securities that occur between the time their prices
are determined and the close of regular trading on the NYSE will not be
reflected in the Portfolio's calculation of net asset value unless the Board
or its delegates deems that the particular event would materially affect net
asset value, in which case an adjustment may be made.
Portfolio Transactions
Counsellors is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio
securities are usually principal transactions without brokerage commissions
effected directly with the issuer or with an underwriter acting as principal.
Other purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or
execution will be obtained. The purchase price paid by a Portfolio to
underwriters of newly issued securities usually includes a concession paid by
the issuer to the underwriter, and purchases of securities from dealers,
acting as either principals or agents in the after market, are normally
executed at a price between the bid and asked price, which includes a dealer's
mark-up or mark-down. Transactions on U.S. stock exchanges and some foreign
stock exchanges
<PAGE>27
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. On most foreign exchanges, commissions are generally
fixed. There is generally no stated commission in the case of securities
traded in domestic or foreign over-the-counter markets, but the price of
securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. government securities are generally purchased
from underwriters or dealers, although certain newly issued U.S. government
securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.
Counsellors will select specific portfolio investments and effect
transactions for each Portfolio. Counsellors seeks to obtain the best net
price and the most favorable execution of orders. In evaluating prices and
executions, Counsellors will consider the factors it deems relevant, which may
include the breadth of the market in the security, the price of the security,
the financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, to the extent that the execution and price
offered by more than one broker or dealer are comparable, Counsellors may, in
its discretion, effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934, as amended) to a Portfolio
and/or other accounts over which Counsellors exercises investment discretion.
Research and other services received may be useful to Counsellors in serving
both the Portfolios and its other clients and, conversely, research or other
services obtained by the placement of business of other clients may be useful
to Counsellors in carrying out its obligations to the Portfolios. The fees to
Counsellors under its advisory agreements with the Trust are not reduced by
reason of its receiving any brokerage and research services.
Investment decisions for each Portfolio concerning specific portfolio
securities are made independently from those for other clients advised by
Counsellors. Such other investment clients may invest in the same securities
as a Portfolio. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Counsellors believes to be equitable to each client, including
the Portfolios. In some instances, this investment procedure may adversely
affect the price paid or received by the Trust or the size of the position
obtained or sold for the Portfolio. To the extent permitted by law,
Counsellors may aggregate the securities to be sold or purchased for a
Portfolio with those to be sold or purchased for such other investment clients
in order to obtain best execution.
Any portfolio transaction for a Portfolio may be executed through
Counsellors Securities Inc., the Trust's distributor ("Counsellors
Securities"), if, in Counsellors' judgment, the use of Counsellors Securities
is likely to result in price and execution at least as favorable as those of
other qualified brokers, and if, in the transaction, Counsellors Securities
charges the Portfolio a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All
<PAGE>28
transactions with affiliated brokers will comply with Rule 17e-1 under the
1940 Act. In no instance will portfolio securities be purchased from or sold
to Counsellors or Counsellors Securities or any affiliated person of such
companies.
Each Portfolio may participate, if and when practicable, in bidding for
the purchase of securities for the Portfolio's portfolio directly from an
issuer in order to take advantage of the lower purchase price available to
members of such a group. A Portfolio will engage in this practice, however,
only when Counsellors, in its sole discretion, believes such practice to be
otherwise in the Portfolio's interest.
Portfolio Turnover
The Portfolios do not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when a Portfolio deems
it desirable to sell or purchase securities. A Portfolio's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of its
portfolio securities for the year by the monthly average value of the
portfolio securities. Securities with remaining maturities of one year or
less at the date of acquisition are excluded from the calculation.
Certain practices that may be employed by each Portfolio could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. The Small Company Growth Portfolio's
investment in special situation companies could result in high portfolio
turnover. To the extent that its portfolio is traded for the short-term, the
Portfolio will be engaged essentially in trading activities based on
short-term considerations affecting the value of an issuer's stock instead of
long-term investments based on fundamental valuation of securities. Because
of this policy, portfolio securities may be sold without regard to the length
of time for which they have been held. Consequently, the annual portfolio
turnover rate of the Small Company Growth Portfolio may be higher than mutual
funds having a similar objective that do not invest in special situation
companies.
MANAGEMENT OF THE TRUST
Officers and Board of Trustees
The names (and ages) of the Trust's Trustees and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<PAGE>29
Richard N. Cooper* **(60) . . . Trustee
Harvard University Professor at Harvard University;
1737 Cambridge Street Director or Trustee of CNA
Cambridge, Massachusetts 02138 Financial Corporation, Circuit City Stores,
Inc. (retail electronics and appliances) and
Phoenix Home Life Insurance Co.
Donald J. Donahue (70) . . . . Trustee
99 Indian Field Road Chairman of Magma Copper Company since
Greenwich, Connecticut 06830 January 1987; Director or Trustee of Northeast
Utilities, GEV Corporation and Signet Star
Reinsurance Company; Chairman and Director of
NAC Holdings from September 1990-June 1993.
Jack W. Fritz (68) . . . . . . Trustee
2425 North Fish Creek Road Private investor; Consultant
P.O. Box 483 and Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and operators
of radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (64) . . . . . . Chief Executive Officer and Trustee
466 Lexington Avenue Vice Chairman and Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1970; Chief
Executive Officer of 12 other investment
companies advised by Counsellors.
Thomas A. Melfe (63) . . . . . Trustee
30 Rockefeller Plaza Partner in the law firm of
New York, New York 10112 Donovan Leisure Newton & Irvine; Director of
Municipal Fund for New York Investors, Inc.
Alexander B. Trowbridge (65) . Trustee
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc.
Suite 700 (business consulting) from January 1990-
Washington, DC 20036 January 1994; President of the National
Association of Manufacturers from 1980-1990;
- -------------------------
* Indicates a Trustee who is an "interested person" of the Trust as defined
in the 1940 Act.
** Mr. Cooper has consulting arrangements with Counsellors and an affiliate
of Counsellors. Although these relationships do not appear to require
designation of Mr. Cooper as an interested person, the Trust is currently
making such a designation in order to avoid the possibility that Mr.
Cooper's independence would be questioned.
<PAGE>30
Director or Trustee of New England Mutual Life
Insurance Co., ICOS Corporation
(biopharmaceuticals), P.H.H. Corporation (fleet
auto management; housing and plant relocation
service), WMX Technologies Inc. (solid and
hazardous waste collection and disposal), The
Rouse Company (real estate development),
SunResorts International Ltd. (hotel and real
estate management), Harris Corp. (electronics
and communications equipment), The Gillette
Co. (personal care products) and Sun Company
Inc. (petroleum refining and marketing).
Arnold M. Reichman (47) . . . . President
466 Lexington Avenue Managing Director and Assistant
New York, New York 10017-3147 Secretary of EMW; Associated with EMW since
1984; Senior Vice President, Secretary and
Chief Operating Officer of Counsellors
Securities; Executive Vice President of 14
other investment companies advised by
Counsellors.
Eugene L. Podsiadlo (38) . . . Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated with
New York, New York 10017-3147 EMW since 1991; Vice President of Citibank,
N.A. from 1987-1991; Senior Vice President of
Counsellors Securities and 14 other investment
companies advised by Counsellors.
Stephen Distler (41) . . . . . Vice President and Chief Financial Officer
466 Lexington Avenue Managing Director, Controller and Assistant
New York, New York 10017-3147 Secretary of EMW; Associated with EMW since
1984; Treasurer of Counsellors Securities;
Vice President, Treasurer and Chief Accounting
Officer or Treasurer and Chief Financial
Officer of 14 other investment companies
advised by Counsellors.
Eugene P. Grace (43) . . . . . Vice President and Secretary
466 Lexington Avenue Associated with EMW since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General
<PAGE>31
Counsel and Secretary, Home Unity Savings
Bank from 1991-1992; Vice President and Chief
Compliance Officer of Counsellors Securities;
Vice President and Secretary of 14 other
investment companies advised by Counsellors.
Howard Conroy (41) . . . . . . Vice President, Treasurer and Chief
466 Lexington Avenue Accounting Officer
New York, New York 10017-3147 Associated with EMW since 1992; Associated
with Martin Geller, C.P.A. from 1990-1992;
Vice President, Finance with Gabelli/Rosenthal
& Partners, L.P. until 1990; Vice President,
Treasurer and Chief Accounting Officer of 13
other investment companies advised by
Counsellors.
Karen Amato (31) . . . . . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987; Assistant
New York, New York 10017-3147 Secretary of 14 other investment companies
advised by Counsellors.
No employee of Counsellors or PFPC Inc., the Trust's co-
administrator ("PFPC"), or any of their affiliates receives any compensation
from the Trust for acting as an officer or director of the Trust. Each
Trustee who is not a director, trustee, officer or employee of Counsellors,
PFPC or any of their affiliates receives an annual fee of $500 and $250 for
each meeting of the Board attended by him for his services as Trustee and is
reimbursed for expenses incurred in connection with his attendance at Board
meetings.
<PAGE>32
Trustees' Compensation
(estimated for the fiscal year ended December 31, 1995)+
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Trust Managed by Counsellors*
---------------- ----------------- ------------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $1,500 $39,500
Donald J. Donahue $1,500 $39,500
Jack W. Fritz $1,500 $39,500
Thomas A. Melfe $1,500 $39,500
Alexander B. Trowbridge $1,500 $39,500
</TABLE>
__________________________
+ Estimates of future payments to be made pursuant to existing
arrangements.
* Each Trustee also serves as a Director or Trustee of 14 other investment
companies advised by Counsellors.
** Mr. Furth is considered to be an interested person of the Trust and
Counsellors, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receives no compensation from the Trust or any other
investment company managed by Counsellors.
Portfolio Managers
Richard H. King, portfolio manager of the International Equity
Portfolio, earned a B.A. degree from Durham University in England. Mr. King
is also portfolio manager of Warburg, Pincus International Equity Fund and the
International Equity Portfolio of Warburg, Pincus Institutional Fund, Inc. and
a co-portfolio manager of Warburg, Pincus Emerging Markets Fund and Warburg,
Pincus Japan OTC Fund. From 1968 to 1982, he worked at W.I. Carr Sons &
Company (Overseas), a leading international brokerage firm. He resided in the
Far East as an Investment Analyst from 1970 to 1977, became director, and
later relocated to the U.S. where he became founder and president of W.I. Carr
(America), based in New York. From 1982 to 1984 Mr. King was a director in
charge of the Far East equity investments at N.M. Rothschild International
Asset Management, a London merchant bank. In 1984 Mr. King became chief
investment officer and director for all international investment strategy with
Fiduciary Trust Company International S.A., in
<PAGE>33
London. He managed an EAFE mutual fund (FTIT) 1985-1986 which grew from $3
million to over $100 million during this two-year period.
Nicholas P.W. Horsley, associate portfolio manager and research
analyst of the International Equity Portfolio is also co-portfolio manager of
Warburg, Pincus Emerging Markets Fund and Warburg, Pincus Japan OTC Fund and
an associate portfolio manager and research analyst of Warburg, Pincus
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. He joined Counsellors in 1993. From 1981 to
1984 he was a securities analyst at Barclays Merchant Bank in London, UK and
Johannesburg, RSA. From 1984 to 1986 he was a senior analyst with BZW
Investment Management in London. From 1986 to 1993 he was a director,
portfolio manager and analyst at Barclays deZoete Wedd in New York City. Mr.
Horsley earned B.A. and M.A. degrees with honors from University College,
Oxford.
Harold W. Ehrlich, associate portfolio manager and research analyst
of the International Equity Portfolio, is also an associate portfolio manager
and research analyst of Warburg, Pincus Emerging Markets Fund, Warburg, Pincus
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. Prior to joining Counsellors in February,
1995, Mr. Ehrlich was a senior vice president, portfolio manager and analyst
at Templeton Investment Counsel Inc. from 1987 to 1995. He was a research
analyst and assistant portfolio manager at Fundamental Management Corporation
from 1985 to 1986 and a research analyst at First Equity Corporation of
Florida from 1983 to 1985. Mr. Ehrlich earned a B.S.B.A. degree from
University of Florida and earned his Chartered Financial Analyst designation
in 1990.
Vincent McBride, associate portfolio manager and research analyst of
the International Equity Portfolio, is also an associate portfolio manager and
research analyst of Warburg, Pincus Emerging Markets Fund, Warburg, Pincus
International Equity Fund and the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. Prior to joining Counsellors in 1994, Mr.
McBride was an international equity analyst at Smith Barney Inc. from 1993 to
1994 and at General Electric Investment Corporation from 1992 to 1993. He was
also a portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride
earned a B.S. degree from the University of Delaware and an M.B.A. degree from
Rutgers University.
Elizabeth B. Dater, co-portfolio manager of the Small Company Growth
Portfolio is also co-portfolio manager of Warburg, Pincus Emerging Growth
Fund, manages a post-venture capital fund and is the former director of
research for Counsellors' investment management activities. Prior to joining
Counsellors in 1978, she was a Vice President of Research at Fiduciary Trust
Company of New York and an Institutional Sales Assistant at Lehman Brothers.
Ms. Dater has been a regular panelist on Maryland public television's "Wall
Street Week" since 1976. Ms. Dater earned a B.A. degree from Boston
University in Massachusetts.
<PAGE>34
Stephen J. Lurito, co-portfolio manager of the Small Company Growth
Portfolio, is also co-portfolio manager of Warburg, Pincus Emerging Growth
Fund. Mr. Lurito, also the research coordinator and a portfolio manager for
micro-cap equity and post-venture products, has been with EMW since 1987.
Prior to that he was a research analyst at Sanford C. Bernstein & Company,
Inc. Mr. Lurito earned a B.A. degree from the University of Virginia and a
M.B.A. from the University of Pennsylvania.
Investment Adviser and Co-Administrators
Counsellors serves as investment adviser to each Portfolio,
Counsellors Funds Service, Inc. ("Counsellors Service") serves as a co-
administrator to the Trust and PFPC serves as a co-administrator to the Trust
pursuant to separate written agreements (the "Advisory Agreements," the
"Counsellors Service Co-Administration Agreement" and the "PFPC Co-
Administration Agreement," respectively). The services provided by, and the
fees payable by the Trust to, Counsellors under the Advisory Agreements,
Counsellors Service under the Counsellors Service Co-Administration Agreement
and PFPC under the PFPC Co-Administration Agreement are described in the
Prospectus.
Organization of the Trust
The Trust was organized as an unincorporated business trust under
the laws of The Commonwealth of Massachusetts pursuant to a Declaration of
Trust dated March 15, 1995, as amended from time to time (the "Declaration of
Trust"), and is a business entity commonly known as a "Massachusetts business
trust." Under the Declaration of Trust, the Board is authorized to create
separate series of an unlimited number of full and fractional shares of
beneficial interest, par value $.001 per share. Shareholders of the Trust
generally vote in the aggregate, except with respect to (i) matters affecting
only the shares of a particular Portfolio, in which case only the shares of
the affected Portfolio would be entitled to vote, or (ii) when the 1940 Act
requires that shares of the Portfolios be voted separately. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders. Under the Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Trust's outstanding shares.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of a Portfolio.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Trust or a Trustee. The Declaration of Trust provides for indemnification
from a Portfolio's property for all losses and expenses of any shareholder
held personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's
<PAGE>35
incurring financial loss on account of shareholder liability is limited to
circumstances in which the relevant Portfolio would be unable to meet its
obligations, a possibility that Counsellors believes is remote and immaterial.
Upon payment of any liability incurred by the Trust, the shareholder paying
the liability will be entitled to reimbursement from the general assets of the
relevant Portfolio. The Trustees intend to conduct the operations of the
Trust in such a way so as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Trust.
All shareholders of a Portfolio, upon liquidation, participate
ratably in the Portfolio's net assets. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of Trustees can elect all Trustees. Shares are transferable but have
no preemptive, conversion or subscription rights.
Custodian and Transfer Agent
PNC Bank, National Association ("PNC") and State Street Bank and
Trust Company ("State Street") serve as custodians of each Portfolio's U.S.
and foreign assets, respectively, pursuant to separate custodian agreements
(the "Custodian Agreements"). Under the Custodian Agreements, PNC and State
Street each (i) maintains a separate account or accounts in the name of each
Portfolio, (ii) holds and transfers portfolio securities on account of each
Portfolio, (iii) makes receipts and disbursements of money on behalf of each
Portfolio, (iv) collects and receives all income and other payments and
distributions on account of each Portfolio's portfolio securities held by it
and (v) makes periodic reports to the Board concerning the Trust's operations.
PNC and State Street are each authorized to select one or more domestic or
foreign banks or trust companies to serve as sub-custodian on behalf of the
Trust, provided that each remains responsible for the performance of all its
duties under the relevant Custodian Agreement and holds the Trust harmless
from the acts and omissions of any sub-custodian, in accordance with the
Custodian Agreement. PNC is an indirect, wholly owned subsidiary of PNC Bank
Corp., and its principal business address is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101. The principal business address of State
Street is 225 Franklin Street, Boston, Massachusetts 02110.
State Street has also agreed to serve as the shareholder servicing,
transfer and dividend disbursing agent pursuant to a Transfer Agency and
Service Agreement, under which State Street (i) issues and redeems shares of
each Portfolio, (ii) addresses and mails all communications by the Trust to
record owners of Portfolio shares, including reports to shareholders, dividend
and distribution notices and proxy material for its meetings of shareholders,
(iii) maintains shareholder accounts and, if requested, sub-accounts and
(iv) makes periodic reports to the Board concerning the transfer agent's
operations with respect to the Trust. State Street has delegated to Boston
Financial Data Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility
for most shareholder servicing functions. BFDS's principal business address
is 2 Heritage Drive, Boston, Massachusetts 02171.
<PAGE>36
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
As described in the Prospectus, shares of the Portfolios may not be
purchased or redeemed by individual investors directly may be purchased or
redeemed only through Variable Contracts offered by separate accounts of
Participating Insurance Companies. The offering price of each Portfolio's
shares is equal to its per share net asset value. Additional information on
how to purchase and redeem a Portfolio's shares and how such shares are priced
is included in the Prospectus.
Under the 1940 Act, a Portfolio may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which
the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. (The Fund may also suspend or postpone
the recordation of an exchange of its shares upon the occurrence of any of the
foregoing conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, a Portfolio may make
payment wholly or partly in securities or other property. If a redemption is
paid wholly or partly in securities or other property, a shareholder would
incur transaction costs in disposing of the redemption proceeds. The Trust
intends to comply with Rule 18f-1 promulgated under the 1940 Act with respect
to redemptions in kind.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Trust and its shareholders is intended to be only a summary and
is not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult the sponsoring
Participating Insurance Company separate account prospectus and their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Portfolio.
Each Portfolio of the Trust intends to qualify as a "regulated
investment company" under Subchapter M of the Code. If it qualifies as a
regulated investment company, a Portfolio will pay no federal income taxes on
its taxable net investment income (that is, taxable income other than net
realized capital gains) and its net realized capital gains that are
distributed to shareholders. To qualify under Subchapter M, a Portfolio must,
among other things: (i) distribute to its shareholders at least 90% of its
taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains); (ii) derive at
least 90% of its gross income from dividends, interest, payments with respect
to loans of securities, gains from the sale or other disposition
<PAGE>37
of securities, or other income (including, but not limited to, gains from
options, futures, and forward contracts) derived with respect to its business
of investing in securities; (iii) derive less than 30% of its annual gross
income from the sale or other disposition of securities, options, futures or
forward contracts held for less than three months; and (iv) diversify its
holdings so that, at the end of each fiscal quarter of the Portfolio (a) at
least 50% of the market value of the Portfolio's assets is represented by
cash, U.S. government securities and other securities, with those other
securities limited, with respect to any one issuer, to an amount no greater in
value than 5% of the Portfolio's total assets and to not more than 10% of the
outstanding voting securities of the issuer, and (b) not more than 25% of the
market value of the Portfolio's assets is invested in the securities of any
one issuer (other than U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that the Portfolio
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses. In meeting these requirements, a
Portfolio may be restricted in the selling of securities held by the Portfolio
for less than three months and in the utilization of certain of the investment
techniques described above and in the Trust's Prospectus. As a regulated
investment company, a Portfolio will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year
of distributions representing at least 98% of the Portfolio's taxable ordinary
income for the calendar year and at least 98% of the excess of its capital
gains over capital losses realized during the one-year period ending October
31 during such year, together with any undistributed, untaxed amounts of
ordinary income and capital gains from the previous calendar year. The
Portfolios expect to pay the dividends and make the distributions necessary to
avoid the application of this excise tax.
In addition, each Portfolio intends to comply with the
diversification requirements of Section 817(h) of the Code related to the tax-
deferred status of insurance company separate accounts. To comply with
regulations under Section 817(h) of the Code, each Portfolio will be required
to diversify its investments so that on the last day of each calendar quarter
no more than 55% of the value of its assets is represented by any one
investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section
817(h), obligations of the United States Treasury and each U.S. government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing
the circumstances in which a Variable Contract owner's control of the
investments of a separate account may cause the Variable Contract owner,
rather than the Participating Insurance Company, to be treated as the owner of
the assets held by the separate account. If the Variable Contract owner is
considered the owner of the securities underlying the separate account, income
and gains produced by those securities would be included currently in the
Variable Contract owner's gross income. It is not known what standards will
be set forth in such pronouncements or when, if at all, these pronouncements
may be issued. In the event
<PAGE>38
that rules or regulations are adopted, there can be no assurance that the
Portfolios will be able to operate as currently described, or that the Trust
will not have to change the investment goal or investment policies of a
Portfolio. While a Portfolio's investment goal is fundamental and may be
changed only by a vote of a majority of the Portfolio's outstanding shares,
the Board reserves the right to modify the investment policies of a Portfolio
as necessary to prevent any such prospective rules and regulations from
causing a Variable Contract owner to be considered the owner of the shares of
the Portfolio underlying the separate account.
A Portfolio's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Portfolio (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Portfolio, defer
Portfolio losses and cause the Portfolio to be subject to hyperinflationary
currency rules. These rules could therefore affect the character, amount and
timing of distributions to shareholders. These provisions also (i) will
require a Portfolio to mark-to-market certain types of its positions (i.e.,
treat them as if they were closed out) and (ii) may cause the Portfolio to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements
for avoiding income and excise taxes. Each Portfolio will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (a) neither the Portfolio nor its shareholders will be treated as
receiving a materially greater amount of capital gains or distributions than
actually realized or received, (b) the Portfolio will be able to use
substantially all of its losses for the fiscal years in which the losses
actually occur and (c) the Portfolio will continue to qualify as a regulated
investment company.
As described in the Prospectus, because shares of a Portfolio may
only be purchased through Variable Contracts, it is anticipated that dividends
and distributions will be exempt from current taxation if left to accumulate
within the Variable Contracts.
Investment in Passive Foreign Investment Companies
If a Portfolio purchases shares in certain foreign entities
classified under the Code as "passive foreign investment companies" ("PFICs"),
the Portfolio may be subject to federal income tax on a portion of an "excess
distribution" or gain from the disposition of the shares, even though the
income may have to be distributed by the Portfolio to its shareholders, the
Variable Contracts. In addition, gain on the disposition of shares in a PFIC
generally is treated as ordinary income even though the shares are capital
assets in the hands of the Portfolio. Certain interest charges may be imposed
on the Portfolio with respect to any taxes arising from excess distributions
or gains on the disposition of shares in a PFIC.
<PAGE>39
A Portfolio may be eligible to elect to include in its gross income
its share of earnings of a PFIC on a current basis. Generally, the election
would eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Portfolio compared to a fund that
did not make the election. In addition, information required to make such an
election may not be available to the Portfolio.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of a Portfolio is unclear. If the
Portfolio is not able to make the foregoing election, it may be able to avoid
the interest charge (but not the ordinary income treatment) on disposition of
the stock by electing, under proposed regulations, each year to mark-to-market
the stock (that is, treat it as if it were sold for fair market value). Such
an election could also result in acceleration of income to the Portfolio.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return in
advertisements or in reports and other communications to shareholders. Total
return is calculated by finding the average annual compounded rates of return
for the one-, five-, and ten- (or such shorter period as the Portfolio has
been offered) year periods that would equate the initial amount invested to
the ending redeemable value according to the following formula:
P (1 + T)[*GRAPHIC OMITTED-SEE FOOTNOTE] = ERV. For purposes of this formula,
"P" is a hypothetical investment of $1,000; "T" is average annual total
return; "n" is number of years; and "ERV" is the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the one-, five- or
ten-year periods (or fractional portion thereof). Total return or "T" is
computed by finding the average annual change in the value of an initial
$1,000 investment over the period and assumes that all dividends and
distributions are reinvested during the period.
A Portfolio may advertise, from time to time, comparisons of its
performance with that of one or more other mutual funds with similar
investment objectives. A Portfolio may advertise its average annual
calendar-year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph, except that the
relevant measuring period would be the number of months that have elapsed in
the current calendar year or most recent three months, as the case may be.
A Portfolio's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and operating expenses
allocable to it. As described above, total return is based on historical
earnings and is not intended to indicate future performance. Consequently,
any given performance quotation should not be
- -------------------------
* - The expression P(1 + T) is being raised to the power of n.
<PAGE>40
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, a Portfolio's performance will
fluctuate, unlike certain bank deposits or other investments which pay a fixed
yield for a stated period of time. Performance quotations for the Portfolios
include the effect of deducting each Portfolio's expenses, but may not include
charges and expenses attributable to any particular Variable Contract, which
would reduce the returns described in this section. See the Prospectus,
"Performance."
The International Equity Portfolio intends to diversify its assets
among countries, and in doing so, would expect to be able to reduce the risk
arising from economic problems affecting a single country. Counsellors thus
believes that, by spreading risk throughout many diverse markets outside the
United States, the International Equity Portfolio will reduce its exposure to
country-specific economic problems. Counsellors also believes that a
diversified portfolio of international equity securities, when combined with a
similarly diversified portfolio of domestic equity securities, tends to have a
lower volatility than a portfolio composed entirely of domestic securities.
Furthermore, international equities have been shown to reduce volatility in
single asset portfolios regardless of whether the investments are in all
domestic equities or all domestic fixed-income instruments.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International (EAFE)
Europe, Australia and Far East Index (the "MS-EAFE Index"), has equalled or
exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S & P 500 Index") in 14 of the last 23
years. The following table compares annual total returns of the MS-EAFE Index
and the S & P 500 Index for the calendar years 1972 through 1994.
<PAGE>41
MS-EAFE Index vs. S&P 500 Index
1972 - 1994
Annual Total Return
Year MS-EAFE Index S&P 500 Index
1972* 36.36 18.61
1973* -14.91 -14.92
1974* -23.61 -26.56
1975 35.39 37.07
1976 2.55 23.54
1977* 18.06 -7.20
1978* 32.62 6.37
1979 4.75 18.61
1980 22.58 32.27
1981* -2.27 -5.24
1982 -1.85 21.42
1983* 23.70 22.50
1984* 7.39 6.27
1985* 56.16 31.73
1986* 69.44 18.62
1987* 24.64 5.28
1988* 28.27 16.49
1989 10.54 31.61
1990 -23.44 -3.11
1991 12.13 30.36
1992 -12.17 7.60
1993* 32.60 10.06
1994* 7.78 1.28
_________________
* The MS-EAFE Index has outperformed the S&P 500 Index 14 out of the last
23 years.
The quoted performance information shown above is not intended to
indicate the future performance of the International Equity Portfolio.
From time to time, a Portfolio may advertise evaluations published
by nationally recognized financial publications, such as Morningstar Inc. or
Lipper Analytical Services, Inc. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various time periods. In
addition, advertising or supplemental sales literature relating to the
International Equity Portfolio may describe the percentage decline from all-
<PAGE>42
time high levels for certain foreign stock markets. It may also describe how
the International Equity Portfolio differs from the MS-EAFE Index in
composition.
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves
as independent auditors for the Trust. The financial statements for the
Portfolios that appear in this Statement of Additional Information have been
audited by Coopers & Lybrand, whose report thereon appears elsewhere herein
and have been included herein in reliance upon the report of such firm of
independent auditors given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as well as
counsel to Counsellors, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENT
The Trust's financial statement follows the Report of Independent
Auditors.
<PAGE>A-1
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Although they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher-rated categories.
To provide more detailed indications of credit quality, the ratings from
"AA" to "BBB" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
<PAGE>A-2
The following summarizes the ratings used by Moody's for corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "Baa". The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
<PAGE>1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Warburg, Pincus Trust
We have audited the accompanying Statement of Assets and Liabilities of
Warburg, Pincus Trust (the "Trust"), comprised of the International Equity
Portfolio and the Small Company Growth Portfolio, as of June 9, 1995. This
financial statement is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Warburg, Pincus Trust as of
June 9, 1995 in conformity with generally accepted principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 12, 1995
<PAGE>2
WARBURG, PINCUS TRUST
STATEMENT OF ASSETS AND LIABILITIES
as of June 9, 1995
International Equity Small Company
Portfolio Growth Portfolio
Assets:
Cash $50,000 $50,000
Deferred Organizational Costs 59,498 59,498
Total Assets $109,498 $109,498
Liabilities:
Payable to Adviser 59,498 59,498
Net Assets $50,000 $50,000
Net Asset Value, Redemption and
Offering Price Per Share (unlimited
shares authorized - $.001 per share)
applicable to 5000 International
Equity Portfolio shares and 5000
Small Company Growth Portfolio
shares. $10.00 $10.00
The accompanying notes are an integral part of the financial statements.
<PAGE>3
WARBURG, PINCUS TRUST
Notes to Financial Statements
June 9, 1995
1. Organization:
Warburg, Pincus Trust (the "Trust") was organized on March 15, 1995 as an
unincorporated business trust under the laws of The Commonwealth of
Massachusetts. The Trust is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company
initially consisting of two portfolios: International Equity Portfolio
and Small Company Growth Portfolio. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in
which shares are held. The Trust has not commenced operations except
those related to organizational matters and the sale of 10,000 shares
("Initial Shares") of beneficial interest to Warburg, Pincus
Counsellors, Inc. (the "Adviser") on June 9, 1995.
2. Organizational Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Trust and are being
amortized over sixty months commencing with operations. In the event any
of the Initial Shares of the Trust are redeemed by any holder thereof
during the period that the Trust is amortizing its organizational costs,
the redemption proceeds payable to the holder thereof by the Trust will
be reduced by unamortized organizational costs in the same ratio as the
number of Initial Shares outstanding at the time of redemption.
Certain officers and a trustee of the Trust are also officers and a
director of the Adviser. Such officers and the trustee are paid no fees
by the Trust for serving as officers or trustee of the Trust.
