Rule 497(e)
Securities Act File No. 33-58125
Investment Company Act No. 811-07261
<PAGE>
PROSPECTUS
March 1, 1996, As Revised November 12th, 1996
WARBURG PINCUS TRUST
[*] INTERNATIONAL EQUITY PORTFOLIO
[*] POST-VENTURE CAPITAL PORTFOLIO
[*] SMALL COMPANY GROWTH PORTFOLIO
Warburg Pincus Trust shares are not available directly to
individual investors but may be offered only through certain
insurance products and pension and retirement plans.
Prospectus November 12, 1996
Warburg Pincus Trust (the 'Trust') is an open-end management investment
company that currently offers four investment funds, three of which are
offered pursuant to this Prospectus (the 'Portfolios'):
International Equity Portfolio seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers. 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.'
Post-Venture Capital Portfolio seeks long-term growth of capital by investing
primarily in equity securities of issuers in their post-venture capital stage
of development and pursues an aggressive investment strategy. Because of the
nature of the Post-Venture Capital Portfolio's investments and certain
strategies it may use, an investment in the Portfolio involves certain risks
and may not be appropriate for all investors.
Small Company Growth Portfolio seeks capital growth by investing in equity
securities of small-sized domestic companies.
Shares of a Portfolio are not available directly to individual investors but
may be offered only to certain (i) 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') and (ii)
tax-qualified pension and retirement plans ('Plans'), including
participant-directed Plans which elect to make a Portfolio an investment
option for Plan participants. 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 or with the Plan documents
or other informational materials supplied by Plan sponsors. Additional
information about each Portfolio, contained in a Statement of Additional
Information, has been filed with the Securities and Exchange Commission (the
'SEC') and is available for reference, along with other related materials, on
the SEC Internet Web site (http://www.sec.gov). The Statement of Additional
Information is also available upon request and without charge by calling
Warburg Pincus Funds at (800) 369-2728. The Statement of Additional
Information, as amended from time to time, bears the same date as this
Prospectus and is incorporated by reference in its entirety into this
Prospectus.
Shares of the Fund are not deposits or obligations of or guaranteed or
endorsed by any bank, and shares are not insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government
agency. Investments in shares of the Fund involve investment risks, including
the possible loss of principal amount invested.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
THE TRUST'S EXPENSES
__________________________________________________________
<TABLE>
<CAPTION>
International Post-Venture Small Company
Equity Capital Growth
Portfolio Portfolio Portfolio
--------------- --------------- ---------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on
Purchases
(as a percentage of offering
price)............................ 0 0 0
Annual Fund Operating Expenses
(as a percentage of average net
assets)
Management Fees.................... 0.27% 0.64% 0.67%
12b-1 Fees......................... 0 0 0
Other Expenses..................... 1.17% .76% 0.58%
-- -- --
Total Portfolio Operating Expenses
(after fee waivers and expense
reimbursements)................... 1.44%* 1.40%** 1.25%*
Example
You would pay the following
expenses
on a $1,000 investment, assuming
(1) 5% annual return
and (2) redemption at the end of
each time period:
1 year............................. $ 15 $ 14 $ 13
3 years............................ $ 46 $ 44 $ 40
</TABLE>
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* Management Fees, Other Expenses and Total Portfolio Operating Expenses for
the International Equity and Small Company Growth Portfolios are based on
actual expenses for the fiscal period ended December 31, 1995, net of any
fee waivers or expense reimbursements. Without such waivers or
reimbursements, Management Fees would have equalled 1.00% and .90%, Other
Expenses would have equalled 1.21% and .60% and Total Portfolio Operating
Expenses would have equalled 2.21% and 1.50% for the International Equity
and Small Company Growth Portfolios, respectively.
** Absent the waiver of fees by the Post-Venture Capital Portfolio's
investment adviser and co-administrator, Management Fees for the
Post-Venture Capital Portfolio would equal 1.25%; Other Expenses would
equal .81%; and Total Portfolio Operating Expenses would equal 2.06%. Other
Expenses for the Post-Venture Capital Portfolio are based on annualized
estimates of expenses for the fiscal year ending December 31, 1996, net of
any fee waivers or expense reimbursements. The investment adviser has
undertaken to limit the Post-Venture Capital Portfolio's Total Portfolio
Operating Expenses through December 31, 1996; there is no assurance that
this undertaking will continue.
---------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. The table does not
reflect additional charges and expenses which are, or may be, imposed under
the Variable Contracts or Plans; such charges and expenses are described in
the prospectus of the sponsoring Participating Insurance Company separate
account or in the Plan documents or other informational materials supplied by
Plan sponsors. 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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FINANCIAL HIGHLIGHTS
__________________________________________________________
(for a share outstanding throughout each period)
The following information for the fiscal period ended December 31, 1995 has
been derived from information audited by Coopers & Lybrand L.L.P., independent
auditors, whose report dated February 13, 1996 appears in the Statement of
Additional Information. Further information about the performance of the
International Equity and Small Company Growth Portfolios is contained in the
Trust's annual report, dated December 31, 1995, copies of which may be obtained
without charge by calling the Trust at (800) 369-2728.
INTERNATIONAL EQUITY PORTFOLIO
For the Period
June 30, 1995
(Commencement of
Operations)
through
December 31, 1995
-----------------
Net Asset Value,
Beginning of Period..... $ 10.00
------
Income from Investment
Operations
Net Investment Income... .03
Net Gain on Securities
and Foreign Currency
Related Items
(both realized and
unrealized)........... .70
------
Total from Investment
Operations............ .73
------
Less Distributions
Dividends (from net
investment income).... (.01)
Distributions in Excess
of Net Investment
Income................ (.07)
------
Total Distributions..... (.08)
------
Net Asset Value, End of
Period.................. $ 10.65
------
------
Total Return............. 7.30%`D'
Ratios/Supplemental Data
Net Assets, End of Period
(000s).................. $ 64,537
Ratios to Average Daily
Net Assets:
Operating expenses...... 1.44%*
Net investment income... .48%*
Decrease reflected in
above operating
expense ratio due to
waivers/reimbursements... .77%*
Portfolio Turnover
Rate.................... 16.49%*
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* Annualized.
`D' Non-annualized.
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SMALL COMPANY GROWTH PORTFOLIO
For the
Period
June 30, 1995
(Commencement
of
Operations)
through
December 31,
1995
-------------
Net Asset Value,
Beginning of Period..... $ 10.00
------
Income from Investment
Operations
Net Investment Loss..... (.01)
Net Gain on Securities
(both realized and
unrealized)........... 2.52
------
Total from Investment
Operations............ 2.51
------
Less Distributions
Dividends (from net
investment income).... .00
Distributions (from
capital gains)........ .00
------
Total Distributions..... .00
------
Net Asset Value, End of
Period.................. $ 12.51
------
------
Total Return............. 25.10%`D'
Ratios/Supplemental Data
Net Assets, End of Period
(000s).................. $ 97,445
Ratios to Average Daily
Net Assets:
Operating expenses...... 1.25%*
Net investment loss..... (.36)%*
Decrease reflected in
above operating
expense ratio due to
waivers/reimbursements... .25%*
Portfolio Turnover
Rate.................... 67.57%*
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* Annualized.
`D' Non-annualized.
4
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INVESTMENT OBJECTIVES AND POLICIES
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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
'Portfolio Investments' and 'Certain Investment Strategies' for descriptions
of certain types of investments the Portfolios may make.
International Equity Portfolio. The International Equity Portfolio's
investment objective is to seek long-term capital appreciation. The Portfolio
is a diversified investment fund 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 Warburg, Pincus
Counsellors, Inc., the Portfolios' investment adviser ('Warburg'), 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. Warburg 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.
Post-Venture Capital Portfolio. Because of the nature of the Post-Venture
Capital Portfolio's investments and certain strategies it may use, such as
investing in Private Funds (as defined below), an investment in the Portfolio
should be considered only for the aggressive portion of an investor's
portfolio and may not be appropriate for all investors.
The investment objective of the Post-Venture Capital Portfolio is to seek
long-term growth of capital. The Portfolio is a diversified portfolio that
pursues its investment objective by investing primarily in equity securities
of
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companies considered by Warburg, Pincus Counsellors, Inc., the Portfolio's
investment adviser ('Warburg'), to be in their post-venture capital stage.
Although the Portfolio may invest up to 10% of its assets in venture capital
and other investment funds, the Portfolio is not designed primarily to provide
venture capital financing. Rather, under normal market conditions, the
Portfolio will invest at least 65% of its total assets in equity securities of
'post-venture capital companies.' A post-venture capital company is a company
that has received venture capital financing either (a) during the early stages
of the company's existence or the early stages of the development of a new
product or service or (b) as part of a restructuring or recapitalization of
the company. The investment of venture capital financing, distribution of such
company's securities to venture capital investors, or initial public offering
('IPO'), whichever is later, will have been made within ten years prior to the
Portfolio's purchase of the company's securities.
Warburg believes that venture capital participation in a company's capital
structure can lead to revenue/earnings growth rates above those of older,
public companies such as those in the Dow Jones Industrial Average or the
Fortune 500. Venture capitalists finance start-up companies, companies in the
early stages of developing new products or services and companies undergoing a
restructuring or recapitalization, since these companies may not have access
to conventional forms of financing (such as bank loans or public issuances of
stock). Venture capitalists may hold substantial positions in companies that
may have been acquired at prices significantly below the initial public
offering price. This may create a potential adverse impact in the short-term
on the market price of a company's stock due to sales in the open market by a
venture capitalist or others who acquired the stock at lower prices prior to
the company's IPO. Warburg will consider the impact of such sales in selecting
post-venture capital investments. Venture capitalists may be individuals or
funds organized by venture capitalists which are typically offered only to
large institutions, such as pension funds and endowments, and certain
accredited investors. Venture capital participation in a company is often
reduced when the company engages in an IPO of its securities or when it is
involved in a merger, tender offer or acquisition.
Warburg has experience in researching smaller companies, companies in the
early stages of development and venture capital-financed companies. Its team
of analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 250 of the larger
domestic venture capital funds. Ms. Dater and Mr. Lurito have managed
post-venture equity securities in separate accounts for institutions since
1989 and currently manage over $1 billion of such assets for institutions. The
Portfolio will invest in securities of post-venture capital companies that are
traded on a national securities exchange or in an organized over-the-counter
market.
Private Fund Investments. Up to 10% of the Post-Venture Capital Portfolio's
assets may be invested in United States or foreign private limited
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partnerships or other investment funds ('Private Funds') that themselves
invest in equity or debt securities of (a) companies in the venture capital or
post-venture capital stages of development or (b) companies engaged in special
situations or changes in corporate control, including buyouts. In selecting
Private Funds for investment, Abbott Capital Management, L.P., the Portfolio's
sub-investment adviser with respect to Private Funds ('Abbott'), attempts to
invest in a mix of Private Funds that will provide an above average internal
rate of return (i.e., the discount rate at which the present value of an
investment's future cash inflows (dividend income and capital gains) are equal
to the cost of the investment). Warburg believes that the Portfolio's
investments in Private Funds offers individual investors a unique opportunity
to participate in venture capital and other private investment funds,
providing access to investment opportunities typically available only to large
institutions and accredited investors. Although the Portfolio's investments in
Private Funds are limited to a maximum of 10% of the Portfolio's assets, these
investments are highly speculative and volatile and may produce gains or
losses in this portion of the Portfolio that exceed those of the Portfolio's
other holdings and of more mature companies generally.
Because Private Funds generally are investment companies for purposes of the
1940 Act, the Portfolio's ability to invest in them will be limited. In
addition, Portfolio shareholders will remain subject to the Portfolio's
expenses while also bearing their pro rata share of the operating expenses of
the Private Funds. The ability of the Portfolio to dispose of interests in
Private Funds is very limited and will involve the risks described under 'Risk
Factors and Special Considerations -- Non-Publicly Traded Securities; Rule
144A Securities.' In valuing the Portfolio's holdings of interests in Private
Funds, the Portfolio will be relying on the most recent reports provided by
Abbott and by the Private Funds themselves prior to calculation of the
Portfolio's net asset value. These reports, which are provided on an
infrequent basis, often depend on the subjective valuations of the managers of
the Private Funds and, in addition, would not generally reflect positive or
negative subsequent developments affecting companies held by the Private Fund.
See 'Net Asset Value.' Debt securities held by a Private Fund will tend to be
rated below investment grade and may be rated as low as C by Moody's Investors
Service, Inc. ('Moody's') or D by Standard & Poor's Ratings Services ('S&P').
For a discussion of the risks of investing in below investment grade debt, see
'Risk Factors and Special Considerations -- Lower Rated Securities' below and
'Investment Policies -- Below Investment Grade Debt Securities' in the
Statement of Additional Information. For a discussion of the possible tax
consequences of investing in foreign Private Funds, see 'Additional
Information Concerning Taxes -- Investment in Passive Foreign Investment
Companies' in the Statement of Additional Information.
The Post-Venture Capital Portfolio may also hold non-publicly traded equity
securities of companies in the venture and post-venture stages of development,
such as those of closely held companies or private placements
7
<PAGE>
of public companies. The portion of the Portfolio's assets invested in these
non-publicly traded securities will vary over time depending on investment
opportunities and other factors. The Portfolio's illiquid assets, including
interests in Private Funds and other illiquid non-publicly traded securities,
may not exceed 15% of net assets.
Other Strategies. The Post-Venture Capital Portfolio may invest up to 35% of
its assets in exchange-traded and over-the-counter securities that do not meet
the definition of post-venture capital companies without regard to market
capitalization. Up to 10% of the Portfolio's assets may be invested, directly
or through Private Funds, in securities of issuers engaged at the time of
purchase in 'special situations,' such as a restructuring or recapitalization;
an acquisition, consolidation, merger or tender offer; a change in corporate
control or investment by a venture capitalist.
To attempt to reduce risk, the Post-Venture Capital Portfolio will diversify
its investments over a broad range of issuers operating in a variety of
industries. The Portfolio may hold securities of companies of any size, and
will not limit capitalization of companies it selects to invest in. However,
due to the nature of the venture capital to post-venture cycle, the Portfolio
anticipates that the average market capitalization of companies in which it
invests will be less than $1 billion at the time of investment. Although the
Portfolio will invest primarily in U.S. companies, up to 20% of the
Portfolio's assets may be invested in securities of issuers located in any
foreign country. Equity securities in which the Portfolio will invest are
common stock, preferred stock, warrants, securities convertible into or
exchangeable for common stock and partnership interests. The Portfolio may
engage in a variety of strategies to reduce risk or seek to enhance return,
including engaging in short selling (see 'Certain Investment Strategies').
Small Company Growth Portfolio. The Small Company Growth Portfolio's
investment objective is to seek capital growth. The Portfolio is a
non-diversified investment fund 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.
8
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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,
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 may invest up to
35%, and each of the Post-Venture Capital and Small Company Growth Portfolios
may invest up to 20%, of its total assets in investment grade debt securities
(other than money market obligations) and 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 Warburg. Because the market value of debt
obligations can be expected to vary inversely to changes in prevailing
interest rates, investing in debt obligations may provide an opportunity for
capital appreciation when interest rates are expected to decline. The success
of such a strategy is dependent upon Warburg's ability to accurately forecast
changes in interest rates. 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 or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by 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, although
Warburg will consider such event in its determination of whether the Portfolio
should continue to hold the securities.
When Warburg 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. When such a defensive posture is warranted, the International
Equity Portfolio may also invest temporarily without limit in foreign
investment grade debt obligations and in other 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
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foreign short-term (one year or less remaining to maturity) and medium-term
(five years or less remaining to maturity) money market obligations and, for
temporary defensive purposes, may invest in these securities without limit.
These instruments consist of obligations issued or guaranteed by the U.S.
government or a foreign government, their agencies or instrumentalities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and
similar institutions) that are high quality investments or, if unrated, deemed
by Warburg to be 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 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 in which
the Portfolio seeks to assert this right. Warburg, 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 Warburg 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, Warburg
or the Portfolios' co-administrator, PFPC, Inc. ('PFPC'). As a shareholder in
any mutual fund, a Portfolio will bear its ratable share of the mutual fund's
expenses, including management fees, and will remain subject to payment of the
Portfolio's administrative fees and other expenses with respect to assets so
invested.
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U.S. Government Securities. The obligations issued or guaranteed by the
U.S. 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.
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 9 and 'Certain Investment
Strategies' beginning at page 14.
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 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.
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Emerging Growth and Small 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. Because small- and medium-sized
companies normally have fewer shares outstanding than larger companies, it may
be more difficult to buy or sell significant amounts of such shares without an
unfavorable impact on prevailing prices. Small- and medium-sized companies may
have limited product lines, markets or financial resources and may lack
management depth. In addition, small- and medium-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- and medium-sized companies than for
larger, more established ones. 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 either the Post-Venture Capital
Portfolio or 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-Publicly Traded Securities; 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 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 Warburg the daily function of determining and
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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 and, with
respect to the Post-Venture Capital Portfolio, interests in Private Funds) may
involve a high degree of business and financial risk and may result in
substantial losses. The 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. Further, 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.
Lower-Rated Securities. Private Fund investments of the Post-Venture
Capital Portfolio may hold lower-rated and comparable unrated securities. The
market values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit
risk. The risk of loss due to default by such issuers is significantly greater
because medium- and lower-rated securities and unrated securities generally
are unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
The market value of securities in lower rating categories is more volatile
than that of higher quality securities. In addition, the Post-Venture Capital
Portfolio may have difficulty disposing of certain of these securities because
there may be a thin trading market. The lack of a liquid secondary market for
certain securities may have an adverse impact on the Post-Venture Capital
Portfolio's ability to dispose of particular issues and may make it more
difficult for the Post-Venture Capital Portfolio to obtain accurate market
quotations for purposes of valuing the Post-Venture Capital Portfolio and
calculating its net asset value.
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
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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.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it 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. It is not possible to predict the Portfolios' turnover rates.
However, it is anticipated that no Portfolio's annual turnover rate should
exceed 100%. High 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 Warburg 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 Warburg 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
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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, (ii) lending portfolio securities and (iii)
entering into reverse repurchase agreements and dollar rolls. 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 each of the
Post-Venture Portfolio 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
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inherent in U.S. 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 unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments positions. Investment in
foreign securities will also result in higher 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.
Options, Futures and Currency Transactions. At the discretion of Warburg,
each Portfolio may, but is not required to, engage in a number of strategies
involving options, futures and forward currency contracts. These strategies,
commonly referred to as 'derivatives,' may be used (i) for the purpose of
hedging against a decline in value of a Portfolio's current or anticipated
portfolio holdings, (ii) as a substitute for purchasing or selling portfolio
securities or (iii) to seek to generate income to offset expenses or increase
return. Transactions that are not considered hedging should be considered
speculative and may serve to increase a Portfolio's investment risk.
Transaction costs and any premiums associated with these strategies, and any
losses incurred, will affect a Portfolio's net asset value and performance.
Therefore, an investment in a Portfolio may involve a greater risk than an
investment in other mutual funds that do not utilize these strategies. A
Portfolio's use of these strategies may be limited by position and exercise
limits established by securities and commodities exchanges and the National
Association of Securities Dealers, Inc. and by the Code.
Securities and Stock Index Options. Each Portfolio may write 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. Each Portfolio may also utilize
up to 10% of
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its assets to purchase options on stocks and debt securities that are traded
on U.S. and foreign exchanges, as well as over-the-counter ('OTC') options.
The purchaser of a put option on a security has the right to compel the
purchase by the writer of the underlying security, while the purchaser of a
call option has the right to purchase the underlying security from the writer.
In addition to purchasing and writing options on securities, each Portfolio
may also utilize up to 10% of its total assets to purchase exchange-listed and
OTC put and call options on stock indexes, and may also write such options. A
stock index measures the movement of a certain group of stocks by assigning
relative values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from
its use. However, for an option writer the exposure to adverse price movements
in the underlying security or index is potentially unlimited during the
exercise period. Writing securities options may result in substantial losses
to a Portfolio, force the sale or purchase of portfolio securities at
inopportune times or at less advantageous prices, limit the amount of
appreciation the Portfolio could realize on its investments or require the
Portfolio to hold securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into
foreign currency, interest rate and stock index 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, if consistent with
CFTC regulations, on foreign exchanges. These futures contracts are
standardized contracts for the future delivery of foreign currency or an
interest rate sensitive security or, in the case of stock index and certain
other futures contracts, are settled in cash with reference to a specified
multiplier times the change in the specified index, exchange rate or interest
rate. An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited
in the amount of assets that may be invested in futures transactions, there is
no overall limit on the percentage of a Portfolio's assets that may be at risk
with respect to futures activities.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date
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at a price set at the time of the contract. An option on a foreign currency
operates similarly to an option on a security. Risks associated with currency
forward contracts and purchasing currency options are similar to those
described in this Prospectus for futures contracts and securities and stock
index options. In addition, the use of currency transactions could result in
losses from the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events.
Hedging Considerations. A hedge is designed to offset a loss on a portfolio
position with a gain in the hedge position; at the same time, however, a
properly correlated hedge will result in a gain in the portfolio position
being offset by a loss in the hedge position. As a result, the use of options,
futures contracts and currency exchange transactions for hedging purposes
could limit any potential gain from an increase in value of the position
hedged. In addition, the movement in the portfolio position hedged may not be
of the same magnitude as movement in the hedge. Each Portfolio will engage in
hedging transactions only when deemed advisable by Warburg, and successful use
of hedging transactions will depend on Warburg's ability to correctly predict
movements in the hedge and the hedged position and the correlation between
them, which could prove to be inaccurate. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Additional Considerations. To the extent that a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than
if these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out an option or futures position without
incurring substantial losses, if at all. A Portfolio is also subject to the
risk of a default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
and forward currency contracts. The use of these strategies may require that
the Portfolio maintain cash or certain liquid securities or other assets that
are acceptable as collateral to the appropriate regulatory authority in a
segregated account with its custodian or a designated sub-custodian to the
extent the Portfolio's obligations with respect to these strategies are not
otherwise 'covered' through ownership of the underlying security, financial
instrument or currency or by other portfolio positions or by other means
consistent with applicable regulatory policies. Segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of a Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations.
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Short Selling. The Post-Venture Capital Portfolio may from time to time
sell securities short. A short sale is a transaction in which the Portfolio
sells borrowed securities in anticipation of a decline in the market price of
the securities. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested. The current market value of the securities sold short will not
exceed 10% of the Portfolio's assets.
When the Post-Venture Capital Portfolio makes a short sale, the proceeds it
receives from the sale are retained by a broker until the Portfolio replaces
the borrowed securities. To deliver the securities to the buyer, the Portfolio
must arrange through a broker to borrow the securities and, in so doing, the
Portfolio becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Portfolio
may have to pay a premium to borrow the securities and must pay any dividends
or interest payable on the securities until they are replaced.
The Post-Venture Capital Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by cash or U.S.
government securities deposited as collateral with the broker. In addition,
the Portfolio will place in a segregated account with its custodian or a
qualified subcustodian an amount of cash or U.S. government securities equal
to the difference, if any, between (i) the market value of the securities sold
at the time they were sold short and (ii) any cash or U.S. government
securities deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it replaces
the borrowed securities, the Portfolio will maintain the segregated account
daily at a level so that (a) the amount deposited in the account plus the
amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short.
The extent to which the Post-Venture Capital Portfolio may make short sales
may be limited by Code requirements for qualification as a regulated
investment company. See 'Dividends, Distributions and Taxes' for other tax
considerations applicable to short sales.
Short Sales Against the Box. Each Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an
equal amount of the securities sold short or owns preferred stocks or debt
securities, convertible or exchangeable without payment of further
consideration, into an equal number of securities sold short. This kind of
short sale, which is referred to as one 'against the box,' will be entered
into by the Portfolio for the purpose of receiving a portion of the interest
earned by the executing broker from the proceeds of the sale. The proceeds of
the
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sale will generally be held by the broker until the settlement date when the
Portfolio delivers securities to close out its short position. Although prior
to delivery the Portfolio will have to pay an amount equal to any dividends
paid on the securities sold short, the Portfolio will receive the dividends
from the securities sold short or the dividends from the preferred stock or
interest from the debt securities convertible or exchangeable into the
securities sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Portfolio will deposit, in a segregated account with
its custodian or a qualified subcustodian, the securities sold short or
convertible or exchangeable preferred stocks or debt securities in connection
with short sales against the box. The Portfolio will endeavor to offset
transaction costs associated with short sales against the box with the income
from the investment of the cash proceeds. Not more than 10% of the Portfolio's
net assets (taken at current value) may be held as collateral for short sales
against the box at any one time.
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; (iii) time deposits maturing in more than seven calendar days; and (iv)
certain Rule 144A Securities. 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 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 Adviser. The Trust employs Warburg as investment adviser to each
Portfolio and, with respect to the Post-Venture Capital Portfolio, Abbott as
its sub-investment adviser. Warburg, subject to the control of the Trust's
officers and the Board, manages the investment and reinvestment of
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the assets of each Portfolio in accordance with the Portfolio's investment
objective and stated investment policies. Warburg makes investment decisions
for each Portfolio and places orders to purchase or sell securities on behalf
of the Portfolio and, with respect to the Post-Venture Capital Portfolio,
supervises the activities of Abbott. Warburg also employs a support staff of
management personnel to provide services to the Portfolios and furnishes each
Portfolio with office space, furnishings and equipment. Abbott, in accordance
with the investment objective and policies of the Post-Venture Capital
Portfolio, makes investment decisions for the Portfolio regarding investments
in Private Funds, effects transactions in interests in Private Funds on behalf
of the Portfolio and assists in administrative functions relating to
investments in Private Funds.
For the services provided by Warburg, the International Equity and the Small
Company Growth Portfolios pay Warburg a fee calculated at an annual rate of
1.00% and .90%, respectively, of the relevant Portfolio's average daily net
assets. For the services provided by Warburg, the Post-Venture Capital
Portfolio pays Warburg a fee calculated at an annual rate of 1.25% of the
Fund's average daily net assets out of which Warburg pays Abbott for sub-
advisory services. Warburg 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 paid by a Portfolio.
Warburg is a professional investment counselling firm which provides
investment services to investment endowment funds, foundations and other
institutions and individuals. As of July 31, 1996, Warburg managed
approximately $16.8 billion of assets, including approximately $9.2 billion of
investment company assets. Incorporated in 1970, Warburg is a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York
general partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Warburg
through its ownership of a class of voting preferred stock of Warburg. Warburg
G.P. has no business other than being a holding company of Warburg and its
subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
Abbott. Abbott, which was founded in 1986, is an independent specialized
investment firm with assets under management of approximately $3 billion.
Abbott is a registered investment adviser which concentrates on venture
capital, buyout and special situations partnership investments. Abbott's
management team provides full-service private equity programs to clients.
Raymond L. Held, Stanley E. Pratt and Gary H. Solomon are the general partners
of Abbott and Thaddeus I. Gray, CFA is a limited partner of Abbott. Messrs.
Held, Pratt, Solomon and Gray are also the investment managers of Abbott. The
principal business address of Abbott and Mr. Pratt is 50 Rowes Wharf, Suite
240, Boston, Massachusetts 02110-3328 and that of Messrs. Held, Solomon and
Gray is 1330 Avenue of the Americas, Suite 2800, New York, New York 10019.
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For tax and other business purposes, the partners of Abbott plan to merge
Abbott with and into, or transfer all of the assets of Abbott to, a newly
formed Delaware limited liability company ('Abbott LLC'), with Abbott LLC to
survive and assume all of the liabilities of Abbott as part of the
transaction. This transaction, which is expected to occur before May 31, 1997
and is subject to certain contingencies, will not involve any material change
in the management, ownership, personnel, operations or activities of Abbott.
The present partners of Abbott will be members of Abbott LLC and will hold
officerships and other positions in Abbott LLC carrying responsibilities
generally commensurate with their present responsibilities. Pursuant to a new
sub-advisory agreement, Abbott LLC, as successor to Abbott, will perform the
services then being performed by Abbott. The new sub-advisory agreement will
be substantially identical to the current sub-advisory agreement among
Warburg, the Trust and Abbott, except for the change of the service provider
from Abbott to Abbott LLC.
Portfolio Managers. The portfolio manager of the International Equity
Portfolio is Richard H. King, who has been the Portfolio's manager since
inception. 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.
Nicholas P.W. Horsley, P. Nicholas Edwards, Harold W. Ehrlich and Vincent
McBride are associate portfolio managers and research analysts of the
International Equity Portfolio. Mr. Horsley is a senior vice president of
Warburg and has been with Warburg since 1993, before which time he was a
director, portfolio manager and analyst at Barclays deZoete Wedd in New York
City. Mr. Edwards has been with Warburg since August 1995, before which time
he was a director at Jardine Fleming Investment Advisers, Tokyo. He was a vice
president of Robert Fleming Inc. in New York City from 1988 to 1991. Mr.
Ehrlich is a senior vice president of Warburg and has been with Warburg since
February 1995, before which time he was a senior vice president, portfolio
manager and analyst at Templeton Investment Counsel Inc. Mr. McBride has been
with Warburg since 1994. Prior to joining Warburg, Mr. McBride was an
international equity analyst at Smith Barney Inc. from 1993 to 1994 and at
General Electric Investment Corporation from 1992 to 1993. From 1989 to 1992
he was a portfolio manager/analyst at United Jersey Bank.
The portfolio managers of the Post-Venture Capital and Small Company Growth
Portfolios are Elizabeth B. Dater and Stephen J. Lurito. Ms. Dater is a senior
managing director of EMW and has been a portfolio manager of Warburg since
1978. Mr. Lurito is a managing director of EMW and has been with Warburg since
1987, before which time he was a research analyst at Sanford C. Bernstein &
Company, Inc.
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Robert S. Janis and Christopher M. Nawn, vice presidents of Warburg, are
associate portfolio managers and research analysts for the Post-Venture
Capital Portfolio. Mr. Janis has been with Warburg since October 1994, before
which time he was a vice president and senior research analyst at U.S. Trust
Company of New York. Mr. Nawn has been with Warburg since September 1994,
before which time he was a senior sector analyst and portfolio manager at the
Dreyfus Corporation.
Raymond L. Held and Gary H. Solomon, investment managers and general
partners of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Abbott also acts as sub-investment adviser for the Warburg
Pincus Post-Venture Capital Fund.
Co-Administrators. The Portfolios employ Counsellors Funds Service, Inc., a
wholly owned subsidiary of Warburg ('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 Counsellors Service a fee calculated at an annual rate of .10%
of the Portfolio's average daily net assets.
The Trust employs PFPC, 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 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. Each of the Post-Venture Capital and Small
Company Growth Portfolio pays PFPC a fee calculated at an annual rate of .10%
of each Portfolio's first $500 million in average daily net assets, .075% of
the next $1 billion in average daily net assets, and .05% of average daily net
assets over $1.5 billion, in each case exclusive of out-of-pocket expenses.
PFPC has its principal offices at 400 Bellevue Parkway, Wilmington, Delaware
19809.
Custodians. 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 the International Equity and
Small Company Growth Portfolios' non-U.S. assets. Fiduciary Trust
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Company International ('Fiduciary') serves as custodian of the Post-Venture
Capital Portfolio's non-U.S. assets. PNC is a subsidiary of PNC 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. Fiduciary's principal business address is
Two World Trade Center, New York, New York 10048.
Transfer Agent. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. 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 Portfolios. Counsellors Securities is a
wholly owned subsidiary of Warburg and is located at 466 Lexington Avenue, New
York, New York 10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ('Service Organizations') with whom it enters into agreements up to .35%
(the 'Service Fee') of the annual average value of accounts maintained by such
Organizations with a Portfolio. A portion of the Service Fee may be borne by a
Portfolio as a transfer agency fee. In addition, a Service Organization may
directly or indirectly pay a portion of this Service Fee to a Portfolio's
custodian or transfer agent for costs related to accounts of the Service
Organizations' clients or customers. The Service Fee payable to any one
Service Organization is determined based upon a number of factors, including
the nature and quality of the services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Service Organization.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to qualified recipients who support the sale of shares of a
Portfolio, consisting of 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.
23
<PAGE>
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 or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select
a Portfolio as an investment option for a Variable Contract or Plan.
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 a Portfolio 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
contract owners' orders to the Participating Insurance Company and that
Participating Insurance Company's orders to a Portfolio.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account. Participants
should contact their Plan sponsor for information concerning the appropriate
procedure for investing in the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's opinion, they are of a size
that would disrupt the management of a Portfolio. A Portfolio may discontinue
sales of its shares if management believes that a substantial further increase
in assets may adversely affect that Portfolio's ability to achieve its
investment objective. In such event, however, it is anticipated that existing
Variable Contract owners and Plan participants 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 or
Plan or its agent 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
24
<PAGE>
business day. Redemption proceeds will normally be wired to the Participating
Insurance Company or Plan 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. 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, in the case of a Variable
Contract, 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 or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. Each Portfolio intends to distribute
all of its net income and capital gains to its shareholders (the Variable
Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, 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 Plans and will be exempt from current
taxation of the Variable Contract owner or Plan participant if left to
accumulate within the Variable Contract or Plan. Generally, withdrawals from
Variable Contracts or Plans 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 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.
Special Tax Matters Relating to the Post-Venture Capital Portfolio. Certain
provisions of the Code may require that a gain recognized by the Post-
25
<PAGE>
Venture Capital Portfolio upon the closing of a short sale be treated as a
short-term capital gain, and that a loss recognized by the Portfolio upon the
closing of a short sale be treated as a long-term capital loss, regardless of
the amount of time that the Portfolio held the securities used to close the
short sale. The Portfolio's use of short sales may also affect the holding
periods of certain securities held by the Portfolio if such securities are
'substantially identical' to securities used by the Portfolio to close the
short sale. The Portfolio's short selling activities will not result in
unrelated business taxable income to a tax-exempt investor.
Internal Revenue Service Requirements. 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 dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the NASDAQ National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the
closing value on the date on which the valuation is made. Options and futures
contracts will be valued similarly. Debt obligations that mature in 60 days or
less from the valuation date are valued on the basis of amortized cost, unless
the Board determines that using this valuation method would not reflect the
investments' value.
With respect to the Post-Venture Capital Portfolio, investments in Private
Funds will initially be valued at cost and, thereafter, will be valued in
accordance with periodic reports received by Abbott from the Private Funds
(generally quarterly). Because the issuers of securities held by Private Funds
are generally not subject to the reporting requirements of the federal
securities laws, interim changes in value of underlying holdings of Private
Funds will not generally be reflected in the Portfolio's net asset value.
However, Warburg will report to the Board information about certain holdings
of Private Funds that, in its judgment, could have a material impact
26
<PAGE>
on the valuation of a Private Fund. The Board will take these reports into
account in valuing Private Funds.
Securities, options and futures contracts for which market quotations are
not readily available and other assets, including, with respect to the Post-
Venture Capital Portfolio, Private Funds, will be valued at their fair value
as determined in good faith pursuant to consistently applied procedures
established by the Board. Further information regarding valuation policies is
contained in the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------
From time to time, each Portfolio may 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 or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents
or other informational materials supplied by Plan sponsors 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
27
<PAGE>
Additional Information describes the method used to determine the total
return. Current total return figures may be obtained by calling (800)
369-2728.
In reports or other communications to investors or in advertising material,
a Portfolio or a Participating Insurance Company or Plan sponsor 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 Europe, Australia and
Far East ('EAFE') Index, the Salomon Russell Global Equity Index, the
FT-Actuaries World Indices (jointly compiled by The Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500 Index, in
the case of the Post-Venture Capital and Small Company Growth Portfolios, the
Russell 2000 Small Stock Index and the S&P 500 Index and, in the case of the
Post-Venture Capital Portfolio only, with the Venture Capital 100 Index, all
of which are unmanaged indexes; or (iii) other appropriate indexes of
investment securities or with data developed by Warburg derived from such
indexes. The Post-Venture Capital Portfolio may also make comparisons using
data and indexes compiled by the National Venture Capital Association,
Venture-One and Private Equity Analysts Newsletter and similar organizations
and publications. 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 Business Daily, Money, Inc., Institutional Investor,
Barron's, Fortune, Forbes, Business Week, Mutual Fund Magazine, Morningstar,
Inc. and Financial Times.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also
describe the general biography or work experience of the portfolio managers of
the Portfolio and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Portfolio's investments,
research methodology underlying stock selection or the Portfolio's investment
objective. In addition, a Portfolio and its portfolio managers may render
periodic updates of Portfolio activity, which may include a discussion of
significant portfolio holdings and analysis of holdings by industry, country,
credit quality and other characteristics. The Post-Venture Capital Portfolio
may discuss characteristics of venture capital financed companies and the
benefits expected to be achieved from investing in these companies. Each
Portfolio may also discuss the continuum of risk and return relating to
different investments and the potential impact of foreign securities on a
portfolio otherwise composed of domestic securities. Morningstar, Inc. rates
funds in broad categories based on risk/reward analyses over various periods
of time. In addition, each Portfolio or a Participating Insurance Company or
Plan sponsor may from time to time
28
<PAGE>
compare the Portfolio's expense ratio to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
GENERAL INFORMATION
- --------------------------------------------------
Trust Organization. The Trust was organized on March 15, 1995 under the
laws of The Commonwealth of Massachusetts 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 four series have been authorized, three of 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. 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. 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.
Plans may or may not pass through voting rights to Plan participants,
depending on the terms of the Plan's governing documents. For a more complete
discussion of voting rights, refer to the sponsoring Participating Insurance
Company separate account prospectus or the Plan documents or other
informational materials supplied by Plan sponsors.
Conflicts of Interest. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance
Companies which may or may not be affiliated with each other and (ii) Plans
including Participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Due to differences of tax treatment
and other considerations, the interests of various Variable Contract owners
and Plan participants 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 and/or Plans to withdraw its investments in one or both Portfolios.
As a result, a Portfolio may be forced to sell securities at disadvantageous
prices
29
<PAGE>
and orderly portfolio management could be disrupted. In addition, the Board
may refuse to sell shares of a Portfolio to any Variable Contract or Plan 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. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios may be obtained by calling the
Trust at (800) 369-2728.
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.
30
TABLE OF CONTENTS
The Trust's Expenses...................................... 2
Financial Highlights...................................... 3
Investment Objectives and Policies........................ 5
Portfolio Investments..................................... 9
Risk Factors and Special Considerations................... 11
Portfolio Transactions and Turnover Rate.................. 14
Certain Investment Strategies............................. 14
Investment Guidelines..................................... 19
Management of the Portfolios.............................. 19
How to Purchase and Redeem Shares in the Portfolios....... 24
Dividends, Distributions and Taxes........................ 25
Net Asset Value........................................... 26
Performance............................................... 27
General Information....................................... 29
[LOGO]
P.O. Box 9030, Boston, MA 02205-9030
800-369-2728
WPTRU-1-1196
<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1996, As Revised November 12, 1996
WARBURG PINCUS TRUST
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 369-2728
Contents
Page
Investment Objectives.........................................................2
Investment Policies...........................................................2
Management of the Trust......................................................30
Additional Purchase and Redemption Information...............................37
Additional Information Concerning Taxes......................................38
Determination of Performance.................................................40
Independent Accountants and Counsel..........................................42
Miscellaneous................................................................43
Financial Statements.........................................................43
Appendix -- Description of Ratings..........................................A-1
Statement of Assets and Liabilities.........................................B-5
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Warburg Pincus Trust (the "Trust"), dated
March 1, 1996, as revised November 12, 1996, as amended or supplemented
from time to time, and is incorporated by reference in its entirety into
that Prospectus. The Trust currently offers four managed investment
funds, three of which, the International Equity Portfolio, the Post-Venture
Capital Portfolio and the Small Company Growth Portfolio (together the
"Portfolios" and each a "Portfolio") are described in this Statement of
Additional Information. Shares of a Portfolio are not available directly to
individual investors but may be offered only to certain (i) 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") and (ii) tax-qualified pension and retirement plans
("Plans"), including participant-directed Plans which elect to make a
Portfolio an investment option for Plan participants. 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 the
<PAGE>2
Trust at (800) 369-2728 or by writing to the Trust, P.O. Box 9030, Boston,
Massachusetts 02205-9030.
INVESTMENT OBJECTIVES
The investment objective of the International Equity
Portfolio is long-term capital appreciation. The investment objective of the
Post-Venture Capital Portfolio is long-term growth of capital. 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.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Portfolio may write covered put and
call options on stock and debt securities and may purchase such options that
are traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC").
Each Portfolio realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price for
a specified time period or at a specified time. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price for a specified
time period or at a specified time.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Portfolio
as the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Portfolio as a put or call writer retains the risk of a decline in the price
of the underlying security. The size of the premiums that the Portfolio may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
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
<PAGE>3
required to convert or exchange and obtain physical delivery of the
underlying common stock with respect to which the Portfolio has written
options may exceed the time within which the Portfolio must make delivery
in accordance with an exercise notice. In these instances, the Portfolio
may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear
any market risk, since the Portfolio will have the absolute right to receive
from the issuer of the underlying security an equal number of shares to
replace the borrowed securities, but the Portfolio may incur additional
transaction costs or interest expenses in connection with any such purchase or
borrowing.
Additional risks exist with respect to certain of the
securities for which the Portfolios may write covered call options. For example,
if a Portfolio writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Portfolio will compensate for the decline in the value of the cover
by purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration
dates between one and nine months from the date written. The exercise price of
the options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios may write (i) in-the-money call
options when Warburg, Pincus Counsellors, Inc., the Portfolios' investment
adviser ("Warburg"), expects that the price of the underlying security will
remain flat or decline moderately during the option period, (ii) at-the-money
call options when Warburg expects that the price of the underlying security will
remain flat or advance moderately during the option period and (iii)
out-of-the-money call options when Warburg expects that the premiums received
from writing the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options Clearing
Corporation (the "Clearing Corporation") and of the securities exchange on which
the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by the Portfolio
prior to the exercise of options that it has purchased or written, respectively,
of options of the same series) in which the Portfolio may realize a profit or
loss from the sale. An option position may be closed out only where there exists
a secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. When the Portfolio has purchased an
option and engages in a closing sale transaction, whether the Portfolio realizes
a profit or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium the Portfolio
<PAGE>4
initially paid for the original option plus the related transaction
costs. Similarly, in cases where the Portfolio has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur
a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. The Portfolio may engage in a
closing purchase transaction to realize a profit, to prevent an underlying
security with respect to which it has written an option from being called or
put or, in the case of a call option, to unfreeze an underlying security
(thereby permitting its sale or the writing of a new option on the security
prior to the outstanding option's expiration). The obligation of the
Portfolio under an option it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option as
a result of the transaction. So long as the obligation of the Portfolio as
the writer of an option continues, the Portfolio may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Portfolio to deliver the underlying security against payment of the exercise
price. This obligation terminates when the option expires or the Portfolio
effects a closing purchase transaction. The Portfolio can no longer effect a
closing purchase transaction with respect to an option once it has been
assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Portfolio's ability to terminate options positions established in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that securities dealers participating in
over-the-counter transactions would fail to meet their obligations to the
Portfolio. The Portfolio, however, intends to purchase over-the-counter options
only from dealers whose debt securities, as determined by Warburg, are
considered to be investment grade. If, as a covered call option writer, the
Portfolio is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. In either case,
the Portfolio would continue to be at market risk on the security and could face
higher transaction costs, including brokerage commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Trust or a Portfolio and other clients of Warburg and certain of its affiliates
may be considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of
<PAGE>5
these limits and it may impose certain other sanctions. These limits may
restrict the number of options a Portfolio will be able to purchase on a
particular security.
Stock Index Options. Each Portfolio may purchase and write
exchange-listed and OTC put and call options on stock indexes. The aggregate
value of the securities underlying the options 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 options on securities written by the
Portfolio, may not exceed 25% 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 NYSE Composite Index, or a narrower market
index such as the Standard & Poor's 100. Indexes may also be based on a
particular industry or market segment.
Options on stock indexes are similar to options on stock
except that (i) the expiration cycles of stock index options are monthly, while
those of stock options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the index and the
exercise price of the option times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Stock index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. The Portfolios may purchase OTC or dealer options
or sell covered OTC options. Unlike exchange-listed options where an
intermediary or clearing corporation, such as the Clearing Corporation, assures
that all transactions in such options are properly executed, the responsibility
for performing all transactions with respect to OTC options rests solely with
the writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Portfolio
were to purchase a dealer option, however, it would rely on the dealer from whom
it purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Portfolio, the Portfolio would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Portfolio will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Portfolio writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Portfolio originally wrote the option. Although the Portfolios will
seek to enter into dealer
<PAGE>6
options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Portfolios,
there can be no assurance that the Portfolio will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
a Portfolio. Until the Portfolio, as a covered OTC call option writer, is
able to effect a closing purchase transaction, it will not be able to
liquidate securities (or other assets) used to cover the written option until
the option expires or is exercised. This requirement may impair the
Portfolio's ability to sell portfolio securities or, with respect to currency
options, currencies at a time when such sale might be advantageous. In the
event of insolvency of the other party, the Portfolio may be unable to
liquidate a dealer option.
Futures Activities. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return.
A Portfolio will not enter into futures contracts and related
options for which the aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC exceed 5% of the Portfolio's net asset value after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into. The Portfolios reserve the right to engage in transactions
involving futures contracts and options on futures contracts to the extent
allowed by CFTC regulations in effect from time to time and in accordance with a
Portfolio's policies. Although each Portfolio is limited in the amount of assets
it may invest in futures transactions (as described above and in the
Prospectus), there is no overall limit on the percentage of Portfolio assets
that may be at risk with respect to futures activities. The ability of the
Portfolio to trade in futures contracts and options on futures contracts may be
limited by the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified non-U.S. currency at a specified price, date,
time and place. An interest rate futures contract provides for the future sale
by one party and the purchase by the other party of a certain amount of a
specific interest rate sensitive financial instrument (debt security) at a
specified price, date, time and place. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between the
value of the index at the close of the last trading day on the contract and the
price at which the agreement is made.
No consideration is paid or received by a Portfolio upon
entering into a futures contract. Instead, the Portfolio is required to deposit
in a segregated account with its custodian an amount of cash or cash
equivalents, such as U.S. government securities or other liquid
<PAGE>7
high-grade debt obligations, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the
contract is traded, and brokers may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. The broker will have access to amounts in the margin
account if the Portfolio fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker,
will be made daily as the currency, financial instrument or stock index
underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." The Portfolios will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
Portfolio may elect to close the position by taking an opposite position, which
will operate to terminate the Portfolio's existing position in the contract.
Positions in futures contracts and options on futures contracts (described
below) may be closed out only on the exchange on which they were entered into
(or through a linked exchange). No secondary market for such contracts exists.
Although the Portfolios intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio had insufficient cash, it might have to sell securities to meet
daily variation margin requirements at a time when it would be disadvantageous
to do so. In addition, if the transaction is entered into for hedging purposes,
in such circumstances the Portfolio may realize a loss on a futures contract or
option that is not offset by an increase in the value of the hedged position.
Losses incurred in futures transactions and the costs of these transactions will
affect the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase and
write put and call options on foreign currency, interest rate and stock index
futures contracts and may enter into closing transactions with respect to such
options to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or stock index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the
<PAGE>8
accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of
the option is fixed at the point of sale, there are no daily cash payments by
the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of the Portfolio.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Portfolio that are invested in foreign securities may be
affected favorably or unfavorably by changes in exchange control regulations,
and the Portfolio may incur costs in connection with conversion between various
currencies. Currency exchange transactions may be from any non-U.S. currency
into U.S. dollars or into other appropriate currencies. Each Portfolio will
conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market, (ii) through entering into
futures contracts or options on such contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed
upon by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are standardized
as to contract size and delivery date.
At or before the maturity of a forward contract, the Portfolio
may either sell a portfolio security and make delivery of the currency, or
retain the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to purchase a
second, offsetting contract. If the Portfolio retains the portfolio security and
engages in an offsetting transaction, the Portfolio, at the time of execution of
the offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Portfolios may purchase exchange-traded
put and call options on foreign currencies. Put options convey the right to sell
the underlying currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected to
be lower than the spot price of the currency at the time the option is
exercised.
Currency Hedging. The Portfolios' currency hedging will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of a Portfolio generally accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. A Portfolio
<PAGE>9
may not position hedge to an extent greater than the aggregate market value (at
the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which the Portfolio's securities are denominated will reduce the U.S. dollar
value of the securities, even if their value in the foreign currency remains
constant. The use of currency hedges does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. For example, in order to protect against
diminutions in the U.S. dollar value of securities it holds, a Portfolio may
purchase currency put options. If the value of the currency does decline, the
Portfolio will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, the Portfolio may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. The benefit to the Portfolio
derived from purchases of currency options, like the benefit derived from other
types of options, will be reduced by premiums and other transaction costs.
Because transactions in currency exchange are generally conducted on a principal
basis, no fees or commissions are generally involved. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Portfolio may not be able to contract
to sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of the Portfolio's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Portfolio's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the
Portfolio against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, each Portfolio may enter into
these transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by 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.
<PAGE>10
In hedging transactions based on an index, whether a Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. The risk of imperfect
correlation increases as the composition of the Portfolio's portfolio varies
from the composition of the index. In an effort to compensate for imperfect
correlation of relative movements in the hedged position and the hedge, the
Portfolio's hedge positions may be in a greater or lesser dollar amount than the
dollar amount of the hedged position. Such "over hedging" or "under hedging" may
adversely affect the Portfolio's net investment results if market movements are
not as anticipated when the hedge is established. Stock index futures
transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the stock index and futures
markets. Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market also may cause temporary price distortions. Because of the
possibility of price distortions in the futures market and the imperfect
correlation between movements in the stock index and movements in the price of
stock index futures, a correct forecast of general market trends by Warburg
still may not result in a successful hedging transaction.
A Portfolio will engage in hedging transactions only when
deemed advisable by Warburg, and successful use by the Portfolio of hedging
transactions will be subject to Warburg's ability to predict trends in currency,
interest rate or securities markets, as the case may be, and to correctly
predict movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Portfolio's performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectus, each Portfolio will comply
with guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolio on securities and indexes; and currency, interest rate and
index futures contracts and options on these futures contracts. These guidelines
may, in certain instances, require segregation by the Portfolio of cash or
certain liquid securities or other securities that are acceptable as collateral
to the appropriate regulatory authority.
For example, a call option written by the Portfolio on
securities may require the Portfolio to hold the securities subject to the call
(or securities convertible into the securities without additional consideration)
or to segregate assets (as described above) sufficient to purchase and deliver
the securities if the call is exercised. A call option written by the Portfolio
on an index may require the Portfolio to own portfolio securities that correlate
with the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise
<PAGE>11
price on a current basis. A put option written by the Portfolio may
require the Portfolio to segregate assets (as described above) equal to the
exercise price. The Portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the
price of the contract held. The Portfolio may enter into fully or
partially offsetting transactions so that its net position, coupled with any
segregated assets (equal to any remaining obligation), equals its net
obligation. Asset coverage may be achieved by other means when consistent with
applicable regulatory policies.
Additional Information on Investment Practices
Foreign Investments. Investors should recognize that
investing in foreign companies involves certain risks, including those
discussed below, which are not typically associated with investing in U.S.
issuers.
Foreign Currency Exchange. Since the International Equity
Portfolio will, and the Post-Venture Capital (up to 20% of its total assets) and
Small Company Growth Portfolios may, be investing in securities denominated in
currencies other than the U.S. dollar, and since a Portfolio may temporarily
hold funds in bank deposits or other money market investments denominated in
foreign currencies, each Portfolio's investments in foreign companies 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 foreign countries important to international trade and finance.
Governmental intervention may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in response to
economic forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls or
taxes, to affect the exchange rates of their currencies. A Portfolio may use
hedging techniques with the objective of protecting against loss through the
fluctuation of the valuation of foreign currencies against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Transactions" and "Futures Transactions" above.
Information. The majority of the foreign securities held by
a Portfolio will not be registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC.
<PAGE>12
Accordingly, there may be less publicly available information about the
securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign
companies are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies.
Political Instability. 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 and neighboring countries.
Delays. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure of a Portfolio to market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on a
Portfolio's liquidity, the Portfolios will avoid investing in countries which
are known to experience settlement delays which may expose the Portfolios to
unreasonable risk of loss.
Increased Expenses. 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.
General. In general, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. A Portfolio may invest in
securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
Japanese Investments (International Equity Portfolio). From
time to time depending on current market conditions, the 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.
THE INFORMATION SET FORTH IN THIS SECTION HAS BEEN EXTRACTED
FROM VARIOUS GOVERNMENTAL PUBLICATIONS AND OTHER SOURCES. THE TRUST MAKES NO
REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR HAS THE TRUST
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 INTERNATIONAL EQUITY PORTFOLIO.
<PAGE>13
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 government
has announced a $5.9 billion plan to repair the port and estimated that damage
to the region equals $120 billion. However, the long-term economic effects of
the earthquake on the Japanese economy as a whole and on the Portfolio's
investments 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 sizable 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.
In 1995, however, the trade surplus decreased due to a drop in exports. The
reduced exports are due primarily to the strength of the yen and the impact of
threatened U.S. trade sanctions. 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. On June 28, 1995, the United
States agreed not to impose trade sanctions in return for a modest commitment by
Japan to buy more American cars and auto parts. 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>14
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
Year Exports Imports Trade Balance Current
---- ------- ------- ------------- Balance
-------
(U.S. dollars in millions)
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 384,176 283,232 145,944 129,140
Source: 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) 469,149 465,972 463,145 451,297 424,537 396,197
(Expenditures)
Change in GDP
from Preceding
Year
Nominal terms 0.7% 0.6% 2.6% 6.3% 7.2% 6.7%
Real Terms 0.5% -0.2% 1.1% 4.3% 4.8% 4.7%
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of Japan
<PAGE>15
WHOLESALE PRICE INDEX
Change from
All Preceding
Year Commodities Year
---- ----------- -----------
(Base year: 1990)
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)
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of Japan
CONSUMER PRICE INDEX
Change from
Year General Preceding Year
---- ------- --------------
(Base Year: 1990)
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
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of Japan
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>16
The following table sets forth the number of Japanese
companies listed on the three major Japanese stock exchanges as of the end of
1994.
NUMBER OF LISTED DOMESTIC COMPANIES
Tokyo Osaka Nagoya
----------------- --------------- ---------------
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec.
1,235 454 855 344 431 129
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)
Year Volume Value
---- ------ -----
1989......... 256,296 (Y)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
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange New York
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>17
TOPIX
(January 4, 1968=100)
Year Year-end High Low
- ---- -------- ---- ---
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
Source: Tokyo Stock Exchange, Fact Book 1995
U.S. Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. government securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
government securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board and Student Loan Marketing
Association. Each Portfolio may also invest in instruments that are supported by
the right of the issuer to borrow from the U.S. Treasury and instruments that
are supported by the credit of the instrumentality. Because the U.S. government
is not obligated by law to provide support to an instrumentality it sponsors, a
Portfolio will invest in obligations issued by such an instrumentality only if
Warburg determines that the credit risk with respect to the instrumentality does
not make its securities unsuitable for investment by the Portfolio.
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 affiliates of Warburg unless it has applied for and
received specific authority
<PAGE>18
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.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. A
Portfolio will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Warburg deems it advantageous to do so.
The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on such securities
may be higher or lower than the yields available in the market on the dates when
the investments are actually delivered to the buyers.
When a Portfolio agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations or other securities that are acceptable
as collateral to the appropriate regulatory authority 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
<PAGE>19
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 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.
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 seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
A Portfolio may engage in a short sale 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." 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.
The Portfolios do not intend to engage in short sales against the box
for investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security), or when a Portfolio wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Portfolio's long position should be offset by a gain in
the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Portfolio owns. There will be certain additional
transaction costs associated with short sales against the box, but the Portfolio
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
Warrants. Each Portfolio may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by a
Portfolio as part of a unit or attached to securities at the time of purchase).
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
<PAGE>20
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,
repurchase agreements which have a maturity of longer than seven days, time
deposits maturing in more than seven days, certain Rule 144A Securities (as
defined below) and, with respect to the Post-Venture Capital Portfolio, Private
Funds (as defined in the Prospectus). 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 Securities. Rule 144A under the Securities Act adopted by the
SEC allows for a broader institutional trading market for securities otherwise
subject to restriction on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to qualified institutional buyers. Warburg
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Portfolio's limits on the purchase of
illiquid securities unless the Board or its
<PAGE>21
delegates determines that the 144A securities are liquid. In reaching
liquidity decisions, the Board and its delegates may consider, inter alia,
the following factors: (i) the unregistered nature of the security; (ii) the
frequency of trades and quotes for the security; (iii) the number of dealers
wishing to purchase or sell the security and the number of other
potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Borrowing. Each Portfolio may borrow up to 30% of its total
assets for temporary or emergency purposes, including to meet portfolio
redemption requests so as to permit the orderly disposition of portfolio
securities or to facilitate settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when borrowings exceed 5% of
the Portfolio's net assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the borrowing
is outstanding. Each Portfolio expects that some of its borrowings may be made
on a secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
Below Investment Grade Securities (Post-Venture Capital
Portfolio). The Post-Venture Capital Portfolio may invest in below investment
grade convertible debt and preferred securities and it is not required to
dispose of securities downgraded below investment grade subsequent to
acquisition by the Portfolio. Although the Portfolio may invest only in
investment grade non-convertible debt securities (as described in the
Prospectus), securities held by Private Funds (as described in the Prospectus)
may be rated below investment grade. While the market values of medium- and
lower-rated securities and unrated securities of comparable quality tend to
react less to fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-quality securities. In addition, medium- and lower-rated
securities and comparable unrated securities generally present a higher degree
of credit risk. Issuers of medium- and lower-rated securities and unrated
securities are often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service their
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater because medium- and lower-rated securities and unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
The market for medium- and lower-rated and unrated securities
is relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
Certain of these securities may be difficult to dispose of
because there may be a thin trading market. Because there is no establishing
retail secondary market for many of these securities, it is anticipated that
these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market for
higher-rated securities. The lack of a liquid
<PAGE>22
secondary market, as well as adverse publicity and investor perception with
respect to these securities, may have an adverse impact on market price and
the ability to dispose of particular issues when necessary to meet the
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more
difficult to obtain accurate market quotations for purposes of valuation and
calculation of net asset value.
The market value of securities in medium- and lower-rated
categories is more volatile than that of higher quality securities. Factors
adversely impacting the market value of these securities will adversely impact
the Post-Venture Capital Portfolio's net asset value. The Portfolio will rely on
the judgment, analysis and experience of Warburg in evaluating the
creditworthiness of an issuer. In this evaluation, Warburg will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. Additional expenses may be incurred to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings of such securities. Recent adverse publicity regarding
lower-rated securities may have depressed the prices for such securities to some
extent. Whether investor perceptions will continue to have a negative effect on
the price of such securities is uncertain.
Private Funds (Post-Venture Capital Portfolio). Although
investments in Private Funds offer the opportunity for significant capital
gains, these investments involve a high degree of business and financial risk
that can result in substantial losses in the portion of the Post-Venture Capital
Portfolio's portfolio invested in these investments. Among these are the risks
associated with investment in companies in an early stage of development or with
little or no operating history, companies operating at a loss or with
substantial variation in operation results from period to period, companies with
the need for substantial additional capital to support expansion or to maintain
a competitive position, or companies with significant financial leverage. Such
companies may also face intense competition from others including those with
greater financial resources or more extensive development, manufacturing,
distribution or other attributes, over which the Portfolio will have no control.
Interests in the Private Funds in which the Post-Venture
Capital Portfolio may invest will be subject to substantial restrictions on
transfer and, in some instances, may be non-transferable for a period of years.
Private Funds may participate in only a limited number of investments and, as a
consequence, the return of a particular Private Fund may be substantially
adversely affected by the unfavorable performance of even a single investment.
Certain of the Private Funds in which the Portfolio may invest may pay their
investment managers a fee based on the performance of the Private Fund, which
may create an incentive for the manager to make investments that are riskier or
more speculative than would be the case if the manager was paid a fixed fee.
Private Funds are not registered under the 1940 Act and, consequently, are not
subject to the restrictions on affiliated transactions and other protections
applicable to regulated investment companies. The valuation of companies held by
Private Funds, the securities of which
<PAGE>23
are generally unlisted and illiquid, may be very difficult and will often
depend on the subjective valuation of the managers of the Private Funds,
which may prove to be inaccurate. Inaccurate valuations of a Private Fund's
portfolio holdings may affect the Fund's net asset value calculations.
Private Funds in which the Portfolio invests will not borrow to increase
the amount of assets available for investment or otherwise engage in leverage.
Securities of Small Companies (Post-Venture Capital
Portfolio). The Post-Venture Capital Portfolio's investments involve
considerations that are not applicable to investing in securities of
established, larger-capitalization issuers, including reduced and less reliable
information about issuers and markets, less stringent accounting standards,
illiquidity of securities and markets, higher brokerage commissions and fees and
greater market risk in general. In addition, securities of smaller companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile.
Special Situation Companies (Post-Venture Capital and Small
Company Growth Portfolios). The Post-Venture Capital and Small Company Growth
Portfolios' investments involve considerations that are not applicable to
investing in securities of established, larger-capitalization issuers,
including reduced and less reliable information about issuers and markets, less
stringent accounting standards, illiquidity of securities and markets, higher
brokerage commissions and fees and greater market risk in general.
Each Portfolio may invest (with respect to the Post-Venture
Capital Portfolio, up to 10% of its assets, directly or indirectly) in the
securities of "special situation companies" involved in an actual or prospective
acquisition or consolidation; reorganization; recapitalization; merger,
liquidation or distribution of cash, securities or other assets; a tender or
exchange offer; a breakup or workout of a holding company; or litigation which,
if resolved favorably, would improve the value of the company's stock. If the
actual or prospective situation does not materialize as anticipated, the market
price of the securities of a "special situation company" may decline
significantly. The Portfolio believes, however, that if Warburg analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Portfolio may achieve capital growth.
There can be no assurance, however, that a special situation that exists at the
time the Portfolio makes its investment will be consummated under the terms and
within the time period contemplated.
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 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.
<PAGE>24
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 Capital Portfolio and the
Post-Venture Capital 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.
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. For the International Equity Capital Portfolio and the Small
Company Growth Portfolio only, make short sales of securities or maintain a
short position, except that the Portfolio
<PAGE>25
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. 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.
14. 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 Warburg 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.
15. 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.
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.
<PAGE>26
General. If a percentage restriction (other than
the percentage limitation set forth in investment restriction No. 1, above) 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 foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the bid and asked quotations. If there are no such
quotations, the value of the securities will be taken to be the highest bid
quotation on the exchange or market. Options or futures contracts will be valued
similarly. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. Short-term obligations with maturities of 60 days or less are
valued at amortized cost, which constitutes fair value as determined by the
Board. Amortized cost involves valuing a portfolio instrument at its initial
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to debt obligations with 60 days or less remaining to maturity. In
determining the market value of portfolio investments, the Portfolio may employ
outside organizations (a "Pricing Service") which may use a matrix formula or
other objective method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. The procedures of Pricing Services
are reviewed periodically by the officers of the Trust under the general
supervision and responsibility of the Board, which may replace a Pricing Service
at any time. Securities, options and futures contracts for which market
quotations are not available and certain other assets of the Portfolio will be
valued at their fair value as determined in good faith pursuant to consistently
applied procedures established by the Board. In addition, the Board or its
delegates may value a security at fair value if it determines that such
security's value determined by the methodology set forth above does not reflect
its fair value.
Private Funds (Post-Venture Capital Portfolio). Private Funds
are initially valued at cost (i.e., the actual dollar amount invested).
Thereafter, Private Funds are valued at the prices set forth in periodic reports
received by Abbott Capital Management, L.P., the Portfolio's sub-investment
adviser ("Abbott"), from the Private Funds. These reports are generally made
quarterly. Neither Abbott nor the Portfolio will monitor interim changes in the
value of portfolio holdings of the Private Funds. As a result, these changes
will not be taken into account by the Portfolio in calculating its net asset
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
<PAGE>27
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. As a result,
calculation of the Portfolio's net asset value may not take place
contemporaneously with the determination of the prices of certain
portfolio securities used in such calculation. Events affecting the values
of portfolio securities that occur between the time their prices are determined
and the close of regular trading on the NYSE will not be reflected in
the Portfolios' calculation of net asset value, in which case an adjustment
may be made by the Board or its delegates. All assets and liabilities
initially expressed in foreign currency values will be converted into
U.S. dollar values at the prevailing rate as quoted by a Pricing Service.
If such quotations are not available, the rate of exchange will be
determined in good faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. With
respect to the Post-Venture Capital Portfolio, Private Funds may be purchased
directly from the issuer or may involve a broker or placement agent. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a Portfolio to underwriters of
newly issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or mark-down.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. With
respect to the Post-Venture Capital Portfolio, purchases of Private Funds
through a broker or placement agent will also involve a commission or other fee.
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.
Except for the Post-Venture Capital Portfolio's investments in
Private Funds, which will be managed by Abbott, Warburg will select specific
portfolio investments and effect transactions for each Portfolio and in doing so
seeks to obtain the overall best execution of portfolio transactions. In
evaluating prices and executions, Warburg will consider the factors it deems
relevant, which may include the breadth of the market in the security, the price
of the security, the financial condition and execution capability of a broker or
dealer and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. Warburg may, in its discretion, effect
transactions in portfolio securities with dealers who provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to a Portfolio and/or other accounts over which Warburg
exercises
<PAGE>28
investment discretion. Warburg may place portfolio transactions
with a broker or dealer with whom it has negotiated a commission that is in
excess of the commission another broker or dealer would have charged for
effecting the transaction if Warburg determines in good faith that such
amount of commission was reasonable in relation to the value of such
brokerage and research services provided by such broker or dealer viewed
in terms of either that particular transaction or of the overall
responsibilities of Warburg. Research and other services received may be
useful to Warburg in serving both the Portfolios and its other clients and,
conversely, research or other services obtained by the placement of
business of other clients may be useful to Warburg in carrying out its
obligations to the Portfolios. Research may include furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities
and the availability of securities or purchasers or sellers of securities;
furnishing seminars, information, analyses and reports concerning issuers,
industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management
personnel, industry experts, economists and government officials;
comparative performance evaluation and technical measurement services
and quotation services; and products and other services (such as third
party publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process
or otherwise utilize information, including the research described
above) that assist Warburg in carrying out its responsibilities. For the
fiscal period ended December 31, 1995, $6,172 and $16,561 of total brokerage
commissions was paid to brokers and dealers by the International Equity
Portfolio and the Small Company Growth Portfolio, respectively, who provided
such research and other services. Research received from brokers or dealers
is supplemental to Warburg's own research program. The fees to Warburg
under its advisory agreements with the Trust are not reduced by reason of its
receiving any brokerage and research services.
During the fiscal period ended December 31, 1995, the Trust,
on behalf of the International Equity Portfolio and Small Company Growth
Portfolio, paid an aggregate of approximately $224,678 and $94,028,
respectively, in commissions to broker-dealers for execution of portfolio
transactions. As of December 31, 1995, the International Equity Portfolio and
Small Company Growth Portfolio each had outstanding a repurchase agreement in
the amount of $4,060,000 and $5,775,000, respectively, with State Street Boston
Securities, one of each Portfolio's regular broker-dealers and an affiliate of
its transfer agent.
Investment decisions for each Portfolio concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg or, in the case of the Post-Venture Capital Portfolio, Abbott. Such
other investment clients may invest in the same securities as a Portfolio. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which Warburg or, in
the case of the Post-Venture Capital Portfolio, Abbott, believes to be equitable
to each client, including the Portfolios. In some instances, this investment
procedure may adversely affect the price paid or received by a Portfolio or the
size of the position obtained or sold for a Portfolio. To the extent permitted
by law, securities to be sold or purchased for a Portfolio may be aggregated
with those to be sold or purchased for such other investment clients in order to
obtain best execution.
<PAGE>29
Any portfolio transaction for a Portfolio may be executed
through Counsellors Securities Inc., the Trust's distributor ("Counsellors
Securities"), if, in Warburg's judgment, the use of Counsellors Securities is
likely to result in price and execution at least as favorable as those of other
qualified brokers, and if, in the transaction, Counsellors Securities charges
the Portfolio a commission rate consistent with those charged by Counsellors
Securities to comparable unaffiliated customers in similar transactions. All
transactions with affiliated brokers will comply with Rule 17e-1 under the 1940
Act. In no instance will portfolio securities be purchased from or sold to
Warburg or Counsellors Securities or any affiliated person of such companies.
Transactions for the Portfolios may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Portfolios will deal directly with the dealers
who make a market in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Such dealers usually
are acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale of underlying securities upon exercise of options.
Each Portfolio may participate, if and when practicable, in
bidding for the purchase of securities for the Portfolio's portfolio directly
from an issuer in order to take advantage of the lower purchase price available
to members of such a group. A Portfolio will engage in this practice, however,
only when Warburg, in its sole discretion, believes such practice to be
otherwise in the Portfolio's interest.
Portfolio Turnover
The Portfolios do not intend to seek profits through
short-term trading, but the rate of turnover will not be a limiting factor when
a Portfolio deems it desirable to sell or purchase securities. A Portfolio's
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of its portfolio securities for the year by the monthly average value of
the portfolio securities. Securities with remaining maturities of one year or
less at the date of acquisition are excluded from the calculation.
Certain practices that may be employed by a Portfolio could
result in high portfolio turnover. For example, options on securities may be
sold in anticipation of a decline in the price of the underlying security
(market decline) or purchased in anticipation of a rise in the price of the
underlying security (market rise) and later sold. The Post-Venture Capital and
Small Company Growth Portfolios' investments in special situation companies
could result in high portfolio turnover. To the extent that its portfolio is
traded for the short-term, a 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 rates of the Post-Venture Capital and Small Company
Growth Portfolios may be higher than mutual funds having similar objectives that
do not invest in special situation companies.
<PAGE>30
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.
<TABLE>
<CAPTION>
<S> <C>
Richard N. Cooper (62)...................................Trustee
Harvard University National Intelligence Counsel Professor at Harvard
1737 Cambridge Street University; Director or Trustee of Circuit City Stores,
Cambridge, Massachusetts 02138 Inc. (retail electronics and appliances) and Phoenix
Home Life Insurance Co.
Donald J. Donahue (72)...................................Trustee
27 Signal Road Chairman of Magma Copper Company
Stamford, Connecticut 06902 from January 1987 until January 1996; Chairman and
Director of NAC Holdings from September 1990-June 1993;
Director of Chase Brass Industries, Inc. since December
1994; Director of Pioneer Companies, Inc. (chlor-alkali
chemicals) and predecessor companies since 1990 and Vice
Chairman since March 1996.
Jack W. Fritz (69).......................................Trustee
2425 North Fish Creek Road Private investor; Consultant
P.O. Box 483 and Director of Fritz
Wilson, Wyoming 83014 Broadcasting, Inc. and Fritz Communications (developers
and operators of radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (65)......................................Chairman of the Board and Trustee
466 Lexington Avenue Vice Chairman and Director of EMW;
New York, New York 10017-3147 Associated with E.M. Warburg, Pincus & Co., Inc. ("EMW")
since 1970; Officer of other investment companies
advised by Warburg.
Thomas A. Melfe (64).....................................Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton &
New York, New York 10112 Irvine; Director of Municipal Fund for New York
Investors, Inc.
- --------------------------
* Indicates a Trustee who is an "interested person" of the Trust as defined
in the 1940 Act.
</TABLE>
<PAGE>31
<TABLE>
<CAPTION>
<S> <C>
Arnold M. Reichman* (48).................................Trustee and 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;
Officer of other
investment companies
advised by Warburg.
Alexander B. Trowbridge (67).............................Trustee
1155 Connecticut Avenue, N.W. President of Trowbridge Partners,
Suite 700 Inc. (business consulting) from
Washington, DC 20036 January 1990-January 1994; President of the National
Association of Manufacturers from 1980-1990; 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).
Eugene L. Podsiadlo (39).................................Senior Vice President
466 Lexington Avenue Managing Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1991; Vice President of
Citibank, N.A. from 1987-1991; Senior Vice President of
Counsellors Securities and other investment companies
advised by Warburg.
Stephen Distler (43).....................................Vice President
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of
New York, New York 10017-3147 EMW; Associated with EMW since 1984; Treasurer of
Counsellors Securities; Vice President, Treasurer and
Chief Accounting Officer or Vice President and Chief
Financial
- ----------------------------
* Indicates a Trustee who is an "interested person" of the Trust as defined
in the 1940 Act.
</TABLE>
<PAGE>32
<TABLE>
<CAPTION>
<S> <C>
Officer of other investment companies advised by
Warburg.
Eugene P. Grace (45).....................................Vice President and Secretary
466 Lexington Avenue Associated with EMW since April
New York, New York 10017-3147 1994; Attorney-at-law from September 1989-April 1994;
life insurance agent, New York Life Insurance Company
from 1993-1994; General Counsel and Secretary, Home
Unity Savings Bank from 1991-1992; Vice President and
Chief Compliance Officer of Counsellors Securities; Vice
President and Secretary of other investment companies
advised by Warburg.
Howard Conroy (42).......................................Vice President and
466 Lexington Avenue Chief Financial 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 other
investment companies advised by Warburg.
Daniel S. Madden, CPA (31).............................Treasurer and Chief Accounting Officer
466 Lexington Avenue Associated with EMW since 1995;
New York, New York 10017-3147 Associated with BlackRock Financial Management, Inc. from
September 1994 to October 1996; Associated
with BEA Associates from April 1993 to September 1994;
Associated with Ernst & Young LLP from 1990 to 1993.
Treasurer and Chief Accounting Officer of
other investment companies advised by Warburg.
Janna Manes (29).........................................Assistant Secretary
466 Lexington Avenue Associated with EMW since 1996; Associated with the law
New York, New York 10017-3147 firm of Willkie Farr & Gallagher from 1993-1996;
Assistant Secretary of other investment companies
advised by Warburg.
</TABLE>
<PAGE>33
No employee of Warburg 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 Trustee of the Trust. Each Trustee
who is not a director, trustee, officer or employee of Warburg, PFPC or any of
their affiliates receives an annual fee of $500 and $250 for each meeting of the
Board attended by him for his services as Trustee and is reimbursed for expenses
incurred in connection with his attendance at Board meetings.
Trustees' Compensation
(estimated for the fiscal year ended December 31, 1996)+
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Trust Managed by Warburg*
---------------- ----------------- ------------------------
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $1,500 $48,000
Donald J. Donahue $1,500 $48,000
Jack W. Fritz $1,500 $48,000
Thomas A. Melfe $1,500 $48,000
Alexander B. Trowbridge $1,500 $48,000
- --------------------------
+ Estimates of future payments to be made pursuant to existing arrangements.
* Each Trustee also serves as a Director or Trustee of 21 other investment
companies advised by Warburg.
** Mr. Furth and Mr. Reichman are considered to be interested persons of the
Trust and Warburg, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receive no compensation from the Trust or any other investment
company managed by Warburg.
As of January 31, 1996, no Trustees or officers of the Trust owned
any of the outstanding shares of the Portfolios.
Portfolio Managers
International Equity Portfolio. Mr. 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, the Emerging Markets Portfolio of the
Trust (which is offered by a separate prospectus) 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
<PAGE>34
resided in the Far East as an investment analyst from 1970 to 1977, became
director, and later relocated to the U.S. where he became founder and
president of W.I. Carr (America), based in New York. From 1982 to 1984 Mr.
King was a director in charge of the Far East equity investments at
N.M. Rothschild International Asset Management, a London merchant bank. In
1984 Mr. King became chief investment officer and director for all
international investment strategy with Fiduciary Trust Company International
S.A., in London. He managed an EAFE mutual fund (FTIT) 1985-1986 which grew
from $3 million to over $100 million during this two-year period.
Mr. Nicholas P.W. Horsley, associate portfolio manager and
research analyst of the International Equity Portfolio, is also a co-portfolio
manager of Warburg Pincus Emerging Markets Fund, the Emerging Markets Portfolio
of the Trust 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. From
1981 to 1984 Mr. Horsley was a securities analyst at Barclays Merchant Bank in
London, UK and Johannesburg, RSA. From 1984 to 1986 he was a senior analyst with
BZW Investment Management in London. From 1986 to 1993 he was a director,
portfolio manager and analyst at Barclays deZoete Wedd in New York City. Mr.
Horsley earned B.A. and M.A. degrees with honors from University College,
Oxford.
Mr. P. Nicholas Edwards, associate portfolio manager and
research analyst of the International Equity Portfolio, is also portfolio
manager of Warburg Pincus Japan Growth Fund and a co-portfolio manager and
research analyst of Warburg Pincus International Equity Fund and an associate
portfolio manager and research analyst of the International Equity Portfolio of
Warburg Pincus Institutional Fund, Inc. Prior to joining Warburg in August
1995, Mr. Edwards was a director at Jardine Fleming Investment Advisers, Tokyo.
He was a vice president of Robert Fleming Inc. in New York City from 1988 to
1991. Mr. Edwards earned M.A. degrees from Oxford University and Hiroshima
University in Japan.
Mr. Harold W. Ehrlich, associate portfolio manager and
research analyst of the International Equity Portfolio, is also an associate
portfolio manager and research analyst of Warburg Pincus Emerging Markets Fund,
the Emerging Markets Portfolio of the Trust, Warburg Pincus International
Equity Fund and the International Equity Portfolio of Warburg Pincus
Institutional Fund, Inc. Prior to joining Warburg, Mr. Ehrlich was a senior vice
president, portfolio manager and analyst at Templeton Investment Counsel Inc.
from 1987 to 1995. He was a research analyst and assistant portfolio manager at
Fundamental Management Corporation from 1985 to 1986 and a research analyst at
First Equity Corporation of Florida from 1983 to 1985. Mr. Ehrlich earned a
B.S.B.A. degree from University of Florida and earned his Chartered Financial
Analyst designation in 1990.
Mr. Vincent J. McBride, associate portfolio manager and
research analyst of the International Equity Portfolio, is also an associate
portfolio manager and research analyst of Warburg Pincus Emerging Markets Fund,
the Emerging Markets Portfolio of the Trust, Warburg Pincus International Equity
Fund and the International Equity Portfolio of Warburg Pincus Institutional
Fund, Inc. Prior to joining Warburg in 1994, Mr. McBride was an international
equity analyst at Smith Barney Inc. from 1993 to 1994 and at General Electric
Investment
<PAGE>35
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.
Post-Venture Capital and Small Company Growth Portfolios. Ms.
Elizabeth B. Dater, co-portfolio manager of the Post-Venture Capital and Small
Company Growth Portfolios is also co-portfolio manager of Warburg Pincus
Emerging Growth Fund, Warburg Pincus Post-Venture Capital Fund and the Small
Company Growth Portfolio of Warburg Pincus Institutional Fund, Inc., manages a
post-venture capital fund and is the former director of research for Warburg's
investment management activities. Prior to joining Warburg in 1978, she was a
vice president of Research at Fiduciary Trust Company of New York and an
institutional sales assistant at Lehman Brothers. Ms. Dater has been a regular
panelist on Maryland Public Television's "Wall Street Week" since 1976.
Ms. Dater earned a B.A. degree from Boston University in Massachusetts.
Mr. Stephen J. Lurito, co-portfolio manager of the
Post-Venture Capital and the Small Company Growth Portfolios, is also
co-portfolio manager of Warburg, Pincus Emerging Growth Fund, Warburg Pincus
Post-Venture Capital Fund and the Small Company Growth Portfolio of Warburg
Pincus Institutional Fund, Inc. Mr. Lurito, also the research coordinator and
a portfolio manager for micro-cap equity and post-venture products, has been
with Warburg since 1987. Prior to that he was a research analyst at Sanford C.
Bernstein & Company, Inc. Mr. Lurito earned a B.A. degree from the University
of Virginia and a M.B.A. from the University of Pennsylvania.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to each Portfolio, Abbott
serves as sub-investment adviser to the Post-Venture Capital 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 Agreements" and the "PFPC
Co-Administration Agreements," respectively). The services provided by, and the
fees payable by the Trust to, Warburg under the Advisory Agreements, Abbott,
with respect to the Post-Venture Capital Portfolio, under the Sub-Advisory
Agreement, Counsellors Service under the Counsellors Service Co-Administration
Agreements and PFPC under the PFPC Co-Administration Agreements are described in
the Prospectus.
During the fiscal period ended December 31, 1995, Warburg
earned $120,130 and $218,618 in investment advisory fees with respect to the
International Equity Portfolio and Small Company Growth Portfolio, respectively.
Warburg voluntarily waived $47,206 and $47,601, respectively, of such fees and
reimbursed $39,973 and $8,512, respectively, in expenses. Counsellors Service
earned $12,013 and $24,291 in co-administration fees with respect to the
International Equity Portfolio and Small Company Growth Portfolio, respectively.
PFPC received $14,416 and $24,291 in co-administration fees with respect to the
International Equity Portfolio
<PAGE>36
and Small Company Growth Portfolio, respectively, and voluntarily
waived $5,665 and $5,289 of such fees, respectively.
Custodian 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 custodian of the International Equity and Small Company
Growth Portfolios' non-U.S. assets and Fiduciary Trust Company International
("Fiduciary") serves as custodian of the Post-Venture Capital Portfolio's
non-U.S. assets pursuant to separate custodian agreements (the "Custodian
Agreements"). Under the Custodian Agreements, PNC, State Street and Fiduciary
each (i) maintains a separate account or accounts in the name of the relevant
Portfolio, (ii) holds and transfers portfolio securities on account of the
relevant Portfolio, (iii) makes receipts and disbursements of money on behalf of
the relevant Portfolio, (iv) collects and receives all income and other payments
and distributions on account of the relevant Portfolio's portfolio securities
held by it and (v) makes periodic reports to the Board concerning the Trust's
custodial arrangements. PNC may delegate its duties under its Custodian
Agreement with the Trust to a wholly owned direct or indirect subsidiary of PNC
or PNC Bank Corp. upon notice to the Trust and upon the satisfaction of certain
other conditions. With the approval of the Board, State Street and Fiduciary are
authorized to select one or more foreign banking institutions and foreign
securities depositaries as sub-custodian on behalf of the Portfolios. PNC is an
indirect, wholly owned subsidiary of PNC Bank Corp., and its principal business
address is Broad and Chestnut Streets, Philadelphia, Pennsylvania 19101. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110. The principal business address of Fiduciary is Two World
Trade Center, New York, New York 10048.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of the Trust 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.
Organization of the Trust
The Trust was organized as an unincorporated Massachusetts
business trust under the name "Warburg, Pincus Trust."
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
<PAGE>37
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 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 Warburg 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, will
participate ratably in the Portfolio's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees. Shares are transferable but
have no preemptive, conversion or subscription rights.
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 and through Plans, including
participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. The offering price of each Portfolio's shares is equal to
its per share net asset value. Additional information on how to purchase and
redeem a Portfolio's shares and how such shares are priced is included in the
Prospectus under "Net Asset Value."
Under the 1940 Act, a Portfolio may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (A Portfolio may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, a Portfolio
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Trust intends to comply with Rule 18f-1 promulgated
under the 1940 Act with respect to redemptions in kind.
<PAGE>38
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 or the Plan documents or other
informational materials supplied by Plan sponsors and their own tax advisers
with respect to the particular tax consequences to them of an investment in a
Portfolio.
Each Portfolio 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 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
<PAGE>39
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 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 and Plans, it is anticipated
that dividends and distributions will be exempt from current taxation if left to
accumulate within the Variable Contracts or Plans.
<PAGE>40
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 and Plans. 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.
A Portfolio may be eligible to elect to include in its gross
income its share of earnings of a PFIC on a current basis. Generally, the
election would eliminate the interest charge and the ordinary income treatment
on the disposition of stock, but such an election may have the effect of
accelerating the recognition of income and gains by the Portfolio compared to a
fund that did not make the election. In addition, information required to make
such an election may not be available to the Portfolio.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice indicating
that final regulations will provide that regulated investment companies may
elect the mark-to-market election for tax years ending after March 31, 1992 and
before April 1, 1993. Whether and to what extent the notice will apply to
taxable years of a Portfolio is unclear. If the Portfolio is not able to make
the foregoing election, it may be able to avoid the interest charge (but not the
ordinary income treatment) on disposition of the stock by electing, under
proposed regulations, each year to mark-to-market the stock (that is, treat it
as if it were sold for fair market value). Such an election could result in
acceleration of income to the Portfolio. Recently proposed legislation would
codify the mark-to-market election for regulated investment companies.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return
in advertisements or in reports and other communications to shareholders.
The actual total return of the International Equity Portfolio for the fiscal
period ended December 31, 1995 (since June 30, 1995 inception) was 7.30% (7.11%
without waivers) (14.91% and 14.50%, respectively, on an annualized basis),
and the actual total return of the Small Company Growth Portfolio for the
fiscal period ended December 31, 1995 (since June 30, 1995 inception) was
25.10% (25.00% without waivers) (55.56% and 55.31%, respectively, on an
annualized basis). 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 BELOW] = 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
- ------------------------------
* The expression (1 + T) is being raised to the nth power.
<PAGE>41
thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000 investment over the period and
assumes that all dividends and distributions are reinvested during the
period.
A Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. A Portfolio may advertise average annual
calendar-year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph, except that the
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the Portfolio's
total return in longer market cycles.
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 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 or Plan, 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. Warburg 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 equaled
or exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S & P 500 Index") in 14 of the last 23
years. The following table compares annual total returns of the MS-EAFE Index
and the S & P 500 Index for the calendar years shown.
<PAGE>42
MS-EAFE Index vs. S&P 500 Index
1972 - 1995
Annual Total Return+
Year MS-EAFE Index S&P 500 Index
---- ------------- -------------
1972* 33.28 14.43
1973* -16.82 -18.85
1974* -25.60 -30.96
1975* 31.21 27.81
1976 -.36 18.27
1977* 14.61 -9.64
1978* 28.92 5.01
1979 1.82 9.02
1980 19.01 27.71
1981* -4.85 -10.17
1982 -4.63 14.80
1983* 20.91 13.93
1984* 5.02 -1.22
1985* 52.97 29.45
1986* 66.80 14.97
1987* 23.18 .26
1988* 26.66 8.61
1989 9.22 28.81
1990 -24.71 -8.24
1991 10.19 27.94
1992 -13.89 4.43
1993* 30.49 7.22
1994* 6.24 -1.34
1995 9.42 34.71
- -----------------
+ Without reinvestment of dividends.
* The MS-EAFE Index has outperformed the S&P 500 Index 15 out of the last 24
years.
Source: Morgan Stanley Capital International; Bloomberg Financial Markets
The quoted performance information shown above is not intended
to indicate the future performance of the International Equity Portfolio.
Advertising or supplemental sales literature relating to the Portfolio may
describe the percentage decline from all-time high levels for certain foreign
stock markets. It may also describe how the Portfolio differs from the MS-EAFE
Index in composition.
<PAGE>43
INDEPENDENT ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for the 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 accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of January 31, 1996, the name, address and percentage
ownership of each person that owned of record 5% or more of a Portfolio's
outstanding shares were as follows: Nationwide Life Insurance Company
("Nationwide"), on behalf of its separate account Nationwide Variable Account
II, c/o IPO Portfolio Accounting, P.O. Box 182029, Columbus, OH 43218-2029 --
97.29% (International Equity Portfolio) and 96.56% (Small Company Growth
Portfolio). Nationwide is not the beneficial owner of these shares.
FINANCIAL STATEMENTS
The Trust's audited annual report dated December 31, 1995 and
unaudited semiannual report dated June 30, 1996, which either accompany this
Statement of Additional Information or have previously been provided to the
investor to whom this Statement of Additional Information is being sent, are
incorporated herein by reference with respect to all information regarding the
International Equity Portfolio and the Small Company Growth Portfolio included
therein. The Trust will furnish without charge a copy of the annual report and
the semiannual report upon request by calling Warburg Pincus Funds at (800)
369-2728.
The unaudited statement of assets and liabilities for the
Post-Venture Capital Portfolio dated as of April 17, 1996 accompanies this
Statement of Additional Information.
<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
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
<PAGE>A-3
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.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "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.
Caa - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
<PAGE>A-4
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>A-5
WARBURG PINCUS TRUST
STATEMENT OF ASSETS AND LIABILITIES
as of April 17, 1996
Post-Venture
Capital
Portfolio
Assets: ------------
Cash 0
Deferred Organizational Costs 0
-
Total Assets 0
Liabilities: 0
Net Assets 0
Net Asset Value, Redemption and Offering:
Price Per Share (1 billion shares
classified for the Emerging Markets
Portfolio - $.001 par value)
applicable to 1 share outstanding.
$10.00
-----
