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Rule 497(e)
Securities Act File No. 33-58125
Investment Company Act File No. 811-07261
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PROSPECTUS
April 30, 1997,
as revised
January 6, 1998
WARBURG PINCUS TRUST
EMERGING MARKETS 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.
[WARBURG PINCUS LOGO]
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PROSPECTUS April 30, 1997, as revised January 6, 1998
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 EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of non-United States issuers consisting of
companies in emerging securities markets. International investment entails
special risk considerations, including currency fluctuations, lower liquidity,
economic instability, political uncertainty and differences in accounting
methods.
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 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, 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 THE 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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<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................... 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees.......................................................... 0.45%
12b-1 Fees............................................................... 0
Other Expenses*.......................................................... 0.95%
----
Total Portfolio Operating Expenses (after fee waivers and expense
reimbursements)*....................................................... 1.40%
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..................................................................... $ 14
3 years.................................................................... $ 44
</TABLE>
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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 1.25%; Other
Expenses would equal .95%; and Total Portfolio Operating Expenses would equal
2.20%. Other Expenses for the Portfolio are based on annualized estimates of
expenses for the fiscal year ending December 31, 1998, net of any fee waivers
or expense reimbursements. The investment adviser and co-administrator have
undertaken to limit the Portfolio's Total Portfolio Operating Expenses to the
limits shown in the table above through December 31, 1998.
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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 OBJECTIVE AND POLICIES
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The investment objective of the Emerging Markets Portfolio is to seek long-
term growth of capital. The Portfolio's objective is a fundamental policy and
may not be amended without first obtaining the approval of a majority of the
outstanding shares of the Portfolio. Any investment involves risk and,
therefore, there can be no assurance that the Portfolio will achieve its
investment objective. See "Portfolio Investments" and "Certain Investment
Strategies" for descriptions of certain types of investments the Portfolio may
make.
The Portfolio is a non-diversified portfolio that pursues its investment
objective by investing primarily in equity securities of non-United States
issuers consisting of companies in emerging securities markets. An investment in
the Portfolio may involve a greater degree of risk than investment in other
mutual funds that seek capital growth by investing in larger, more developed
markets.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of issuers in Emerging Markets (as defined
below), and the Portfolio intends to acquire securities of many issuers located
in a number of foreign countries. The Portfolio will not necessarily seek to
diversify investments on a geographical basis or on the basis of the level of
economic development of any particular country and the Emerging Markets in which
the Portfolio invests will vary from time to time. However, the Portfolio will
at all times, except during defensive periods, maintain investments in at least
three countries outside the United States. An equity security of an issuer in an
Emerging Market is defined as common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts of an issuer: (i) the
principal securities trading market for which is in an Emerging Market; (ii)
which derives at least 50% of its revenues or earnings, either alone or on a
consolidated basis, from goods produced or sold, investments made or services
performed in an Emerging Market, or which has at least 50% of its total or net
assets situated in one or more Emerging Markets; or (iii) that is organized
under the laws of, and with a principal office in, an Emerging Market.
Determinations as to whether an issuer is an Emerging Markets issuer will be
made by Warburg Pincus Asset Management, Inc., the Portfolio's investment
adviser ("Warburg"), based on publicly available information and inquiries made
to the issuers.
As used in this Prospectus, an Emerging Market is any country (i) which is
generally considered to be an emerging or developing country by the World Bank
and the International Finance Corporation (the "IFC") or by the United Nations
Development Programme or (ii) which is included in the IFC Investable Index or
the Morgan Stanley Capital International Emerging Markets Index or (iii) which
has a gross national product ("GNP") per capita
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of $2,000 or less, in each case at the time of the Portfolio's investment. Among
the countries which Warburg currently considers to be Emerging Markets are the
following: Algeria, Angola, Antigua, Argentina, Armenia, Azerbaijan, Bangladesh,
Barbados, Barbuda, Belarus, Belize, Bhutan, Bolivia, Botswana, Brazil, Bulgaria,
Cambodia, Chile, People's Republic of China, Republic of China (Taiwan),
Colombia, Cyprus, Czech Republic, Dominica, Ecuador, Egypt, Estonia, Georgia,
Ghana, Greece, Grenada, Guyana, Hong Kong, Hungary, India, Indonesia, Israel,
Ivory Coast, Jamaica, Jordan, Kazakhstan, Kenya, Republic of Korea (South
Korea), Latvia, Lebanon, Lithuania, Malawi, Malaysia, Mauritius, Mexico,
Moldova, Mongolia, Montserrat, Morocco, Mozambique, Myanmar (Burma), Namibia,
Nepal, Nigeria, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines,
Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia,
South Africa, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Swaziland, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey,
Turkmenistan, Uganda, Ukraine, Uruguay, Uzbekistan, Venezuela, Vietnam,
Yugoslavia, Zambia and Zimbabwe. Among the countries that will not be considered
Emerging Markets are: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United
States.
The Portfolio may invest in securities of companies of any size, whether
traded on or off a national securities exchange. Portfolio holdings may include
emerging growth companies, which are small- or medium-sized companies that have
passed their start-up phase and that show positive earnings and prospects for
achieving profit and gain in a relatively short period of time.
In appropriate circumstances, such as when a direct investment by the
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), invest in the
securities of closed-end investment companies that invest in foreign securities.
As a shareholder in a closed-end investment company, the Portfolio will bear its
ratable share of the investment company's expenses, including management fees,
and will remain subject to payment of the Portfolio's administration fees and
other expenses with respect to assets so invested.
PORTFOLIO INVESTMENTS
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DEBT SECURITIES. The Portfolio may invest up to 35% of its total assets in
debt securities (other than money market obligations) for the purpose of seeking
growth of capital. The interest income to be derived may be considered as one
factor in selecting debt securities for investment by Warburg. Because the
market value of debt obligations can be expected to vary inversely to changes in
prevailing interest rates, investing in debt obligations may provide an
opportunity for capital growth when interest rates are
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expected to decline. The success of such a strategy is dependent upon Warburg's
ability to accurately forecast changes in interest rates. The market value of
debt obligations may also be expected to vary depending upon, among other
factors, the ability of the issuer to repay principal and interest, any change
in investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's 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. Subsequent to
its purchase by the Portfolio, an issue of securities may cease to be rated or
its rating may be reduced. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Portfolio should continue to hold the securities.
When Warburg believes that a defensive posture is warranted, the Portfolio may
invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
When such a defensive posture is warranted, the Portfolio may also invest
temporarily without limit in other securities of U.S. companies.
The Portfolio may invest or hold up to 35% of its net assets in fixed-income
securities (including convertible bonds) rated below investment grade (commonly
referred to as "junk bonds") and as low as C by Moody's or D by S&P, or in
unrated securities considered to be of equivalent quality. Securities that are
rated C by Moody's are 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. In selecting debt securities for the Portfolio, Warburg will review and
monitor the creditworthiness of each issuer and issue, in addition to relying on
ratings assigned by Moody's or S&P. Interest rate trends and specific
developments which may affect individual issuers will also be analyzed.
Subsequent to its purchase by the Portfolio, an issue of securities may cease to
be rated or its rating may be reduced. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Portfolio should continue to hold the securities.
For a complete description of rating systems of Moody's and S&P, see the
appendix to the Statement of Additional Information.
Among the types of debt securities in which the Portfolio may invest are Brady
Bonds, loan participations and assignments, asset-backed securities and
mortgage-backed securities:
Brady Bonds are collateralized or uncollateralized securities created through
the exchange of existing commercial bank loans to public and private Latin
American entities for new bonds in connection with certain debt
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restructurings. Brady Bonds have been issued only recently and therefore do not
have a long payment history. However, in light of the history of commercial bank
loan defaults by Latin American public and private entities, investments in
Brady Bonds may be viewed as speculative.
Loan Participations and Assignments of fixed and floating rate loans arranged
through private negotiations between a foreign government as borrower and one or
more financial institutions as lenders will typically result in the Portfolio
having a contractual relationship only with the lender, in the case of a
participation, or the borrower, in the case of an assignment. The Portfolio may
not directly benefit from any collateral supporting a participation, and in the
event of the insolvency of a lender will be treated as a general creditor of the
lender. As a result, the Portfolio assumes the risk of both the borrower and the
lender of a participation. The Portfolio's rights and obligations as the
purchaser of an assignment may differ from, and be more limited than, those held
by the assigning lender. The lack of a liquid secondary market for both
participations and assignments will have an adverse impact on the value of such
securities and on the Portfolio's ability to dispose of participations or
assignments.
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 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) and medium-term (five years
or less remaining to maturity) money market obligations and, for temporary
defensive purposes, may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, its agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and
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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 invest in 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.
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 or Warburg.
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.
CONVERTIBLE SECURITIES. Convertible securities in which the Portfolio may
invest, including both convertible debt and convertible preferred stock, may
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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. Subsequent to purchase by the Portfolio,
convertible securities may cease to be rated or a rating may be reduced. Neither
event will require sale of such securities, although Warburg will consider such
event in its determination of whether the Portfolio should continue to hold the
securities.
WARRANTS. The Portfolio may invest up to 10% 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 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 4 and "Certain Investment Strategies"
beginning at page 11.
EMERGING MARKETS. The Portfolio may invest in securities of issuers located in
less developed countries considered to be "emerging markets." Investing in
securities of issuers located in emerging markets involves not only the risks
described below, with respect to investing in foreign securities, but also other
risks, including exposure to economic structures that are generally less diverse
and mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of emerging
markets that may affect investment there include certain national policies that
may restrict investment by foreigners in issuers or industries deemed sensitive
to relevant national interests and the absence of developed legal structures
governing private and foreign investments and private property. The typically
small size of the markets for securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
EMERGING GROWTH AND SMALL COMPANIES. Investing in securities of small-sized
and emerging growth companies may involve greater risks than investing in
larger, more established issuers since these securities may have limited
marketability and, thus, may be more volatile than securities of larger, more
established companies or market averages in general. Because small-and
medium-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult to buy or sell significant amounts of
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such shares without an unfavorable impact on prevailing prices. Small- and
medium-sized companies may have limited product lines, markets or financial
resources and may lack management depth. In addition, small- and medium-sized
companies are typically subject to a greater degree of changes in earnings and
business prospects than are larger, more established companies. There is
typically less publicly available information concerning small- and medium-sized
companies than for larger, more established ones. Securities of issuers in
"special situations" also may be more volatile, since the market value of these
securities may decline in value if the anticipated benefits do not materialize.
Companies in "special situations" include, but are not limited to, companies
involved in an acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; litigation
which, if resolved favorably, would improve the value of the companies'
securities; or a change in corporate control. Although investing in securities
of emerging growth companies or "special situations" offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Portfolio may
involve a greater degree of risk than an investment in other mutual funds that
seek capital growth by investing in better-known, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The 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"). An investment in Rule 144A Securities 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 and the
Portfolio may take longer to liquidate these positions than would be the case
for publicly traded securities. Although these securities may be resold in
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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.
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.
NON-DIVERSIFIED STATUS. The Portfolio is classified as non-diversified under
the 1940 Act, which means that the Portfolio is not limited by the 1940 Act in
the proportion of its assets that it may invest in the obligations of a single
issuer. The Portfolio will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. Being non-diversified means
that the Portfolio may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the
Portfolio assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
BELOW INVESTMENT GRADE SECURITIES. Medium-and lower-rated 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 organizations, 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 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
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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.
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 their 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 100%. 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.
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 Trust's 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)
purchasing securities on a when-issued basis and purchasing or selling
securities for delayed-delivery, (ii) lending portfolio securities and (iii)
entering into reverse repurchase agreements and dollar rolls. The Portfolio may
also invest in zero coupon securities and stand-by commitments, although the
Portfolio currently anticipates that during the coming year zero coupon
securities or stand-by commitments will not exceed 5% of net assets. Detailed
information concerning the Portfolio's strategies and their related risks is
contained below and in the Statement of Additional Information.
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FOREIGN SECURITIES. The Portfolio will ordinarily hold no less than 65% of its
total assets in foreign securities of non-U.S. issuers in emerging markets.
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. The risks
associated with investing in securities of non-U.S. issuers are generally
heightened for investment in securities of issuers in emerging markets.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying 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.
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, forward currency contracts and swaps. These strategies, commonly
referred to as "derivatives," may be used (i) for the
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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) 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. The Portfolio may utilize up to
10% of its assets to purchase options on stocks and debt securities that are
traded on U.S. and foreign exchanges, as well as over-the-counter ("OTC")
options. The purchaser of a put option on a security has the right to compel the
purchase by the writer of the underlying security, while the purchaser of a call
option on a security has the right to purchase the underlying security from the
writer. In addition to purchasing and writing options on securities, the
Portfolio may also utilize up to 15% of its total assets to purchase exchange-
listed and OTC put and call options on stock indexes, and may also write such
options. A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to 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
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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 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.
Swaps. The Portfolio may enter into swaps relating to indexes, currencies and
equity interests of foreign issuers. A swap transaction is an agreement between
the Portfolio and a counterparty to act in accordance with the terms of the swap
contract. Index swaps involve the exchange by the Portfolio with another party
of the respective amounts payable with respect to a notional principal amount
related to one or more indexes. Currency swaps involve the exchange of cash
flows on a notional amount of two or more currencies based on their relative
future values. An equity swap is an agreement to exchange streams of payments
computed by reference to a notional amount based on the performance of a basket
of stocks or a single stock. The Portfolio may enter into these transactions to
preserve a return or spread on a particular investment or portion of its assets,
to protect against currency fluctuations, as a duration management technique or
to protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio may also use these
transactions for speculative purposes, such as to obtain the price performance
of a security without actually purchasing the security in circumstances where,
for example, the subject security is illiquid, or is unavailable for direct
investment or available only on less attractive terms. Swaps have risks
associated with them including possible default by the counterparty to the
transaction, illiquidity and, where swaps are used as hedges, the risk that the
use of a swap could result in losses greater than if the swap had not been
employed.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Swaps do not involve
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the delivery of securities, other underlying assets or principal. Accordingly,
the risk of loss with respect to swaps is limited to the net amount of payments
that the Portfolio is contractually obligated to make. If the counterparty to a
swap defaults, the Portfolio's risk of loss consists of the net amount of
payments that the Portfolio is contractually entitled to receive. Where swaps
are entered into for good faith hedging purposes, Warburg believes such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Portfolio's borrowing
restrictions. Where swaps are entered into for other than hedging purposes, the
Portfolio will segregate an amount of cash or liquid securities having a value
equal to the accrued excess of its obligations over its entitlements with
respect to each swap on a daily basis.
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, currency exchange transactions and swaps 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 indexes; currency, interest rate
and stock index futures contracts and options on these futures contracts;
forward currency contracts; and swaps. 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
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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 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 or to postpone a gain or loss for federal income tax purposes.
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.
INVESTMENT GUIDELINES
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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 investments (including roll-overs). Except for
the limitations on borrowing, the investment guidelines set forth in this
paragraph may be changed at any time without shareholder consent by vote of the
Board, subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that 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 Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIO
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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
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in accordance with the Portfolio's investment objective and stated investment
policies. Warburg makes investment decisions for the Portfolio, 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 1.25% of the Portfolio's 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 advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of November 30, 1997,
Warburg managed approximately $20 billion of assets, including approximately
$11.5 billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), a New York general
partnership, 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 MANAGERS. Richard H. King and Vincent J. McBride are Co-Portfolio
Managers of the Portfolio, and Harold W. Ehrlich is Associate Portfolio Manager
and Research Analyst.
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989,
before which time he was chief investment officer and a director at Fiduciary
Trust Company International S.A. in London, with responsibility for all
international equity management and investment strategy. Mr. McBride, a Vice
President of Warburg, has been with Warburg since 1994. Prior to joining
Warburg, Mr. McBride was an international equity analyst at Smith Barney Inc.
from 1993 to 1994 and at General Electric Investment Corporation from 1992 to
1993.
Mr. Ehrlich is a Managing Director of Warburg and has been with Warburg since
February 1995, before which time he was a senior vice president, portfolio
manager and analyst at Templeton Investment Counsel Inc.
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 also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Portfolio and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual and semiannual reports, assisting in the
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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 Inc. ("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 .12%
of the Portfolio's first $250 million in average daily net assets, .10% of the
next $250 million in average daily net assets, .08% of the next $250 million in
average daily net assets, and .05% of average daily net assets over $750
million. PFPC has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809.
CUSTODIAN. State Street Bank and Trust Company ("State Street") serves as
custodian of the Portfolio's assets. 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., a 50% owned subsidiary ("BFDS"),
responsibility for most shareholder servicing functions. BFDS's principal
business address is 2 Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the 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,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ("Service Organizations") with whom it enters into agreements up to .35%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with the Portfolio. The Service Fee payable to any one Service
Organization is determined based upon a number of factors, including the nature
and quality of the services provided, the operations processing requirements of
the relationship and the standardized fee schedule of the Service Organization.
Warburg or its affiliates may, at their own expense, provide promotional
incentives 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
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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 Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES IN THE PORTFOLIO
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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 a
Portfolio as an investment option for a Variable Contract or Plan.
PURCHASES. 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 the 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. 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.
Plan participants may invest in shares of the Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account. Participants
should contact their Plan sponsor for information concerning the appropriate
procedure for investing in the Portfolio.
The Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's opinion, they are of a size that
would disrupt the management of the Portfolio. The Portfolio may discontinue
sales of its shares if management believes that a substantial
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further increase in assets may adversely affect that Portfolio's ability to
achieve its investment objective. In such event, however, it is anticipated that
existing Variable Contract owners and Plan participants would be permitted to
continue to authorize investment in the Portfolio and to reinvest any dividends
or capital gains distributions.
REDEMPTIONS. Shares of the Portfolio may be redeemed on any business day.
Redemption orders which are received by a Participating Insurance Company or
Plan or its agent prior to the close of regular trading on the NYSE on any
business day and transmitted to the Trust or its specified agent during the
morning of the next business day will be processed at the net asset value
computed at the close of regular trading on the NYSE on the previous business
day. Redemption proceeds will normally be wired to the Participating Insurance
Company or Plan the business day following receipt of the redemption order, but
in no event later than seven days after receipt of such order.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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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 annually. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Distributions of net
realized long-term and short-term capital gains are declared annually and, as a
general rule, will be distributed or paid after the end of the fiscal year in
which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the Portfolio at net asset value unless, in
the case of a Variable Contract, a Participating Insurance Company elects to
have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
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.
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Constructive Sales. If the Portfolio effects a short sale of securities at a
time when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Portfolio closes out the short
sale with securities other than the appreciated securities held at the time of
the short sale and if certain other conditions are satisfied. Uncertainty
regarding the tax consequences of effecting short sales may limit the extent to
which the Portfolio may effect short sales. The Portfolio's short selling
activities will not result in unrelated business taxable income to a tax-exempt
investor.
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
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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
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
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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
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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 investment services that
monitor the performance of mutual funds or as set forth in the publications
listed below; (ii) the IFC Emerging Market Free Index, the IFC Investible Index
and the Morgan Stanley Capital International Emerging Markets Free Index, all of
which are unmanaged indexes of common stocks; or (iii) other appropriate indexes
of investment securities or with data developed by Warburg derived from such
indexes. The Portfolio or
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a Participating Insurance Company may also include evaluations published by
nationally recognized ranking services and by financial publications that are
nationally recognized, 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.
In reports or other communications to investors or in advertising, the
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 activity, which may include a discussion of significant
portfolio holdings and analysis of holdings by industry, country, credit quality
and other characteristics. The Portfolio may also discuss the continuum of risk
and return relating to different investments and the potential impact of foreign
securities on a portfolio otherwise composed of domestic securities.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various periods of time. In addition, 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.
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 constitutes 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 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
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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 the 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 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 Objective and Policies........................ 3
Portfolio Investments.................................... 4
Risk Factors and Special Considerations.................. 8
Portfolio Transactions and Turnover Rate................. 11
Certain Investment Strategies............................ 11
Investment Guidelines.................................... 16
Management of the Portfolio.............................. 16
How to Purchase and Redeem Shares in the Portfolio....... 19
Dividends, Distributions and Taxes....................... 20
Net Asset Value.......................................... 21
Performance.............................................. 21
General Information...................................... 23
</TABLE>
[WARBURG PINCUS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TREMK-1-0198
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1997,
As Revised January 6, 1998
-----------------------------
WARBURG PINCUS TRUST
International Equity Portfolio
Emerging Markets Portfolio
Small Company Growth Portfolio
Post-Venture Capital 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....................................................36
Additional Purchase And Redemption Information.............................44
Additional Information Concerning Taxes....................................45
Determination Of Performance...............................................47
Independent Accountants And Counsel........................................50
Miscellaneous..............................................................50
Financial Statements.......................................................51
Appendix -- Description of Ratings........................................A-1
Statement of Assets and Liabilities.......................................F-1
Warburg Pincus Trust ("Trust") currently offers five managed
investment funds, four of which are described in this Statement of Additional
Information, the International Equity Portfolio, the Emerging Markets Portfolio,
the Small Company Growth Portfolio and the Post-Venture Capital Portfolio
(together the "Portfolios" and each a "Portfolio"). This Statement of Additional
Information is meant to be read in conjunction with the Prospectus of the
relevant Portfolio, dated April 30, 1997, as amended or supplemented from time
to time, and is incorporated by reference in its entirety into that Prospectus.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance policies (together "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants.
Because this Statement of Additional Information is not itself a prospectus, no
investment in shares of a Portfolio should be made solely upon the information
contained herein. Copies of the Trust's Prospectuses for the Portfolios and
information regarding each of the Portfolios' current performance may be
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obtained by calling the Trust at (800) 369-2728 or by writing to the Trust, P.O.
Box 9030, Boston, Massachusetts 02205-9030.
INVESTMENT OBJECTIVES
The investment objective of the International Equity Portfolio is
long-term capital appreciation. The investment objective of the Small Company
Growth Portfolio is capital growth. The investment objective of each of the
Emerging Markets Portfolio and the Post-Venture Capital Portfolio is long-term
growth of capital.
INVESTMENT POLICIES
The following policies supplement the descriptions of each Portfolio's
investment objective and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
- ---------------------------------------------------
Securities Options. Each Portfolio, other than the Emerging Markets
Portfolio, may write covered put and call options on stock and debt securities
and each Portfolio may purchase such options that are traded on foreign and U.S.
exchanges, as well as over-the-counter ("OTC").
Each 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, a Portfolio as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Portfolio as a put or call writer retains the risk of a decline in the price
of the underlying security. The size of the premiums that the Portfolio may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
In the case of options written by a Portfolio that are deemed covered
by virtue
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of the Portfolio's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Portfolio has
written options may exceed the time within which the Portfolio must make
delivery in accordance with an exercise notice. In these instances, the
Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio will have the absolute right to receive from
the issuer of the underlying security an equal number of shares to replace the
borrowed securities, but the Portfolio may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Portfolios may write covered call options. For example, if a Portfolio
writes covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios, other than the Emerging
Markets Portfolio, may write (i) in-the-money call options when Warburg Pincus
Asset Management, Inc., the Portfolios' investment adviser ("Warburg"), expects
that the price of the underlying security will remain flat or decline moderately
during the option period, (ii) at-the-money call options when Warburg expects
that the price of the underlying security will remain flat or advance moderately
during the option period and (iii) out-of-the-money call options when Warburg
expects that the premiums received from writing the call option plus the
appreciation in market price of the underlying security up to the exercise price
will be greater than the appreciation in the price of the underlying security
alone. In any of the preceding situations, if the market price of the underlying
security declines and the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of call
options as to the relation of exercise price to market price) may be used in the
same market environments that such call options are used in equivalent
transactions. To secure its obligation to deliver the underlying security when
it writes a call option, a Portfolio will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "Clearing Corporation") and of the securities exchange
on which the option is written.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by the Portfolio prior
to the exercise of options that it has purchased or, 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
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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 it has written an option from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). The obligation of the Portfolio under an option it has
written would be terminated by a closing purchase transaction, but the Portfolio
would not be deemed to own an option as a result of the transaction. So long as
the obligation of the Portfolio as the writer of an option continues, the
Portfolio may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Portfolio to deliver the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Portfolio effects a closing purchase transaction. The
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Portfolio's
ability to terminate options positions established in the 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 a
Portfolio and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits
4
<PAGE>
may restrict the number of options a Portfolio will be able to purchase on a
particular security.
Stock Index Options. Each 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 options are based on a broad
market index, such as the NYSE Composite Index, or a narrower market index such
as the Standard & Poor's 100. Indexes may also be based on a particular industry
or market segment.
Options on stock indexes are similar to options on stock except that
(i) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (b) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the index and the exercise
price of the option times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Stock index options may be offset by entering into closing transactions as
described above for securities options.
OTC Options. The Portfolios may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Portfolio
were to purchase a dealer option, however, it would rely on the dealer from whom
it purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Portfolio, the Portfolio would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while dealer
options have none. Consequently, the Portfolio will generally be able to realize
the value of a dealer option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when the Portfolio writes a dealer
option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Portfolio originally wrote the option. Although the Portfolios will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Portfolios, there can be no assurance that the Portfolio will be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
The inability to enter into a closing transaction may result in material losses
to a Portfolio. Until the Portfolio, as a covered OTC call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover
5
<PAGE>
the written option until the option expires or is exercised. This requirement
may impair the Portfolio's ability to sell portfolio securities or, with respect
to currency options, currencies at a time when such sale might be advantageous.
In the event of insolvency of the other party, the Portfolio may be unable to
liquidate a dealer option.
Futures Activities. Each Portfolio may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return.
A Portfolio will not enter into futures contracts and related options
for which the aggregate initial margin and premiums (discussed below) required
to establish positions other than those considered to be "bona fide hedging" by
the CFTC exceed 5% of the Portfolio's net asset value after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The Portfolios reserve the right to engage in transactions involving
futures contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with a Portfolio's
policies. Although each Portfolio is limited in the amount of assets it may
invest in futures transactions (as described above and in the Prospectus), there
is no overall limit on the percentage of Portfolio assets that may be at risk
with respect to futures activities. The ability of the Portfolio to trade in
futures contracts and options on futures contracts may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Stock indexes are capitalization weighted indexes
which reflect the market value of the stock listed on the indexes. A stock index
futures contract is an agreement to be settled by delivery of an amount of cash
equal to a specified multiplier times the difference between the value of the
index at the close of the last trading day on the contract and the price at
which the agreement is made.
No consideration is paid or received by a Portfolio upon entering into
a futures contract. Instead, the Portfolio is required to deposit in a
segregated account with its custodian an amount of cash or cash equivalents,
such as U.S. government securities or other liquid high-grade debt obligations,
equal to approximately 1% to 10% of the contract amount (this amount is subject
to change by the exchange on which the contract is traded, and brokers may
charge a higher amount). This amount is known as "initial margin" and is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Portfolio fails
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to meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the currency, financial
instrument or stock index underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." The Portfolios will also incur brokerage
costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Portfolio
may elect to close the position by taking an opposite position, which will
operate to terminate the Portfolio's existing position in the contract.
Positions in futures contracts and options on futures contracts (described
below) may be closed out only on the exchange on which they were entered into
(or through a linked exchange). No secondary market for such contracts exists.
Although the Portfolios intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio had insufficient cash, it might have to sell securities to meet
daily variation margin requirements at a time when it would be disadvantageous
to do so. In addition, if the transaction is entered into for hedging purposes,
in such circumstances the Portfolio may realize a loss on a futures contract or
option that is not offset by an increase in the value of the hedged position.
Losses incurred in futures transactions and the costs of these transactions will
affect the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase and write
put and call options on foreign currency, interest rate and 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 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
7
<PAGE>
value of the underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value of the
Portfolio.
Currency Exchange Transactions. The value in U.S. dollars of the
assets of a Portfolio that are invested in foreign securities may be affected
favorably or unfavorably by changes in exchange control regulations, and the
Portfolio may incur costs in connection with conversion between various
currencies. Currency exchange transactions may be from any non-U.S. currency
into U.S. dollars or into other appropriate currencies. Each Portfolio will
conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market, (ii) through entering into
futures contracts or options on such contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, the Portfolio may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Portfolio retains the portfolio security and engages
in an offsetting transaction, the Portfolio, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices.
Currency Options. The Portfolios may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. The Portfolios' currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of a Portfolio generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. A
Portfolio 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
8
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that can be achieved in the future. For example, in order to protect against
diminutions in the U.S. dollar value of securities it holds, a Portfolio may
purchase currency put options. If the value of the currency does decline, the
Portfolio will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, the Portfolio may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. The benefit to the Portfolio
derived from purchases of currency options, like the benefit derived from other
types of options, will be reduced by premiums and other transaction costs.
Because transactions in currency exchange are generally conducted on a principal
basis, no fees or commissions are generally involved. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Portfolio may not be able to contract
to sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
the Portfolio's investments and a currency hedge may not be entirely successful
in mitigating changes in the value of the Portfolio's investments denominated in
that currency. A currency hedge, for example, should protect a Yen-denominated
bond against a decline in the Yen, but will not protect the Portfolio against a
price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency
exchange transactions for other purposes, including generating current income to
offset expenses or increase return, each Portfolio may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures 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 a Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. The risk of imperfect
correlation increases as the composition of the Portfolio's portfolio varies
from the composition of the index. In an effort to compensate for imperfect
correlation of relative
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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 a securities
index and movements in the price of index futures, a correct forecast of general
market trends by Warburg still may not result in a successful hedging
transaction.
A Portfolio will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Portfolio of hedging
transactions will be subject to Warburg's ability to predict trends in
currencies, interest rates or securities markets, as the case may be, and to
correctly predict movements in the directions of the hedge and the hedged
position and the correlation between them, which predictions could prove to be
inaccurate. This requires different skills and techniques than predicting
changes in the price of individual securities, and there can be no assurance
that the use of these strategies will be successful. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market behavior or
trends. Losses incurred in hedging transactions and the costs of these
transactions will affect the Portfolio's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. As described in the Prospectus, each Portfolio will comply with
guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolios on currencies and securities indexes and, in the case of the
International Equity Portfolio, the Small Company Growth Portfolio or the
Post-Venture Capital Portfolio, 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 a Portfolio on securities may
require the Portfolio to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a 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
a 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 a Portfolio holds a futures or forward
contract, the Portfolio could purchase a put option on the same futures or
forward contract with a strike price as high or higher than the price of the
contract held. The Portfolio may
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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. See "Japanese
Investments" for a discussion of factors relating to Japanese investments
specifically.
Foreign Currency Exchange. Since the International Equity and Emerging
Markets Portfolios will, and the Post-Venture Capital and Small Company Growth
Portfolios (each up to 20% of its total assets) may, be investing in securities
denominated in currencies other than the U.S. dollar, and since a Portfolio may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, each Portfolio's investments in foreign
companies may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the dollar value of a Portfolio's
assets denominated in that foreign currency. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed by a Portfolio with respect to its foreign
investments. The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign exchange
markets. Changes in the exchange rate may result over time from the interaction
of many factors directly or indirectly affecting economic and political
conditions in the United States and a particular foreign country, including
economic and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and the
extent of government surpluses or deficits in the United States and the
particular foreign country, all of which are in turn sensitive to the monetary,
fiscal and trade policies pursued by the governments of the United States and
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. See "Japanese
Investments--Economic Background--Currency Fluctuation" below. A Portfolio may
use hedging techniques with the objective of protecting against loss through the
fluctuation of the valuation of foreign currencies against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Transactions" and "Futures Transactions" above.
Information. The majority of the foreign securities held by a
Portfolio will not be registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC. 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.
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companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Delays. Securities of some foreign companies are less liquid and their
prices are more volatile than securities of comparable U.S. companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold. Due to the increased exposure
of a Portfolio to market and foreign exchange fluctuations brought about by such
delays, and due to the corresponding negative impact on a Portfolio's liquidity,
the Portfolios will avoid investing in countries which are known to experience
settlement delays which may expose the Portfolios to unreasonable risk of loss.
Foreign Taxes and Increased Expenses. The operating expenses of the
International Equity Portfolio and the Emerging Markets Portfolio can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities, since the expenses of the Portfolio associated with foreign
investing, such as custodial costs, valuation costs and communication costs, as
well as the rate of the investment advisory fees, though similar to such
expenses of some other funds investing internationally, are higher than those
costs incurred by other investment companies.
General. In general, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. A Portfolio may invest in
securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
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 a 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.
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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.
Brady Bonds. (International Equity and Emerging Markets Portfolios)
The Emerging Markets Portfolio may invest in so-called "Brady Bonds," which have
been issued by Costa Rica, Mexico, Uruguay and Venezuela and which may be issued
by other Latin American countries. Brady Bonds are issued as part of a debt
restructuring in which the bonds are issued in exchange for cash and certain of
the country's outstanding commercial bank loans. Investors should recognize that
Brady Bonds do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter ("OTC")
secondary market for debt of Latin American issuers.
U.S. Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. Government Securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Federal Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board and Student Loan
Marketing Association. Each Portfolio may also invest in instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury and
instruments that are supported by the credit of the instrumentality. Because the
U.S. government is not obligated by law to provide support to an instrumentality
it sponsors, a Portfolio will invest in obligations issued by such an
instrumentality only if Warburg determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Portfolio.
Securities of Other Investment Companies. Each Portfolio may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, a Portfolio may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of such
company, (ii) do not exceed 5% of the value of the Portfolio's total assets and
(iii) when added to all other investment company securities held by the
Portfolio, do not exceed 10% of the value of the Portfolio's total assets.
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Lending of Portfolio Securities. A Portfolio may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Trust's Board of Trustees (the "Board"). These loans, if and when made, may not
exceed 20% of the Portfolio's total assets taken at value. A Portfolio will not
lend portfolio securities to Warburg or its affiliates unless it has applied for
and received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. Government
Securities, which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Portfolio involved. From time to time,
a Portfolio may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Portfolio and that is acting as a "finder."
By lending its securities, the Portfolio can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. Although the
generation of income is not an investment objective of the Portfolios, income
received could be used to pay a Portfolio's expenses and would increase an
investor's total return. Each Portfolio will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Portfolio must receive at
least 100% cash collateral or equivalent securities of the type discussed in the
preceding paragraph from the borrower; (ii) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Board must terminate the loan and
regain the right to vote the securities. Loan agreements involve certain risks
in the event of default or insolvency of the other party including possible
delays or restrictions upon the Portfolio's ability to recover the loaned
securities or dispose of the collateral for the loan.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. A
Portfolio will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Warburg deems it advantageous to do so.
The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on such securities
may be higher or lower than the yields available in the market on the dates when
the investments are actually delivered to the buyers.
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When a Portfolio agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities 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 a 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, a Portfolio sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
A Portfolio may engage in a short sale if at the time of the short sale the
Portfolio owns or has the right to obtain without additional cost an equal
amount of the security being sold short. This investment technique is known as a
short sale "against the box." If the Portfolio engages in a short sale, the
collateral for the short position will be maintained by the Portfolio's
custodian or qualified sub-custodian.
The Portfolios do not intend to engage in short sales against the box
for investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security), or when a Portfolio wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Portfolio's long position should be offset by a gain in
the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Portfolio owns. There will be certain additional
transaction costs associated with short sales against the box, but the Portfolio
will endeavor to offset these costs with the income from the investment of the
cash proceeds of
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short sales.
If a Portfolio effects a short sale of securities at a time
when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Portfolio closes out the short
sale with securities other than the appreciated securities held at the time of
the short sale and if certain other conditions are satisfied. Uncertainty
regarding the tax consequences of effecting short sales may limit the extent to
which a Portfolio may effect short sales.
Warrants. Each Portfolio may invest up to 10% 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. A Portfolio may not
invest more than 15% of its net assets in illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market, repurchase agreements which have a maturity of longer than seven days,
time deposits maturing in more than seven day, certain Rule 144A Securities (as
defined below) and, with respect to the Post-Venture Capital Portfolio, Private
Funds (as defined in the Prospectuses relating to the Post-Venture Capital
Portfolio). 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.
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
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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 a
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. Each Portfolio may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption requests
so as to permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Portfolio's net
assets. Although the principal of such borrowings will be fixed, the Portfolio's
assets may change in value during the time the borrowing is outstanding. Each
Portfolio expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender.
Japanese Investments (International Equity Portfolio). From time to
time depending on current market conditions, the International Equity Portfolio
may invest a significant portion of its assets in Japanese securities. Like any
investor in Japan, the Portfolio will therefore be subject to general economic
and political conditions in the country. In addition to the considerations
discussed above, these include future political and economic developments, the
possible imposition of, or changes in, exchange controls or other Japanese
governmental laws or restrictions applicable to such investments, diplomatic
developments, political or social unrest and natural disasters.
The information set forth in this section has been extracted from
various governmental publications and other sources. The Trust makes no
representation as to the accuracy of the information, nor has the Trust
attempted to verify it. Furthermore, no representation is made that any
correlation exists between Japan or its economy in general and the performance
of the International Equity Portfolio.
Domestic Politics. Japan has a parliamentary form of government. The
legislative power is vested in the Japanese Diet, which consists of a House of
Representatives and a House of Councillors. Members of the House of
Representatives are elected for terms of four years unless the House of
Representatives is dissolved prior to the expiration of their full elected
terms. Members of the House of Councillors are elected for terms of six years
with one-half of the membership being elected every three years. Various
political parties are
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represented in the Diet, including the conservative Liberal Democratic Party
("LDP"), which until August 1993, had been in power nationally since its
formation in 1955. The LDP ceased to have a majority of the House of
Representatives in June 1993, when certain members of the House of
Representatives left the LDP and formed two new political parties. After an
election for the House of Representatives was held on July 18, 1993 and the LDP
failed to secure a majority, seven parties formed a coalition to control the
House of Representatives and chose Morihiro Hosokawa, the Representative of the
Japan New Party, to head their coalition. In April 1994, amid accusations of
financial improprieties, Prime Minister Hosokawa announced that he would resign.
Tsutomu Hata succeeded Mr. Hosokawa as prime minister and formed a new cabinet
as a minority coalition government. In June 1994, Mr. Hata yielded to political
pressure from opposition parties and resigned. He was succeeded by Social
Democratic Party leader Tomiichi Murayama, Japan's first Socialist prime
minister since 1948, who was chosen by a new and unstable alliance between
left-wing and conservative parties, including the LDP. On September 18, 1994,
187 opposition politicians founded a new party, the Reform Party, led by Ichiro
Ozawa, to oppose the government of Prime Minister Murayama in the next
elections. Political realignment has continued in 1995, as the Social Democrats
incurred significant losses in the July elections. In August 1995, the LDP
elected Ryutaro Hashimoto, the minister for international trade and industry, as
its new leader, and in January 1996, he became prime minister. Mr. Hashimoto
dissolved the Diet, and called a general election in October 1996, in which the
LDP failed to secure a majority. The LDP formed a new coalition with the Social
Democratic Party, but it will need to attract members from the main opposition
party to attain a working majority. The recently formed Democratic Party, which
calls for serious public sector reforms, is likely to have a strong influence on
the future course of political party developments. This continuing political
instability may hamper Japan's ability to establish and maintain effective
economic and fiscal policies, and recent and future political developments may
lead to changes in policy that might adversely affect the Funds' investments.
Economic Background. Over the past 30 years Japan has experienced
significant economic development. During the era of high economic growth in the
1960s and early 1970s the expansion was based on the development of heavy
industries such as steel and shipbuilding. In the 1970s Japan moved into
assembly industries which employ high levels of technology and consume
relatively low quantities of resources, and since then has become a major
producer of electrical and electronic products and automobiles. Moreover, since
the mid-1980s, Japan has become a major creditor nation. With the exception of
the periods associated with the oil crises of the 1970s, Japan has generally
experienced very low levels of inflation.
The accumulation of trade and current account surpluses in the 1980s
led to increased investment in financial assets and Japanese real estate,
resulting in a rapid escalation of prices and the infamous "bubble economy" of
the late 1980s. In the early 1990s, however, declining stock and land prices hit
Japanese banks especially hard. Falling land prices caused a rapid accumulation
of bad loans and because Japanese banks count a portion of their equity holdings
of other Japanese companies as part of their capital base, falling stock prices
adversely affected the financial health of these banks. Bank failures in 1995
and losses from unauthorized bond trading by Daiwa Bank, one of Japan's oldest
and most venerable banks, revealed serious flaws in the Japanese financial
system and a government regulatory regime
18
<PAGE>
that had protected that system from the consequences of its actions. These
serious difficulties continued through the end of 1996. Extricating financial
institutions from bad loans could impede the pace of any recovery. There can be
no assurance that any recovery will continue and will not, in fact, be reversed.
Japan is largely dependent upon foreign economies for raw materials.
For instance, almost all of its oil is imported, the majority from the Middle
East. Oil prices therefore have a major impact on the domestic economy, as is
evidenced by the current account deficits triggered by the two oil crises of the
1970s. Oil prices have declined mainly due to a worldwide easing of demand for
crude oil. The stabilized price of oil contributed to Japan's sizable current
account surplus and stability of wholesale and consumer prices. However, the
recent increase in oil prices has put pressure on both the trade balance and
prices.
International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must import. Japan's
trade surplus has increased dramatically in recent years, exceeding $100 billion
per year since 1991 and reaching a record high of $145 billion in 1994. Because
of the concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
resulting therefrom, Japan has entered a difficult phase in its relations with
its trading partners, particularly with respect to the United States, with whom
the trade imbalance is the greatest. In 1995, however, the trade surplus had
decreased due to a drop in exports. The reduced exports are due primarily to the
strength of the yen and the shift in production by major manufacturers to
foreign countries, particularly to other parts of Asia. In 1996, the overall
trade surplus declined by 32% from the previous year, although the monthly pace
of decline slowed in late 1996. The declining trade surplus has been accompanied
by changes in the composition of trade and trade partners. The proportion of
finished products has increased, while that of raw materials has decreased, and
trade with other Asian countries rose to comprise 44% and 37% of Japan's exports
and imports, respectively. The U.S. still constitutes Japan's largest trading
partner, accounting for 27% of Japan's exports and 23% of its imports. The trade
imbalance with the U.S. has caused friction in the past, and could adversely
affect Japan and the performance of the International Equity Portfolio.
The following table sets forth the composition of Japan's trade
balance, as well as other components of its current account, for the years
shown.
<TABLE>
<CAPTION>
CURRENT ACCOUNT
Trade
---------------------------------------------------------------------
Percentage Percentage
Change from Change from Trade Balance Current
Year Exports Preceding Year Imports Preceding Year Services Transfers Balance
---- ------- -------------- ------- -------------- ------------- -------- --------- -------
(U.S. dollars in
millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 168,290 15.7 124,003 8.8 44,257 (7,747) (1,507) 35,003
1985 174,015 3.4 118,029 (4.8) 55,986 (5,165) (1,652) 49,169
1986 205,591 18.1 112,764 (4.5) 92,827 (4,932) (2,050) 85,845
1987 224,605 9.2 128,219 13.7 96,386 (5,702) (3,669) 87,015
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 259,765 15.7 164,753 28.5 95,012 (11,263) (4,118) 79,631
1989 269,570 3.8 192,653 16.9 76,917 (15,526) (4,234) 57,157
1990 280,374 4.0 216,846 12.6 63,528 (22,292) (5,475) 35,761
1991 306,557 9.3 203,513 (6.1) 103,044 (17,660) (12,483) 72,901
1992 330,850 7.9 198,502 (2.5) 132,348 (10,112) (4,685) 117,551
1993 351,292 6.2 209,778 5.7 141,514 (3,949) (6,117) 131,448
1994 384,176 9.4 238,232 13.6 145,944 (9,296) (7,508) 129,140
1995 429,482 11.8 297,795 25.0 131,689 (13,154) (7,737) 110,798
1996 435,715 1.5 344,563 15.7 91,152 (67,760) (9,755) 71,806
Source: Bank of Japan
</TABLE>
20
<PAGE>
Economic Trends. The following table sets forth Japan's gross domestic
product for the years shown.
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT (GDP)
1996* 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
(yen in billions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private...........(Y)298,786 (Y)289,045 (Y)277,676.8 (Y)270,919.4 (Y)264,824.1 (Y)255,084.2 (Y)243,628.1 (Y)228,483.2
Government..........49,106 46,824 46,108.0 44,666.4 43,257.9 41,232.0 38,806.6 36,274.8
Capital Formation
(incl. inventories)
Private.............. N/A 70,758 93,111.4 99,180.1 108,727.6 116,638.0 110,871.9 100,130.8
Government........... N/A 41,461 42,227.3 40,295.8 35,110.1 30,062.3 28,182.6 25,724.5
Exports of Goods
and Services.........48,773 45,408 44,449.2 44,243.8 47,409.4 46,809.7 45,919.9 42,351.8
Imports of Goods and
Services............. 46,127 38,227 34,424.0 33,333.1 36,183.8 38,529.3 42,871.8 36,768.1
GDP (Expenditures).. 499,667 480,693 469,148.7 465,972.4 463,145.3 451,296.9 24,537.2 396,197.0
Change in GDP from
Preceding Year
Nominal terms........ 3.9% 0.3% 0.7% 0.6% 2.6% 6.3% 7.2% 6.7%
Real Terms........... N/A 0.9% 0.5% -0.2% 1.1% 4.3% 4.8% 4.7%
Source: Economic Planning Agency, Japan
_______________
* Average of the first, second and third quarters of 1996.
</TABLE>
The following tables set forth certain economic indicators in Japan
for the years shown.
<TABLE>
<CAPTION>
UNEMPLOYMENT
Labor Productivity
Year Number Unemployed Percent Unemployed Index (Manufacturing)
- ---- ----------------- ------------------ ---------------------
(in millions) (Base Year: 1990)
<S> <C> <C> <C>
1985..................... 1.56 2.6 75.6
1986..................... 1.67 2.8 77.0
1987..................... 1.73 2.8 81.4
1988..................... 1.55 2.5 90.8
1989..................... 1.42 2.3 96.2
1990..................... 1.34 2.1 100.0
1991..................... 1.36 2.1 102.5
1992..................... 1.42 2.2 97.0
1993..................... 1.66 2.5 95.4
1994..................... 1.92 2.9 98.3
1995..................... 2.10 3.2 103.0
1996..................... 2.25 3.4 107.4*
Source: Japan Productivity Center; Bureau of Statistics Management and
Coordination Agency
________________
* Average of the first, second and third quarters of 1996.
</TABLE>
21
<PAGE>
WHOLESALE PRICE INDEX
(Base Year: 1990)
All Change from
Year Commodities Preceding Year
- ---- ----------- --------------
1985 110.4 (1.1)%
1986 100.3 (9.1)
1987 96.5 (3.8)
1988 95.6 (0.9)
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 (2.1)
1995 92.2 (0.9)
1996 92.8 0.7
Source: Bank of Japan
CONSUMER PRICE INDEX
Change from
Year General Preceding Year
- ---- ------- --------------
(Base Year: 1990)
1985 93.5 2.0%
1986 94.1 0.6
1987 94.2 0.1
1988 94.9 0.7
1989 97.0 2.3
1990 100.0 3.1
1991 103.3 3.3
(Base Year: 1995)
1992 98.2 1.8
1993 99.4 1.2
1994 100.1 0.7
1995 100.0 (0.1)
1996 100.1 0.1
Source: Bureau of Statistics Management and Coordination Agency
Currency Fluctuation. The International Equity Portfolio's investments
in Japanese securities will be denominated in yen and most income received by
the Portfolio from such investments will be in yen. However, the Portfolio's net
asset value will be reported, and distributions will be made, in U.S. dollars.
Therefore, a decline in the value of the yen relative to the U.S. dollar could
have an adverse effect on the value of the Portfolio's Japanese investments. The
following table presents the average exchange rates of Japanese yen for U.S.
dollars for the years shown:
22
<PAGE>
CURRENCY EXCHANGE RATES
Year Yen Per U.S. Dollar
---- -------------------
1985 (Y)238.47
1986 168.35
1987 144.60
1988 128.17
1989 138.07
1990 145.00
1991 134.59
1992 126.62
1993 111.18
1994 102.22
1995 94.07
1996 108.78
Source: Nikkei (Calendar Year, Closing Average, Inter-Bank Rates in Tokyo,
Spot)
On December 30, 1997, the rate of exchange was 130.13 Japanese yen per
U.S. dollar.
Geological Factors. The islands of Japan lie in the western Pacific
Ocean, off the eastern coast of the continent of Asia. Japan has in the past
experienced earthquakes and tidal waves of varying degrees of severity. The
risks of such phenomena, and the damage resulting therefrom, continue to exist.
On January 17, 1995, the Great Hanshin Earthquake killed over 5,000 people and
severely damaged the port of Kobe, Japan's largest container port. The
government has announced a $5.9 billion plan to repair the port and estimates
damage to the region at approximately $120 billion. However, the long-term
economic effects of the earthquake on the Japanese economy as a whole, and on
the Funds' investments, cannot be predicted.
Securities Markets. There are eight stock exchanges in Japan. Of
these, the Tokyo Stock Exchange is by far the largest, followed by the Osaka
Stock Exchange and the Nagoya Stock Exchange. These exchanges divide the market
for domestic stocks into two sections, with newly listed companies and smaller
companies assigned to the Second Section and larger companies assigned to the
First Section.
As of the end of 1996, there were 1,293 domestic companies listed on
the Tokyo Stock Exchange, first section, and 473 listed on the second section.
The following table sets forth the trading volume and value of
Japanese stocks on each of the eight Japanese stock exchanges for the years
shown.
<TABLE>
<CAPTION>
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
All Exchanges Tokyo Osaka Nagoya
------------------- ------------------- ------------------ ------------------
Year Volume Value Volume Value Volume Value Volume Value
---- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989........ 256,296 (Y)386,395 222,599 (Y)332,617 25,096 (Y)41,679 7,263 (Y)10,395
1990........ 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991........ 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992........ 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993........ 101,172 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1994........ 105,936 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1995........ 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1996........ 126,496 136,170 100,170 101,893 20,783 27,280 4,104 5,391
</TABLE>
<TABLE>
<CAPTION>
Kyoto Hiroshima Fukuoka Niigata Sapporo
---------------- ---------------- ---------------- ---------------- ----------------
Volume Value Volume Value Volume Value Volume Value Volume Value
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989..... 331 (Y)443 190 (Y)235 268 (Y)330 398 (Y)475 151 (Y)221
1990..... 416 770 169 261 203 405 245 334 195 286
1991..... 220 300 125 149 122 174 181 208 113 123
1992..... 225 322 110 136 139 129 163 178 149 129
1993..... 223 340 185 178 229 225 207 226 174 170
1994..... 447 562 256 312 578 669 250 299 267 296
1995..... 641 873 286 306 404 396 295 212 336 308
1996..... 358 600 257 250 300 297 231 196 290 263
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
</TABLE>
The following table sets forth the stock trading value of Japanese
stocks on the Tokyo Stock Exchange for the years shown.
<TABLE>
<CAPTION>
TOKYO STOCK EXCHANGE
STOCK TRADING VALUE
Year Total Daily Average High Low Turnover Ratio
---- ----- ------------- ---- --- --------------
(yen in millions)
<S> <C> <C> <C> <C> <C>
1985....................... (Y) 78,711,048 (Y) 276,179 (Y) 727,316 (Y) 110,512 44.7%
1986....................... 159,836,218 572,890 1,682,060 115,244 67.2
1987....................... 250,736,971 915,098 2,382,114 221,230 80.6
1988....................... 285,521,260 1,045,865 2,768,810 192,704 70.2
1989....................... 332,616,597 1,335,810 2,796,946 392,347 61.1
1990....................... 186,666,820 758,808 1,464,920 218,205 37.7
1991....................... 110,897,491 450,803 1,531,064 151,565 29.3
1992....................... 60,110,391 243,362 686,737 97,616 18.0
1993....................... 86,889,072 353,208 1,422,760 61,747 28.3
1994....................... 87,355,567 353,666 1,114,216 123,904 25.6
1995....................... 83,563,906 335,598 1,337,999 81,884 23.1
1996....................... 101,892,634 412,521 1,362,586 154,643 28.9
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
</TABLE>
Securities Indexes. The Tokyo Stock Price Index ("TOPIX") is a
composite index of all common stocks listed on the First Section of the Tokyo
Stock Exchange. TOPIX reflects the change in the aggregate market value of the
common stocks as compared to the
24
<PAGE>
aggregate market value of those stocks as of the close on January 4, 1968.
25
<PAGE>
The following table sets forth the high, low and year-end TOPIX for
the years shown.
TOPIX (Tokyo Stock Price Index)
(Jan. 4, 1968=100)
Year Year-end High Low
---- -------- ---- ---
1985 1,049.40 1,058.35 916.93
1986 1,556.37 1,583.35 1,025.85
1987 1,725.83 2,258.56 1,557.46
1988 2,357.03 2,357.03 1,690.44
1989 2,881.37 2,884.80 2,364.33
1990 1,733.83 2,867.70 1,523.43
1991 1,714.68 2,028.85 1,638.06
1992 1,307.66 1,763.43 1,102.50
1993 1,439.31 1,698.67 1,250.06
1994 1,559.09 1,712.73 1,445.97
1995 1,577.70 1,585.87 1,193.16
1996 1,470.94 1,551.76 1,448.45
Source: Tokyo Stock Exchange, Fact Book 1996; Tokyo Stock Exchange New York
As this index reflects, share prices of companies traded on Japanese
stock exchanges reached historical peaks (which were later referred to as the
"bubble") in 1989 and 1990. Afterwards stock prices decreased significantly,
reaching their lowest levels in the second half of 1992. There can be no
assurance that additional market corrections will not occur.
Below Investment Grade Securities. The Portfolios may invest in below
investment grade convertible debt and preferred securities and it is not
required to dispose of securities downgraded below investment grade subsequent
to acquisition by the Portfolios. Although the Post-Venture Capital Portfolio
may invest only in investment grade non-convertible debt securities (as
described in the Prospectuses), securities held by Private Funds (as described
in the Prospectuses relating to the Post-Venture Capital Portfolio) may be rated
below investment grade. While the market values of medium- and lower-rated
securities and unrated securities of comparable quality tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and lower-rated securities and unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and lower-rated securities and unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness.
The market for medium- and lower-rated and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
26
<PAGE>
The Trust may have difficulty disposing of certain of these securities
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, the Trust anticipates 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 valuing and
calculating a Portfolio's 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. A Portfolio may incur additional
expenses 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.
Securities of Small Companies (Small Company Growth and Post-Venture
Capital Portfolios). The Small Company Growth and Post-Venture Capital
Portfolio's investments involve considerations that are not applicable to
investing in securities of established, larger-capitalization issuers, including
reduced and less reliable information about issuers and markets, less stringent
accounting standards, illiquidity of securities and markets, higher brokerage
commissions and fees and greater market risk in general. In addition, securities
of smaller companies may involve greater risks since these securities may have
limited marketability and, thus, may be more volatile.
Special Situation Companies (Emerging Markets, Small Company Growth
and Post-Venture Capital Portfolios). The Emerging Markets, Small Company Growth
and Post-Venture Capital Portfolios' investments involve considerations that are
not applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent accounting standards, illiquidity of securities and
markets, higher brokerage commissions and fees and greater market risk in
general.
Each Portfolio may invest in the securities of "special situation
companies" involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved
27
<PAGE>
favorably, would improve the value of the company's stock. If the actual or
prospective situation does not materialize as anticipated, the market price of
the securities of a "special situation company" may decline significantly. The
Portfolio believes, however, that if Warburg analyzes "special situation
companies" carefully and invests in the securities of these companies at the
appropriate time, the Portfolio may achieve capital growth. There can be no
assurance, however, that a special situation that exists at the time the
Portfolio makes its investment will be consummated under the terms and within
the time period contemplated.
Non-Diversified Status (Emerging Markets and Small Company Growth
Portfolios). The Emerging Markets and Small Company Growth Portfolios are
classified as non-diversified within the meaning of the 1940 Act, which means
that each Portfolio is not limited by such Act in the proportion of its assets
that it may invest in securities of a single issuer. The Portfolios' investments
will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Code. See "Additional Information Concerning
Taxes." To qualify, the Portfolio will comply with certain requirements,
including limiting its investments so that at the close of each quarter of the
taxable year (i) not more than 25% of the market value of its total assets will
be invested in the securities of a single issuer, and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Portfolio will not own more than 10% of the outstanding voting securities of a
single issuer.
Investment Policies of the Emerging Markets Portfolio Only
- ----------------------------------------------------------
Loan Participations and Assignments. The Emerging Markets Portfolio
may invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a foreign government (a "Borrower") and one or more
financial institutions ("Lenders"). The majority of the Emerging Markets
Portfolio's investments in Loans are expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in the
Portfolio having a contractual relationship only with the Lender, not with the
Borrower. The Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
Borrower. In connection with purchasing Participations, the Emerging Markets
Portfolio generally will have no right to enforce compliance by the Borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the Borrower, and the Portfolio may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, the Portfolio will assume the credit risk of both the Borrower and
the Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the Borrower. The Emerging Markets Portfolio will acquire Participations
only if the Lender interpositioned between the Portfolio and the Borrower is
determined by Warburg to be creditworthy.
When the Portfolio purchases Assignments from Lenders, the Portfolio
will acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Portfolio as the purchaser of an
28
<PAGE>
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
There are risks involved in investing in Participations and
Assignments. The Portfolio may have difficulty disposing of them because there
is no liquid market for such securities. The lack of a liquid secondary market
will have an adverse impact on the value of such securities and on the
Portfolio's ability to dispose of particular Participations or Assignments when
necessary to meet the Portfolio's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the Borrower.
The lack of a liquid market for Participations and Assignments also may make it
more difficult for the Portfolio to assign a value to these securities for
purposes of valuing the Portfolio's portfolio and calculating its net asset
value.
Mortgage-Backed Securities. The Emerging Markets Portfolio may invest
in mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or certain
foreign 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 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.
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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 Emerging Markets 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 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.
Zero Coupon Securities. The Emerging Markets Portfolio may invest in
"zero coupon" U.S. Treasury, foreign government and U.S. and foreign corporate
convertible and nonconvertible debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and custodial
receipts or certificates of participation representing interests in such
stripped debt obligations and coupons. A zero coupon security pays no interest
to its holder prior to maturity. Accordingly, such securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. The Portfolio anticipates that it will not normally hold zero coupon
securities to maturity. Federal tax law requires that a holder of a zero coupon
security accrue a portion of the discount at which the security was purchased as
income each year, even though the holder receives no interest payment on the
security during the year. Such accrued
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<PAGE>
discount will be includible in determining the amount of dividends the Portfolio
must pay each year and, in order to generate cash necessary to pay such
dividends, the Portfolio may liquidate portfolio securities at a time when it
would not otherwise have done so.
Stand-By Commitments. The Emerging Markets Portfolio may acquire
"stand-by commitments" with respect to securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the Portfolio's option
specified securities at a specified price. The Portfolio's right to exercise
stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by the Portfolio may also be referred to as "put" options. A stand-by
commitment is not transferable by the Portfolio, although the Portfolio can sell
the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. The Portfolio intends to enter into stand-by commitments only with
brokers, dealers and banks that, in the opinion of Warburg, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, Warburg will periodically review relevant financial information
concerning the issuer's assets, liabilities and contingent claims. The Portfolio
will acquire stand-by commitments only in order to facilitate portfolio
liquidity and does not intend to exercise its rights under stand-by commitments
for trading purposes.
The amount payable to the Portfolio upon its exercise of a stand-by
commitment is normally (i) the Portfolio's acquisition cost of the securities
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date during
that period.
The Portfolio expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolio may pay for a stand-by commitment
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding stand-by commitments held in the Portfolio's
portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
The Portfolio would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by the Portfolio would be valued at zero in determining net asset
value. Where the Portfolio paid any consideration directly or indirectly for a
stand-by commitment, its cost would be reflected as unrealized depreciation for
the period during which the commitment was held by the Portfolio. Stand-by
commitments would not affect the average weighted maturity of the Portfolio's
portfolio. The Portfolio currently anticipates that it will not invest more than
5% of its net assets in stand-by commitments.
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Investment Policies of the Post-Venture Capital Portfolio Only
- --------------------------------------------------------------
Private Funds. Although investments in Private Funds offer the
opportunity for significant capital gains, these investments involve a high
degree of business and financial risk that can result in substantial losses in
the portion of the Post-Venture Capital Portfolio's portfolio invested in these
investments. Among these are the risks associated with investment in companies
in an early stage of development or with little or no operating history,
companies operating at a loss or with substantial variation in operation results
from period to period, companies with the need for substantial additional
capital to support expansion or to maintain a competitive position, or companies
with significant financial leverage. Such companies may also face intense
competition from others including those with greater financial resources or more
extensive development, manufacturing, distribution or other attributes, over
which the Portfolio will have no control.
Interests in the Private Funds in which the Post-Venture Capital
Portfolio may invest will be subject to substantial restrictions on transfer
and, in some instances, may be non-transferable for a period of years. Private
Funds may participate in only a limited number of investments and, as a
consequence, the return of a particular Private Fund may be substantially
adversely affected by the unfavorable performance of even a single investment.
Certain of the Private Funds in which the Portfolio may invest may pay their
investment managers a fee based on the performance of the Private Fund, which
may create an incentive for the manager to make investments that are riskier or
more speculative than would be the case if the manager was paid a fixed fee.
Private Funds are not registered under the 1940 Act and, consequently, are not
subject to the restrictions on affiliated transactions and other protections
applicable to regulated investment companies. The valuation of companies held by
Private Funds, the securities of which are generally unlisted and illiquid, may
be very difficult and will often depend on the subjective valuation of the
managers of the Private Funds, which may prove to be inaccurate. Inaccurate
valuations of a Private Fund's portfolio holdings may affect the Portfolio's net
asset value calculations. Private Funds in which the Portfolio invests will not
borrow to increase the amount of assets available for investment or otherwise
engage in leverage.
Other Investment Limitations
- ----------------------------
The investment limitations numbered 1 through 10 may not be changed
without the affirmative vote of the holders of a majority of a Portfolio's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more of
the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 11 through 15
may be changed by a vote of the Board at any time.
A Portfolio may not:
1. Borrow money except that the Portfolio may (a) borrow from banks
for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Portfolio may not exceed 30% of the value of the
Portfolio's total assets at the time of such borrowing. For purposes of this
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restriction, short sales, the entry into currency transactions, options, futures
contracts, options on futures contracts, forward commitment transactions and
dollar roll transactions that are not accounted for as financings (and the
segregation of assets in connection with any of the foregoing) shall not
constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. For the International Equity and Post-Venture Capital Portfolios
only, purchase the securities of any issuer, if as a result more than 5% of the
value of the Portfolio's total assets would be invested in the securities of
such issuer, except that this 5% limitation does not apply to U.S. Government
Securities and except that up to 25% of the value of the Portfolio's total
assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Portfolio may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
5. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Portfolio may invest in (a)
securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. For the International Equity, Emerging Markets and Small Company
Growth Portfolios only, make short sales of securities or maintain a short
position, except that the Portfolio may maintain short positions in forward
currency contracts, options, futures contracts and options on futures contracts
and make short sales "against the box".
8. Purchase securities on margin, except that the Portfolio may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Portfolio may purchase and
sell futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis and, with respect to the Emerging Markets Portfolio, enter into stand-by
commitments.
10. Issue any senior security except as permitted in these investment
limitations.
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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 10%
of the value of the Portfolio's net assets.
15. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
General. If a percentage limitation (other than the percentage
limitation set forth in investment restriction No. 1 above) is adhered to at the
time of an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of the Portfolio's assets will not constitute a violation of such restriction.
Portfolio Valuation
- -------------------
The Prospectus discusses the time at which the net asset value of each
Portfolio is determined for purposes of sales and redemptions. The following is
a description of the procedures used by each Portfolio in valuing its assets.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an 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. The valuation of
short sales of securities, which are not traded on a national exchange, will be
at the mean of bid and asked prices. Amortized cost involves valuing a portfolio
instrument at its initial cost and thereafter assuming a constant amortization
to maturity of an discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes
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<PAGE>
fair value as determined by the Board. Amortized cost involves valuing a
portfolio instrument at its initial cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. The amortized
cost method of valuation may also be used with respect to other debt obligations
with 60 days or less remaining to maturity. In determining the market value of
portfolio investments, the Portfolio may employ outside organizations (a
"Pricing Service") which may use a matrix formula or other objective method that
takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of the Trust under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Securities, options and futures contracts for which market quotations are not
available and certain other assets of the Portfolio will be valued at their fair
value as determined in good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its delegates may value a
security at fair value if it determines that such security's value determined by
the methodology set forth above does not reflect its fair value.
Private Funds (Post-Venture Capital Portfolio). Private Funds are
initially valued at cost (i.e., the actual dollar amount invested). Thereafter,
Private Funds are valued at the prices set forth in periodic reports received by
Abbott Capital Management, LLC, the Portfolio's sub-investment adviser
("Abbott"), from the Private Funds. These reports are generally made quarterly.
Neither Abbott nor the Portfolio will monitor interim changes in the value of
portfolio holdings of the Private Funds. As a result, these changes will not be
taken into account by the Portfolio in calculating its net asset value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which the Portfolio's net asset value is not calculated. As a
result, calculation of the Portfolio's net asset value may not take place
contemporaneously with the determination of the prices of certain portfolio
securities used in such calculation. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of regular trading on the NYSE will not be reflected in the Portfolios'
calculation of net asset value, in which case an adjustment may be made by the
Board or its delegates. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the
prevailing rate as quoted by a Pricing Service. If such quotations are not
available, the rate of exchange will be determined in good faith pursuant to
consistently applied procedures established by the Board.
Portfolio Transactions
- ----------------------
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Private
Funds may be purchased directly from the issuer or may involve a broker or
placement agent. Other purchases and sales may be effected on a securities
exchange or
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<PAGE>
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a Portfolio to underwriters of
newly issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or mark-down.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. Purchases
of Private Funds through a broker or placement agent will involve a commission
or other fee. 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. Government Securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
Except for the Post-Venture Capital Portfolio's investments in
Private Funds, which will be managed by Abbott, Warburg will select specific
portfolio investments and effect transactions for each Portfolio and in doing so
seeks to obtain the overall best execution of portfolio transactions. In
evaluating prices and executions, Warburg will consider the factors it deems
relevant, which may include the breadth of the market in the security, the price
of the security, the financial condition and execution capability of a broker or
dealer and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. Warburg may, in its discretion, effect
transactions in portfolio securities with dealers who provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to a Portfolio and/or other accounts over which Warburg
exercises investment discretion. Warburg may place portfolio transactions with a
broker or dealer with whom it has negotiated a commission that is in excess of
the commission another broker or dealer would have charged for effecting the
transaction if Warburg determines in good faith that such amount of commission
was reasonable in relation to the value of such brokerage and research services
provided by such broker or dealer viewed in terms of either that particular
transaction or of the overall responsibilities of Warburg. Research and other
services received may be useful to Warburg in serving both the Portfolios and
its other clients and, conversely, research or other services obtained by the
placement of business of other clients may be useful to Warburg in carrying out
its obligations to the Portfolios. Research may include furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities;
furnishing seminars, information, analyses and reports concerning issuers,
industries, securities, trading markets and methods, legislative developments,
changes in accounting practices, economic factors and trends and portfolio
strategy; access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance evaluation
and technical measurement services and quotation services; and products and
other services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and accessories
that deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to Warburg's own
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<PAGE>
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.
The following table details amounts paid by each Portfolio in
commissions to broker-dealers for execution of portfolio transactions during the
indicated fiscal year ended December 31.
Portfolio Year Commissions
- --------- ---- -----------
International Equity Portfolio 1995 $ 224,678
1996 $ 1,056,276
Small Company Growth Portfolio 1995 $ 94,028
1996 $ 386,387
Post-Venture Capital Portfolio 1995 ---
1996 $ 5,237
The Emerging Markets Portfolio had not yet commenced operations at
December 31, 1996, and therefore, no brokerage commissions were paid by this
Portfolio.
Investment decisions for each Portfolio concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg or, in the case of the Post-Venture Capital Portfolio, Abbott. Such
other investment clients may invest in the same securities as a Portfolio. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which Warburg or, in
the case of the Post-Venture Capital Portfolio, Abbott, believes to be equitable
to each client, including the Portfolios. In some instances, this investment
procedure may adversely affect the price paid or received by a Portfolio or the
size of the position obtained or sold for a Portfolio. To the extent permitted
by law, Warburg may aggregate the securities to be sold or purchased for a
Portfolio with those to be sold or purchased for such other investment clients
in order to obtain best execution.
Any portfolio transaction for a Portfolio may be executed through
Counsellors Securities Inc., the Trust's distributor ("Counsellors Securities"),
if, in 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. No portfolio transactions have been executed through Counsellors Securities
since the commencement of each Portfolio's operations. In no instance will
portfolio securities be purchased from or sold to Warburg or Counsellors
Securities or any affiliated person of such companies.
Transactions for the Portfolios may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Portfolios will deal directly with the dealers who make
a market in the securities involved, except in
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<PAGE>
those circumstances where better prices and execution are available elsewhere.
Such dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve brokerage
commissions. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options.
Each Portfolio may participate, if and when practicable, in bidding
for the purchase of securities for the Portfolio's portfolio directly from an
issuer in order to take advantage of the lower purchase price available to
members of such a group. A Portfolio will engage in this practice, however, only
when Warburg, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interest.
Portfolio Turnover
- ------------------
The Portfolios do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when a Portfolio
deems it desirable to sell or purchase securities. A Portfolio's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of its
portfolio securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by a Portfolio could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. The Emerging Markets, Small Company
Growth or Post-Venture Capital Portfolios' investment in special situation
companies could result in high portfolio turnover. To the extent that its
portfolio is traded for the short-term, the Portfolio will be engaged
essentially in trading activities based on short-term considerations affecting
the value of an issuer's stock instead of long-term investments based on
fundamental valuation of securities. Because of this policy, portfolio
securities may be sold without regard to the length of time for which they have
been held. Consequently, the annual portfolio turnover rate of the Emerging
Markets, Small Company Growth and Post-Venture Capital Portfolios may be higher
than mutual funds having similar objectives that do not invest in special
situation companies.
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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;
1737 Cambridge Street National Intelligence Council from
Cambridge, Massachusetts 02138 June 1995 until January 1997;
Director or Trustee of Circuit City
Stores, Inc. (Retail electronics
and appliances) and Phoenix Home
Life Mutual Insurance Company.
Donald J. Donahue (73).......................Trustee
27 Signal Road Chairman of Magma Copper Company
Stamford, Connecticut 06902 from December 1987 until December
1995; Chairman and Director of NAC
Holdings from September 1990-June
1993; Director of Chase Brass
Industries, Inc. since December
1994; Director of Pioneer
Companies, Inc. (chlor-alkali
chemicals) and predecessor
companies since 1990 and Vice
Chairman since December 1995.
Jack W. Fritz (70)...........................Trustee
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting,
Wilson, Wyoming 83014 Inc. and Fritz Communications
(developers and operators of radio
stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (67)..........................Chairman of the Board and Trustee
466 Lexington Avenue Vice Chairman and Director of
New York, New York 10017-3147 Warburg; Associated with Warburg
since 1970; Director of Counsellors
Securities, Chairman of the Board
and officer of other investment
companies advised by Warburg.
Thomas A. Melfe (65).........................Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan
New York, New York 10112 Leisure Newton & Irvine; Chairman
of the Board, Municipal Fund for
New York Investors, Inc.
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<PAGE>
Arnold M. Reichman* (49)....................Trustee
466 Lexington Avenue Managing Director, Chief Operating
New York, New York 10017-3147 and Assistant Secretary of Warburg;
Associated with Warburg since 1984;
Director, Secretary and Chief
Operating Officer of Counsellors
Securities. Director/Trustee of
other investment companies advised
by Warburg.
Alexander B. Trowbridge (68).................Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners,
Washington, DC 20004 Inc. (business consulting) from
January 1990-January 1994; 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;
New York, New York 10017-3147 Associated with Warburg since 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
New York, New York 10017-3147 Assistant Secretary of Warburg;
Associated with Warburg since 1984;
Treasurer of Counsellors
Securities; Vice President of other
investment companies advised by
Warburg.
Eugene P. Grace (46).........................Vice President and Secretary
466 Lexington Avenue Associated with Warburg since April
New York, New York 10017-3147 1994; Attorney-at-law from
September 1989-April 1994; life
insurance agent, New York Life
Insurance Company from 1993-1994;
Vice President, Chief Compliance
Officer and Assistant Secretary of
Counsellors Securities; Vice
President and Secretary of other
investment companies advised by
Warburg.
______________________
* Indicates a Trustee who is an "interested person" of the Trust as defined
in the 1940 Act.
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Howard Conroy (43)...........................Vice President and Chief Financial
466 Lexington Avenue Officer
New York, New York 10017-3147 Associated with Warburg since 1992;
Vice President, Treasurer and Chief
Financial Officer of other
investment companies advised by
Warburg.
Daniel S. Madden, CPA (31)...................Treasurer and Chief Accounting
466 Lexington Avenue Officer
New York, New York 10017-3147 Associated with Warburg since 1995;
Associated with BlackRock Financial
Management, Inc. from September
1994 to October 1996; Associated
with BEA Associates from April 1993
to September 1994; Associated with
Ernst & Young LLP from 1990 to
1993. Treasurer and Chief
Accounting Officer of other
investment companies advised by
Warburg.
Janna Manes (30) ............................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.
41
<PAGE>
Trustees' Compensation
- ----------------------
Total Total Compensation from
Name of Director Compensation from all Investment Companies
Trust Managed by Warburg+*
---------------- ----------------- ------------------------
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $1,500 $46,000
Donald J. Donahue $1,500 $46,000
Jack W. Fritz $1,500 $46,000
Thomas A. Melfe $1,500 $46,000
Alexander B. Trowbridge $1,500 $46,000
_________________________
+ Amounts shown are estimates of future payments to be made in the fiscal
year ending December 31, 1997 pursuant to existing arrangements.
* Each Trustee also serves as a Director or Trustee of 24 other investment
companies advised by Warburg.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg,
and, accordingly, they receive no compensation from the Trust or any other
investment company managed by Warburg.
As of April 1, 1997, no Trustees or officers of the Trust owned any of the
outstanding shares of the Portfolios.
Portfolio Managers
- ------------------
International Equity and Emerging Markets Portfolios. Mr. Richard H.
King, Portfolio Manager of the International Equity Portfolio and Co-Portfolio
Manager of the Emerging Markets Portfolio, is also Portfolio Manager of Warburg
Pincus International Equity Fund and the International Equity Portfolio of
Warburg Pincus Institutional Fund, Inc. and a Co-Portfolio Manager of Warburg
Pincus Emerging Markets Fund, Warburg Pincus Japan OTC Fund, Warburg Pincus
Managed EAFE(R) Countries Fund and the Emerging Markets Portfolio of Warburg
Pincus Institutional Fund, Inc. From 1968 to 1982, he worked at W.I. Carr Sons &
Company (Overseas), a leading international brokerage firm. He resided in the
Far East as an investment analyst from 1970 to 1977, became director, and later
relocated to the U.S. where he became founder and president of W.I. Carr
(America), based in New York. From 1982 to 1984 Mr. King was a director in
charge of the Far East equity investments at N.M. Rothschild International Asset
Management, a London merchant bank. In 1984 Mr. King became chief investment
officer and director for all international investment strategy with Fiduciary
Trust Company International S.A., in London. He managed an EAFE mutual fund
(FTIT) from 1985 to 1986 which grew from $3 million to over $100 million during
this two-year period. Mr. King earned a B.A. degree from Durham University in
England.
42
<PAGE>
Mr. P. Nicholas Edwards, Associate Portfolio Manager and Research
Analyst of the International Equity Portfolio, is also Portfolio Manager of
Warburg Pincus Japan Growth Fund and the Japan Growth Portfolio of Warburg
Pincus Institutional Fund, Inc., Co-Portfolio Manager and Research Analyst of
Warburg Pincus International Equity Fund, Co-Portfolio Manager of Warburg Pincus
Managed EAFE(R) Countries Fund and Associate Portfolio Manager and Research
Analyst of the International Equity Portfolio of Warburg Pincus Institutional
Fund, Inc. Prior to joining Warburg in August 1995, Mr. Edwards was a director
at Jardine Fleming Investment Advisers, Tokyo. He was a vice president of Robert
Fleming Inc. in New York City from 1988 to 1991. Mr. Edwards earned M.A. degrees
from Oxford University and Hiroshima University in Japan.
Mr. Vincent J. McBride, Co-Portfolio Manager of the International
Equity and Emerging Markets Portfolios, is also an Associate Portfolio Manager
and Research Analyst of Warburg Pincus Emerging Markets Fund, Warburg Pincus
International Equity Fund and the International Equity Portfolio and the
Emerging Markets Portfolio of Warburg Pincus Institutional Fund, Inc. and
Associate Portfolio Manager of Warburg Pincus Managed EAFE(R) Countries Fund.
Prior to joining Warburg in 1994, Mr. McBride was an international equity
analyst at Smith Barney Inc. from 1993 to 1994 and at General Electric
Investment Corporation from 1992 to 1993. He was also a portfolio
manager/analyst at United Jersey Bank from 1989 to 1992 and a portfolio manager
at First Fidelity Bank from 1987 to 1989. Mr. McBride earned a B.S. degree from
the University of Delaware and an M.B.A. degree from Rutgers University.
Mr. Harold W. Ehrlich, Associate Portfolio Manager and Research
Analyst of the International Equity and Emerging Markets Portfolios, is also
Co-Portfolio Manager of Warburg Pincus Managed EAFE(R) Countries Fund, an
Associate Portfolio Manager and Research Analyst of Warburg Pincus Emerging
Markets Fund, Warburg Pincus International Equity Fund and the International
Equity and Emerging Markets Portfolios of Warburg Pincus Institutional Fund,
Inc. Prior to joining Warburg in February 1995, Mr. Ehrlich was a senior vice
president, portfolio manager and analyst at Templeton Investment Counsel Inc.
from 1987 to 1995. He was a research analyst and assistant portfolio manager at
Fundamental Management Corporation from 1985 to 1986, and a research analyst at
First Equity Corporation of Florida from 1983 to 1985. Mr. Ehrlich earned a
B.S.B.A. degree from University of Florida and earned his Chartered Financial
Analyst designation in 1990.
Small Company Growth and Post-Venture Capital Portfolios. Ms.
Elizabeth B. Dater, Co-Portfolio Manager of the Small Company Growth and
Post-Venture Capital Portfolios is also Co-Portfolio Manager of Warburg Pincus
Emerging Growth Fund, Warburg Pincus Post-Venture Capital Fund, Warburg Pincus
Global Post-Venture Capital Fund and the Small Company Growth and Post-Venture
Capital Portfolios of Warburg Pincus Institutional Fund, Inc. Prior to joining
Warburg in 1978, she was a vice president of Research at Fiduciary Trust Company
of New York and an institutional sales assistant at Lehman Brothers. Ms. Dater
has been a regular panelist on Maryland Public Television's "Wall Street Week"
since 1976. Ms. Dater earned a B.A. degree from Boston University in
Massachusetts.
Mr. Stephen J. Lurito, Co-Portfolio Manager of the Small Company
Growth
43
<PAGE>
and Post-Venture Capital Portfolios, is also Portfolio Manager of
Warburg Pincus Small Company Growth Fund and Co-Portfolio Manager of Warburg,
Pincus Emerging Growth Fund, Warburg Pincus Post-Venture Capital Fund and the
Small Company Growth and Post-Venture Capital Portfolios of Warburg Pincus
Institutional Fund, Inc. Mr. Lurito has been with Warburg since 1987. Prior to
that he was a research analyst at Sanford C. Bernstein & Company, Inc. Mr.
Lurito earned a B.A. degree from the University of Virginia and a M.B.A. from
The Wharton School, University of Pennsylvania.
Robert S. Janis and Christopher M. Nawn are Associate Portfolio
Managers and Research Analysts for the Post-Venture Capital Portfolio. Mr. Janis
and Mr. Nawn are also Associate Portfolio Managers and Research Analysts for
Warburg Pincus Post-Venture Capital Fund, Warburg Pincus Global Post-Venture
Capital Fund and the Post-Venture Capital Portfolio of Warburg Pincus
Institutional Fund, Inc. Mr. Janis has been with Warburg since October 1994,
before which time he was a vice president and senior research analyst at U.S.
Trust Company of New York. Mr. Nawn has been with Warburg since September 1994,
before which time he was a senior sector analyst and portfolio manager at the
Dreyfus Corporation.
Raymond L. Held and Gary H. Solomon, investment managers and general
partners of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Abbott also acts as sub-investment adviser for Warburg Pincus
Post-Venture Capital Fund, Warburg Pincus Global Post-Venture Capital Fund and
the Post-Venture Capital Portfolio of Warburg Pincus Institutional Fund, Inc.
Investment Adviser and Co-Administrators
- ----------------------------------------
Warburg serves as investment adviser to the Portfolios, Abbott serves
as sub-investment adviser to the Post-Venture Capital Portfolio, and Counsellors
Funds Service, Inc. ("Counsellors Service") and PFPC serve as co-administrators
to the Trust pursuant to separate written agreements (the "Advisory Agreements,"
the "Counsellors Service Co-Administration Agreements" and the "PFPC
Co-Administration Agreements," respectively). The services provided by, and the
fees payable by the Trust to, Warburg under the Advisory Agreements, Counsellors
Service under the Counsellors Service Co-Administration Agreements and PFPC
under the PFPC Co-Administration Agreements are described in the Prospectus.
Advisory Fees earned by Warburg
- -------------------------------
(portions of fees waived, if any, are noted in
parentheses next to the amount earned)*
Fiscal year ended Fiscal year ended
December 31, 1995 December 31, 1996
----------------- -----------------
International Equity Portfolio $120,130 ($47,206) $2,217,681 ($79,157)
Small Company Growth Portfolio $218,618 ($47,601) $2,100,487 ($10,689)
Post-Venture Capital Portfolio** -- -- $6,696 ($6,696)
_____________________
* During the fiscal year ended December 31, 1995, Warburg also reimbursed
expenses of
44
<PAGE>
$39,973 and $8,512 to International Equity Portfolio and the Small Company
Growth Portfolio, respectively. During the fiscal period ended December 31,
1996, Warburg also reimbursed expenses of $15,007 to the Post-Venture
Capital Portfolio.
** From its investment advisory fee, Warburg pays Abbott a sub-investment
advisory fee for its services to the Post-Venture Capital Portfolio. No
compensation is paid by the Post-Venture Capital Portfolio to Abbott for
its sub-investment advisory services.
Co-Administration Fees earned by PFPC
- --------------------------------------
(portions of fees waived, if any, are
noted in parentheses next to the amount earned)
Fiscal year ended Fiscal year ended
December 31, 1995 December 31, 1996
----------------- -----------------
International Equity Portfolio $14,416 ($5,665) $263,565 ($2,836)
Small Company Growth Portfolio $24,291 ($5,289) $233,388 ($1,188)
Post-Venture Capital Portfolio -- -- $536 ($536)
Co-Administration Fees earned by Counsellors Service
- ----------------------------------------------------
Fiscal year ended Fiscal year ended
December 31, 1995 December 31, 1996
----------------- -----------------
International Equity Portfolio $12,013 $221,792
Small Company Growth Portfolio $24,291 $233,388
Post-Venture Capital Portfolio -- $536
The Emerging Markets Portfolio had not yet commenced operations as of
December 31, 1996 and, consequently, paid no advisory fees or co-administration
fees with respect to the periods shown above.
Custodian and Transfer Agent
- ----------------------------
PNC Bank, National Association ("PNC") serves as custodian of the U.S.
assets of the International Equity, Small Company Growth and Post-Venture
Capital Portfolios. State Street Bank and Trust Company ("State Street") serves
as custodian of the U.S. assets of the Emerging Markets Portfolio and the
non-U.S. assets of each 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 each Portfolio, (ii) holds and transfers portfolio
securities on account of each Portfolio, (iii) makes receipts and disbursements
of money on behalf of each Portfolio, (iv) collects and receives all income and
other payments and distributions on account of each Portfolio's portfolio
securities held by it and (v) makes periodic reports to the Board concerning the
Trust's 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
45
<PAGE>
relevant 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 each
Portfolio, (ii) addresses and mails all communications by the Trust to record
owners of Portfolio shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board concerning the transfer agent's operations with
respect to the Trust. State Street has delegated to Boston Financial Data
Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, Boston, Massachusetts 02171.
Organization of the Trust
- -------------------------
The Trust was organized as an unincorporated Massachusetts business
trust under the name "Warburg, Pincus Trust."
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of a Portfolio.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from a
Portfolio's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the relevant Portfolio would be unable to meet
its obligations, a possibility that Warburg believes is remote and immaterial.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
relevant Portfolio. The Trustees intend to conduct the operations of the Trust
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Trust.
All shareholders of a Portfolio, upon liquidation, will participate
ratably in the Portfolio's net assets. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
As described in the Prospectus, shares of the Portfolios may not be
purchased or redeemed by individual investors directly 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 a Portfolio an investment option
for Plan participants. The offering price of each Portfolio's shares is equal to
its per share net asset value. Additional information on how to purchase and
redeem a Portfolio's shares and how such shares are priced is included in the
Prospectus under
46
<PAGE>
"Net Asset Value."
Under the 1940 Act, a Portfolio may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A Portfolio may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, a Portfolio may make
payment wholly or partly in securities or other investment instruments which may
not constitute securities as such term is defined in the applicable securities
laws. If a redemption is paid wholly or partly in securities or other property,
a shareholder would incur transaction costs in disposing of the redemption
proceeds. The Trust intends to comply with Rule 18f-1 promulgated under the 1940
Act with respect to redemptions in kind.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally affecting
the Trust and its shareholders is intended to be only a summary and is not
intended as a substitute for careful tax planning by prospective shareholders.
Shareholders are advised to consult the sponsoring Participating Insurance
Company separate account prospectus or the Plan documents or other informational
materials supplied by Plan sponsors and their own tax advisers with respect to
the particular tax consequences to them of an investment in a Portfolio.
Each Portfolio intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Internal Revenue Code
of 1986, as amended (the "Code"). To so qualify, a Portfolio must, among other
things: (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities, loans and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; and (b) diversify its holdings so that, at the
end of each quarter of the Portfolio's taxable year, (i) at least 50% of the
market value of the Portfolio's assets is represented by cash, securities of
other regulated investment companies, U.S. Government securities and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the Portfolio's assets and not greater than 10%
of the outstanding voting securities of such issuer and (ii) not more than 25%
of the value of its assets is invested in the securities (other than U.S.
Government Securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that the Portfolio controls and are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. Each Portfolio expects that all of its foreign currency
gains will be directly related to its principal business of investing in stocks
and securities.
47
<PAGE>
In addition, each Portfolio intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the Code, each Portfolio will be required to diversify its investments
so that on the last day of each calendar quarter no more than 55% of the value
of its assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any three
investments and no more than 90% is represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For the purposes of Section 817(h), obligations of the United States Treasury
and each U.S. government 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 Portfolios will be able to operate as currently described, or
that the Trust will not have to change the investment goal or investment
policies of a Portfolio. While a Portfolio's investment goal is fundamental and
may be changed only by a vote of a majority of the Portfolio's outstanding
shares, the Board reserves the right to modify the investment policies of a
Portfolio as necessary to prevent any such prospective rules and regulations
from causing a Variable Contract owner to be considered the owner of the shares
of the Portfolio underlying the separate account.
A Portfolio's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures 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 realized by the Portfolio (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of income to the
Portfolio and defer Portfolio losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require a Portfolio to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they were closed out) and (b)
may cause the Portfolio to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. Each Portfolio
will monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of the Portfolio as a regulated investment company.
Investments by the Emerging Markets Portfolio in zero coupon
securities may create special tax consequences. Zero coupon securities do not
make interest payments, although a portion of the difference between a zero
coupon security's face value and its purchase price is imputed as income to the
Portfolio each year even though the Portfolio receives no cash distribution
until maturity. Under the U.S. federal tax laws, the Portfolio
48
<PAGE>
will not be subject to tax on this income if it pays dividends to its
shareholders substantially equal to all the income received from, or imputed
with respect to, its investments during the year, including its zero coupon
securities. These dividends ordinarily will constitute taxable income to the
shareholders of the Portfolio.
As described in the Prospectus, because shares of a Portfolio may only
be purchased through Variable Contracts and Plans, it is anticipated that
dividends and distributions will be exempt from current taxation if left to
accumulate within the Variable Contracts or Plans.
Investment in Passive Foreign Investment Companies
- --------------------------------------------------
If a Portfolio purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the
Portfolio may be subject to federal income tax on a portion of an "excess
distribution" or gain from the disposition of the shares, even though the income
may have to be distributed by the Portfolio to its shareholders, the Variable
Contracts and Plans. In addition, gain on the disposition of shares in a PFIC
generally is treated as ordinary income even though the shares are capital
assets in the hands of the Portfolio. Certain interest charges may be imposed on
the Portfolio with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
A Portfolio may be eligible to elect to include in its gross income
its share of earnings of a PFIC on a current basis. Generally, the election
would eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Portfolio compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Portfolio. On October 9, 1997, the Ways and
Means Committee of the U.S. Congress approved technical corrections legislation
that would treat PFICs as pass-through entities for purposes of applying the 20%
rate to the portion of a PFIC's long-term gain attributable to assets held more
than 18 months.
Recently, legislation was enacted that provides a mark-to-market
election for regulated investment companies effective for taxable years
beginning after December 31, 1997. This election would result in a Portfolio
being treated as if it had sold and repurchased all of the PFIC stock at the end
of each year. In this case, the Portfolio would report gains as ordinary income
and would deduct losses as ordinary losses to the extent of previously
recognized gains. The election, once made, would be effective for all subsequent
taxable years of the Portfolio, unless revoked with the consent of the IRS. By
making the election, a Portfolio could potentially ameliorate the adverse tax
consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. The Portfolio may have to distribute this "phantom" income and
gain to satisfy its distribution requirement and to avoid imposition of the 4%
excise tax. Each Portfolio will make the appropriate tax elections, if possible,
and take any additional steps that are necessary to mitigate the effect of these
rules.
49
<PAGE>
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return in
advertisements or in reports and other communications to shareholders. The
aggregate total return for the fiscal periods ended December 31, 1996, were as
follows (performance figures calculated without the waiver of fees by a
Portfolio's service provider(s), if any, are noted in parentheses):
One-Year Since Inception (Date)
-------- ----------------------
International Equity Portfolio 9.98% (9.95%) 18.01% (17.77%)
(6/30/95)
Small Company Growth Portfolio 13.91% (13.91%) 42.50% (42.40%)
(6/30/95)
Post-Venture Capital Portfolio --- -2.40%* (-2.60%*)
(9/30/96)
________________________
* Non-annualized.
The Emerging Markets Portfolio had not yet commenced operations at
December 31, 1996, and accordingly, no performance information is available for
this Portfolio.
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.
A Portfolio may advertise, from time to time, comparisons of its
performance with that of one or more other mutual funds with similar investment
objectives. A Portfolio may advertise average annual calendar-year-to-date and
calendar quarter returns, which are calculated according to the formula set
forth in the preceding paragraph, except that the relevant measuring period
would be the number of months that have elapsed in the current calendar year or
most recent three months, as the case may be. Investors should note that this
performance may not be representative of the Portfolio's total return in longer
market cycles.
A Portfolio's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and operating expenses
allocable to it. As described above, total return is based on historical
earnings and is not intended to indicate future performance. Consequently, any
given performance quotation should not be considered as representative of
performance for any specified period in the future. Performance information may
be useful as a basis for comparison with other investment alternatives.
50
<PAGE>
However, a Portfolio's performance will fluctuate, unlike certain bank deposits
or other investments which pay a fixed yield for a stated period of time.
Performance quotations for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan, which would reduce the returns
described in this section. See the Prospectus, "Performance."
Warburg believes that a diversified portfolio of international equity
securities, when combined with a similarly diversified portfolio of domestic
equity securities, tends to have a lower volatility than a portfolio composed
entirely of domestic securities. Furthermore, international equities have been
shown to reduce volatility in single asset portfolios regardless of whether the
investments are in all domestic equities or all domestic fixed-income
instruments, and research has indicated that volatility can be significantly
decreased when international equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International (EAFE)
Europe, Australasia and Far East Index (the "EAFE(R) Index"), has equaled or
exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S&P 500 Index") in 14 of the last 25
years. The following table compares annual total returns of the EAFE Index and
the S&P 500 Index for the calendar years shown.
EAFE(R) Index vs. S&P 500 Index
1972-1996
Annual Total Return+
Year EAFE(R)Index S&P 500 Index
---- ------------ -------------
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 20.26
1996 4.40 34.11
51
<PAGE>
- -----------------
+ Without reinvestment of dividends.
* The MS-EAFE(R)Index has outperformed the S&P 500 Index 14 out of the last
25 years.
Source: Morgan Stanley Capital International; Bloomberg Financial Markets
The quoted performance information shown above is not intended to
indicate the future performance of the International Equity Portfolio.
Advertising or supplemental sales literature relating to the Portfolio may
describe the percentage decline from all-time high levels for certain foreign
stock markets. It may also describe how the Portfolio differs from the EAFE(R)
Index in composition.
INDEPENDENT ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal offices
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for the Trust. The financial statements for the
Portfolios that are incorporated by reference in this Statement of Additional
Information have been audited by Coopers & Lybrand, and have been included
herein in reliance upon the report of such firm of independent accountants given
upon their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of March 31, 1997, the name, address and percentage ownership of
each person that owned of record 5% or more of a Portfolio's outstanding shares
were as follows. None of the persons listed below is the beneficial owner of
these shares.
International Equity Nationwide Variable Account II ("Nationwide") 87.54%
c/o IPO Portfolio Accounting
P.O. Box 182029,
Columbus, OH 43218-2029
Equitable Life Insurance Company of Iowa 8.27%
Separate Account A,
604 Locust Street,
Des Moines, IA 50309-3705
Small Company Growth Nationwide 69.35%
IDS Life Insurance Company 25.67%
IDS Tower 10 T11/1646
Minneapolis, MN 55440
52
<PAGE>
Post-Venture Capital Nationwide 73.37
Pruco Life Flexible Premium 20.52%
Variable Annuity Account, 1111 Durham Avenue
South Plainfield, NJ 07080-2305
FINANCIAL STATEMENTS
The Trust's audited financial report dated December 31, 1996, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference with respect to all
information regarding the International Equity, Small Company Growth and
Post-Venture Capital Portfolios included therein. The Trust will furnish without
charge a copy of its annual report upon request by calling the Trust at (800)
369-2728.
The unaudited statement of assets and liabilities for the Emerging
Markets Portfolio dated as of April 1, 1997 accompanies this Statement of
Additional Information.
53
<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.
The following summarizes the ratings used by Moody's for corporate bonds:
A-1
<PAGE>
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
EMERGING MARKETS PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
as of April 1, 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 Emerging Markets
Portfolio - $.001 par value) applicable
$10.00
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F-1
