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PROSPECTUS
October 15, 1997
WARBURG PINCUS TRUST
[*] GROWTH & INCOME 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.
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PROSPECTUS October 15, 1997
Warburg Pincus Trust (the 'Trust') is an open-end management investment company
that currently offers five investment funds, one of which is offered pursuant to
this Prospectus (the 'Portfolio'):
The GROWTH & INCOME PORTFOLIO (the 'Portfolio') seeks long-term growth of
capital and income by investing primarily in dividend-paying equity securities.
Shares of the 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 the Portfolio an investment option for Plan participants.
The Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolio 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 the Portfolio, contained in a Statement of Additional Information, has
been filed with the Securities and Exchange Commission (the 'SEC'). The SEC
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Portfolio. The Statement of Additional Information is also
available upon request and without charge by calling the Trust at (800)
369-2728. Warburg Pincus Funds maintain a Web site at www.warburg.com. The
Statement of Additional Information relating to the Portfolio, as amended or
supplemented from time to time, bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR
ENDORSED BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE PORTFOLIO 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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THE PORTFOLIO'S EXPENSES
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Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................. 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees*....................................................... .65%
12b-1 Fees............................................................. 0
Other Expenses*........................................................ .35%
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Total Portfolio Operating Expenses (after fee waivers and expense
reimbursements)*..................................................... 1.00%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
1 year................................................................. $ 10
3 years................................................................ $ 32
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* Absent the waiver of fees by the Portfolio's investment adviser and
co-administrator, Management Fees for the Portfolio would equal .75%; Other
Expenses would equal .45%; and Total Portfolio Operating Expenses would equal
1.20%. Other Expenses for the Portfolio are based on annualized estimates of
expenses for the fiscal year ending December 31, 1997, net of any fee waivers
or expense reimbursements. The Portfolio's investment adviser and co-
administrator have undertaken to limit the Portfolio's Total Portfolio
Operating Expenses to the limit shown in the table above through December 31,
1999.
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The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of the 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, the Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
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INVESTMENT OBJECTIVES AND POLICIES
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The Growth & Income Portfolio's investment objectives are to seek long-term
growth of capital and income. The Portfolio's objectives are a fundamental
policy and may not be amended without first obtaining the approval of a majority
of the outstanding shares of the Portfolio. Any investment involves risk and,
therefore, there can be no assurance that the Portfolio will achieve its
investment objectives. See 'Portfolio Investments' and 'Certain Investment
Strategies' for descriptions of certain types of investments the Portfolio may
make.
The Portfolio is a diversified management investment fund that pursues its
objectives by investing primarily in equity securities. The policy of the
Portfolio is to invest, under normal market conditions, substantially all of its
assets in equity securities that Warburg Pincus Asset Management, Inc., the
Portfolio's investment adviser ('Warburg'), considers to be relatively
undervalued. Warburg will determine whether a company is undervalued based upon
research and analysis, taking into account, among other factors, price/earnings
ratio, price/book ratio, price/cash flow ratio, earnings growth, debt/capital
ratio and multiples of earnings of comparable securities. Other relevant
factors, including a company's asset value, franchise value and quality of
management, will also be considered. These factors are not applied to
prospective investments in a mechanical way; rather, Warburg analyzes each
security individually, taking all relevant factors into account. Equity
securities include common stocks, securities which are convertible into common
stocks and readily marketable securities, such as rights and warrants, which
derive their value from common stock.
The Portfolio may hold securities of any size, but currently expects to focus
on companies with market capitalizations of $1 billion or greater at the time of
initial purchase. The Portfolio seeks to achieve its income objective by
investing in dividend-paying equity securities, although the Portfolio may also
derive income from investing in fixed income securities. The amount of income
generated from the Portfolio will fluctuate, and investments in common stock in
general are subject to market risks that may cause their prices to fluctuate
over time. Therefore, an investment in the Portfolio may be more suitable for
long-term investors who can bear the risk of these fluctuations.
The Portfolio may invest up to 20% of its total assets in securities in
foreign issuers and may hold from time to time various foreign currencies
pending investment in foreign securities or conversion into U.S. dollars. The
Portfolio may also purchase without limitation dollar-denominated American
Depositary Receipts ('ADRs'). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
PORTFOLIO INVESTMENTS
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DEBT SECURITIES. The Portfolio may invest up to 20% of its total assets in
debt securities (other than money market obligations) and preferred stocks that
are not convertible into common stock for the purpose of seeking growth
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of capital and income. 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 growth of capital when interest
rates are expected to decline. The success of such a strategy is dependent upon
Warburg's ability to forecast accurately changes in interest rates. The market
value of debt obligations may also be expected to vary depending upon, among
other factors, the ability of the issuer to repay principal and interest, any
change in investment rating and general economic conditions.
Within the 20% limitation on investments in debt securities, up to 10% of the
Portfolio's assets may be invested in debt securities rated below investment
grade, including convertible debt securities. A security will be deemed to be
investment grade if it is rated within the four highest grades by Moody's
Investors Service, Inc. ('Moody's') or Standard & Poor's Ratings Services
('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. The Portfolio's holdings of debt securities rated below
investment grade (commonly referred to as 'junk bonds') may be rated as low as C
by Moody's or D by S&P at the time of purchase, or may be unrated securities and
considered to be of equivalent quality. Securities that are rated C by Moody's
comprise the lowest rated class and can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Debt rated D by S&P is
in default or is expected to default upon maturity or payment date.
When Warburg believes that a defensive posture is warranted, the Portfolio
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
ASSET-BACKED AND MORTGAGE-BACKED SECURITIES. In addition to the Portfolio's
authority to invest in money market securities but within the 20% limitation on
investments in debt securities, the Portfolio may invest up to 5% of its net
assets in asset-backed securities and mortgage-backed securities:
Asset-backed securities are collateralized by interests in pools of consumer
loans, with interest and principal payments ultimately depending on payments in
respect of the underlying loans by individuals (or a financial institution
providing credit enhancement). Because market experience in these securities is
limited, the market's ability to sustain liquidity through all phases of the
market cycle had not been tested. In addition, there is no assurance that the
security interest in the collateral can be realized. The Portfolio may purchase
asset-backed securities that are unrated.
Mortgage-backed securities are collateralized by mortgages or interests in
mortgages and may be issued by government or non-government entities.
Non-government issued mortgage-backed securities may offer higher yields
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than those issued by government entities, but may be subject to greater price
fluctuations. The value of mortgage-backed securities may change due to shifts
in the market's perceptions of issuers, and regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Prepayment, which
occurs when unscheduled or early payments are made on the underlying mortgages,
may shorten the effective maturities of these securities and may lower their
returns.
MONEY MARKET OBLIGATIONS. The Portfolio is authorized to invest, under
normal market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) money market obligations
and, for temporary defensive purposes, may invest in these securities without
limit. Money market 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 Portfolio may enter into repurchase agreement
transactions 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,
the 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 the Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 1940 Act.
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Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to the Portfolio and appropriate considering the factors of return
and liquidity, the 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 Portfolio's co-administrator, PFPC Inc. ('PFPC'). As a shareholder in any
mutual fund, the 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.
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by the U.S.
government in which the 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. Included among direct obligations of the
United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Treasury Bills have maturities
of less than one year, Treasury Notes have maturities of one to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are: instruments that are supported by
the full faith and credit of the United States (such as certificates issued by
the Government National Mortgage Association); instruments that are supported by
the right of the issuer to borrow from the U.S. Treasury (such as securities of
Federal Home Loan Banks), and instruments that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation bonds).
CONVERTIBLE SECURITIES. Convertible securities in which the 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. Up to 10% of the Portfolio's net assets may be
invested in convertible securities rated below investment grade at the time of
purchase (as low as C by Moody's or D by S&P) or deemed by Warburg to be of
equivalent quality.
WARRANTS. The Portfolio may invest up to 15% of its total assets in
warrants. Warrants are securities that give the holder the right, but not the
obligation, to purchase equity issues of the company issuing the warrants, or
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a related company, at a fixed price either on a date certain or during a set
period.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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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 the Portfolio's investments, see
'Portfolio Investments' beginning at page 3 and 'Certain Investment Strategies'
beginning at page 9.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolio may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the 'Securities Act'), but that can be sold to 'qualified institutional
buyers' in accordance with Rule 144A under the Securities Act ('Rule 144A
Securities'). A Rule 144A Security will be considered illiquid and therefore
subject to the Portfolio's 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 Portfolio 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 monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may 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. The 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.
BELOW INVESTMENT GRADE SECURITIES. Medium- and lower-rated debt securities
and comparable unrated securities (commonly referred to as 'junk bonds') (i)
will likely have some quality and protective characteristics that, in the
judgment of the rating organization, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The
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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 these rating categories is more volatile
than that of higher quality securities. In addition, the 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 Portfolio's ability to dispose of particular
issues and may make it more difficult for the Portfolio to obtain accurate
market quotations for purposes of valuing the Portfolio and calculating its net
asset value.
For a complete description of rating systems of Moody's and S&P, see the
appendix to the Statement of Additional Information.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This effect enables the investor to gain exposure to the underlying
security with a relatively low capital investment but increases an investor's
risk in the event of a decline in the value of the underlying security and can
result in a complete loss of the amount invested in the warrant. In addition,
the price of a warrant tends to be more volatile than, and may not correlate
exactly to, the price of the underlying security. If the market price of the
underlying security is below the exercise price of the warrant on its expiration
date, the warrant will generally expire without value.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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The 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 Portfolio. The Portfolio
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objectives and policies. It is not
possible to predict the Portfolio's turnover rate. However, it is anticipated
that the Portfolio's annual turnover rate should not exceed 150%. High portfolio
turnover rates (100% or more) may result in dealer markups or underwriting
commissions as well as other transaction costs, including correspondingly higher
brokerage commissions. In addition, short-term gains realized from portfolio
turnover may be taxable to shareholders as ordinary income. See 'Dividends,
Distributions and Taxes -- Taxes' below and 'Investment Policies -- Portfolio
Transactions' in the Statement of Additional Information.
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All orders for transactions in securities or options on behalf of the
Portfolio are placed by Warburg with broker-dealers that it selects, including
Counsellors Securities Inc., the Portfolio's distributor ('Counsellors
Securities'). The 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, the
Portfolio is authorized to engage in the following investment strategies: (i)
lending portfolio securities and (ii) entering into reverse repurchase
agreements and dollar rolls. Detailed information concerning the Portfolio's
strategies and their related risks is contained below and in the Statement of
Additional Information.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in 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 Portfolio,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
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.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with ADRs,
European Depositary Receipts ('EDRs') and International Depositary Receipts
('IDRs'), instruments that evidence ownership in underlying
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securities issued by a foreign corporation. ADRs, EDRs and IDRs may not
necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
REITS. The Portfolio may invest up to 15% of its total assets in real estate
investment trusts ('REITs'), which are pooled investment vehicles that invest
primarily in income-producing real estate or real estate related loans or
interests. Like regulated investment companies such as the Trust, REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the 'Code'). By
investing in a REIT, the Portfolio will indirectly bear its proportionate share
of any expenses paid by the REIT in addition to the expenses of the Portfolio.
Investing in REITs involves certain risks. A REIT may be affected by changes
in the value of the underlying property owned by such REIT or by the quality of
any credit extended by the REIT. REITs are dependent on management skills, are
not diversified (except to the extent the Code requires), and are subject to the
risks of financing projects. REITs are subject to heavy cash flow dependency,
default by borrowers, self-liquidation, the possibilities of failing to qualify
for the exemption from tax for distributed income under the Code and failing to
maintain their exemptions from the 1940 Act. REITs are also subject to interest
rate risks.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, the
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 the Portfolio's current or anticipated
portfolio holdings, (ii) as a substitute for purchasing or selling portfolio
securities or (iii) except with respect to currency exchange transactions, 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 THE PORTFOLIO'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Portfolio's net asset value and performance. Therefore, an investment in the
Portfolio may involve a greater risk than an investment in other mutual funds
that do not utilize these strategies. The Portfolio's use of these strategies
may be limited by position and exercise limits established by securities and
commodities exchanges and other applicable regulatory authorities.
Securities Options and Stock Index Options. Each Fund may write covered call
options and put options and purchase put and call options on securities and
stock indexes and will realize fees (referred to as 'premiums') for
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granting the rights evidenced by the options. Such options may be traded on an
exchange or may trade over-the-counter ('OTC'). The purchaser of a put option on
a security has the right to compel the purchase by the writer of the underlying
security, while the purchaser of a call option on a security has the right to
purchase the underlying security from the writer. A stock index measures the
movement of a certain group of stocks by assigning relative values to the 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 the
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. The 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 the Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although the Portfolio is limited
in the amount of assets that may be invested in futures transactions, there is
no overall limit on the percentage of the Portfolio's assets that may be at risk
with respect to futures activities.
Currency Exchange Transactions. The 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
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
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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. The Portfolio will engage in hedging
transactions only when deemed advisable by Warburg, and successful use of
hedging transactions will depend on Warburg's ability to predict correctly
movements in the hedge and the hedged position and the correlation between them,
which could prove to be inaccurate. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Additional Considerations. To the extent that the 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 a position without incurring
substantial losses, if at all. The Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. The 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 liquid securities in a segregated account with its
custodian or a designated sub-custodian to the extent the Portfolio's
obligations with respect to these strategies are not otherwise 'covered' through
ownership of the underlying security, financial instrument or currency or by
other portfolio positions or by other means consistent with applicable
regulatory policies. Segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. As a result, there is a possibility that segregation of a large
percentage of the Portfolio's assets could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
SHORT SALES AGAINST THE BOX. The 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
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<PAGE>
short sale, which is referred to as one 'against the box,' may be entered into
by the Portfolio to, for example, lock in a sale price for a security the
Portfolio does not wish to sell immediately. 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. 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.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Portfolio may
utilize up to 20% of its total assets to purchase securities on a when-issued
basis and purchase or sell securities on a delayed-delivery basis. In these
transactions, payment for and delivery of the securities occurs beyond the
regular settlement dates, normally within 30-45 days after the transaction. The
Portfolio will not enter into a when-issued or delayed-delivery transaction for
the purpose of leverage, but may sell the right to acquire a when-issued
security prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction if Warburg deems it advantageous to
do so. The payment obligation and the interest rate that will be received in
when-issued and delayed-delivery transactions are fixed at the time the buyer
enters into the commitment. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. The Portfolio will establish a segregated account with its custodian
consisting of cash or liquid securities in an amount equal to the amount of its
when-issued and delayed-delivery purchase commitments, and will segregate the
securities underlying commitments to sell securities for delayed delivery.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
The 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. The 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 the Portfolio's total assets,
the Portfolio will not make any additional 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,
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<PAGE>
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that the 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 Portfolio's Statement of
Additional Information.
MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. The Trust employs Warburg as investment adviser to the
Portfolio. Warburg, subject to the control of the Trust's officers and the
Board, manages the investment and reinvestment of the assets of the Portfolio in
accordance with the Portfolio's investment objectives and stated investment
policies. Warburg makes investment decisions for the Portfolio and places orders
to purchase or sell securities on behalf of the Portfolio. Warburg also employs
a support staff of management personnel to provide services to the Portfolio and
furnishes the Portfolio with office space, furnishings and equipment.
For the services provided by Warburg, the Portfolio pays Warburg a fee
calculated at an annual rate of .75% of its average daily net assets. 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 borne by the
Portfolio.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of August 31,
1997, Warburg managed approximately $20.2 billion of assets, including
approximately $11.8 billion of investment company assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ('WP&Co.'), which has
no business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
PORTFOLIO MANAGER. Brian S. Posner has been the Portfolio Manager of the
Portfolio since its inception. Mr. Posner, a Managing Director of Warburg since
January 1997, was an employee of Fidelity Investments ('Fidelity') from 1987
until December 1996. He was the vice president and portfolio manager of the
Fidelity Equity-Income II Fund (1992-December 1996); the portfolio manager of
the Fidelity Value Fund (1990-1992); assistant portfolio manager of the Fidelity
Equity-Income Fund (1989-1990); assistant portfolio manager of the Fidelity
Capital Appreciation Fund (1989); portfolio manager of the Fidelity Select
Property-Casualty Insurance Portfolio (1987-1990) and an equity analyst (1987).
CO-ADMINISTRATORS. The Portfolio employs 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 Portfolio, including responding to shareholder inquiries
and providing information on shareholder investments. Counsellors Service
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also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolio
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 the
preparation of tax returns and monitoring and developing compliance procedures
for the Portfolio. As compensation, the 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., as a co-administrator. As a co-administrator, PFPC calculates the
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 Portfolio pays PFPC a fee calculated at an annual rate of .15% of the
Portfolio's first $1 billion in average daily net assets and .05% of average
daily net assets over $1 billion. PFPC has its principal offices at 400 Bellevue
Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ('PNC'), serves as custodian of
the Portfolio's U.S. assets and State Street Bank and Trust Company ('State
Street') serves as custodian of the Portfolio's non-U.S. assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103. State Street's principal business
address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolio. It has delegated
to Boston Financial Data Services, Inc. ('BFDS'), a 50% owned subsidiary,
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 Portfolio. 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,
Warburg, Counsellors Securities or its affiliates may enter into agreements with
Participating Insurance Companies and Plans or their affiliates or entities that
provide services to them ('Service Organizations') to pay a fee of up to .35%
(the 'Service Fee') of the annual average value of accounts maintained by such
Organizations with the Portfolio. A portion of the Service Fee may be borne by
the Portfolio as a transfer agency fee. In addition, a Service Organization may
directly or indirectly pay a portion of its Service Fee to the Portfolio's
custodian or transfer agent for costs related to Portfolio accounts it services.
The Service Fee payable to any one Service Organization is determined based upon
a number of factors, including the nature and
15
<PAGE>
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 for qualified recipients who support the sale of shares of the
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of significant amounts of the Portfolio's shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage the Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for the 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 Portfolio's
Statement of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES IN THE PORTFOLIO
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of the 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 the 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
the Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolio are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by the
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 the
Portfolio during the morning of the next business day with payment for purchases
to follow no later than the Portfolio's pricing on the next business day. If
payment for purchases is not received by such time,
16
<PAGE>
the Participating Insurance Company could be held liable for resulting fees or
losses. 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 the Portfolio. 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.
The Portfolio reserves the right to suspend the offering of shares for a
period of time or 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 the Portfolio. The Portfolio may discontinue sales of its shares
if management believes that a substantial further increase in assets may
adversely affect the 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
the Portfolio and to reinvest any dividends or capital gains distributions.
Plan participants may invest in shares of the Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may conduct transactions by telephone. Neither the Portfolio nor its
agents will be liable for following instructions communicated by telephone that
it reasonably believes to be genuine. Reasonable procedures will be employed on
behalf of the Portfolio to confirm that instructions communicated by telephone
are genuine. Such procedures include providing written confirmation of telephone
transactions and tape recording telephone instructions.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The 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. The Portfolio declares dividends from its net investment
income quarterly. 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 Portfolio at net
17
<PAGE>
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.
The Portfolio intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. The Portfolio intends to distribute all
of its net income and capital gains to its shareholders (the Variable Contracts
and Plans).
Because shares of the Portfolio may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital gain
distributions from the 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.
INTERNAL REVENUE SERVICE REQUIREMENTS. The 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
- --------------------------------------------------------------------------------
The 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, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, 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 the
Portfolio generally changes every day.
The net asset value per share of the 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.
Securities, options and futures contracts for which market quotations are not
readily available and other assets will be valued at their fair value as
18
<PAGE>
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, the 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 Portfolio include the effect of deducting the
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 the Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing the 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 the
Portfolio's return over a longer market cycle. The Portfolio may also advertise
its aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in share prices and assuming reinvestment of
dividends and distributions). Aggregate and average total returns may be shown
by means of schedules, charts or graphs and may indicate various components of
total return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
Investors should note that return figures are based on historical earnings
and are not intended to indicate future performance. The Statement of Additional
Information describes the method used to determine the total return. Current
total return figures may be obtained by calling (800) 369-2728.
In reports or other communications to investors or in advertising material,
the 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
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<PAGE>
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) with the S&P 500 Index, which is an
unmanaged index of common stocks; or (iii) other appropriate indexes of
investment securities or with data developed by Warburg derived from such
indexes. The Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and financial
publications, such as Barron's, Business Week, Financial Times, Forbes, Fortune,
Inc., Institutional Investor, Investor's Business Daily, Money, Morningstar,
Inc., Mutual Fund Magazine, SmartMoney and The Wall Street Journal. Morningstar,
Inc. rates funds in broad categories based on risk/reward analyses over various
periods of time. In addition, the Portfolio or a Participating Insurance Company
or Plan sponsor may from time to time 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.
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, the Portfolio and its portfolio managers may render periodic
updates of Portfolio investment activity, which may include, among other things,
discussion or quantitative statistical or comparative analysis of portfolio
composition and significant portfolio holdings, including analyses of holdings
by sector, industry, country or geographic region, credit quality and other
characteristics. The Portfolio may also discuss various measures of risk,
including those based on statistical or econometric analyses, 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.
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 five series have been authorized, one of which constitute the
interests in the Portfolio. 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 the 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
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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. The 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 the 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 the Portfolio may conflict. The Board will monitor
the Portfolio 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 the Portfolio. As a result, the Portfolio may be
forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of the Portfolio to any Variable Contract or Plan or may suspend or terminate
the offering of shares of the 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 Portfolio, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE PORTFOLIO'S
STATEMENT OF ADDITIONAL INFORMATION OR THE PORTFOLIO'S OFFICIAL SALES LITERATURE
IN CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIO, 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 PORTFOLIO IN ANY STATE IN WHICH, OR TO ANY PERSON TO
WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolio's Expenses................................................ 2
Investment Objectives and Policies...................................... 3
Portfolio Investments................................................... 3
Risk Factors and Special Considerations................................. 7
Portfolio Transactions and Turnover Rate................................ 8
Certain Investment Strategies........................................... 9
Investment Guidelines................................................... 13
Management of the Portfolio............................................. 14
How to Purchase and Redeem Shares in the Portfolio...................... 16
Dividends, Distributions and Taxes...................................... 17
Net Asset Value......................................................... 18
Performance............................................................. 19
General Information..................................................... 20
</TABLE>
[Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-369-2728
WWW.WARBURG.COM
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRGRI-1-1097
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
October 15, 1997
------------------------------------
WARBURG PINCUS TRUST
Growth & Income 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.......................................................24
Additional Purchase And Redemption Information................................30
Additional Information Concerning Taxes.......................................30
Determination Of Performance..................................................32
Independent Accountants And Counsel...........................................33
Financial Statement...........................................................33
Appendix -- Description of Ratings...........................................A-1
Statement of Assets and Liabilities..........................................F-1
Warburg Pincus Trust ("Trust") currently offers five managed
investment funds, one of which, the Growth & Income Portfolio (the "Portfolio"),
is described herein. This Statement of Additional Information is meant to be
read in conjunction with the Prospectus of the Portfolio dated October 15, 1997,
as amended or supplemented from time to time, and is incorporated by reference
in its entirety into that Prospectus. Shares of the 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 the
Portfolio an investment option for Plan participants. Because this Statement of
Additional Information is not itself a prospectus, no investment in shares of
the Portfolio should be made solely upon the information contained herein.
Copies of the Trust's Prospectus for the Portfolio and information regarding the
Portfolio's current performance may be obtained by calling the Trust at (800)
369-2728 or by writing to the Trust, P.O. Box 9030, Boston, Massachusetts
02205-9030.
<PAGE>
INVESTMENT OBJECTIVES
The investment objectives of the Portfolio are long-term growth
of capital and income.
INVESTMENT POLICIES
The following policies supplement the descriptions of the
Portfolio's investment objectives and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
- ---------------------------------------------------
Securities Options. The Portfolio may write covered put and call
options on stock and debt securities and the Portfolio may purchase such options
that are traded on foreign and U.S. exchanges, as well as over-the-counter
("OTC").
The Portfolio that may write options 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, the
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 the Portfolio that are deemed
covered by virtue of the Portfolio's holding convertible or exchangeable
preferred stock or debt securities, the time required to convert or exchange and
obtain physical delivery of the underlying common stock with respect to which
the Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
the Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio
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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 Portfolio may write covered call options. For example, if the
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 the Portfolio will normally have expiration
dates between one and nine months from the date written. The exercise price of
the options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolio may write (i) in-the-money call
options when Warburg Pincus Asset Management, Inc., the Portfolio's 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, the Portfolio will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options Clearing
Corporation (the "Clearing Corporation") and of the securities exchange on which
the option is written.
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, if permissible, 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 OTC market. When the Portfolio has purchased an
option and engages in a closing sale transaction, whether the Portfolio realizes
a profit or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium the Portfolio initially paid
for the original option plus the related transaction costs. Similarly, in cases
where the Portfolio has written an option, it will realize a profit if the cost
of the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security with respect to which
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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, the Portfolio's
ability to terminate options positions established in the OTC market may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in OTC transactions would fail to meet their
obligations to the Portfolio. The Portfolio, however, intends to purchase OTC
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 the Portfolio and other clients of Warburg and certain of its
affiliates may be considered to be such a group. A securities exchange may order
the liquidation of positions found to be in violation of these limits and it may
impose certain other sanctions. These limits may restrict the number of options
the Portfolio will be able to purchase on a particular security.
Stock Index Options. The Portfolio may purchase exchange-listed
and OTC put and call options on stock indexes. A stock index measures the
movement of a certain group of stocks by assigning relative values to the common
stocks included in the index, fluctuating with changes in the market values of
the stocks included in the index. Some stock index
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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 Portfolio 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 the 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 Portfolio will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Portfolio, there can be no assurance that the Portfolio will be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
The inability to enter into a closing transaction may result in material losses
to the Portfolio. Until the Portfolio, as a covered 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. The Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options traded on
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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.
The 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 Portfolio 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
the Portfolio's policies. Although the 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.
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 the 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 liquid
securities acceptable to the broker 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 Portfolio will also
incur brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, the
Portfolio may elect to close the position by taking an opposite position, which
will operate to terminate the Portfolio's existing position in the contract.
Positions in futures contracts and options on futures contracts (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
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exists. Although the Portfolio 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 the Portfolio to substantial
losses. In such event, and in the event of adverse price movements, the
Portfolio would be required to make daily cash payments of variation margin. In
such 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. The 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 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 the 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. The 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.
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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 Portfolio 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 Portfolio's currency hedging will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of the Portfolio generally accruing
in connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. The Portfolio may not position hedge to an extent greater than the
aggregate market value (at the time of 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, the 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
8
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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, the 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.
In hedging transactions based on an index, whether the 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
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the price of stock index futures, a correct forecast of general market trends by
Warburg still may not result in a successful hedging transaction.
The 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, the Portfolio will comply
with guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolio on currencies and securities indexes and on securities; and
currency, interest rate and index futures contracts and options on these futures
contracts. These guidelines may, in certain instances, require segregation by
the Portfolio of cash or liquid securities.
For example, a call option written by the Portfolio on securities
may require the Portfolio to hold the securities subject to the call (or
securities convertible into the securities without additional consideration) or
to segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Portfolio on
an index may require the Portfolio to own portfolio securities that correlate
with the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise price on a current basis. A put option
written by the Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. The Portfolio may enter into fully or partially offsetting
transactions so that its net position, coupled with any segregated assets (equal
to any remaining obligation), equals its net obligation. Asset coverage may be
achieved by other means when consistent with applicable regulatory policies.
Additional Information on 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 Portfolio may be investing
in securities denominated in currencies other than the U.S. dollar, and since
the Portfolio may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the Portfolio's investments in
foreign companies may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such
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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
the 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 the 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. The 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 the
Portfolio will not be registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign company or
government issuing them than is available about a domestic company or government
entity. Foreign companies are generally not subject to uniform financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Political Instability. In addition, with respect to some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Portfolio, political
or social instability, or domestic developments which could affect U.S.
investments in those countries.
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 the Portfolio to market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on the
Portfolio's liquidity, the Portfolio will avoid investing in countries which are
known to experience settlement delays which may expose the Portfolio to
unreasonable risk of loss.
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. The Portfolio may invest in
securities of foreign governments (or agencies or instrumentalities
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thereof), and many, if not all, of the foregoing considerations apply to such
investments as well.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign fixed
income securities. The relative performance of various countries' fixed income
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Year-to-year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign government securities in which the Portfolio may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
U.S. Government Securities. The 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, Federal Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board and Student Loan
Marketing Association. The 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, the Portfolio will invest in obligations issued by such an
instrumentality only if Warburg determines that the credit risk
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with respect to the instrumentality does not make its securities unsuitable for
investment by the Portfolio.
Securities of Other Investment Companies. The 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, the 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. The 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. The Portfolio will
not lend portfolio securities to affiliates of Warburg unless it has applied for
and received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities, which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Portfolio involved. From time to time,
the Portfolio may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Portfolio and that is acting as a "finder."
By lending its securities, the Portfolio can increase its income
by continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. Income received
could be used to pay the Portfolio's expenses and would increase its total
return. The 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. The
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. The
Portfolio will enter into a when-issued transaction for the purpose of
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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 the Portfolio agrees to purchase when-issued or
delayed-delivery securities, its custodian will set aside cash or liquid
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 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.
Depositary Receipts. The assets of the Portfolio may be invested
in the securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are receipts issued outside the United States.
EDRs, CDRs, IDRs and GDRs are typically issued by non-U.S. banks and trust
companies 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 (CDRs) and IDRs (GDRs) in bearer form are designed for use in
European securities markets and non-U.S. securities markets, respectively.
Short Sales "Against the Box." In a short sale, the 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. The 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 Portfolio does not intend to engage in short sales against
the box for investment purposes. The Portfolio may, however, make a short sale
as a hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Portfolio (or a security
convertible or exchangeable for such security). In such case, any future losses
in the Portfolio's long position should be offset by a gain in the short
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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. The Portfolio may invest up to 15% of net assets in
warrants to purchase equity securities consisting of common and preferred stock.
The equity security underlying a warrant is authorized at the time the warrant
is issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for profit
or loss than an equivalent investment in the underlying security, and, thus, can
be a speculative investment. The value of a warrant may decline because of a
decline in the value of the underlying security, the passage of time, changes in
interest rates or in the dividend or other policies of the company whose equity
underlies the warrant or a change in the perception as to the future price of
the underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. The 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 and certain Rule 144A Securities
(as defined below). Securities that have legal or contractual restrictions on
resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days without borrowing. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
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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.
Warburg will monitor the liquidity of restricted securities in
the Portfolio under the supervision of the Board. In reaching liquidity
decisions, Warburg may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes for
the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer undertakings
to make a market in the security and (v) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Borrowing. The 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. The 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. 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.
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Certain of these securities may be difficult to dispose of
because there may be a thin trading market. Because there is no established
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 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 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.
Mortgage-Backed Securities. The Portfolio may invest in
mortgage-backed securities issued by U.S. government entities, such as the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). In
addition, the Portfolio may invest in mortgage-backed securities sponsored by
U.S. and foreign issuers as well as non-governmental issuers. Mortgage-backed
securities represent direct or indirect participations in, or are secured by and
payable from, mortgage loans secured by real property. The mortgages backing
these securities include, among other mortgage instruments, conventional 30-year
fixed-rate mortgages, 15-year fixed rate mortgages, graduated payment mortgages
and adjustable rate mortgages. The government or the issuing agency typically
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Portfolio's shares. These securities
generally are "pass-through" instruments, through which the holders receive a
share of all interest and principal payments from the mortgages underlying the
securities, net of certain fees.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments
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is affected by various factors, including the level of interest rates, general
economic conditions, the location, scheduled maturity and age of the mortgage
and other social and demographic conditions. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. For pools of fixed-rate 30-year mortgages, a
common industry practice in the U.S. has been to assume that prepayments will
result in a 12-year average life. At present, pools, particularly those with
loans with other maturities or different characteristics, are priced on an
assumption of average life determined for each pool. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of a pool of mortgage-related securities. Conversely, in
periods of rising rates the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. However, these effects may not
be present, or may differ in degree, if the mortgage loans in the pools have
adjustable interest rates or other special payment terms, such as a prepayment
charge. Actual prepayment experience may cause the yield of mortgage-backed
securities to differ from the assumed average life yield. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, thus affecting the Portfolio's yield.
The rate of interest on mortgage-backed securities is lower than
the interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield to
the holder of such securities.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which the Portfolio may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off
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certain amounts owed on the credit cards, thereby reducing the balance due.
Because asset-backed securities are relatively new, the market experience in
these securities is limited, and the market's ability to sustain liquidity
through all phases of the market cycle has not been tested.
Reverse Repurchase Agreements and Dollar Rolls. The Portfolio may
enter into reverse repurchase agreements with the same parties with whom it may
enter into repurchase agreements. Reverse repurchase agreements involve the sale
of securities held by the Portfolio pursuant to its agreement to repurchase them
at a mutually agreed upon date, price and rate of interest. At the time the
Portfolio enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing cash or
liquid high-grade debt securities having a value not less than the repurchase
price (including accrued interest). The assets contained in the segregated
account will be marked-to-market daily and additional assets will be placed in
such account on any day in which the assets fall below the repurchase price
(plus accrued interest). The Portfolio's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
decision.
The Portfolio also may enter into "dollar rolls," in which the
Portfolio sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio would forego principal and interest paid on such
securities. The Portfolio would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
the interest earned on the cash proceeds of the initial sale. At the time the
Portfolio enters into a dollar roll transaction, it will place in a segregated
account maintained with an approved custodian cash or other liquid obligations
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure that its value is
maintained. Reverse repurchase agreements and dollar rolls that are accounted
for as financings are considered to be borrowings under the 1940 Act.
Other Investment Limitations
- ----------------------------
Investment limitations numbered 1 through 10 may not be changed
without the affirmative vote of the holders of a majority of the Portfolio's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more of
the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. If a percentage limitation (other than
the percentage limitation set forth in investment restriction No. 1 below) 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
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will not constitute a violation of such restriction. Investment limitations 11
through 15 may be changed by a vote of the Board at any time.
The 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. 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 securities
issued by companies which invest in real estate or interests therein, and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Make short sales of securities or maintain a short position,
except that the Portfolio may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box".
8. Purchase securities on margin, except that the Portfolio may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
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9. Invest in commodities, except that the Portfolio may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, and purchase and sell currencies on a forward commitment or
delayed-delivery basis.
10. Issue any senior security except as permitted in these
investment limitations.
11. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
12. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow and in connection with the writing of covered put
and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
13. Invest more than 15% of the Portfolio's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
14. 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 15% of the value of the Portfolio's total assets.
15. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
Portfolio Valuation
- -------------------
The Prospectus discusses the time at which the net asset value of
the Portfolio is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the 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 OTC 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.
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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.
Trading in securities in certain foreign countries is completed
at various times prior to the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange ("NYSE") is open for trading).
In addition, securities trading in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and days
on which the Portfolio's net asset value is not calculated. As a result,
calculation of the Portfolio's net asset value may not take place
contemporaneously with the determination of the prices of the majority of the
Portfolio's securities. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading on the NYSE will not be reflected in the Portfolio's calculation of net
asset value, 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 the Portfolio's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by the Portfolio to underwriters of
newly issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or mark-down.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. There is
generally no stated commission in the case of securities traded in domestic or
foreign OTC markets, but the price of securities traded in OTC 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.
22
<PAGE>
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for the 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
the Portfolio and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving both the Portfolio 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 Portfolio. 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.
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.
Investment decisions for the Portfolio concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg. Such other investment clients may invest in the same securities as
the Portfolio. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Warburg believes to be equitable to each client, including the
Portfolio. In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtained or
sold for the Portfolio. To the extent permitted by law, Warburg may aggregate
the securities to be sold or purchased for the Portfolio with those to be sold
or purchased for such other investment clients in order to obtain best
execution.
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Any portfolio transaction for the 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 Portfolio may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Portfolio 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.
The 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. The 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 Portfolio does not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the
Portfolio deems it desirable to sell or purchase securities. The 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 the 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. To the extent that its
portfolio is traded for the short-term, the Portfolio will be engaged
essentially in trading activities based on short-term considerations affecting
the value of an issuer's stock instead of long-term investments based on
fundamental valuation of securities. Because of this policy, portfolio
securities may be sold without regard to the length of time for which they have
been held.
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<PAGE>
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.
Richard N. Cooper (63) Trustee
Harvard University Professor at Harvard University; National
1737 Cambridge Street Intelligence Council from June 1995 until
Cambridge, Massachusetts 02138 January 1997; Director or Trustee of
CircuitCity Stores, Inc. (retail electronics
and appliances) and Phoenix Home Mutual Life
Insurance Company.
Donald J. Donahue (73) Trustee
27 Signal Road Chairman of Magma Copper Company from December
Stamford, Connecticut 06902 1987 until December 1995; Chairman and
Director of NAC Holdings from September 1990 -
June 1993; Director of Pioneer Companies,
Inc. (chlor-alkali chemicals) and predecessor
companies since 1990 and Vice Chairman since
December 1995.
Jack W. Fritz (70) Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (66) Chairman of the Board and Trustee
466 Lexington Avenue Vice Chairman and Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1970; Officer
of other investment companies advised by
Warburg.
Thomas A. Melfe (65) Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure
New York, New York 10112 Newton & Irvine; Chairman of the Board 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.
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<PAGE>
Arnold M. Reichman * (49) Trustee
466 Lexington Avenue Senior Managing Director, Chief Operating
New York, New York 10017-3147 Officer and Assistant Secretary of Warburg;
Associated with Warburg since 1984; Senior
Vice President, Secretary and Chief
Operating Officer of Counsellors
Securities; Director/Trustee of other
investment companies advised by
Warburg.
Alexander B. Trowbridge (67) Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from January 1990-
November 1996; President of the National
Association of Manufacturers from 1980-1990;
Director or Trustee of New England Mutual Life
Insurance Co., ICOS Corporation
(biopharmaceuticals), WMX Technologies Inc.
(solid and hazardous waste collection and
disposal), The Rouse Company (real estate
development), Harris Corp. (electronics and
communications equipment), The Gillette Co.
(personal care products) and Sun Company Inc.
(petroleum refining and marketing).
Eugene L. Podsiadlo (40) President
466 Lexington Avenue Managing Director of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1991; Vice President of
Citibank, N.A. from 1987-1991; Senior Vice
President of Counsellors Securities and
officer of other investment companies advised
by Warburg.
Stephen Distler (44) Vice President
466 Lexington Avenue Managing Director, Controller and Assistant
New York, New York 10017-3147 Secretary of Warburg; Associated with Warburg
since 1984; Treasurer of Counsellors
Securities; Vice President of other
investment companies advised by
Warburg.
Eugene P. Grace (45) Vice President and Secretary
466 Lexington Avenue Associated with Warburg since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994;
General Counsel and Secretary, Home
Unity Savings Bank from 1991-1992;
Vice President, Chief Compliance
Officer and Assistant Secretary of
Counsellors Securities; Vice
President and Secretary of other
investment companies advised by
Warburg.
26
<PAGE>
Howard Conroy (43) Vice President and Chief Financial Officer
466 Lexington Avenue Associated with Warburg since 1992; Associated
New York, New York 10017-3147 with Martin Geller, C.P.A. from 1990-1992;
Vice President, Finance with
Gabelli/Rosenthal & Partners, L.P.
until 1990; Vice President and Chief
Financial Officer of other investment
companies advised by Warburg.
Daniel S. Madden, CPA (31) Treasurer and Chief Accounting Officer
466 Lexington Avenue Associated with Warburg since 1995; Associated
New York, New York 10017-3147 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, Esq. (29) Assistant Secretary
466 Lexington Avenue Associated with Warburg since 1996;
New York, New York 10017-3147 Associated with the law firm of Willkie
Farr & Gallagher from 1993-1996; Assistant
Secretary of other investment companies
advised by Warburg.
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.
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Trustees' Compensation
- ----------------------
(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 $43,000
Donald J. Donahue $1,500 $43,000
Jack W. Fritz $1,500 $43,000
Thomas A. Melfe $1,500 $43,000
Alexander B. Trowbridge $1,500 $43,000
- ----------
* Each Trustee also serves as a Director or Trustee of 23 other investment
companies advised by Warburg.
** Mr. Furth and Mr. Reichman are considered to be interested persons of the
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 September 30, 1997, no Trustees or officers of the Trust owned any
of the outstanding shares of the Portfolios.
Portfolio Manager
- -----------------
Mr. Brian S. Posner is Portfolio Manager of the Portfolio as well
as the Portfolio Manager of Warburg Pincus Growth & Income Fund and the Value
Portfolio of Warburg Pincus Institutional Fund, Inc. Prior to joining Warburg,
Mr. Posner was employed from 1987 to 1996 by Fidelity Investments, where, most
recently, he was the vice president and portfolio manager of the Fidelity
Equity-Income II Fund. Mr. Posner received an undergraduate degree from
Northwestern University and his M.B.A. in finance from the University of
Chicago.
Investment Adviser and Co-Administrators
- ----------------------------------------
Warburg serves as investment adviser to the Portfolio and
Counsellors Funds Service, Inc. ("Counsellors Service") and PFPC serve as
co-administrators to the Trust pursuant to separate written agreements (the
"Advisory Agreement," the "Counsellors Service Co-Administration Agreement" and
the "PFPC Co-Administration Agreement," respectively). The services provided by,
and the fees payable by the Trust to, Warburg under the Advisory Agreement,
Counsellors Service under the Counsellors Service Co-Administration Agreement
and PFPC under the PFPC Co-Administration Agreement are described in the
Prospectus. See the Prospectus, "Management of the Fund."
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Custodians and Transfer Agent
- -----------------------------
PNC Bank, National Association ("PNC") and State Street Bank and
Trust Company ("State Street") serve as custodian of the U.S. and non-U.S.
assets, respectively, of the Portfolio. Each custodian serves pursuant to
separate custodian agreements (the "Custodian Agreements"). Under the Custodian
Agreements, PNC and State Street each (i) maintains a separate account or
accounts in the name of the Portfolio, (ii) holds and transfers portfolio
securities on account of the Portfolio, (iii) makes receipts and disbursements
of money on behalf of the Portfolio, (iv) collects and receives all income and
other payments and distributions on account of the Portfolio's portfolio
securities held by it and (v) makes periodic reports to the Board concerning the
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 is authorized to
select one or more foreign banking institutions and foreign securities
depositaries as sub-custodian on behalf of the Portfolio. PNC is an indirect,
wholly owned subsidiary of PNC Bank Corp., and its principal business address is
1600 Market Street, Philadelphia, Pennsylvania 19103. The principal business
address of State Street is 225 Franklin Street, Boston, Massachusetts 02110.
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 the
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. ("BFDS"), a 50% owned subsidiary, 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 the Portfolio.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from the
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 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
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.
29
<PAGE>
All shareholders of the 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 Portfolio may not
be purchased or redeemed by individual investors directly but 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 the Portfolio an investment
option for Plan participants. The offering price of the Portfolio's shares is
equal to its per share net asset value. Additional information on how to
purchase and redeem the Portfolio's shares and how such shares are priced is
included in the Prospectus under "Net Asset Value."
Under the 1940 Act, the Portfolio may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The 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, the 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.
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 the
Portfolio.
The Portfolio intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). If it qualifies as a regulated investment company, the 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, the Portfolio must, among other things: (i) distribute to its shareholders
the
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<PAGE>
sum of at least 90% of its taxable net investment income (for this purpose
consisting of taxable net investment income and net realized short-term capital
gains) plus at least 90% of its net tax-exempt interest income; (ii) derive at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities, gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such securities or currencies; and (iii) 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 addition, the 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, the Portfolio will be required to
diversify its investments so that on the last day of each calendar quarter no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% is represented by any two investments, no more than 80% is
represented by any three investments and no more than 90% is represented by any
four investments. Generally, all securities of the same issuer are treated as a
single investment. For the purposes of Section 817(h), obligations of the United
States Treasury and each U.S. government agency or 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 Portfolio will be able to operate as
currently described, or that the Trust will not have to change the investment
goal or investment policies of the Portfolio. While the 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 the 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.
The Portfolio's short sales against the box, if any, and
transactions, if any, in foreign currencies, forward contracts, options and
futures contracts (including options, futures contracts and forward contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses recognized by
the Portfolio (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Portfolio, defer Portfolio
losses and cause the Portfolio to be
31
<PAGE>
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 the 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. The 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 the 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.
DETERMINATION OF PERFORMANCE
From time to time, the Portfolio may quote its total return in
advertisements or in reports and other communications to shareholders. Total
return is calculated by finding the average annual compounded rates of return
for the one-, five-, and ten- (or such shorter period as the Portfolio has been
offered) year periods that would equate the initial amount invested to the
ending redeemable value according to the following formula: P (1 + T)n* = ERV.
For purposes of this formula, "P" is a hypothetical investment of $1,000; "T" is
average annual total return; "n" is number of years; and "ERV" is the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
one-, five- or ten-year periods (or fractional portion thereof). Total return or
"T" is computed by finding the average annual change in the value of an initial
$1,000 investment over the period and assumes that all dividends and
distributions are reinvested during the period.
The Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. The 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.
The 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,
the 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
- ------
* As used here, "n" is an exponent.
32
<PAGE>
the Portfolio include the effect of deducting the 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."
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.
Willkie Farr & Gallagher serves as counsel for the Trust as well
as counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENT
The unaudited statement of assets and liabilities for the
Portfolio dated as of August 8, 1997 accompanies this Statement of Additional
Information.
33
<PAGE>
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.
A-1
<PAGE>
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "Baa". The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category.
A-2
<PAGE>
WARBURG PINCUS TRUST
GROWTH & INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
as of August 8, 1997
(unaudited)
Assets:
Cash 0
Deferred Organizational Costs 0
-
Total Assets 0
Liabilities: 0
-
Net Assets 0
=
Net Asset Value, Redemption and Offering Price
Per share (1 billion shares
classified for the Growth & Income
Portfolio - $.001 par value) applicable
to 1 share issued. $10.00
======
F-1
