<PAGE> 1
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS FUNDS
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to these Warburg Pincus funds. Under
the terms of the arrangement, no immediate changes are planned to Warburg Pincus
investment portfolio managers and investment professionals.
The funds' governing Board and fund shareholders will be asked to vote on
the "assignment" of the funds' current investment advisory agreements with
Warburg Pincus Asset Management. Shareholders will receive more information
about the advisory agreement arrangements, but until then shareholders do not
need to take any action relating to their Warburg Pincus fund shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: March 22, 1999
<PAGE> 2
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST
-------------------------- INTERNATIONAL EQUITY
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]
<PAGE> 3
PROSPECTUS April 30, 1998
Warburg Pincus Trust (the "Trust") is an open-end management investment company
that currently offers five investment funds, one of which, the International
Equity Portfolio (the "Portfolio"), is offered pursuant to this Prospectus.
THE INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers. International investment
entails special risk considerations, including currency fluctuations, lower
liquidity, economic instability, political uncertainty and differences in
accounting methods. See "Risk Factors and Special Considerations."
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 available to investors without charge by calling the Trust at
(800) 369-2728. Warburg Pincus Funds maintains 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 4
THE PORTFOLIO'S EXPENSES
- --------------------------------------------------------------------------------
<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........................................... 1.00%
12b-1 Fees................................................ 0
Other Expenses*........................................... 0.36
----
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)*............................... 1.36%
====
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.................................................. $ 43
5 years.................................................. $ 74
10 years.................................................. $164
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses are based on actual expenses for the
fiscal year ended December 31, 1997. Operating expenses for the Portfolio were
reduced by .01% for the fiscal year ended December 31, 1997 as a result of
certain arrangements that served to offset portions of the Portfolio's
transfer agent expense. After reflecting these arrangements, "Total Portfolio
Operating Expenses (after fee waivers)" for the Portfolio were 1.35% for the
fiscal year ended December 31, 1997.
---------------------------
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%.
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for the two fiscal years ended December 31, 1997 and
the fiscal period ended December 31, 1995 has been derived from information
audited by Coopers & Lybrand L.L.P., independent accountants, whose report dated
February 9, 1998 is incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Portfolio is
contained in the Trust's annual report, dated December 31, 1997, copies of which
may be obtained without charge by calling the Trust at (800) 369-2728.
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
-------------------- Operations) through
1997 1996 December 31, 1995
-------- -------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.48 $10.65 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Income..................................... 0.10 0.00 0.03
Net Gain (Loss) from Securities and Foreign Currency
Related Items (both realized and unrealized)........... (0.37) 1.06 0.70
------ ------ ------------
Total from Investment Operations.......................... (0.27) 1.06 0.73
------ ------ ------------
Less Distributions:
Dividends from net investment income...................... (0.01) (0.06) (0.01)
Distributions in excess of net investment income.......... 0.00 (0.10) (0.07)
Distributions from realized gains......................... 0.00 (0.06) 0.00
Distributions in excess of realized gains................. (0.71) (0.01) 0.00
------ ------ ------------
Total Distributions....................................... (0.72) (0.23) (0.08)
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $10.49 $11.48 $10.65
====== ====== ============
Total Return................................................ (2.26%) 9.98% 7.30%+
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s)............................ $347,229 $298,218 $64,537
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 1.36%@ 1.36%@ 1.44%*
Net Investment Income..................................... 0.66% 0.64% 0.48%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.04% 0.77%*
Portfolio Turnover Rate..................................... 78.65% 30.82% 8.31%+
Average Commission Rate#.................................... $.0163 $0.0232 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balance is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.35% and 1.36% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
3
<PAGE> 6
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The International Equity Portfolio's investment objective is to seek long-
term capital appreciation. 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 diversified investment fund that pursues its investment
objective by investing primarily in a broadly diversified portfolio of equity
securities of companies, wherever organized, that in the judgment of Warburg
Pincus Asset Management, Inc., the Portfolio's investment adviser ("Warburg"),
have their principal business activities and interests outside of the United
States. The Portfolio will ordinarily invest substantially all of its
assets -- but no less than 65% of its total assets -- in common stocks, warrants
and securities convertible into or exchangeable for common stocks. Generally the
Portfolio will hold no less than 65% of its total assets in at least three
countries other than the United States. The Portfolio intends to be widely
diversified across securities of many corporations located in a number of
different countries. Warburg anticipates, however, that the Portfolio may from
time to time invest a significant portion of its assets in a single country such
as Japan, which may involve special risks. See "Risk Factors and Special
Considerations -- Japanese Investments" below. In appropriate circumstances,
such as when a direct investment by the Portfolio in the securities of a
particular country cannot be made or when the securities of an investment
company are more liquid than the underlying portfolio securities, the Portfolio
may, consistent with the provisions of the Investment Company Act of 1940, as
amended (the "1940 Act"), invest in the securities of closed-end investment
companies that invest in foreign securities.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The Portfolio may invest up to 35% of its total assets in
investment grade debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg.
Because the market value of debt obligations can be expected to vary inversely
to changes in prevailing interest rates, investing in debt obligations may
provide an opportunity for capital appreciation when interest rates are expected
to decline. The success of such a strategy is dependent upon Warburg's ability
to forecast accurately changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
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 events 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 U.S. and foreign investment grade debt
obligations, other securities of U.S. companies and in domestic and foreign
money market obligations, including repurchase agreements.
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, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by Warburg to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
4
<PAGE> 7
Repurchase Agreements. The Portfolio may enter into repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement,
the Portfolio would acquire any underlying security for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. The value of the
underlying securities will at all times be at least equal to the total amount of
the purchase obligation, including interest. The Portfolio bears a risk of loss
in the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period while 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. U.S. government securities 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 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
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
- --------------------------------------------------------------------------------
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" and "Certain Investment Strategies" in this Prospectus.
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. For example, many investments in
emerging markets experienced significant declines in value due to political and
currency volatility in emerging market countries during the latter part of 1997.
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.
JAPANESE INVESTMENTS. The Portfolio may from time to time have a large
position in Japanese securities and, as a result, would be subject to general
economic and political conditions in Japan. Japan is largely dependent upon
foreign economies for raw materials. International trade is important to Japan's
economy, as exports provide the means to pay for many of the raw materials it
must import. Because of its large trade surpluses Japan has entered a
5
<PAGE> 8
difficult phase in its relations with certain trading partners, particularly
with respect to the United States, with whom the trade imbalance is the
greatest.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States.
Japan has a parliamentary form of government. Since mid-1993, there have been
several changes in leadership in Japan. What, if any, effect the current
political situation will have on prospective regulatory reforms in the Japanese
economy cannot be predicted. For additional information, see "Investment
Policies -- Japanese Investments" in the Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolio may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to the Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolio to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A Securities. The Board will carefully monitor any investments by the
Portfolio in Rule 144A Securities. The Board may adopt guidelines and delegate
to Warburg the daily function of determining and monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
The securities may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio. Further, companies whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. The Portfolio's
investment in illiquid securities is subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Portfolio's net assets could be adversely affected.
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 leveraging 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.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolio and its
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolio's other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolio nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolio's
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolio's foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Portfolio's other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolio's other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
6
<PAGE> 9
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
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 objective and policies. High
portfolio turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See "Dividends, Distributions and Taxes -- Taxes" below and "Investment
Policies -- Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the
Portfolio are placed by Warburg with broker-dealers that it selects, including
Counsellors Securities Inc., the Portfolio's distributor ("Counsellors
Securities"). The Portfolio may utilize Counsellors Securities in connection
with a purchase or sale of securities when Warburg believes that the charge for
the transaction does not exceed usual and customary levels and when doing so is
consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
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. Detailed
information concerning the Portfolio's strategies and their related risks is
contained below and in the Statement of Additional Information.
FOREIGN SECURITIES. The Portfolio will ordinarily hold no less than 65% of its
total assets in foreign securities. There are certain risks involved in
investing in securities of companies and governments of foreign nations which
are in addition to the usual risks inherent in U.S. investments. These risks
include those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, the lack of uniform accounting, auditing and financial
reporting standards and other regulatory practices and requirements that are
often generally less rigorous than those applied in the United States. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Portfolio, including the withholding of dividends. Foreign
securities may be subject to foreign government taxes that would reduce the net
yield on such securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Investment in foreign
securities will also result in higher operating expenses due to the cost of
converting foreign currency into U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
U.S. exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with 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 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.
7
<PAGE> 10
Securities Options and Stock Index Options. The Portfolio may write put and
call options on up to 25% of the net asset value of the stock and debt
securities in its portfolio and will realize fees (referred to as "premiums")
for granting the rights evidenced by the options. The Portfolio may also 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 10% of its total assets to purchase
exchange-listed and OTC put and call options on stock indexes, and may also
write such options. A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. The Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of the Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although the Portfolio is limited
in the amount of assets that may be invested in futures transactions, there is
no overall limit on the percentage of the Portfolio's assets that may be at risk
with respect to futures activities.
Currency Exchange Transactions. The Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract. An option on a foreign currency
operates similarly to an option on a security. Risks associated with currency
forward contracts and purchasing currency options are similar to those described
in this Prospectus for futures contracts and securities and stock 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 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
8
<PAGE> 11
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 a
Portfolio's borrowing restrictions. Where swaps are entered into for other than
hedging purposes, the Portfolio will segregate a net 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. The Portfolio may engage in options, futures, currency
transactions and swaps for, among other reasons, hedging purposes. 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 and 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 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 for a security the Portfolio does not wish to sell
immediately. The Portfolio will deposit, in a segregated account with its
custodian or a qualified sub-custodian, 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
- --------------------------------------------------------------------------------
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.
9
<PAGE> 12
MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. The Trust employs Warburg as investment adviser to the
Portfolio. Warburg, subject to the control of the Trust's officers and the
Board, manages the investment and reinvestment of the assets of the Portfolio in
accordance with the Portfolio's investment objective and stated investment
policies. Warburg makes investment decisions for the Portfolio and places orders
to purchase or sell securities on behalf of the Portfolio. Warburg also employs
a support staff of management personnel to provide services to the Portfolio and
furnishes the Portfolio with office space, furnishings and equipment.
For the services provided by Warburg, the Portfolio pays Warburg a fee
calculated at an annual rate of 1.00% 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 February 28, 1998,
Warburg managed approximately $20.9 billion of assets, including approximately
$11.9 billion of investment company assets. Incorporated in 1970, Warburg
indirectly is controlled by Warburg, Pincus & Co. ("WP&Co."), which has no
business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
PORTFOLIO MANAGERS. Richard H. King, Harold W. Ehrlich and Vincent J. McBride
serve as Co-Portfolio Managers and Nancy Nierman serves as Associate Portfolio
Manager of the Portfolio. Mr. King has been a Portfolio Manager or Co-Portfolio
Manager of the Portfolio since its inception and Mr. Ehrlich, Mr. McBride and
Ms. Nierman have served the Portfolio in their respective capacities since April
1998. (Mr. Ehrlich and Mr. McBride served as Associate Portfolio Managers and
Research Analysts of the Portfolio from its inception to April 1998.)
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989.
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. Mr. McBride is a Senior
Vice President of Warburg and has been with Warburg since 1994. Prior to joining
Warburg, Mr. McBride was an international equity analyst at Smith Barney Inc.
Ms. Nierman is a Vice President of Warburg and has been with Warburg since April
1996, before which time she was an analyst with Fiduciary Trust Company
International.
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 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.
CUSTODIANS. PNC Bank, National Association ("PNC"), serves as custodian of the
Portfolio's U.S. assets. State Street Bank and Trust Company ("State Street")
serves as international custodian of the Portfolio's non-U.S. assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103. State Street's principal business
address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolio. It has delegated
most of its responsibilities to Boston Financial Data Services, Inc. ("BFDS"),
an affiliated service company. 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
10
<PAGE> 13
("Services Organizations") with whom it enters into agreements up to .40% (the
"Service Fee") of the annual average value of accounts maintained by such
Organizations with a 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 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 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
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of the Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make the Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select
the Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolio are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by the
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of 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 with payment
for purchases to follow no later than the Portfolio's pricing on the next
business day. If payment for purchases is not received by such time, the
Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to the Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of the Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
The Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
The Portfolio may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect the Portfolio's
ability to achieve its investment objective. In such event, however, it is
anticipated that existing Variable Contract owners and Plan participants would
be permitted to continue to authorize investment in the Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for following instructions communicated by telephone
that it reasonably believes to be genuine. Reasonable procedures will be
employed on behalf of the Portfolio to confirm that instructions communicated by
telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
11
<PAGE> 14
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. The Portfolio declares dividends from its net investment
income 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 Internal Revenue Code of 1986, as amended (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.
Certain provisions of the Code may require that a gain recognized by the
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close the short sale. The
Portfolio's use of short sales may also affect the holding periods of certain
securities held by the Portfolio if such securities are "substantially
identical" to securities used by the Portfolio to close the short sale. The
Portfolio's short selling activities will not result in unrelated business
taxable income to a tax-exempt investor.
Dividends and interest received by the Portfolio may be subject to withholding
and other taxes imposed by foreign countries. However, tax conventions between
certain countries and the United States may reduce or eliminate such taxes.
Shareholders will bear the cost of foreign tax withholding in the form of
increased expenses to the Portfolio, but generally will not be able to claim a
foreign tax credit or deduction for foreign taxes paid by the Portfolio by
reason of the tax-deferred status of Variable Contracts.
Internal Revenue Service Requirements. The Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and on the preceding Friday or subsequent Monday when one of the holidays falls
on a Saturday or Sunday, respectively. The net asset value per share of the
Portfolio generally changes every day.
The net asset value per share of the Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the closing
value on the date on which the valuation is made. Options and futures contracts
will be valued similarly. Debt obligations that mature in 60 days or less from
the valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value. Securities, options and futures contracts for which market quotations are
not readily available and other assets will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, the Portfolio may advertise its average annual total return
over various periods of time. These total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
12
<PAGE> 15
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.
The Portfolio or a Participating Insurance Company or Plan sponsor may compare
the Portfolio's performance 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 Morgan Stanley Capital International Europe,
Australasia, Far East ("EAFE") Index and/or other indexes prepared by Morgan
Stanley relating to securities represented in the Portfolio, the Salomon Russell
Global Equity Index, the FT-Actuaries World Indices (jointly compiled by The
Financial Times, Ltd., Goldman, Sachs & Co. and NatWest Securities Ltds.) and
the S&P 500 Index, all of which are unmanaged indexes; or (iii) other
appropriate indexes of investment securities or with data developed by Warburg
derived from such indexes. The Portfolio or a Participating Insurance Company
may also include evaluations published by nationally recognized ranking services
and by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney,
The Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various periods of time. In
addition, the Portfolio or a Participating Insurance Company or Plan sponsor may
from time to time compare the Portfolio's expense ratio to that of investment
companies with similar objectives and policies, based on data generated by
Lipper Analytical Services, Inc. or similar investment services that monitor
mutual funds.
In reports or other communications to investors or in advertising, 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; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Portfolio with
respect to relevant market and industry benchmarks. The Portfolio may also
discuss the continuum of risk and return relating to different investments and
the potential impact of international securities on a portfolio otherwise
composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws
of The Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of five series have been authorized, one of which 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.
13
<PAGE> 16
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 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 or on the Warburg Pincus Funds Web site at www.warburg.com.
------------------------------
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.
14
<PAGE> 17
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolio's Expenses................................. 2
Financial Highlights..................................... 3
Investment Objective and Policies........................ 4
Portfolio Investments.................................... 4
Risk Factors and Special Considerations.................. 5
Portfolio Transactions and Turnover Rate................. 7
Certain Investment Strategies............................ 7
Investment Guidelines.................................... 9
Management of the Portfolio.............................. 10
How to Purchase and Redeem Shares........................ 11
Dividends, Distributions and Taxes....................... 12
Net Asset Value.......................................... 12
Performance.............................................. 12
General Information...................................... 13
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRIEQ-1-0498
<PAGE> 18
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST
-------------------------- INTERNATIONAL EQUITY
PORTFOLIO
-------------------------- POST-VENTURE CAPITAL
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]
<PAGE> 19
PROSPECTUS April 30, 1998
Warburg Pincus Trust (the "Trust") is an open-end management investment company
that currently offers five investment funds, two of which are offered pursuant
to this Prospectus (the "Portfolios"):
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers. International investment
entails special risk considerations, including currency fluctuations, lower
liquidity, economic instability, political uncertainty and differences in
accounting methods. See "Risk Factors and Special Considerations."
The POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, an investment in the Portfolio involves certain
risks and may not be appropriate for all investors.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio 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 Portfolios. The Statement of Additional
Information is available to investors without charge by calling the Trust at
(800) 369-2728. Warburg Pincus Funds maintains 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 PORTFOLIOS 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 PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 20
THE PORTFOLIOS' EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Post-Venture
Portfolio Capital Portfolio
--------- -----------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 0 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees........................................... 1.00% 1.07%
12b-1 Fees................................................ 0 0
Other Expenses*........................................... 0.36% 0.33%
---- ----
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)*............................... 1.36%** 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 $ 14
3 years.................................................. $ 43 $ 44
5 years.................................................. $ 74 $ 77
10 years.................................................. $164 $168
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses for each Portfolio are based on actual
expenses for the fiscal year ending December 31, 1997, net of any fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Management Fees for the Port-Venture Capital Portfolio would equal 1.25%;
Other Expenses would equal .44% and Total Portfolio Operating Expenses would
equal 1.69%. The investment adviser and co-administrator have undertaken to
limit the Post-Venture Capital Portfolio's Total Portfolio Operating Expenses
to the limits shown in the table above through December 31, 1999.
** Operating expenses for the International Equity Portfolio were reduced by
.01% for the fiscal year ended December 31, 1997 as a result of certain
arrangements that served to offset portions of the Portfolio's transfer agent
expense. After reflecting these arrangements, "Total Portfolio Operating
Expenses (after fee waivers)" for the Portfolio were 1.35% for the fiscal
year ended December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
2
<PAGE> 21
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for each of the periods presented below has been
derived from information audited by Coopers & Lybrand L.L.P., independent
accountants, whose report dated February 9, 1998 is incorporated by reference in
the Statement of Additional Information. Further information about the
performance of the Portfolios is contained in the Trust's annual report, dated
December 31, 1997, copies of which may be obtained without charge by calling the
Trust at (800) 369-2728.
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
--------------------- Operations) through
1997 1996 December 31, 1995
-------- -------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.48 $10.65 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Income..................................... 0.10 0.00 0.03
Net Gain (Loss) from Securities and Foreign Currency
Related Items (both realized and unrealized)........... (0.37) 1.06 0.70
------ ------ ------------
Total from Investment Operations........................ (0.27) 1.06 .073
------ ------ ------------
Less Distributions:
Dividends from net investment income...................... (0.01) (0.06) (0.01)
Distributions in excess of net investment income.......... 0.00 (0.10) (0.07)
Distributions from realized gains......................... 0.00 (0.06) 0.00
Distributions in excess of realized gains................. (0.71) (0.01) 0.00
------ ------ ------------
Total Distributions..................................... (0.72) (0.23) (0.08)
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $10.49 $11.48 $10.65
====== ====== ============
Total Return................................................ (2.26)% 9.98% 7.30%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $347,229 $298,218 $64,537
Ratios to average daily net assets:
Operating expenses........................................ 1.36%@ 1.36%@ 1.44%*
Net investment income..................................... 0.66% 0.64% 0.48%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.04% 0.77%*
Portfolio Turnover Rate..................................... 78.65% 30.82% 8.31%+
Average Commission Rate#.................................... $.0163 $0.0232 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balance is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.35% and 1.36% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
3
<PAGE> 22
POST-VENTURE CAPITAL PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 30, 1996
For the (Commencement
Year Ended of Operations) through
December 31, 1997 December 31, 1996
----------------- ----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $9.76 $10.00
----------- -------------
Income from Investment Operations:
Net Investment Loss....................................... (0.08) 0.00
Net Gain (Loss) from Securities (both realized and
unrealized)............................................ 1.38 (0.24)
----------- -------------
Total from Investment Operations....................... 1.30 (0.24)
----------- -------------
NET ASSET VALUE, END OF PERIOD.............................. $11.06 $9.76
=========== =============
Total Return................................................ 13.34% (2.40%)+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $30,520 $12,400
Ratios to average daily net assets:
Operating expenses........................................ 1.40%@ 1.41%@*
Net investment income (loss).............................. (0.75%) .80%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements................................. 0.18% 4.16%
Portfolio Turnover Rate..................................... 238.12% 6.80%+
Average Commission Rate#.................................... $0.0548 $0.0491
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .00% and .01% for the year or period ended December
31, 1997 and 1996, respectively. The Portfolio's operating expense ratio
after reflecting these arrangements were 1.40% and 1.40% for the year or
period ended December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged.
4
<PAGE> 23
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
"Portfolio Investments" and "Certain Investment Strategies" for descriptions of
certain types of investments the Portfolios may make.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to seek long term
capital appreciation. The Portfolio is a diversified investment fund that
pursues its investment objective by investing primarily in a broadly diversified
portfolio of equity securities of companies, wherever organized, that in the
judgment of Warburg Pincus Asset Management, Inc., the Portfolios' investment
adviser ("Warburg"), have their principal business activities and interests
outside of the United States. The Portfolio will ordinarily invest substantially
all of its assets -- but no less than 65% of its total assets -- in common
stocks, warrants and securities convertible into or exchangeable for common
stocks. Generally the Portfolio will hold no less than 65% of its total assets
in a least three countries other than the United States. The Portfolio intends
to be widely diversified across securities of many corporations located in a
number of different countries. Warburg anticipates, however, that the Portfolio
may from time to time invest a significant portion of its assets in a single
country such as Japan, which may involve special risks. See "Risk Factors and
Special Considerations -- Japanese Investments" below. In appropriate
circumstances, such as when a direct investment by the International Equity
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), invest in the
securities of closed-end investment companies that invest in foreign securities.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
POST-VENTURE CAPITAL PORTFOLIO
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, such as investing in Private Funds (as defined
below), an investment in the Portfolio should be considered only for the
aggressive portion of an investor's portfolio and may not be appropriate for all
investors.
The investment objective of the Post-Venture Capital Portfolio is to seek
long-term growth of capital. The Portfolio is a diversified portfolio that
pursues an aggressive investment strategy. The Portfolio pursues its investment
objective by investing primarily in equity securities of companies considered by
Warburg to be in their post-venture capital stage of development. Although the
Portfolio may invest up to 10% of its assets in venture capital and other
investment funds, the Portfolio is not designed primarily to provide venture
capital financing. Rather, under normal market conditions, the Portfolio will
invest at least 65% of its total assets in equity securities of "post-venture
capital companies." A post-venture capital company is a company that has
received venture capital financing either (a) during the early stages of the
company's existence or the early stages of the development of a new product or
service or (b) as part of a restructuring or recapitalization of the company.
The investment of venture capital financing, distribution of such company's
securities to venture capital investors, or initial public offering ("IPO"),
whichever is later, will have been made within ten years prior to the
Portfolio's purchase of the company's securities.
Warburg believes that venture capital participation in a company's capital
structure can lead to revenue/earnings growth rates above those of older, public
companies such as those in the Dow Jones Industrial Average or the Fortune 500.
Venture capitalists finance start-up companies, companies in the early stages of
developing new products or services and companies undergoing a restructuring or
recapitalization, since these companies may not have access to conventional
forms of financing (such as bank loans or public issuances of stock). Venture
capitalists may hold substantial positions in companies that may have been
acquired at prices significantly below the initial public offering price. This
may create a potential adverse impact in the short-term on the market price of a
company's stock due to sales in the open market by a venture capitalist or
others who acquired the stock at lower prices prior to the company's IPO.
Warburg will consider the impact of such sales in selecting post-venture capital
investments. Venture capitalists may be individuals or funds organized by
venture capitalists which are typically offered only to large institutions, such
as pension funds and endowments, and certain accredited investors. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
Warburg has experience in researching smaller companies, companies in the
early stages of development and venture capital-financed companies. Its team of
analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 400 of the larger domestic
venture capital funds.
5
<PAGE> 24
Ms. Dater and Mr. Lurito have managed post-venture equity securities in separate
accounts for institutions since 1989 and currently manage over $1 billion of
such assets for institutions. The Portfolio will invest in securities of post-
venture capital companies that are traded on a national securities exchange or
in an organized over-the-counter market.
PRIVATE FUND INVESTMENTS. Up to 10% of the Post-Venture Capital Portfolio's
assets may be invested in United States or foreign private limited partnerships
or other investment funds ("Private Funds") that themselves invest in equity or
debt securities of (a) companies in the venture capital or post-venture capital
stages of development or (b) companies engaged in special situations or changes
in corporate control, including buyouts. In selecting Private Funds for
investment, Abbott Capital Management, LLC, the Portfolio's sub-investment
adviser with respect to Private Funds ("Abbott"), attempts to invest in a mix of
Private Funds that will provide an above average internal rate of return (i.e.,
the discount rate at which the present value of an investment's future cash
inflows (dividend income and capital gains) are equal to the cost of the
investment). Warburg believes that the Portfolio's investments in Private Funds
offer individual investors a unique opportunity to participate in venture
capital and other private investment funds, providing access to investment
opportunities typically available only to large institutions and accredited
investors. Although the Portfolio's investments in Private Funds are limited to
a maximum of 10% of the Portfolio's assets, these investments are highly
speculative and volatile and may produce gains or losses in this portion of the
Portfolio that exceed those of the Portfolio's other holdings and of more mature
companies generally.
Because Private Funds generally are investment companies for purposes of the
1940 Act, the Portfolio's ability to invest in them will be limited. In
addition, Portfolio shareholders will remain subject to the Portfolio's expenses
while also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Portfolio to dispose of interests in Private Funds is
very limited and will involve the risks described under "Risk Factors and
Special Considerations -- Non-Publicly Traded Securities; Rule 144A Securities."
In valuing the Portfolio's holdings of interests in Private Funds, the Portfolio
will be relying on the most recent reports provided by Abbott and by the Private
Funds themselves prior to calculation of the Portfolio's net asset value. These
reports, which are provided on an infrequent basis, often depend on the
subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "Net Asset Value." Debt
securities held by a Private Fund will tend to be rated below investment grade
and may be rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D
by Standard & Poor's Ratings Services ("S&P"). Securities in these ratings
categories are in payment default or have extremely poor prospects of attaining
any investment standing. For a discussion of the risks of investing in below
investment grade debt, see "Risk Factors and Special Considerations -- Below
Investment Grade Securities" below and "Investment Policies -- Below Investment
Grade Debt Securities" in the Statement of Additional Information. For a
discussion of the possible tax consequences of investing in foreign Private
Funds, see "Additional Information Concerning Taxes -- Investment in Passive
Foreign Investment Companies" in the Statement of Additional Information.
The Portfolio may also hold non-publicly traded equity securities of companies
in the venture and post-venture stages of development, such as those of closely
held companies or private placements of public companies. The portion of the
Portfolio's assets invested in these non-publicly traded securities will vary
over time depending on investment opportunities and other factors. The
Portfolio's illiquid assets, including interests in Private Funds and other
illiquid non-publicly traded securities, may not exceed 15% of net assets.
OTHER STRATEGIES. The Post-Venture Capital Portfolio may invest up to 35% of
its assets in exchange-traded and over-the-counter securities that do not meet
the definition of post-venture capital companies without regard to market
capitalization. The Portfolio's assets may be invested, directly or through
Private Funds, in securities of issuers engaged at the time of purchase in
"special situations," such as a restructuring or recapitalization; an
acquisition, consolidation, merger or tender offer; or a change in corporate
control or investment by a venture capitalist.
To attempt to reduce risk, the Portfolio will diversify its investments over a
broad range of issuers operating in a variety of industries. The Portfolio may
hold securities of companies of any size, and will not limit capitalization of
companies it selects to invest in. However, due to the nature of the venture
capital to post-venture cycle, the Portfolio anticipates that the average market
capitalization of companies in which it invests will be less than $1 billion at
the time of investment. Although the Portfolio will invest primarily in U.S.
companies, up to 20% of the Portfolio's assets may be invested in securities of
issuers located in any foreign country. Equity securities in which the Portfolio
will invest are common stock, preferred stock, warrants, securities convertible
into or exchangeable for common stock and partnership interests. The Portfolio
may engage in a variety of strategies to reduce risk or seek to enhance return,
including engaging in short selling (see "Certain Investment Strategies").
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The International Equity Portfolio may invest up to 35% of
its total assets in investment grade debt securities (other than money market
obligations) and preferred stocks that are not convertible into common stock
6
<PAGE> 25
for the purpose of seeking capital appreciation. The Post-Venture Capital
Portfolio may invest up to 20% of its total assets in investment grade 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 expected to decline. The
success of such a strategy is dependent upon Warburg's ability to accurately
forecast changes in interest rates. The market value of debt obligations may
also be expected to vary depending upon, among other factors, the ability of the
issuer to repay principal and interest, any change in investment rating and
general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated or its
rating may be reduced. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Portfolio should continue to hold the securities.
When Warburg believes that a defensive posture is warranted, each Portfolio
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
When such a defensive posture is warranted, the Emerging Markets Portfolio may
also invest temporarily without limit in other securities of U.S. companies.
MONEY MARKET OBLIGATIONS. Each Portfolio is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and 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 similar institutions)
that are high quality investments or, if unrated, deemed by Warburg to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Portfolios may 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, a
Portfolio would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Portfolio bears a risk of loss in
the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period in which the Portfolio seeks to assert this right. Warburg, acting under
the supervision of the Trust's Board of Trustees (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which each Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be beneficial
to the Portfolio and appropriate considering the factors of return and
liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or Warburg.
As a shareholder in any mutual fund, a Portfolio will bear its ratable share of
the mutual fund's expenses, including management fees, and will remain subject
to payment of the Portfolio's administrative fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Portfolio
may invest include: direct obligations of the U.S. Treasury, obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Portfolio may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of
7
<PAGE> 26
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 a 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. Each 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
- --------------------------------------------------------------------------------
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to each Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
EMERGING MARKETS. The International Equity 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. For example, many investments in emerging markets experienced
significant declines in value due to political and currency volatility in
emerging market countries during the latter part of 1997. 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.
JAPANESE INVESTMENTS. The International Equity Portfolio may from time to time
have a large position in Japanese securities and, as a result, would be subject
to general economic and political conditions in Japan. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of its large trade surpluses Japan has
entered a difficult phase in its relations with certain trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States.
Japan has a parliamentary form of government. Since mid-1993, there have been
several changes in leadership in Japan. What, if any, effect the current
political situation will have on prospective regulatory reforms on the economy
cannot be predicted. For additional information, see "Investment
Policies -- Japanese Investments" in the Statement of Additional Information.
SMALLER CAPITALIZATION AND EMERGING GROWTH COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth and small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers"), may involve greater risks than investing in larger, more
established companies since these securities may have limited marketability and,
thus, may be more volatile than securities of larger, more established companies
or the market averages in general. Because these issuers normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. These issuers may have limited product lines, markets or
financial resources and may lack management depth. In addition, these issuers
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 these issuers 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; or litigation which, if resolved
favorably, would improve the value of the companies' securities. Although
investing in securities of these companies 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
8
<PAGE> 27
investment in either Portfolio may involve a greater degree of risk than an
investment in other mutual funds that seek capital growth by investing in
better-known, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolios may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "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 each Portfolio's limitation on the purchase of illiquid
securities, unless the Board determines on an ongoing basis that an adequate
trading market exists for the security. In addition to an adequate trading
market, the Board will also consider factors such as trading activity,
availability of reliable price information and other relevant information in
determining whether a Rule 144A Security is liquid. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become uninterested for a time
in purchasing Rule 144A Securities. The Board will carefully monitor any
investments by the Portfolios 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 and interests
in Private Funds) may involve a high degree of business and financial risk and
may result in substantial losses. The securities may be less liquid than
publicly traded securities and a Portfolio may take longer to liquidate these
positions than would be the case for publicly traded securities. Although these
securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio. Further, companies whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. A Portfolio's investment
in illiquid securities is subject to the risk that should the Portfolio desire
to sell any of these securities when a ready buyer is not available at a price
that is deemed to be representative of their value, the value of the Portfolio's
net assets could be adversely affected.
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 leveraging 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.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade 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 ratings 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, these securities generally present a higher degree of credit risk.
The risk of loss due to default by such issuers is significantly greater because
these securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, a 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 a 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.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolios and their
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolios' other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolios nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolios'
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolios' foreign investments.
9
<PAGE> 28
The Warburg Service Providers anticipate that their systems and those of the
Portfolios' other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolios' other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. The
Portfolios will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
It is not possible to predict the Portfolios' turnover rate. High portfolio
turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See "Dividends, Distributions and Taxes -- Taxes" below and "Investment
Policies -- Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ("Counsellors Securities"). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Although there is no intention of doing so during the coming year, each
Portfolio is authorized to engage in the following investment strategies: (i)
lending portfolio securities and (ii) entering into reverse repurchase
agreements and dollar rolls. In addition, although each Portfolio may purchase
securities on a when-issued basis and sell securities for delayed delivery, the
International Equity Portfolio has no intention of doing so during the coming
year. Detailed information concerning the Portfolios' strategies and their
related risks is contained below and in the Statement of Additional Information.
FOREIGN SECURITIES. The International Equity Portfolio will ordinarily hold no
less than 65% of its total assets in foreign securities and the Post-Venture
Capital Portfolio may invest up to 20% of its total assets in the securities of
foreign issuers. There are certain risks involved in investing in securities of
companies and governments of foreign nations which are in addition to the usual
risks inherent in U.S. investments. These risks include those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
adverse political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers, the lack of
uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Portfolios,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians. The risks associated with investing in securities of non-U.S.
issuers are generally heightened for investments 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.
10
<PAGE> 29
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, each Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and, in the case of the International Equity
Portfolio, swaps. These strategies, commonly referred to as "derivatives," may
be used (i) for the purpose of hedging against a decline in value of a
Portfolio's current or anticipated portfolio holdings, (ii) as a substitute for
purchasing or selling portfolio securities or (iii) to seek to generate income
to offset expenses or increase return. TRANSACTIONS THAT ARE NOT CONSIDERED
HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE A PORTFOLIO'S
INVESTMENT RISK. Transaction costs and any premiums associated with these
strategies, and any losses incurred, will affect a Portfolio's net asset value
and performance. Therefore, an investment in a Portfolio may involve a greater
risk than an investment in other mutual funds that do not utilize these
strategies. A Portfolio's use of these strategies may be limited by position and
exercise limits established by securities and commodities exchanges and other
applicable regulatory authorities.
Securities Options and Stock Index Options. Each Portfolio may write put and
call options on up to 25% of the net asset value of the stock and debt
securities in its portfolio and will realize fees (referred to as "premiums")
for granting the rights evidenced by the options. Each Portfolio may also
utilize up to 10% of 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, each Portfolio may also utilize up to 10% of its total
assets to purchase exchange-listed and OTC put and call options on stock
indexes, and may also write such options. A stock index measures the movement of
a certain group of stocks by assigning relative values to the common stocks
included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited in
the amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of a Portfolio's assets that may be at risk with
respect to futures activities.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
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 International Equity 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
11
<PAGE> 30
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 International Equity 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 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 a 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. Each Portfolio may engage in options, futures,
currency transactions and swaps for, among other reasons, hedging purposes. 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, in the case of the International Equity Portfolio, 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. Each Portfolio will
engage in hedging transactions only when deemed advisable by Warburg, and
successful use of hedging transactions will depend on Warburg's ability to
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 a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. A Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
forward currency contracts; and, in the case of the International Equity
Portfolio, 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 necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of a
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
SHORT SELLING. The Post-Venture Capital Portfolio may from time to time sell
securities short. A short sale is a transaction in which the Portfolio sells
borrowed securities in anticipation of a decline in the market price of the
securities. Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested. The current market value of the securities sold short (excluding short
sales "against the box") will not exceed 10% of the Portfolio's assets.
To deliver the securities to the buyer, the Post-Venture Capital Portfolio
must arrange through a broker to borrow the securities and, in so doing, the
Portfolio becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Portfolio will
make a profit or incur a loss as a result of a short sale depending on whether
the price of the securities decreases or increases between the date of the short
sale and the date on which the Portfolio purchases the security to replace the
borrowed securities that have been sold. The amount of any loss would be
increased (and any gain decreased) by any premium or interest the Portfolio is
required to pay in connection with a short sale.
12
<PAGE> 31
The Post-Venture Capital Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by cash or liquid
securities deposited as collateral with the broker. In addition, the Portfolio
will place in a segregated account with its custodian or a qualified
subcustodian an amount of cash or liquid securities equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short and (ii) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). Until it replaces the borrowed securities, the Portfolio will
maintain the segregated account daily at a level so that (a) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market value
of the securities sold short and (b) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time they
were sold short.
Short Sales Against the Box. Each Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an equal
amount of the securities sold short or owns preferred stocks or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one "against the box," may be entered into by a Portfolio to, for
example, lock in a sale price for a security the Portfolio does not wish to sell
immediately. The Portfolio will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or convertible
or exchangeable preferred stocks or debt securities in connection with short
sales against the box. Not more than 10% of the Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Post-Venture
Capital Portfolio may utilize up to 20% of its total assets to purchase
securities on a when-issued basis and purchase or sell securities on a delayed-
delivery basis. In these transactions, payment for and delivery of the
securities occurs beyond the regular settlement dates. The Portfolio will not
enter into a when-issued or delayed-delivery transactions for the purpose of
leverage, but may sell the right to acquire a when-issued security prior to its
acquisition or dispose of its right to deliver or receive securities in a
delayed-delivery transaction if Warburg deems it advantageous to do so. The
payment obligation and the interest rate that will be received in when-issued
and delayed-delivery transactions are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the prices of such securities may be
higher or lower than the prices available in the market on the dates when the
investments are actually delivered to the buyers.
The Portfolio will establish a segregated account with its custodian
consisting of cash or liquid securities in an amount equal to the amount of its
when-issued and delayed-delivery purchase commitments and will segregate the
securities underlying commitments to sell securities for delayed delivery.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that each Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS. The Trust employs Warburg as investment adviser to each
Portfolio. The Post-Venture Capital Portfolio also employs Abbott as its
sub-investment adviser. Warburg, subject to the control of the Trust's officers
and the Board, manages the investment and reinvestment of the assets of each
Portfolio in accordance with the Portfolio's investment objective and stated
investment policies. Warburg makes investment decisions for each Portfolio,
places orders to purchase or sell securities on behalf of the Portfolio and,
with respect to the Post-Venture Capital Portfolio, supervises the activities of
Abbott. Warburg also employs a support staff of management personnel to provide
services to the Portfolios and furnishes each Portfolio with office space,
furnishings and equipment. Abbott, in accordance with the investment objective
and policies of the Post-Venture Capital Portfolio, makes investment decisions
for the Portfolio regarding investments in Private Funds, effects transactions
in interests in
13
<PAGE> 32
Private Funds on behalf of the Portfolio and assists in administrative functions
relating to investments in Private Funds.
For the services provided by Warburg, (i) the International Equity Portfolio
pays Warburg a fee calculated at an annual rate of 1.00% of the Portfolio's
average daily net assets and (ii) the Post-Venture Capital Portfolio pays
Warburg a fee calculated at an annual rate of 1.25% of the Portfolio's average
daily net assets, out of which Warburg pays Abbott for sub-investment advisory
services. Warburg and the Trust's co-administrators may voluntarily waive a
portion of their fees from time to time and temporarily limit the expenses to be
borne by a Portfolio.
Warburg. 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 February 28,
1998, Warburg managed approximately $20.9 billion of assets, including
approximately $11.9 billion of investment company assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has
no business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
Abbott. Abbott is an independent specialized investment firm with assets under
management of approximately $2.3 billion. Abbott is a registered investment
adviser which concentrates on venture capital, buyout and special situations
partnership investments. Abbott's management team provides full-service private
equity programs to clients. The predecessor firm to Abbott was organized in 1986
as a Delaware limited partnership and converted to a Delaware limited liability
company effective July 1, 1997. Abbott's principal business address is 50 Rowes
Wharf, Suite 240, Boston, Massachusetts 02110-3328.
PORTFOLIO MANAGERS
International Equity Portfolio. Richard H. King, Harold W. Ehrlich and Vincent
J. McBride serve as Co-Portfolio Managers and Nancy Nierman serves as Associate
Portfolio Manager of the International Equity Portfolio. Mr. King has been a
Portfolio Manager or Co-Portfolio Manager of the Portfolio since inception, and
Mr. Ehrlich, Mr. McBride and Ms. Nierman have served the Portfolio in their
respective capacities since April 1998. (Mr. Ehrlich and Mr. McBride served as
Associate Portfolio Managers and Research Analysts of the Portfolio from its
inception to April 1998.)
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989.
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. Mr. McBride, a Senior
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.
Ms. Nierman is a Vice President of Warburg and has been with Warburg since April
1996, before which time she was an analyst with Fiduciary Trust Company
International.
Post-Venture Capital Portfolio. The Co-Portfolio Managers of the Post-Venture
Capital Portfolio have been Elizabeth B. Dater and Stephen J. Lurito since its
inception. Robert S. Janis and Christopher M. Nawn, have been Associate
Portfolio Managers and Research Analysts for the Post-Venture Capital Portfolio
since its inception.
Ms. Dater is a Managing Director of Warburg and has been a portfolio manager
of Warburg since 1978. Mr. Lurito is a Managing Director of Warburg and has been
with Warburg since 1987. Mr. Janis is a Senior Vice President of Warburg and 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 is also
a Senior Vice President of Warburg and 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 Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Mr. Held and Mr. Gray have been associated with Abbott and its
predecessor firm since 1986 and 1989, respectively.
CO-ADMINISTRATORS. The Portfolios employ Counsellors Funds Service, Inc., a
wholly owned subsidiary of Warburg ("Counsellors Service"), as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Portfolios, including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolios
and their various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation the International Equity
14
<PAGE> 33
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, and the Post-Venture Capital Portfolio pays PFPC a fee calculated at an
annual rate of .10% of the first $500 million in average daily net assets, .075%
of the next $1 billion in average daily net assets, and .05% of average daily
net assets over $1.5 billion. PFPC has its principal offices at 400 Bellevue
Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ("PNC"), serves as custodian of
each Portfolio's U.S. assets and State Street Bank and Trust Company ("State
Street") serves as custodian of each Portfolio's non-U.S. assets. Like PFPC, PNC
is a subsidiary of PNC Bank Corp. and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103. State Street's principal
business address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. It has
delegated most of its responsibilities to Boston Financial Data Services, Inc.
("BFDS"), an affiliated service company. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolios. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ("Service Organizations") with whom it enters into agreements up to .40%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with a 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 a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of Portfolio shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select a
Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolios are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by a
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of a Portfolio on any day that the
Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of one or both Portfolios during the morning of the next business day
with payment for purchases to follow no later than the Portfolio's pricing on
the next business day. If payment for purchases is not received by such time,
the Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to a Portfolio. Redemption proceeds will normally be
15
<PAGE> 34
wired to the Participating Insurance Company the business day following receipt
of the redemption order, but in no event later than seven days after receipt of
such order.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
Portfolio may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect that Portfolio's
ability to achieve its investment objective. In such event, however, it is
anticipated that existing Variable Contract owners and Plan participants would
be permitted to continue to authorize investment in such Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for the following instructions communicated by
telephone that it reasonably believes to be genuine. Reasonable procedures will
be employed on behalf of the Portfolio to confirm that instructions communicated
by telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. Each Portfolio declares dividends from its net investment
income annually. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Distributions of net
realized long-term and short-term capital gains are declared annually and, as a
general rule, will be distributed or paid after the end of the fiscal year in
which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the relevant Portfolio at net asset value
unless, in the case of a Variable Contract, a Participating Insurance Company
elects to have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a "regulated investment
company" within the meaning of the Internal Revenue Code of 1986, as amended
(the "Code"). Each Portfolio intends to distribute all of its net income and
capital gains to its shareholders (the Variable Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital gain
distributions from a Portfolio are taxable, if at all, to the Participating
Insurance Companies and Plans and will be exempt from current taxation of the
Variable Contract owner or Plan participant if left to accumulate within the
Variable Contract or Plan. Generally, withdrawals from Variable Contracts or
Plans may be subject to ordinary income tax and, if made before age 59 1/2, a
10% penalty tax.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close the short sale. A
Portfolio's use of short sales may also affect the holding periods of certain
securities held by the Portfolio if such securities are "substantially
identical" to securities used by the Portfolio to close the short sale. The
Portfolios' short selling activities will not result in unrelated business
taxable income to a tax-exempt investor.
Special Tax Matters Relating to the International Equity Portfolio. Dividends
and interest received by the Portfolio may be subject to withholding and other
taxes imposed by foreign countries. However, tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
will bear the cost of foreign tax withholding in the form of increased expenses
to the Portfolio, but generally will not be able to claim a foreign tax credit
or deduction for foreign taxes paid by the Portfolio by reason of the
tax-deferred status of Variable Contracts.
Internal Revenue Service Requirements. Each Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
16
<PAGE> 35
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, 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 each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the closing
value on the date on which the valuation is made. Options and futures contracts
will be valued similarly. Debt obligations that mature in 60 days or less from
the valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value. Investments in Private Funds initially will be valued at cost and,
thereafter, will be valued in accordance with periodic reports received by
Abbott from the Private Funds (generally quarterly). Because the issuers of
securities held by Private Funds are generally not subject to the reporting
requirements of the federal securities laws, interim changes in value of
underlying holdings of Private Funds will not generally be reflected in the
Post-Venture Capital Portfolio's net asset value. However, Warburg will report
to the Board of Trustees information about certain holdings of Private Funds
that, in its judgment, could have a material impact on the valuation of a
Private Fund. The Board of Trustees will take these reports into account in
valuing Private Funds. Securities, options and futures contracts for which
market quotations are not readily available and other assets, including Private
Funds, will be valued at their fair value as determined in good faith pursuant
to consistently applied procedures established by the Board. Further information
regarding valuation policies is contained in the Statement of Additional
Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, each Portfolio may advertise its average annual total
return over various periods of time. These total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gain distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of a
Portfolio's return over a longer market cycle. Each Portfolio may also advertise
its aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in share prices and assuming reinvestment of
dividends and distributions). Aggregate and average total returns may be shown
by means of schedules, charts or graphs and may indicate various components of
total return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
Investors should note that return figures are based on historical earnings and
are not intended to indicate future performance. The Statement of Additional
Information describes the method used to determine the total return. Current
total return figures may be obtained by calling (800) 369-2728.
A Portfolio or a Participating Insurance Company or Plan sponsor may describe
the Portfolio's performance may be compared with (i) that of other mutual funds
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar investment services that monitor the performance of mutual funds or as
set forth in the publications listed below; (ii) in the case of the
International Equity Portfolio, with the Morgan Stanley Capital International
Europe, Australasia, Far East ("EAFE") Index and/or other indexes prepared by
Morgan Stanley relating to securities
17
<PAGE> 36
represented in the Portfolio, the Salomon Russell Global Equity Index, the
PT-Actuaries World Indices (jointly compiled by The Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltds.) and the S&P 500 Index, all of
which are unmanaged indexes; and, in the case of the Post-Capital Venture
Portfolio, with the Venture Capital 100 Index (compiled by Venture Capital
Journal), appropriate indexes prepared by Frank Russell Company relating to
securities represented in the Portfolio, and the S&P 500 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 Post-Venture Capital Portfolio may also make comparisons using data
and indexes compiled by the National Venture Capital Association, Venture-One
and Private Equity Analysts Newsletter and similar organizations and
publications. A Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various periods of time. In addition, each
Portfolio or a Participating Insurance Company or Plan sponsor may from time to
time compare the Portfolio's expense ratio to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio activity, which may include a discussion of significant portfolio
holdings; analysis of holdings by industry, country, credit quality and other
characteristics; and comparison and analysis of the Portfolio with respect to
relevant market and industry benchmarks. The Post-Venture Capital Portfolio may
discuss characteristics of venture capital financed companies and the benefits
expected to be achieved from investing in these companies. Each Portfolio may
also discuss the continuum of risk and return relating to different investments
and the potential impact of international securities on a portfolio otherwise
composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws
of The Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of five series have been authorized, two of which constitute the
interests in the Portfolios. The Board may classify or reclassify any of its
shares into one or more additional series without shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
Participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in a Portfolio may conflict. The Board will monitor
the Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in one or both Portfolios. As a result, a Portfolio may
be forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of a Portfolio to any Variable
18
<PAGE> 37
Contract or Plan or may suspend or terminate the offering of shares of a
Portfolio if such action is required by law or regulatory authority or is in the
best interests of the shareholders of the Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THIS PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
THE SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER MAY NOT LAWFULLY BE MADE.
19
<PAGE> 38
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolios' Expenses................................. 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 5
Portfolio Investments.................................... 6
Risk Factors and Special Considerations.................. 8
Portfolio Transactions and Turnover Rate................. 10
Certain Investment Strategies............................ 10
Investment Guidelines.................................... 13
Management of the Portfolios............................. 13
How to Purchase and Redeem Shares........................ 15
Dividends, Distributions and Taxes....................... 16
Net Asset Value.......................................... 17
Performance.............................................. 17
General Information...................................... 18
</TABLE>
[WARBURG PINCUS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRIPX-1-0498
<PAGE> 40
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST
----------------------- INTERNATIONAL EQUITY PORTFOLIO
----------------------- POST-VENTURE CAPITAL PORTFOLIO
----------------------- SMALL COMPANY GROWTH PORTFOLIO
Warburg Pincus Trust shares are not available directly to
individual investors but may be offered only through
certain insurance products and pension and retirement
plans.
[WARBURG PINCUS LOGO]
<PAGE> 41
PROSPECTUS April 30, 1998
Warburg Pincus Trust (the "Trust") is an open-end management investment company
that currently offers five investment funds, three of which are offered pursuant
to this Prospectus (the "Portfolios"):
THE INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers. International investment
entails special risk considerations, including currency fluctuations, lower
liquidity, economic instability, political uncertainty and differences in
accounting methods. See "Risk Factors and Special Considerations."
THE POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, an investment in the Portfolio involves certain
risks and may not be appropriate for all investors.
THE SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized domestic companies.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio 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 Portfolios. The Statement of Additional
Information is also available upon request and without charge by calling the
Trust at (800) 369-2728. Warburg Pincus Funds maintains 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 PORTFOLIOS 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 PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 42
THE PORTFOLIOS' EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Post-Venture Small Company
Equity Portfolio Capital Portfolio Growth Portfolio
---------------- ----------------- ----------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................... 0 0 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees........................................ 1.00% 1.07% 0.90%
12b-1 Fees............................................. 0 0 0
Other Expenses......................................... 0.36% 0.33% 0.25%
---------- ----------- ----------
Total Portfolio Operating Expenses (after fee waivers
and expense reimbursements)*.......................... 1.36%** 1.40% 1.15%**
========== =========== ==========
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 $ 14 $ 12
3 years.................................................. $ 43 $ 44 $ 37
5 years.................................................. $ 74 $ 77 $ 63
10 years.................................................. $164 $168 $140
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses for the Portfolios listed above are based
on actual expenses for the fiscal year ended December 31, 1997, net of any
fee waivers and/or expense reimbursements. Absent such waivers and/or
reimbursements, Management Fees for the Post-Venture Capital Portfolio would
have equalled 1.25%, Other Expenses would have equalled .44% and Total
Portfolio Operating Expenses would have equalled 1.69%. The investment
adviser and co-administrator have undertaken to limit the Post-Venture
Capital Portfolio's Total Portfolio Operating Expenses to the limits shown in
the table above through December 31, 1999.
** Operating expenses for each of the International Equity and Small Company
Growth Portfolios were reduced by .01% for the fiscal year ended December 31,
1997 as a result of certain arrangements that served to offset portions of
the Portfolios' respective transfer agent expense. After reflecting these
arrangements, "Total Portfolio Operating Expenses (after fee waivers)" for
the International Equity and Small Company Growth Portfolios were 1.35% and
1.14%, respectively, for the fiscal year ended December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
2
<PAGE> 43
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for each of the periods presented below has been
derived from information audited by Coopers & Lybrand L.L.P., independent
accountants, whose report dated February 9, 1998 is incorporated by reference in
the Statement of Additional Information. Further information about the
performance of the Portfolios is contained in the Trust's annual report, dated
December 31, 1997, copies of which may be obtained without charge by calling the
Trust at (800) 369-2728.
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
------------------- Operations) through
1997 1996 December 31, 1995
---- ---- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.48 $10.65 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Income (Loss).............................. 0.10 0.00 0.03
Net Gain (Loss) from Securities and Foreign Currency
Related Items (both realized and unrealized)........... (0.37) 1.06 0.70
------ ------ ------------
Total from Investment Operations.......................... (0.27) 1.06 0.73
------ ------ ------------
Less Distributions:
Dividends from Net Investment Income...................... (0.01) (0.06) (0.01)
Distributions in Excess of Net Investment Income.......... 0.00 (0.10) (0.07)
Distributions from Realized Gains......................... 0.00 (0.06) 0.00
Distributions in Excess of Realized Gains................. (0.71) (0.01) 0.00
------ ------ ------------
Total Distributions....................................... (0.72) (0.23) (0.08)
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $10.49 $11.48 $10.65
====== ====== ============
Total Return................................................ (2.26%) 9.98% 7.30%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $347,229 $298,218 $64,537
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 1.36%@ 1.36%@ 1.44%*
Net Investment Income..................................... 0.66% 0.64% 0.48%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.04% .77%*
Portfolio Turnover Rate................................... 78.65% 30.82% 8.31%+
Average Commission Rate#.................................. $0.0163 $0.0232 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expenses. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.35% and 1.36% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
3
<PAGE> 44
POST-VENTURE CAPITAL PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 30, 1996
For the (Commencement of
Year Ended Operations) through
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 9.76 $10.00
----------- ------------
Income from Investment Operations:
Net Investment Loss....................................... (0.08) 0.00
Net Gain (Loss) from Securities (both realized and
unrealized)............................................ 1.38 (0.24)
----------- ------------
Total from Investment Operations.......................... 1.30 (0.24)
----------- ------------
NET ASSET VALUE, END OF PERIOD.............................. $11.06 $ 9.76
=========== ============
Total Return................................................ 13.34% (2.40%)+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $30,520 $12,400
Ratios to Average Daily Net Assets:
Operating expenses........................................ 1.40%@ 1.41%@*
Net investment income (loss).............................. (0.75%) 0.80%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements................................. 0.18% 4.16%*
Portfolio Turnover Rate................................... 238.12% 6.80%+
Average Commission Rate#.................................. $0.0548 $0.0491
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. The arrangements resulted in a reduction to the
Portfolio's expenses by .00% and .01% for the year or period ended December
31, 1997 and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.40% and 1.40% for the year or period
ended December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged.
4
<PAGE> 45
SMALL COMPANY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
---------------------- Operations) through
1997 1996 December 31, 1995
---- ---- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $14.25 $12.51 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Loss....................................... (0.07) (0.06) (0.01)
Net Gain from Securities (both realized and unrealized)... 2.30 1.80 2.52
------ ------ ------------
Total from Investment Operations.......................... 2.23 1.74 2.51
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $16.48 $14.25 $12.51
====== ====== ============
Total Return................................................ 15.65% 13.91% 25.10%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $666,394 $339,398 $97,445
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 1.15%@ 1.16%@ 1.25%*
Net Investment Loss....................................... (0.56%) (0.66%) (0.36%)*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.01% 0.25%*
Portfolio Turnover Rate................................... 92.45% 101.50% 34.25%+
Average Commission Rate#.................................. $0.0550 $0.0538 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.14% and 1.16% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
5
<PAGE> 46
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
"Portfolio Investments" and "Certain Investment Strategies" for descriptions of
certain types of investments the Portfolios may make.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to seek long-term
capital appreciation. The Portfolio is a diversified investment fund that
pursues its investment objective by investing primarily in a broadly diversified
portfolio of equity securities of companies, wherever organized, that in the
judgment of Warburg Pincus Asset Management, Inc., the Portfolios' investment
adviser ("Warburg"), have their principal business activities and interests
outside of the United States. The Portfolio will ordinarily invest substantially
all of its assets -- but no less than 65% of its total assets -- in common
stocks, warrants and securities convertible into or exchangeable for common
stocks. Generally the Portfolio will hold no less than 65% of its total assets
in at least three countries other than the United States. The Portfolio intends
to be widely diversified across securities of many corporations located in a
number of different countries. Warburg anticipates, however, that the Portfolio
may from time to time invest a significant portion of its assets in a single
country such as Japan, which may involve special risks. See "Risk Factors and
Special Considerations -- Japanese Investments" below. In appropriate
circumstances, such as when a direct investment by the International Equity
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), invest in the
securities of closed-end investment companies that invest in foreign securities.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
POST-VENTURE CAPITAL PORTFOLIO
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, such as investing in Private Funds (as defined
below), an investment in the Portfolio should be considered only for the
aggressive portion of an investor's portfolio and may not be appropriate for all
investors.
The investment objective of the Post-Venture Capital Portfolio is to seek
long-term growth of capital. The Portfolio is a diversified portfolio that
pursues an aggressive investment strategy. The Portfolio pursues its investment
objective by investing primarily in equity securities of companies considered by
Warburg to be in their post-venture capital stage of development. Although the
Portfolio may invest up to 10% of its assets in venture capital and other
investment funds, the Portfolio is not designed primarily to provide venture
capital financing. Rather, under normal market conditions, the Portfolio will
invest at least 65% of its total assets in equity securities of "post-venture
capital companies." A post-venture capital company is a company that has
received venture capital financing either (a) during the early stages of the
company's existence or the early stages of the development of a new product or
service or (b) as part of a restructuring or recapitalization of the company.
The investment of venture capital financing, distribution of such company's
securities to venture capital investors, or initial public offering ("IPO"),
whichever is later, will have been made within ten years prior to the
Portfolio's purchase of the company's securities.
Warburg believes that venture capital participation in a company's capital
structure can lead to revenue/earnings growth rates above those of older, public
companies such as those in the Dow Jones Industrial Average or the Fortune 500.
Venture capitalists finance start-up companies, companies in the early stages of
developing new products or services and companies undergoing a restructuring or
recapitalization, since these companies may not have access to conventional
forms of financing (such as bank loans or public issuances of stock). Venture
capitalists may hold substantial positions in companies that may have been
acquired at prices significantly below the initial public offering price. This
may create a potential adverse impact in the short-term on the market price of a
company's stock due to sales in the open market by a venture capitalist or
others who acquired the stock at lower prices prior to the company's IPO.
Warburg will consider the impact of such sales in selecting post-venture capital
investments. Venture capitalists may be individuals or funds organized by
venture capitalists which are typically offered only to large institutions, such
as pension funds and endowments, and certain accredited investors. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
Warburg has experience in researching smaller companies, companies in the
early stages of development and venture capital-financed companies. Its team of
analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 400 of the larger domestic
venture capital funds.
6
<PAGE> 47
Ms. Dater and Mr. Lurito have managed post-venture equity securities in separate
accounts for institutions since 1989 and currently manage over $1 billion of
such assets for institutions. The Portfolio will invest in securities of post-
venture capital companies that are traded on a national securities exchange or
in an organized over-the-counter market.
PRIVATE FUND INVESTMENTS. Up to 10% of the Post-Venture Capital Portfolio's
assets may be invested in United States or foreign private limited partnerships
or other investment funds ("Private Funds") that themselves invest in equity or
debt securities of (a) companies in the venture capital or post-venture capital
stages of development or (b) companies engaged in special situations or changes
in corporate control, including buyouts. In selecting Private Funds for
investment, Abbott Capital Management, LLC, the Portfolio's sub-investment
adviser with respect to Private Funds ("Abbott"), attempts to invest in a mix of
Private Funds that will provide an above-average internal rate of return (i.e.,
the discount rate at which the present value of an investment's future cash
inflows (dividend income and capital gains) are equal to the cost of the
investment). Warburg believes that the Portfolio's investments in Private Funds
offer individual investors a unique opportunity to participate in venture
capital and other private investment funds, providing access to investment
opportunities typically available only to large institutions and accredited
investors. Although the Portfolio's investments in Private Funds are limited to
a maximum of 10% of the Portfolio's assets, these investments are highly
speculative and volatile and may produce gains or losses in this portion of the
Portfolio that exceed those of the Portfolio's other holdings and of more mature
companies generally.
Because Private Funds generally are investment companies for purposes of the
1940 Act, the Portfolio's ability to invest in them will be limited. In
addition, Portfolio shareholders will remain subject to the Portfolio's expenses
while also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Portfolio to dispose of interests in Private Funds is
very limited and will involve the risks described under "Risk Factors and
Special Considerations -- Non-Publicly Traded Securities; Rule 144A Securities."
In valuing the Portfolio's holdings of interests in Private Funds, the Portfolio
will be relying on the most recent reports provided by Abbott and by the Private
Funds themselves prior to calculation of the Portfolio's net asset value. These
reports, which are provided on an infrequent basis, often depend on the
subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "Net Asset Value." Debt
securities held by a Private Fund will tend to be rated below investment grade
and may be rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D
by Standard & Poor's Ratings Services ("S&P"). Securities in these rating
categories are in payment default or have extremely poor prospects of attaining
any investment standing. For a discussion of the risks of investing in below
investment grade debt, see "Risk Factors and Special Considerations -- Below
Investment Grade Securities" below and "Investment Policies -- Below Investment
Grade Debt Securities" in the Statement of Additional Information. For a
discussion of the possible tax consequences of investing in foreign Private
Funds, see "Additional Information Concerning Taxes -- Investment in Passive
Foreign Investment Companies" in the Statement of Additional Information.
The Post-Venture Capital Portfolio may also hold non-publicly traded equity
securities of companies in the venture and post-venture stages of development,
such as those of closely held companies or private placements of public
companies. The portion of the Portfolio's assets invested in these non-publicly
traded securities will vary over time depending on investment opportunities and
other factors. The Portfolio's illiquid assets, including interests in Private
Funds and other illiquid non-publicly traded securities, may not exceed 15% of
net assets.
OTHER STRATEGIES. The Post-Venture Capital Portfolio may invest up to 35% of
its assets in exchange-traded and over-the-counter securities that do not meet
the definition of post-venture capital companies without regard to market
capitalization. The Portfolio's assets may be invested, directly or through
Private Funds, in securities of issuers engaged at the time of purchase in
"special situations," such as a restructuring or recapitalization; an
acquisition, consolidation, merger or tender offer; a change in corporate
control; or investment by a venture capitalist.
To attempt to reduce risk, the Post-Venture Capital Portfolio will diversify
its investments over a broad range of issuers operating in a variety of
industries. The Portfolio may hold securities of companies of any size, and will
not limit capitalization of companies it selects to invest in. However, due to
the nature of the venture capital to post-venture cycle, the Portfolio
anticipates that the average market capitalization of companies in which it
invests will be less than $1 billion at the time of investment. Although the
Portfolio will invest primarily in U.S. companies, up to 20% of the Portfolio's
assets may be invested in securities of issuers located in any foreign country.
Equity securities in which the Portfolio will invest are common stock, preferred
stock, warrants, securities convertible into or exchangeable for common stock
and partnership interests. The Portfolio may engage in a variety of strategies
to reduce risk or seek to enhance return, including engaging in short selling
(see "Certain Investment Strategies").
SMALL COMPANY GROWTH PORTFOLIO
The Small Company Growth Portfolio's investment objective is to seek capital
growth. The Portfolio is a non-diversified investment fund that pursues its
investment objective by investing in a portfolio of equity securities of
small-sized domestic companies. The Portfolio ordinarily will invest at least
65% of its total assets in common stocks
7
<PAGE> 48
or warrants of small-sized companies that represent attractive opportunities for
capital growth. The Portfolio considers a "small-sized" company to be one that
has a market capitalization, measured at the time the Portfolio purchases a
security of that company, within the range of capitalizations of companies
represented in the Russell 2000 Index. (As of January 31, 1998, the Russell 2000
Index included companies with market capitalizations between $23.7 million and
$2.7 billion.) Companies whose capitalization no longer meets this definition
after purchase continue to be considered small companies for purposes of the
Portfolio's policy of investing at least 65% of its assets in small-sized
companies. In addition, the Portfolio has the flexibility to invest in companies
with a market capitalization of any size when the 65% policy is met. As a result
of these policies, the average market capitalization of the Portfolio at any
particular time may exceed $2.7 billion, particularly at times when the market
values of small company stocks are rising. It is anticipated that the Portfolio
will invest primarily in companies whose securities are traded on domestic stock
exchanges or in the over-the-counter market. Small companies may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth progress owing to factors such as management changes or
development of new technology, products or markets or may be companies providing
products or services with a high unit volume growth rate. The Portfolio's
investments will be made on the basis of their equity characteristics and
securities ratings generally will not be a factor in the selection process.
The Portfolio may also invest in securities of emerging growth companies,
which can be either small- or medium-sized companies that have passed their
start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time. Emerging
growth companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The International Equity Portfolio may invest up to 35%, and
each of the Post-Venture Capital and Small Company Growth Portfolios may invest
up to 20%, of its total assets in investment grade debt securities (other than
money market obligations) and preferred stocks that are not convertible into
common stock for the purpose of seeking capital appreciation. The interest
income to be derived may be considered as one factor in selecting debt
securities for investment by Warburg. Because the market value of debt
obligations can be expected to vary inversely to changes in prevailing interest
rates, investing in debt obligations may provide an opportunity for capital
appreciation when interest rates are expected to decline. The success of such a
strategy is dependent upon Warburg's ability to forecast accurately changes in
interest rates. The market value of debt obligations may also be expected to
vary depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated or its
rating may be reduced. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Portfolio should continue to hold the securities.
When Warburg believes that a defensive posture is warranted, each Portfolio
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
When such a defensive posture is warranted, the International Equity Portfolio
may also invest temporarily without limit in foreign investment grade debt
obligations and in other securities of U.S. companies.
MONEY MARKET OBLIGATIONS. Each Portfolio is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five years
or less remaining to maturity) money market obligations and, for temporary
defensive purposes, may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by Warburg to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Portfolios may enter into repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Portfolio would acquire any underlying security for a relatively short
8
<PAGE> 49
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. The value of the
underlying securities will at all times be at least equal to the total amount of
the purchase obligation, including interest. The Portfolio bears a risk of loss
in the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period in which the Portfolio seeks to assert this right. Warburg, acting under
the supervision of the Trust's Board of Trustees (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which each Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be beneficial
to the Portfolio and appropriate considering the factors of return and
liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or Warburg.
As a shareholder in any mutual fund, a Portfolio will bear its ratable share of
the mutual fund's expenses, including management fees, and will remain subject
to payment of the Portfolio's administrative fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Portfolio
may invest include: direct obligations of the U.S. Treasury, obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Portfolio may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a 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 securities.
WARRANTS. Each 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
- --------------------------------------------------------------------------------
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to each Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
EMERGING MARKETS. The International Equity 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. For example, many investments in emerging markets experienced
significant declines in value due to political and currency volatility in
emerging market countries during the latter part of 1997. 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.
JAPANESE INVESTMENTS. The International Equity Portfolio may from time to time
have a large position in Japanese securities and, as a result, would be subject
to general economic and political conditions in Japan. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of its large trade surpluses Japan has
entered a difficult phase in its relations with certain trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
9
<PAGE> 50
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States.
Japan has a parliamentary form of government. Since mid-1993, there have been
several changes in leadership in Japan. What effect, if any, the current
political situation will have on prospective regulatory reforms in the Japanese
economy cannot be predicted. For additional information, see "Investment
Policies -- Japanese Investments" in the Statement of Additional Information.
SMALLER CAPITALIZATION AND EMERGING GROWTH COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth and small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers") may involve greater risks than investing in larger, more
established companies since these securities may have limited marketability and,
thus, may be more volatile than securities of larger, more established companies
or the market averages in general. Because these issuers normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. These issuers may have limited product lines, markets or
financial resources and may lack management depth. In addition, these issuers
are typically subject to a great degree of changes in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning these issuers 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; or litigation which, if resolved
favorably, would improve the value of the companies' securities. Although
investing in securities of these companies offers potential for above-average
returns if the companies are successful, the risk exists that the companies will
not succeed and the prices of the companies' shares could significantly decline
in value. Therefore, an investment in either the Post-Venture Capital Portfolio
or the Small Company Growth Portfolio may involve a greater degree of risk than
an investment in other mutual funds that seek capital growth by investing in
more established, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolios may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to each Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolios to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A Securities. The Board will carefully monitor any investments by the
Portfolio in Rule 144A Securities. The Board may adopt guidelines and delegate
to Warburg the daily function of determining and monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities and, with
respect to the Post-Venture Capital Portfolio, interests in Private Funds) may
involve a high degree of business and financial risk and may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Portfolio. Further, companies whose securities are not
publicly traded are not subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
A Portfolio's investment in illiquid securities is subject to the risk that
should the Portfolio desire to sell any of these securities when a ready buyer
is not available at a price that is deemed to be representative of their value,
the value of the Portfolio's net assets could be adversely affected.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade 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 ratings 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, these securities generally present a higher degree of credit risk.
The risk of loss due to default by such issuers is significantly greater because
these securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.
10
<PAGE> 51
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, a 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 a 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.
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 leveraging 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 Small Company Growth Portfolio is classified as
non-diversified under the 1940 Act, which means that the Portfolio is not
limited by the 1940 Act in the proportion of its assets that it may invest in
the obligations of a single issuer. The Portfolio will, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. Being
non-diversified means that the Portfolio may invest a greater proportion of its
assets in the obligations of a small number of issuers and, as a result, may be
subject to greater risk with respect to portfolio securities. To the extent that
the Portfolio assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolios and their
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolios' other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolios nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolios'
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolios' foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Portfolios' other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolios' other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. The
Portfolios will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
It is not possible to predict the Portfolios' turnover rates. However, it is
anticipated that no Portfolio's annual turnover rate should exceed 100%. High
portfolio turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See "Dividends, Distributions and Taxes -- Taxes" below and "Investment
Policies -- Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ("Counsellors Securities"). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
11
<PAGE> 52
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Although there is no intention of doing so during the coming year, each
Portfolio is authorized to engage in the following investment strategies: (i)
lending portfolio securities and (ii) entering into reverse repurchase
agreements and dollar rolls. In addition, although each Portfolio may purchase
securities on a when-issued basis and purchase or sell securities for
delayed-delivery, the International Equity Portfolio has no intention of doing
so during the coming year. Detailed information concerning the Portfolios'
strategies and their related risks is contained below and in the Statement of
Additional Information.
FOREIGN SECURITIES. The International Equity Portfolio will ordinarily hold no
less than 65% of its total assets in foreign securities, and the Post-Venture
Capital Portfolio may invest up to 20% of its total assets in the securities of
foreign issuers. The Small Company Growth Portfolio may also invest up to 20% of
its total assets in the securities of foreign issuers, which are not included in
the Portfolio's 65% policy of investing in small-sized companies described
above. 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 Portfolios,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
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, each Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and, in the case of the International Equity
Portfolio, swaps. These strategies, commonly referred to as "derivatives," may
be used (i) for the purpose of hedging against a decline in value of a
Portfolio's current or anticipated portfolio holdings, (ii) as a substitute for
purchasing or selling portfolio securities or (iii) to seek to generate income
to offset expenses or increase return. TRANSACTIONS THAT ARE NOT CONSIDERED
HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE A PORTFOLIO'S
INVESTMENT RISK. Transaction costs and any premiums associated with these
strategies, and any losses incurred, will affect a Portfolio's net asset value
and performance. Therefore, an investment in a Portfolio may involve a greater
risk than an investment in other mutual funds that do not utilize these
strategies. A Portfolio's use of these strategies may be limited by position and
exercise limits established by securities and commodities exchanges and other
applicable regulatory authorities.
Securities Options and Stock Index Options. Each Portfolio may write put and
call options on up to 25% of the net asset value of the stock and debt
securities in its portfolio and will realize fees (referred to as "premiums")
for granting the rights evidenced by the options. Each Portfolio may also
utilize up to 10% of 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, each Portfolio may also utilize up to 10% of its total
assets to purchase exchange-listed and OTC put and call options on stock
indexes, and may also write such options. A stock index measures the movement of
a certain group of stocks by assigning relative values to the common stocks
included in the index.
12
<PAGE> 53
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate-
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited in
the amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of a Portfolio's assets that may be at risk with
respect to futures activities.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
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 International Equity 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 International Equity 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 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 a Portfolio's borrowing
restrictions. Where swaps are entered into for other than hedging purposes, the
Portfolio will segregate a net 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. The Portfolios may engage in options, futures,
currency transactions and swaps for, among other reasons, hedging purposes. 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,
13
<PAGE> 54
and, in the case of the International Equity Portfolio, 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. Each Portfolio will
engage in hedging transactions only when deemed advisable by Warburg, and
successful use of hedging transactions will depend on Warburg's ability to
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 a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. A Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
forward currency contracts; and, in the case of the International Equity
Portfolio, 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 necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of a
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
SHORT SELLING. The Post-Venture Capital Portfolio may from time to time sell
securities short. A short sale is a transaction in which the Portfolio sells
borrowed securities in anticipation of a decline in the market price of the
securities. Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested. The current market value of the securities sold short (excluding short
sales "against the box") will not exceed 10% of the Portfolio's assets.
To deliver the securities to the buyer, the Post-Venture Capital Portfolio
must arrange through a broker to borrow the securities and, in so doing, the
Portfolio becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Portfolio will
make a profit or incur a loss as a result of a short sale depending on whether
the price of the securities decreases or increases between the date of the short
sale and the date on which the Portfolio purchases the security to replace the
borrowed securities that have been sold. The amount of any loss would be
increased (and any gain decreased) by any premium or interest the Portfolio is
required to pay in connection with a short sale.
The Post-Venture Capital Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by cash or liquid
securities deposited as collateral with the broker. In addition, the Portfolio
will place in a segregated account with its custodian or a qualified
subcustodian an amount of cash or liquid securities equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short and (ii) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). Until it replaces the borrowed securities, the Portfolio will
maintain the segregated account daily at a level so that (a) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market value
of the securities sold short and (b) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time they
were sold short.
Short Sales Against the Box. Each Portfolio may enter into a short sale of
securities such that when the short position is open a 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 a Portfolio to, for
example, lock in a sale price for a security the Portfolio does not wish to sell
immediately. A 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 a Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Post-Venture
Capital and Small Company Growth Portfolios may each utilize up to 20% of its
total assets to purchase securities on a when-issued basis and purchase or sell
securities on a delayed-delivery basis. In these transactions, payment for and
delivery of the
14
<PAGE> 55
securities occurs beyond the regular settlement dates. A Portfolio will not
enter into a when-issued or delayed-delivery transaction for the purpose of
leverage, but may sell the right to acquire a when-issued security prior to its
acquisition or dispose of its right to deliver or receive securities in a
delayed-delivery transaction if Warburg deems it advantageous to do so. The
payment obligation and the interest rate that will be received in when-issued
and delayed-delivery transactions are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the prices of such securities may be
higher or lower than the prices available in the market on the dates when the
investments are actually delivered to the buyers.
Each Portfolio will establish a segregated account with its custodian
consisting of cash or liquid securities in an amount equal to the amount if its
when-issued and delayed-delivery purchase commitments and will segregate the
securities underlying commitments to sell securities for delayed-delivery.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that each Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS. The Trust employs Warburg as investment adviser to each
Portfolio and, with respect to the Post-Venture Capital Portfolio, Abbott as its
sub-investment adviser. Warburg, subject to the control of the Trust's officers
and the Board, manages the investment and reinvestment of the assets of each
Portfolio in accordance with the Portfolio's investment objective and stated
investment policies. Warburg makes investment decisions for each Portfolio and
places orders to purchase or sell securities on behalf of the Portfolio and,
with respect to the Post-Venture Capital Portfolio, supervises the activities of
Abbott. Warburg also employs a support staff of management personnel to provide
services to the Portfolios and furnishes each Portfolio with office space,
furnishings and equipment. Abbott, in accordance with the investment objective
and policies of the Post-Venture Capital Portfolio, makes investment decisions
for the Portfolio regarding investments in Private Funds, effects transactions
in interests in Private Funds on behalf of the Portfolio and assists in
administrative functions relating to investments in Private Funds.
For the services provided by Warburg, the International Equity and the Small
Company Growth Portfolios pay Warburg a fee calculated at an annual rate of
1.00% and .90%, respectively, of the relevant Portfolio's average daily net
assets. For the services provided by Warburg, the Post-Venture Capital Portfolio
pays Warburg a fee calculated at an annual rate of 1.25% of the Fund's average
daily net assets out of which Warburg pays Abbott for sub-advisory services.
Warburg and the Trust's co-administrators may voluntarily waive a portion of
their fees from time to time and temporarily limit the expenses to be borne by a
Portfolio.
Warburg. 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 February 28,
1998, Warburg managed approximately $20.9 billion of assets, including
approximately $11.9 billion of investment company assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has
no business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
Abbott. Abbott is an independent specialized investment firm with assets under
management of approximately $2.3 billion. Abbott is a registered investment
adviser which concentrates on venture capital, buyout and special situations
partnership investments. Abbott's management team provides full-service private
equity programs to clients. The predecessor firm to Abbott was organized in 1986
as a Delaware limited partnership and converted to a Delaware limited liability
company effective July 1, 1997. Abbott's principal business address is 50 Rowes
Wharf, Suite 240, Boston, Massachusetts 02110-3328.
15
<PAGE> 56
PORTFOLIO MANAGERS
International Equity Portfolio. Richard H. King, Harold W. Ehrlich and Vincent
J. McBride serve as Co-Portfolio Managers and Nancy Nierman serves as Associate
Portfolio Manager of the International Equity Portfolio. Mr. King has been a
Portfolio Manager or Co-Portfolio Manager of the Portfolio since its inception
and Mr. Ehrlich, Mr. McBride and Ms. Nierman have served the Portfolio in their
respective capacities since April 1998. (Mr. Ehrlich and Mr. McBride served as
Associate Portfolio Managers and Research Analysts of the Portfolio from its
inception to April 1998.)
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989.
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. Mr. McBride is a Senior
Vice President of Warburg and has been with Warburg since 1994. Prior to joining
Warburg, Mr. McBride was an international equity analyst at Smith Barney Inc.
Ms. Nierman is a Vice President of Warburg and has been with Warburg since April
1996, before which time she was an analyst with Fiduciary Trust Company
International.
Small Company Growth and Post-Venture Capital Portfolios. The Co-Portfolio
Managers of the Post-Venture Capital and Small Company Growth Portfolios have
been Elizabeth B. Dater and Stephen J. Lurito since the Portfolios' inception.
Robert S. Janis and Christopher M. Nawn have been Associate Portfolio Managers
and Research Analysts for the Post-Venture Capital Portfolio since its
inception.
Ms. Dater is a Managing Director of Warburg and has been a Portfolio Manager
of Warburg since 1978. Mr. Lurito is a Managing Director of Warburg and has been
with Warburg since 1987. Mr. Janis is a Senior Vice President of Warburg and 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 is also
a Senior Vice President of Warburg and 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 Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Mr. Held and Mr. Gray have been associated with Abbott and its
predecessor firm since 1986 and 1989, respectively.
CO-ADMINISTRATORS. The Portfolios employ Counsellors Funds Service, Inc., a
wholly owned subsidiary of Warburg ("Counsellors Service"), as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Portfolios, including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolios
and their various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation the International Equity Portfolio pays PFPC a fee calculated at an
annual rate of .12% of the Portfolio's first $250 million in average daily net
assets, .10% of the next $250 million in average daily net assets, .08% of the
next $250 million in average daily net assets, and .05% of average daily net
assets over $750 million. Each of the Post-Venture Capital and Small Company
Growth Portfolios pays PFPC a fee calculated at an annual rate of .10% of the
Portfolio's first $500 million in average daily net assets, .075% of the next $1
billion in average daily net assets, and .05% of average daily net assets over
$1.5 billion. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ("PNC"), serves as custodian of
each Portfolio's U.S. assets. State Street Bank and Trust Company ("State
Street") serves as custodian of each Portfolio's non-U.S. assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103. State Street's principal business
address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. It has
delegated most of its responsibilities to Boston Financial Data Services, Inc.
("BFDS"), an affiliated service company. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolios. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them
16
<PAGE> 57
("Service Organizations") with whom it enters into agreements up to .40% (the
"Service Fee") of the annual average value of accounts maintained by such
Organizations with a 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 a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of a Portfolio's shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select a
Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolios are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by a
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of a Portfolio on any day that the
Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of a Portfolio during the morning of the next business day with payment
for purchases to follow no later than the Portfolio's pricing on the next
business day. If payment for purchases is not received by such time, the
Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to a Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest money effectively in accordance with its investment objective
and policies, or would otherwise potentially be adversely affected. A Portfolio
may discontinue sales of its shares if management believes that a substantial
further increase in assets may adversely affect that Portfolio's ability to
achieve its investment objective. In such event, however, it is anticipated that
existing Variable Contract owners and Plan participants would be permitted to
continue to authorize investment in such Portfolio and to reinvest any dividends
or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for following instructions communicated by telephone
that it reasonably believes to be genuine. Reasonable procedures will be
employed on behalf of the Portfolio to confirm that instructions communicated by
telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
17
<PAGE> 58
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. Each Portfolio declares dividends from its net investment
income annually. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Distributions of net
realized long-term and short-term capital gains are declared annually and, as a
general rule, will be distributed or paid after the end of the fiscal year in
which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the relevant Portfolio at net asset value
unless, in the case of a Variable Contract, a Participating Insurance Company
elects to have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a "regulated investment
company" within the meaning of the Code. Each Portfolio intends to distribute
all of its net income and capital gains to its shareholders (the Variable
Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital
gains distributions from a Portfolio are taxable, if at all, to the
Participating Insurance Companies and Plans and will be exempt from current
taxation of the Variable Contract owner or Plan participant if left to
accumulate within the Variable Contract or Plan. Generally, withdrawals from
Variable Contracts or Plans may be subject to ordinary income tax and, if made
before age 59 1/2, a 10% penalty tax.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close the short sale. A
Portfolio's use of short sales may also affect the holding periods of certain
securities held by the Portfolio if such securities are "substantially
identical" to securities used by the Portfolio to close the short sale. The
Portfolios' short selling activities will not result in unrelated business
taxable income to a tax-exempt investor.
Special Tax Matters Relating to the International Equity Portfolio. Dividends
and interest received by the International Equity Portfolio may be subject to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Shareholders will bear the cost of foreign tax withholding
in the form of increased expenses to the Portfolio, but generally will not be
able to claim a foreign tax credit or deduction for foreign taxes paid by the
Portfolio by reason of the tax-deferred status of Variable Contracts.
Internal Revenue Service Requirements. Each Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, 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 each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the closing
value on the date on which the valuation is made. Options and futures contracts
will be valued similarly. Debt obligations that mature in 60 days or less from
the valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value.
With respect to the Post-Venture Capital Portfolio, investments in Private
Funds will initially be valued at cost and, thereafter, will be valued in
accordance with periodic reports received by Abbott from the Private Funds
(generally quarterly). Because the issuers of securities held by Private Funds
are generally not subject to the reporting requirements of the federal
securities laws, interim changes in value of underlying holdings of Private
Funds will not generally be reflected in the Portfolio's net asset value.
However, Warburg will report to the Board information about
18
<PAGE> 59
certain holdings of Private Funds that, in its judgment, could have a material
impact on the valuation of a Private Fund. The Board will take these reports
into account in valuing Private Funds.
Securities, options and futures contracts for which market quotations are not
readily available and other assets, including, with respect to the Post-Venture
Capital Portfolio, Private Funds, will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, each Portfolio may advertise its average annual total
return over various periods of time. These total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gains distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of a
Portfolio's return over a longer market cycle. Each Portfolio may also advertise
its aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in share prices and assuming reinvestment of
dividends and distributions). Aggregate and average total returns may be shown
by means of schedules, charts or graphs and may indicate various components of
total return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
Investors should note that return figures are based on historical earnings and
are not intended to indicate future performance. The Statement of Additional
Information describes the method used to determine the total return. Current
total return figures may be obtained by calling (800) 369-2728.
A Portfolio or a Participating Insurance Company or Plan sponsor may compare
the Portfolio's performance with (i) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below; (ii) in the case of the International Equity
Portfolio, with the Morgan Stanley Capital International Europe, Australasia,
Far East ("EAFE") Index and/or other indexes prepared by Morgan Stanley relating
to securities represented in the Portfolio, the Salomon Russell Global Equity
Index, the FT-Actuaries World Indices (jointly compiled by The Financial Times,
Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500 Index;
in the case of the Post-Venture Capital and Small Company Growth Portfolios,
with appropriate indexes prepared by Frank Russell Company relating to
securities represented in these Portfolios, and the S&P 500 Index and, in the
case of the Post-Venture Capital Portfolio only, with the Venture Capital 100
Index (compiled by Venture Capital Journal), all of which are unmanaged indexes;
or (iii) other appropriate indexes of investment securities or with data
developed by Warburg derived from such indexes. The Post-Venture Capital
Portfolio may also make comparisons using data and indexes compiled by the
National Venture Capital Association, Venture-One and Private Equity Analysts
Newsletter and similar organizations and publications. A Portfolio or a
Participating Insurance Company may also include evaluations published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Financial Times, Forbes,
Fortune, Inc., Institutional Investor, Investor's Business Daily, Money,
Morningstar, Mutual Fund Magazine, SmartMoney, The Wall Street Journal and
Worth. Morningstar, Inc. rates funds in broad categories based on risk/reward
analyses over various periods of time. In addition, each Portfolio or a
Participating Insurance Company or Plan sponsor may from time to time compare
the Portfolio's expense ratio to that of investment companies with similar
objectives and policies, based on data generated by Lipper Analytical Services,
Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of
19
<PAGE> 60
the Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio activity, which may include a discussion of significant portfolio
holdings; analysis of holdings by industry, country, credit quality and other
characteristics; and comparison and analysis of the Portfolio with respect to
relevant market and industry benchmarks. The Post-Venture Capital Portfolio may
discuss characteristics of venture capital-financed companies and the benefits
expected to be achieved from investing in these companies. Each Portfolio may
also discuss the continuum of risk and return relating to different investments
and the potential impact of international securities on a portfolio otherwise
composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws
of The Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of five series have been authorized, three of which constitute the
interests in the Portfolios. The Board may classify or reclassify any of its
shares into one or more additional series without shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
Participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in a Portfolio may conflict. The Board will monitor
the Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in one or all Portfolios. As a result, a Portfolio may
be forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of a Portfolio to any Variable Contract or Plan or may suspend or terminate the
offering of shares of a Portfolio if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PORTFOLIOS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
THE SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER MAY NOT LAWFULLY BE MADE.
20
<PAGE> 61
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 62
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolios' Expenses................................. 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 6
Portfolio Investments.................................... 8
Risk Factors and Special Considerations.................. 9
Portfolio Transactions and Turnover Rate................. 11
Certain Investment Strategies............................ 12
Investment Guidelines.................................... 15
Management of the Portfolios............................. 15
How to Purchase and Redeem Shares........................ 17
Dividends, Distributions and Taxes....................... 18
Net Asset Value.......................................... 18
Performance.............................................. 19
General Information...................................... 20
</TABLE>
[WARBURG PINCUS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRIPS-1-0498
<PAGE> 63
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST
----------------------------- EMERGING MARKETS
PORTFOLIO
----------------------------- INTERNATIONAL EQUITY
PORTFOLIO
----------------------------- POST-VENTURE CAPITAL
PORTFOLIO
----------------------------- SMALL COMPANY GROWTH
PORTFOLIO
Warburg Pincus Trust shares are not available directly to individual investors
but may
be offered only through certain insurance products and pension and retirement
plans.
[WARBURG PINCUS LOGO]
<PAGE> 64
PROSPECTUS April 30, 1998
Warburg Pincus Trust (the "Trust") is an open-end management investment company
that currently offers five investment funds, four of which are offered pursuant
to this Prospectus (the "Portfolios"):
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.
THE INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers.
International investment entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See "Risk Factors and Special
Considerations."
THE POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, an investment in the Portfolio involves certain
risks and may not be appropriate for all investors.
THE SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized domestic companies.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio 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 Portfolios. The Statement of Additional
Information is also available upon request and without charge by calling the
Trust at (800) 369-2728. Warburg Pincus Funds maintains 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 PORTFOLIOS 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 PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 65
THE PORTFOLIOS' EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International Post-Venture Small Company
Markets Portfolio Equity Portfolio Capital Portfolio Growth Portfolio
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price).................. 0 0 0 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees................................ 0.81% 1.00% 1.07% 0.90%
12b-1 Fees..................................... 0 0 0 0
Other Expenses................................. 0.59% 0.36% 0.33% 0.25%
----------- ---------- ----------- ----------
Total Portfolio Operating Expenses (after fee
waivers and expense reimbursements)*......... 1.40%** 1.36%*** 1.40% 1.15%***
=========== ========== =========== ==========
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 $ 14 $ 14 $ 12
3 years.......................................... $ 44 $ 43 $ 44 $ 37
5 years.......................................... $N/A $ 74 $ 77 $ 63
10 years.......................................... $N/A $164 $168 $140
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses for the International Equity,
Post-Venture Capital and Small Company Growth Portfolios are based on actual
expenses for the fiscal year ended December 31, 1997, net of any fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Management Fees for the Post-Venture Capital Portfolio would have equalled
1.25%, Other Expenses would have equalled .44% and Total Portfolio Operating
Expenses would have equalled 1.69%. The investment adviser and
co-administrator have undertaken to limit the Post-Venture Capital
Portfolio's Total Portfolio Operating Expenses to the limits shown in the
table above through December 31, 1999.
** Annual Portfolio Operating Expenses for the Emerging Markets Portfolio are
based on annualized estimates of expenses for the fiscal year ending
December 31, 1998, net of any fee and/or expense reimbursements. Absent such
waivers and/or reimbursements, Management Fees would equal 1.25%, Other
Expenses would equal .71%, and Total Portfolio Operating Expenses would
equal 1.96%. The investment adviser and co-administrator have undertaken to
limit the Emerging Markets Portfolio's Total Portfolio Operating Expenses to
the limits shown in the table above through December 31, 1999.
*** Operating expenses for each of the International Equity and Small Company
Growth Portfolios were reduced by .01% for the fiscal year ended December
31, 1997 as a result of certain arrangements that served to offset portions
of the Portfolios' respective transfer agent expense. After reflecting these
arrangements, "Total Portfolio Operating Expenses (after fee waivers)" for
the International Equity and Small Company Growth Portfolios were 1.35% and
1.14%, respectively, for the fiscal year ended December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
2
<PAGE> 66
FINANCIAL HIGHLIGHTS++
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for each of the periods presented below has been
derived from information audited by Coopers & Lybrand L.L.P., independent
accountants, whose report dated February 9, 1998 is incorporated by reference in
the Statement of Additional Information. Further information about the
performance of the Portfolios is contained in the Trust's annual report, dated
December 31, 1997, copies of which may be obtained without charge by calling the
Trust at (800) 369-2728.
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
------------------- Operations) through
1997 1996 December 31, 1995
---- ---- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.48 $10.65 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Income (Loss).............................. 0.10 0.00 0.03
Net Gain (Loss) from Securities and Foreign Currency
Related Items (both realized and unrealized)........... (0.37) 1.06 0.70
------ ------ ------------
Total from Investment Operations.......................... (0.27) 1.06 0.73
------ ------ ------------
Less Distributions:
Dividends from Net Investment Income...................... (0.01) (0.06) (0.01)
Distributions in Excess of Net Investment Income.......... 0.00 (0.10) (0.07)
Distributions from Realized Gains......................... 0.00 (0.06) 0.00
Distributions in Excess of Realized Gains................. (0.71) (0.01) 0.00
------ ------ ------------
Total Distributions....................................... (0.72) (0.23) (0.08)
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $10.49 $11.48 $10.65
====== ====== ============
Total Return................................................ (2.26%) 9.98% 7.30%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $347,229 $298,218 $64,537
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 1.36%@ 1.36%@ 1.44%*
Net Investment Income..................................... 0.66% 0.64% 0.48%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.04% .77%*
Portfolio Turnover Rate................................... 78.65% 30.82% 8.31%+
Average Commission Rate#.................................. $0.0163 $0.0232 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expenses. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.35% and 1.36% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
++ No financial highlights have been presented with respect to the Emerging
Markets Portfolio, which commenced operations on December 31, 1997. The
audited statement of assets and liabilities of the Emerging Markets
Portfolio, dated December 31, 1997, and the report thereon by Coopers &
Lybrand, L.L.P., dated February 9, 1998, copies of which may also be
obtained without charge by calling the Trust at (800) 369-2728, are
incorporated by reference in the Statement of Additional Information.
3
<PAGE> 67
POST-VENTURE CAPITAL PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 30, 1996
For the (Commencement of
Year Ended Operations) through
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 9.76 $10.00
----------- ------------
Income from Investment Operations:
Net Investment Loss....................................... (0.08) 0.00
Net Gain (Loss) from Securities (both realized and
unrealized)............................................ 1.38 (0.24)
----------- ------------
Total from Investment Operations.......................... 1.30 (0.24)
----------- ------------
NET ASSET VALUE, END OF PERIOD.............................. $11.06 $ 9.76
=========== ============
Total Return................................................ 13.34% (2.40%)+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $30,520 $12,400
Ratios to Average Daily Net Assets:
Operating expenses........................................ 1.40%@ 1.41%@*
Net investment income (loss).............................. (0.75%) 0.80%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements................................. 0.18% 4.16%*
Portfolio Turnover Rate................................... 238.12% 6.80%+
Average Commission Rate#.................................. $0.0548 $0.0491
</TABLE>
- --------------------------------------------------------------------------------
@Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. The arrangements resulted in a reduction to the
Portfolio's expenses by .00% and .01% for the year or period ended December 31,
1997 and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.40% and 1.40% for the year or period ended
December 31, 1997 and 1996, respectively.
+Non-annualized.
* Annualized.
#Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a commission
charged.
4
<PAGE> 68
SMALL COMPANY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
---------------------- Operations) through
1997 1996 December 31, 1996
---- ---- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $14.25 $12.51 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Loss....................................... (0.07) (0.06) (0.01)
Net Gain from Securities (both realized and unrealized)... 2.30 1.80 2.52
------ ------ ------------
Total from Investment Operations.......................... 2.23 1.74 2.51
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $16.48 $14.25 $12.51
====== ====== ============
Total Return................................................ 15.65% 13.91% 25.10%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $666,394 $339,398 $97,445
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 1.15%@ 1.16%@ 1.25%*
Net Investment Loss....................................... (0.56%) (0.66%) (0.36%)*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.01% 0.25%*
Portfolio Turnover Rate................................... 92.45% 101.50% 34.25%+
Average Commission Rate#.................................. $0.0550 $0.0538 --
</TABLE>
- --------------------------------------------------------------------------------
@Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997 and
1996, respectively. The Portfolio's operating expense ratio after reflecting
these arrangements were 1.14% and 1.16% for the years ended December 31, 1997
and 1996, respectively.
+Non-annualized.
* Annualized.
#Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a commission
charged. The Average Commission Rate is not required for fiscal periods
beginning before September 1, 1995.
5
<PAGE> 69
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
"Portfolio Investments" and "Certain Investment Strategies" for descriptions of
certain types of investments the Portfolios may make.
EMERGING MARKETS PORTFOLIO
The investment objective of the Emerging Markets Portfolio is to seek
long-term growth of capital. 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 different 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 Portfolios' 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 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), Columbia, 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.
6
<PAGE> 70
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to seek long-term
capital appreciation. The Portfolio is a diversified investment fund that
pursues its investment objective by investing primarily in a broadly diversified
portfolio of equity securities of companies, wherever organized, that in the
judgment of Warburg Pincus, have their principal business activities and
interests outside of the United States. The Portfolio will ordinarily invest
substantially all of its assets -- but no less than 65% of its total
assets -- in common stocks, warrants and securities convertible into or
exchangeable for common stocks. Generally the Portfolio will hold no less than
65% of its total assets in at least three countries other than the United
States. The Portfolio intends to be widely diversified across securities of many
corporations located in a number of different countries. Warburg anticipates,
however, that the Portfolio may from time to time invest a significant portion
of its assets in a single country such as Japan, which may involve special
risks. See "Risk Factors and Special Considerations -- Japanese Investments"
below. In appropriate circumstances, such as when a direct investment by the
International Equity Portfolio in the securities of a particular country cannot
be made or when the securities of an investment company are more liquid than the
underlying portfolio securities, the Portfolio may, consistent with the
provisions of the 1940 Act, invest in the securities of closed-end investment
companies that invest in foreign securities.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
POST-VENTURE CAPITAL PORTFOLIO
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, such as investing in Private Funds (as defined
below), an investment in the Portfolio should be considered only for the
aggressive portion of an investor's portfolio and may not be appropriate for all
investors.
The investment objective of the Post-Venture Capital Portfolio is to seek
long-term growth of capital. The Portfolio is a diversified portfolio that
pursues an aggressive investment strategy. The Portfolio pursues its investment
objective by investing primarily in equity securities of companies considered by
Warburg to be in their post-venture capital stage of development. Although the
Portfolio may invest up to 10% of its assets in venture capital and other
investment funds, the Portfolio is not designed primarily to provide venture
capital financing. Rather, under normal market conditions, the Portfolio will
invest at least 65% of its total assets in equity securities of "post-venture
capital companies." A post-venture capital company is a company that has
received venture capital financing either (a) during the early stages of the
company's existence or the early stages of the development of a new product or
service or (b) as part of a restructuring or recapitalization of the company.
The investment of venture capital financing, distribution of such company's
securities to venture capital investors, or initial public offering ("IPO"),
whichever is later, will have been made within ten years prior to the
Portfolio's purchase of the company's securities.
Warburg believes that venture capital participation in a company's capital
structure can lead to revenue/earnings growth rates above those of older, public
companies such as those in the Dow Jones Industrial Average or the Fortune 500.
Venture capitalists finance start-up companies, companies in the early stages of
developing new products or services and companies undergoing a restructuring or
recapitalization, since these companies may not have access to conventional
forms of financing (such as bank loans or public issuances of stock). Venture
capitalists may hold substantial positions in companies that may have been
acquired at prices significantly below the initial public offering price. This
may create a potential adverse impact in the short-term on the market price of a
company's stock due to sales in the open market by a venture capitalist or
others who acquired the stock at lower prices prior to the company's IPO.
Warburg will consider the impact of such sales in selecting post-venture capital
investments. Venture capitalists may be individuals or funds organized by
venture capitalists which are typically offered only to large institutions, such
as pension funds and endowments, and certain accredited investors. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
Warburg has experience in researching smaller companies, companies in the
early stages of development and venture capital-financed companies. Its team of
analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 400 of the larger domestic
venture capital funds. Ms. Dater and Mr. Lurito have managed post-venture equity
securities in separate accounts for institutions since 1989 and currently manage
over $1 billion of such assets for institutions. The Portfolio will invest in
securities of post-venture capital companies that are traded on a national
securities exchange or in an organized over-the-counter market.
PRIVATE FUND INVESTMENTS. Up to 10% of the Post-Venture Capital Portfolio's
assets may be invested in United States or foreign private limited partnerships
or other investment funds ("Private Funds") that themselves invest in equity or
debt securities of (a) companies in the venture capital or post-venture capital
stages of development or
7
<PAGE> 71
(b) companies engaged in special situations or changes in corporate control,
including buyouts. In selecting Private Funds for investment, Abbott Capital
Management, LLC, the Portfolio's sub-investment adviser with respect to Private
Funds ("Abbott"), attempts to invest in a mix of Private Funds that will provide
an above-average internal rate of return (i.e., the discount rate at which the
present value of an investment's future cash inflows (dividend income and
capital gains) are equal to the cost of the investment). Warburg believes that
the Portfolio's investments in Private Funds offer individual investors a unique
opportunity to participate in venture capital and other private investment
funds, providing access to investment opportunities typically available only to
large institutions and accredited investors. Although the Portfolio's
investments in Private Funds are limited to a maximum of 10% of the Portfolio's
assets, these investments are highly speculative and volatile and may produce
gains or losses in this portion of the Portfolio that exceed those of the
Portfolio's other holdings and of more mature companies generally.
Because Private Funds generally are investment companies for purposes of the
1940 Act, the Portfolio's ability to invest in them will be limited. In
addition, Portfolio shareholders will remain subject to the Portfolio's expenses
while also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Portfolio to dispose of interests in Private Funds is
very limited and will involve the risks described under "Risk Factors and
Special Considerations -- Non-Publicly Traded Securities; Rule 144A Securities."
In valuing the Portfolio's holdings of interests in Private Funds, the Portfolio
will be relying on the most recent reports provided by Abbott and by the Private
Funds themselves prior to calculation of the Portfolio's net asset value. These
reports, which are provided on an infrequent basis, often depend on the
subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "Net Asset Value." Debt
securities held by a Private Fund will tend to be rated below investment grade
and may be rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D
by Standard & Poor's Ratings Services ("S&P"). Securities in these rating
categories are in payment default or have extremely poor prospects of attaining
any investment standing. For a discussion of the risks of investing in below
investment grade debt, see "Risk Factors and Special Considerations -- Below
Investment Grade Securities" below and "Investment Policies -- Below Investment
Grade Debt Securities" in the Statement of Additional Information. For a
discussion of the possible tax consequences of investing in foreign Private
Funds, see "Additional Information Concerning Taxes -- Investment in Passive
Foreign Investment Companies" in the Statement of Additional Information.
The Post-Venture Capital Portfolio may also hold non-publicly traded equity
securities of companies in the venture and post-venture stages of development,
such as those of closely held companies or private placements of public
companies. The portion of the Portfolio's assets invested in these non-publicly
traded securities will vary over time depending on investment opportunities and
other factors. The Portfolio's illiquid assets, including interests in Private
Funds and other illiquid non-publicly traded securities, may not exceed 15% of
net assets.
OTHER STRATEGIES. The Post-Venture Capital Portfolio may invest up to 35% of
its assets in exchange-traded and over-the-counter securities that do not meet
the definition of post-venture capital companies without regard to market
capitalization. The Portfolio's assets may be invested, directly or through
Private Funds, in securities of issuers engaged at the time of purchase in
"special situations," such as a restructuring or recapitalization; an
acquisition, consolidation, merger or tender offer; a change in corporate
control; or investment by a venture capitalist.
To attempt to reduce risk, the Post-Venture Capital Portfolio will diversify
its investments over a broad range of issuers operating in a variety of
industries. The Portfolio may hold securities of companies of any size, and will
not limit capitalization of companies it selects to invest in. However, due to
the nature of the venture capital to post-venture cycle, the Portfolio
anticipates that the average market capitalization of companies in which it
invests will be less than $1 billion at the time of investment. Although the
Portfolio will invest primarily in U.S. companies, up to 20% of the Portfolio's
assets may be invested in securities of issuers located in any foreign country.
Equity securities in which the Portfolio will invest are common stock, preferred
stock, warrants, securities convertible into or exchangeable for common stock
and partnership interests. The Portfolio may engage in a variety of strategies
to reduce risk or seek to enhance return, including engaging in short selling
(see "Certain Investment Strategies").
SMALL COMPANY GROWTH PORTFOLIO
The Small Company Growth Portfolio's investment objective is to seek capital
growth. The Portfolio is a non-diversified investment fund that pursues its
investment objective by investing in a portfolio of equity securities of
small-sized domestic companies. The Portfolio ordinarily will invest at least
65% of its total assets in common stocks or warrants of small-sized companies
that represent attractive opportunities for capital growth. The Portfolio
considers a "small-sized" company to be one that has a market capitalization,
measured at the time the Portfolio purchases a security of that company, within
the range of capitalizations of companies represented in the Russell 2000 Index.
(As of January 31, 1998, the Russell 2000 Index included companies with market
capitalizations between $23.7 million and $2.7 billion.) Companies whose
capitalization no longer meets this definition after purchase continue to be
considered small companies for purposes of the Portfolio's policy of investing
at least 65% of its assets in small-sized companies. In addition, the Portfolio
has the flexibility to invest in companies with a market capitalization of any
size when the
8
<PAGE> 72
65% policy is met. As a result of these policies, the average market
capitalization of the Portfolio at any particular time may exceed $2.7 billion,
particularly at times when the market values of small company stocks are rising.
It is anticipated that the Portfolio will invest primarily in companies whose
securities are traded on domestic stock exchanges or in the over-the-counter
market. Small companies may still be in the developmental stage, may be older
companies that appear to be entering a new stage of growth progress owing to
factors such as management changes or development of new technology, products or
markets or may be companies providing products or services with a high unit
volume growth rate. The Portfolio's investments will be made on the basis of
their equity characteristics and securities ratings generally will not be a
factor in the selection process.
The Portfolio may also invest in securities of emerging growth companies,
which can be either small- or medium-sized companies that have passed their
start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time. Emerging
growth companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The Emerging Markets 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 International Equity Portfolio may
invest up to 35%, and each of the Post-Venture Capital and Small Company Growth
Portfolios may invest up to 20%, of its total assets in investment grade debt
securities (other than money market obligations) and preferred stocks that are
not convertible into common stock for the purpose of seeking capital
appreciation. The interest income to be derived may be considered as one factor
in selecting debt securities for investment by Warburg. Because the market value
of debt obligations can be expected to vary inversely to changes in prevailing
interest rates, investing in debt obligations may provide an opportunity for
capital appreciation when interest rates are expected to decline. The success of
such a strategy is dependent upon Warburg's ability to forecast accurately
changes in interest rates. The market value of debt obligations may also be
expected to vary depending upon, among other factors, the ability of the issuer
to repay principal and interest, any change in investment rating and general
economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated or its
rating may be reduced. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Portfolio should continue to hold the securities.
When Warburg believes that a defensive posture is warranted, each Portfolio
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
When such a defensive posture is warranted, the International Equity Portfolio
may also invest temporarily without limit in foreign investment grade debt
obligations and each of the Emerging Markets and International Equity Portfolios
may also invest temporarily without limit in other securities of U.S. companies.
The Emerging Markets 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 of the Statement of Additional Information.
Among the types of debt securities in which the Emerging Markets Portfolio may
invest are Brady Bonds and loan participations and assignments.
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 restructurings.
Brady Bonds have been issued only recently and therefore do not have a long
payment history. However, in
9
<PAGE> 73
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 Emerging
Markets 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.
MONEY MARKET OBLIGATIONS. Each 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, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by Warburg to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Portfolios may enter into repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Portfolio would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Portfolio bears a risk of loss in
the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period in which the Portfolio seeks to assert this right. Warburg, acting under
the supervision of the Trust's Board of Trustees (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which each Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be beneficial
to the Portfolio and appropriate considering the factors of return and
liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or Warburg.
As a shareholder in any mutual fund, a Portfolio will bear its ratable share of
the mutual fund's expenses, including management fees, and will remain subject
to payment of the Portfolio's administrative fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Portfolio
may invest include: direct obligations of the U.S. Treasury, obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Portfolio may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a 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 securities.
WARRANTS. Each 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.
10
<PAGE> 74
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to each Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
EMERGING MARKETS. The Emerging Markets and International Equity Portfolios may
each 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. For example, many investments in emerging markets
experienced significant declines in value due to political and currency
volatility in emerging market countries during the latter part of 1997. 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.
JAPANESE INVESTMENTS. The International Equity Portfolio may from time to time
have a large position in Japanese securities and, as a result, would be subject
to general economic and political conditions in Japan. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of its large trade surpluses Japan has
entered a difficult phase in its relations with certain trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States.
Japan has a parliamentary form of government. Since mid-1993, there have been
several changes in leadership in Japan. What effect, if any, the current
political situation will have on prospective regulatory reforms in the Japanese
economy cannot be predicted. For additional information, see "Investment
Policies -- Japanese Investments" in the Statement of Additional Information.
SMALLER CAPITALIZATION AND EMERGING GROWTH COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth and small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers") may involve greater risks than investing in larger, more
established companies since these securities may have limited marketability and,
thus, may be more volatile than securities of larger, more established companies
or the market averages in general. Because these issuers normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. These issuers may have limited product lines, markets or
financial resources and may lack management depth. In addition, these issuers
are typically subject to a great degree of changes in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning these issuers 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; or litigation which, if resolved
favorably, would improve the value of the companies' securities. Although
investing in securities of these companies 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 Emerging Markets, Post-Venture Capital
or Small Company Growth Portfolios may involve a greater degree of risk than an
investment in other mutual funds that seek capital growth by investing in more
established, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolios may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to each Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolios to the extent that
11
<PAGE> 75
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 and, with
respect to the Post-Venture Capital Portfolio, interests in Private Funds) may
involve a high degree of business and financial risk and may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Portfolio. Further, companies whose securities are not
publicly traded are not subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
A Portfolio's investment in illiquid securities is subject to the risk that
should the Portfolio desire to sell any of these securities when a ready buyer
is not available at a price that is deemed to be representative of their value,
the value of the Portfolio's net assets could be adversely affected.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade and
comparable unrated securities (i) will likely have some quality and protective
characteristics that, in the judgment of the ratings 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, these securities generally present a
higher degree of credit risk. The risk of loss due to default by such issuers is
significantly greater because these securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, a 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.
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 leveraging 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. Each of the Emerging Markets and Small Company Growth
Portfolios 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. Each 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.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolios and their
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolios' other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolios nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolios'
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolios' foreign investments.
12
<PAGE> 76
The Warburg Service Providers anticipate that their systems and those of the
Portfolios' other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolios' other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. The
Portfolios will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
It is not possible to predict the Portfolios' turnover rates. However, it is
anticipated that no Portfolio's annual turnover rate should exceed 100%. High
portfolio turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See "Dividends, Distributions and Taxes -- Taxes" below and "Investment
Policies -- Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ("Counsellors Securities"). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Although there is no intention of doing so during the coming year, each
Portfolio is authorized to engage in the following investment strategies: (i)
lending portfolio securities and (ii) entering into reverse repurchase
agreements and dollar rolls. In addition, although each Portfolio may purchase
securities on a when-issued basis and purchase or sell securities for
delayed-delivery, the Emerging Markets and International Equity Portfolios have
no intention of doing so during the coming year. The Emerging Markets Portfolio
may also invest in asset-backed securities, mortgage-backed securities, zero
coupon securities and stand-by commitments, although the Portfolio currently
anticipates that during the coming year investments in any one of these
strategies will not exceed 5% of net assets. Detailed information concerning the
Portfolios' strategies and their related risks is contained below and in the
Statement of Additional Information.
FOREIGN SECURITIES. Each of the Emerging Markets and International Equity
Portfolios will ordinarily hold no less than 65% of its total assets in foreign
securities, and the Post-Venture Capital Portfolio may invest up to 20% of its
total assets in the securities of foreign issuers. The Small Company Growth
Portfolio may also invest up to 20% of its total assets in the securities of
foreign issuers, which are not included in the Portfolio's 65% policy of
investing in small-sized companies described above. 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 Portfolios, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that would reduce
the net yield on such securities. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Investment in foreign
securities will also result in higher operating expenses due to the cost of
converting foreign currency into U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
U.S. exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians.
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
13
<PAGE> 77
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, each Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and, in the case of the Emerging Markets and
International Equity Portfolios, swaps. These strategies, commonly referred to
as "derivatives," may be used (i) for the purpose of hedging against a decline
in value of a Portfolio's current or anticipated portfolio holdings, (ii) as a
substitute for purchasing or selling portfolio securities or (iii) to seek to
generate income to offset expenses or increase return. TRANSACTIONS THAT ARE NOT
CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE A
PORTFOLIO'S INVESTMENT RISK. Transaction costs and any premiums associated with
these strategies, and any losses incurred, will affect a Portfolio's net asset
value and performance. Therefore, an investment in a Portfolio may involve a
greater risk than an investment in other mutual funds that do not utilize these
strategies. A Portfolio's use of these strategies may be limited by position and
exercise limits established by securities and commodities exchanges and other
applicable regulatory authorities.
Securities Options and Stock Index Options. Each Portfolio may write put and
call options on up to 25% of the net asset value of the stock and debt
securities in its portfolio and will realize fees (referred to as "premiums")
for granting the rights evidenced by the options. Each Portfolio may also
utilize up to 10% of 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, each Portfolio may also utilize up to 10% of its total
assets (in the case of the Emerging Markets Portfolio, 15% of total assets) to
purchase exchange-listed and OTC put and call options on stock indexes, and may
also write such options. A stock index measures the movement of a certain group
of stocks by assigning relative values to the common stocks included in the
index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate-
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited in
the amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of a Portfolio's assets that may be at risk with
respect to futures activities.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
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 Emerging Markets and International Equity Portfolios may enter into
swaps relating to indexes, currencies and equity interests of foreign issuers. A
swap transaction is an agreement between a Portfolio and a counterparty to act
in accordance with the terms of the swap contract. Index swaps involve the
exchange by a 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
14
<PAGE> 78
computed by reference to a notional amount based on the performance of a basket
of stocks or a single stock. A 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. These Portfolios 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 Emerging Markets and International Equity Portfolios 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 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 a Portfolio's borrowing restrictions. Where swaps are entered
into for other than hedging purposes, a Portfolio will segregate a net 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. The Portfolios may engage in options, futures,
currency transactions and swaps for, among other reasons, hedging purposes. 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, in the case of the Emerging Markets and International Equity
Portfolios, 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. Each Portfolio will engage in hedging transactions only when deemed
advisable by Warburg, and successful use of hedging transactions will depend on
Warburg's ability to 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 a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. A Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
forward currency contracts; and, in the case of the International Equity
Portfolio, 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 necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of a
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
SHORT SELLING. The Post-Venture Capital Portfolio may from time to time sell
securities short. A short sale is a transaction in which the Portfolio sells
borrowed securities in anticipation of a decline in the market price of the
securities. Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested. The current market value of the securities sold short (excluding short
sales "against the box") will not exceed 10% of the Portfolio's assets.
To deliver the securities to the buyer, the Post-Venture Capital Portfolio
must arrange through a broker to borrow the securities and, in so doing, the
Portfolio becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Portfolio will
make a profit or incur a loss as a result of a short sale depending on whether
the price of the securities decreases or increases between the date of the short
sale
15
<PAGE> 79
and the date on which the Portfolio purchases the security to replace the
borrowed securities that have been sold. The amount of any loss would be
increased (and any gain decreased) by any premium or interest the Portfolio is
required to pay in connection with a short sale.
The Post-Venture Capital Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by cash or liquid
securities deposited as collateral with the broker. In addition, the Portfolio
will place in a segregated account with its custodian or a qualified
subcustodian an amount of cash or liquid securities equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short and (ii) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). Until it replaces the borrowed securities, the Portfolio will
maintain the segregated account daily at a level so that (a) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market value
of the securities sold short and (b) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time they
were sold short.
Short Sales Against the Box. Each Portfolio may enter into a short sale of
securities such that when the short position is open a 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 a Portfolio to, for
example, lock in a sale price for a security the Portfolio does not wish to sell
immediately. A 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 a Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Post-Venture
Capital and Small Company Growth Portfolios may each utilize up to 20% of its
total assets to purchase securities on a when-issued basis and purchase or sell
securities on a delayed-delivery basis. In these transactions, payment for and
delivery of the securities occurs beyond the regular settlement dates. A
Portfolio will not enter into a when-issued or delayed-delivery transaction for
the purpose of leverage, but may sell the right to acquire a when-issued
security prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction if Warburg deems it advantageous to
do so. The payment obligation and the interest rate that will be received in
when-issued and delayed-delivery transactions are fixed at the time the buyer
enters into the commitment. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the prices of such
securities may be higher or lower than the prices available in the market on the
dates when the investments are actually delivered to the buyers.
Each Portfolio will establish a segregated account with its custodian
consisting of cash or liquid securities in an amount equal to the amount if its
when-issued and delayed-delivery purchase commitments and will segregate the
securities underlying commitments to sell securities for delayed-delivery.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that each Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS. The Trust employs Warburg as investment adviser to each
Portfolio and, with respect to the Post-Venture Capital Portfolio, Abbott as its
sub-investment adviser. Warburg, subject to the control of the Trust's officers
and the Board, manages the investment and reinvestment of the assets of each
Portfolio in accordance with the Portfolio's investment objective and stated
investment policies. Warburg makes investment decisions for each Portfolio and
places orders to purchase or sell securities on behalf of the Portfolio and,
with respect to the Post-Venture Capital Portfolio, supervises the activities of
Abbott. Warburg also employs a support staff of management
16
<PAGE> 80
personnel to provide services to the Portfolios and furnishes each Portfolio
with office space, furnishings and equipment. Abbott, in accordance with the
investment objective and policies of the Post-Venture Capital Portfolio, makes
investment decisions for the Portfolio regarding investments in Private Funds,
effects transactions in interests in Private Funds on behalf of the Portfolio
and assists in administrative functions relating to investments in Private
Funds.
For the services provided by Warburg, the Emerging Markets, International
Equity and Small Company Growth Portfolios pay Warburg a fee calculated at an
annual rate of 1.25%, 1.00% and .90%, respectively, of the relevant Portfolio's
average daily net assets. For the services provided by Warburg, the Post-Venture
Capital Portfolio pays Warburg a fee calculated at an annual rate of 1.25% of
the Fund's average daily net assets out of which Warburg pays Abbott for
sub-advisory services. Warburg and the Trust's co-administrators may voluntarily
waive a portion of their fees from time to time and temporarily limit the
expenses to be borne by a Portfolio.
Warburg. 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 February 28,
1998, Warburg managed approximately $20.9 billion of assets, including
approximately $11.9 billion of investment company assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has
no business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
Abbott. Abbott is an independent specialized investment firm with assets under
management of approximately $2.3 billion. Abbott is a registered investment
adviser which concentrates on venture capital, buyout and special situations
partnership investments. Abbott's management team provides full-service private
equity programs to clients. The predecessor firm to Abbott was organized in 1986
as a Delaware limited partnership and converted to a Delaware limited liability
company effective July 1, 1997. Abbott's principal business address is 50 Rowes
Wharf, Suite 240, Boston, Massachusetts 02110-3328.
PORTFOLIO MANAGERS
Emerging Markets Portfolio. Richard H. King and Vincent J. McBride have been
Co-Portfolio Managers of the Emerging Markets Portfolio since the Portfolio's
inception. Morid Kamshad has been Associate Portfolio Manager of the Emerging
Markets Portfolio since April 1998.
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989.
Mr. McBride is a Senior Vice President of Warburg and has been with Warburg
since 1994. Prior to joining Warburg, Mr. McBride was an international equity
analyst at Smith Barney Inc. Mr. Kamshad, a Vice President of Warburg, has been
with Warburg since July 1997. Prior to joining Warburg, Mr. Kamshad was a senior
investment manager at Pictet Asset Management from 1995 to 1997. From 1994 to
1995 he was investment analyst at HSBC Asset Management, prior to which time he
was a business development manager at Air Products and Chemicals-France.
International Equity Portfolio. Mr. King (described above), Harold W. Ehrlich
and Mr. McBride (also described above) serve as Co-Portfolio Managers and Nancy
Nierman serves as Associate Portfolio Manager of the International Equity
Portfolio. Mr. King has been a Portfolio Manager or Co-Portfolio Manager of the
Portfolio since its inception and Mr. Ehrlich, Mr. McBride and Ms. Nierman have
served the Portfolio in their respective capacities since April 1998. (Mr.
Ehrlich and Mr. McBride served as Associate Portfolio Managers and Research
Analysts of the Portfolio from its inception to April 1998.)
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. Ms. Nierman is a Vice
President of Warburg and has been with Warburg since April 1996, before which
time she was an analyst with Fiduciary Trust Company International.
Small Company Growth and Post-Venture Capital Portfolios. The Co-Portfolio
Managers of the Post-Venture Capital and Small Company Growth Portfolios have
been Elizabeth B. Dater and Stephen J. Lurito since the Portfolios' inception.
Robert S. Janis and Christopher M. Nawn have been Associate Portfolio Managers
and Research Analysts for the Post-Venture Capital Portfolio since its
inception.
Ms. Dater is a Managing Director of Warburg and has been a Portfolio Manager
of Warburg since 1978. Mr. Lurito is a Managing Director of Warburg and has been
with Warburg since 1987. Mr. Janis is a Senior Vice President of Warburg and 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 is also
a Senior Vice President of Warburg and 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 Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Mr. Held and Mr. Gray have been associated with Abbott and its
predecessor firm since 1986 and 1989, respectively.
17
<PAGE> 81
CO-ADMINISTRATORS. The Portfolios employ Counsellors Funds Service, Inc., a
wholly owned subsidiary of Warburg ("Counsellors Service"), as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Portfolios, including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolios
and their various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation each of the Emerging Markets and International Equity Portfolios
pays PFPC a fee calculated at an annual rate of .12% of the Portfolio's first
$250 million in average daily net assets, .10% of the next $250 million in
average daily net assets, .08% of the next $250 million in average daily net
assets, and .05% of average daily net assets over $750 million. Each of the
Post-Venture Capital and Small Company Growth Portfolios pays PFPC a fee
calculated at an annual rate of .10% of the Portfolio's first $500 million in
average daily net assets, .075% of the next $1 billion in average daily net
assets, and .05% of average daily net assets over $1.5 billion. PFPC has its
principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ("PNC"), serves as custodian of
each Portfolio's U.S. assets. State Street Bank and Trust Company ("State
Street") serves as custodian of each Portfolio's non-U.S. assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103. State Street's principal business
address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. It has
delegated most of its responsibilities to Boston Financial Data Services, Inc.
("BFDS"), an affiliated service company. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolios. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ("Service Organizations") with whom it enters into agreements up to .40%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with a 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 a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of Portfolio shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational
18
<PAGE> 82
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.
All investments in the Portfolios are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by a
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of a Portfolio on any day that the
Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of a Portfolio during the morning of the next business day with payment
for purchases to follow no later than the Portfolio's pricing on the next
business day. If payment for purchases is not received by such time, the
Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to a Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
Portfolio may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect that Portfolio's
ability to achieve its investment objective. In such event, however, it is
anticipated that existing Variable Contract owners and Plan participants would
be permitted to continue to authorize investment in such Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for following instructions communicated by telephone
that it reasonably believes to be genuine. Reasonable procedures will be
employed on behalf of the Portfolio to confirm that instructions communicated by
telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. Each Portfolio declares dividends from its net investment
income annually. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Distributions of net
realized long-term and short-term capital gains are declared annually and, as a
general rule, will be distributed or paid after the end of the fiscal year in
which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the relevant Portfolio at net asset value
unless, in the case of a Variable Contract, a Participating Insurance Company
elects to have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a "regulated investment
company" within the meaning of the Code. Each Portfolio intends to distribute
all of its net income and capital gains to its shareholders (the Variable
Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital
gains distributions from a Portfolio are taxable, if at all, to the
Participating Insurance Companies and Plans and will be exempt from current
taxation of the Variable Contract owner or Plan participant if left to
accumulate within the Variable Contract or Plan. Generally, withdrawals from
Variable Contracts or Plans may be subject to ordinary income tax and, if made
before age 59 1/2, a 10% penalty tax.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close
19
<PAGE> 83
the short sale. A Portfolio's use of short sales may also affect the holding
periods of certain securities held by the Portfolio if such securities are
"substantially identical" to securities used by the Portfolio to close the short
sale. The Portfolios' short selling activities will not result in unrelated
business taxable income to a tax-exempt investor.
Special Tax Matters Relating to the Emerging Markets and International Equity
Portfolios. Dividends and interest received by each of the Emerging Markets and
International Equity Portfolios may be subject to withholding and other taxes
imposed by foreign countries. However, tax conventions between certain countries
and the United States may reduce or eliminate such taxes. Shareholders will bear
the cost of foreign tax withholding in the form of increased expenses to the
Portfolio, but generally will not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the Portfolio by reason of the tax-deferred
status of Variable Contracts.
Internal Revenue Service Requirements. Each Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, 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 each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the closing
value on the date on which the valuation is made. Options and futures contracts
will be valued similarly. Debt obligations that mature in 60 days or less from
the valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value.
With respect to the Post-Venture Capital Portfolio, investments in Private
Funds will initially be valued at cost and, thereafter, will be valued in
accordance with periodic reports received by Abbott from the Private Funds
(generally quarterly). Because the issuers of securities held by Private Funds
are generally not subject to the reporting requirements of the federal
securities laws, interim changes in value of underlying holdings of Private
Funds will not generally be reflected in the Portfolio's net asset value.
However, Warburg will report to the Board information about certain holdings of
Private Funds that, in its judgment, could have a material impact on the
valuation of a Private Fund. The Board will take these reports into account in
valuing Private Funds.
Securities, options and futures contracts for which market quotations are not
readily available and other assets, including, with respect to the Post-Venture
Capital Portfolio, Private Funds, will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, each Portfolio may advertise its average annual total
return over various periods of time. These total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gains distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that
20
<PAGE> 84
such return may not be representative of a Portfolio's return over a longer
market cycle. Each Portfolio may also advertise its aggregate total return
figures for various periods, representing the cumulative change in value of an
investment in the Portfolio for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions).
Aggregate and average total returns may be shown by means of schedules, charts
or graphs and may indicate various components of total return (i.e., change in
value of initial investment, income dividends and capital gain distributions).
Investors should note that return figures are based on historical earnings and
are not intended to indicate future performance. The Statement of Additional
Information describes the method used to determine the total return. Current
total return figures may be obtained by calling (800) 369-2728.
A Portfolio or a Participating Insurance Company or Plan sponsor may compare
the Portfolio's performance with (i) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below; (ii) in the case of the Emerging Markets Portfolio,
the IFC Emerging Market Free Index, the IFC Investible Index and the Morgan
Stanley Capital International Emerging Markets Free Index and/or other indexes
prepared by Morgan Stanley relating to securities represented in the Portfolio;
in the case of the International Equity Portfolio, with the Morgan Stanley
Capital International Europe, Australasia, Far East ("EAFE") Index and/or other
indexes proposed by Morgan Stanley relating to securities represented in the
Portfolio, the Salomon Russell Global Equity Index, the FT-Actuaries World
Indices (jointly compiled by The Financial Times, Ltd., Goldman, Sachs & Co. and
NatWest Securities Ltd.) and the S&P 500 Index; in the case of the Post-Venture
Capital and Small Company Growth Portfolios, with appropriate indexes prepared
by Frank Russell Company relating to securities represented in these Portfolios,
and the S&P 500 Index and, in the case of the Post-Venture Capital Portfolio
only, with the Venture Capital 100 Index (compiled by Venture Capital Journal),
all of which are unmanaged indexes; or (iii) other appropriate indexes of
investment securities or with data developed by Warburg derived from such
indexes. The Post-Venture Capital Portfolio may also make comparisons using data
and indexes compiled by the National Venture Capital Association, Venture-One
and Private Equity Analysts Newsletter and similar organizations and
publications. A Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various periods of time. In addition, each
Portfolio or a Participating Insurance Company or Plan sponsor may from time to
time compare the Portfolio's expense ratio to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio activity, which may include a discussion of significant portfolio
holdings; analysis of holdings by industry, country, credit quality and other
characteristics; and comparison and analysis of the Portfolio with respect to
relevant market and industry benchmarks. The Post-Venture Capital Portfolio may
discuss characteristics of venture capital-financed companies and the benefits
expected to be achieved from investing in these companies. Each Portfolio may
also discuss the continuum of risk and return relating to different investments
and the potential impact of international securities on a portfolio otherwise
composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws
of The Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of five series have been authorized, four of which constitute the
interests in the Portfolios. The Board may classify or reclassify any of its
shares into one or more additional series without shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
21
<PAGE> 85
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
Participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in a Portfolio may conflict. The Board will monitor
the Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in one or all Portfolios. As a result, a Portfolio may
be forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of a Portfolio to any Variable Contract or Plan or may suspend or terminate the
offering of shares of a Portfolio if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PORTFOLIOS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
THE SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER MAY NOT LAWFULLY BE MADE.
22
<PAGE> 86
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 87
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolios' Expenses................................. 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 6
Portfolio Investments.................................... 9
Risk Factors and Special Considerations.................. 11
Portfolio Transactions and Turnover Rate................. 13
Certain Investment Strategies............................ 13
Investment Guidelines.................................... 16
Management of the Portfolios............................. 16
How to Purchase and Redeem Shares........................ 18
Dividends, Distributions and Taxes....................... 19
Net Asset Value.......................................... 20
Performance.............................................. 20
General Information...................................... 21
</TABLE>
[WARBURG PINCUS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRIUS-1-0498
<PAGE> 88
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST
-------------------------- GROWTH & INCOME PORTFOLIO
-------------------------- INTERNATIONAL EQUITY
PORTFOLIO
-------------------------- POST-VENTURE CAPITAL
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]
<PAGE> 89
PROSPECTUS April 30, 1998
Warburg Pincus Trust (the "Trust") is an open-end management investment company
that currently offers five investment funds, three of which are offered pursuant
to this Prospectus (the "Portfolios"):
The GROWTH & INCOME PORTFOLIO seeks long-term growth of capital and income by
investing primarily in dividend-paying equity securities.
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers. International investment
entails special risk considerations, including currency fluctuations, lower
liquidity, economic instability, political uncertainty and differences in
accounting methods. See "Risk Factors and Special Considerations."
The POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, an investment in the Portfolio involves certain
risks and may not be appropriate for all investors.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio 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 Portfolios. The Statement of Additional
Information is available to investors without charge by calling the Trust at
(800) 369-2728. Warburg Pincus Funds maintains 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 PORTFOLIOS 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 PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 90
THE PORTFOLIOS' EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth & International Equity Post-Venture
Income Portfolio Portfolio Capital Portfolio
---------------- --------- -----------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 0 0 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees........................................... 0.57% 1.00% 1.07%
12b-1 Fees................................................ 0 0 0
Other Expenses*........................................... 0.43% 0.36% 0.33%
---- ---- ----
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)................................ 1.00%* 1.36%**+ 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................................................... $10 $ 14 $ 14
3 years.................................................. $32 $ 43 $ 44
5 years.................................................. N/A $ 74 $ 77
10 years.................................................. N/A $164 $168
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses for the Growth & Income Portfolio are
based on annualized estimates of expenses for the fiscal year ending December
31, 1998, net of any fee waivers and/or expense reimbursements. Absent such
waivers and/or reimbursements, Management Fees for the Portfolio would equal
.75%; Other Expenses would equal .53%; and Total Portfolio Operating Expenses
would equal 1.28%. The Portfolio's investment adviser and co-administrator
have undertaken to limit the Portfolio's Total Portfolio Operating Expenses
to the limit shown in the table above through December 31, 1999.
** Annual Portfolio Operating Expenses for each of the International Equity and
Post-Venture Capital Portfolios are based on actual expenses for the fiscal
year ending December 31, 1997, net of any fee waivers and/or expense
reimbursements. Absent such waivers and/or reimbursements, Management Fees
for the Port-Venture Capital Portfolio would equal 1.25%; Other Expenses
would equal .44% and Total Portfolio Operating Expenses would equal 1.69%.
The investment adviser and co-administrator have undertaken to limit the
Post-Venture Capital Portfolio's Total Portfolio Operating Expenses to the
limits shown in the table above through December 31, 1999.
+ Operating expenses for the International Equity Portfolio were reduced by
.01% for the fiscal year ended December 31, 1997 as a result of certain
arrangements that served to offset portions of the Portfolio's transfer agent
expense. After reflecting these arrangements, "Total Portfolio Operating
Expenses (after fee waivers)" for the Portfolio were 1.35% for the fiscal
year ended December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
2
<PAGE> 91
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following information for each of the periods presented below has been
derived from information audited by Coopers & Lybrand L.L.P., independent
accountants, whose report dated February 9, 1998 is incorporated by reference in
the Statement of Additional Information. Further information about the
performance of the Portfolios is contained in the Trust's annual report, dated
December 31, 1997, copies of which may be obtained without charge by calling the
Trust at (800) 369-2728.
GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the Period
October 31, 1997
(Commencement of
Operations) through
December 31, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
------------
Income from Investment Operations:
Net Investment Income..................................... 0.04
Net Gain on Securities (both realized and unrealized)..... 0.35
------------
Total from Investment Operations......................... 0.39
------------
Less Distributions:
Dividends from Net Investment Income...................... (0.03)
Return of Capital......................................... (0.03)
------------
Total Distributions...................................... (0.06)
------------
NET ASSET VALUE, END OF PERIOD.............................. $10.33
============
Total Return................................................ 3.89%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $1,993
Ratios to Average Daily Net Assets:
Operating expenses........................................ 1.00%@*
Net investment income..................................... 2.08%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements................................. 9.42%*
Portfolio Turnover Rate..................................... 64.38%*
Average Commission Rate#.................................... $0.0599
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period to which there was a
commission charged.
3
<PAGE> 92
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
For the For the Period
Year Ended June 30, 1995
December 31, (Commencement of
--------------------- Operations) through
1997 1996 December 31, 1995
-------- -------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.48 $10.65 $10.00
------ ------ ------------
Income from Investment Operations:
Net Investment Income..................................... 0.10 0.00 0.03
Net Gain (Loss) from Securities and Foreign Currency
Related Items (both realized and unrealized)........... (0.37) 1.06 0.70
------ ------ ------------
Total from Investment Operations......................... (0.27) 1.06 .073
------ ------ ------------
Less Distributions:
Dividends from net investment income...................... (0.01) (0.06) (0.01)
Distributions in excess of net investment income.......... 0.00 (0.10) (0.07)
Distributions from realized gains......................... 0.00 (0.06) 0.00
Distributions in excess of realized gains................. (0.71) (0.01) 0.00
------ ------ ------------
Total Distributions...................................... (0.72) (0.23) (0.08)
------ ------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $10.49 $11.48 $10.65
====== ====== ============
Total Return................................................ (2.26)% 9.98% 7.30%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $347,229 $298,218 $64,537
Ratios to Average Daily Net Assets:
Operating expenses........................................ 1.36%@ 1.36%@ 1.44%*
Net investment income..................................... 0.66% 0.64% 0.48%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements.............................. 0.00% 0.04% 0.77%*
Portfolio Turnover Rate..................................... 78.65% 30.82% 8.31%+
Average Commission Rate#.................................... $.0163 $0.0232 --
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balance is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .01% and .00% for the years ended December 31, 1997
and 1996, respectively. The Portfolio's operating expense ratio after
reflecting these arrangements were 1.35% and 1.36% for the years ended
December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged. The Average Commission Rate is not required for fiscal
periods beginning before September 1, 1995.
4
<PAGE> 93
POST-VENTURE CAPITAL PORTFOLIO
<TABLE>
<CAPTION>
For the Period
September 30, 1996
For the (Commencement
Year Ended of Operations) through
December 31, 1997 December 31, 1996
----------------- ----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $9.76 $10.00
----------- -------------
Income from Investment Operations:
Net Investment Loss....................................... (0.08) 0.00
Net Gain (Loss) from Securities (both realized and
unrealized)............................................ 1.38 (0.24)
----------- -------------
Total from Investment Operations....................... 1.30 (0.24)
----------- -------------
NET ASSET VALUE, END OF PERIOD.............................. $11.06 $9.76
=========== =============
Total Return................................................ 13.34% (2.40%)+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $30,520 $12,400
Ratios to average daily net assets:
Operating expenses........................................ 1.40%@ 1.41%@*
Net investment income (loss).............................. (0.75%) .80%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements................................. 0.18% 4.16%
Portfolio Turnover Rate..................................... 238.12% 6.80%+
Average Commission Rate#.................................... $0.0548 $0.0491
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Portfolio's expenses by .00% and .01% for the year or period ended December
31, 1997 and 1996, respectively. The Portfolio's operating expense ratio
after reflecting these arrangements were 1.40% and 1.40% for the year or
period ended December 31, 1997 and 1996, respectively.
+ Non-annualized.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged.
5
<PAGE> 94
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
"Portfolio Investments" and "Certain Investment Strategies" for descriptions of
certain types of investments the Portfolios may make.
GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio's investment objectives are to seek long-term
growth of capital and income. The Portfolio is a diversified management
investment fund that pursues its objectives by investing primarily in equity
securities. The policy of the Portfolio is to invest, under normal market
conditions, substantially all of its assets in equity securities that Warburg
Pincus Asset Management, Inc., the Portfolio's investment adviser ("Warburg"),
considers to be relatively undervalued. Warburg will determine whether a company
is undervalued based upon research and analysis, taking into account, among
other factors, price/earnings ratio, price/book ratio, price/cash flow ratio,
earnings growth, debt/capital ratio and multiples of earnings of comparable
securities. Other relevant factors, including a company's asset value, franchise
value and quality of management, will also be considered. These factors are not
applied to prospective investments in a mechanical way; rather, Warburg analyzes
each security individually, taking all relevant factors into account. Equity
securities include common stocks, securities which are convertible into common
stocks and readily marketable securities, such as rights and warrants, which
derive their value from common stock.
The Portfolio may hold securities of any size, but currently expects to focus
on companies with market capitalizations of $1 billion or greater at the time of
initial purchase. The Portfolio seeks to achieve its income objective by
investing in dividend-paying equity securities, although the Portfolio may also
derive income from investing in fixed income securities. The amount of income
generated from the Portfolio will fluctuate, and investments in common stock in
general are subject to market risks that may cause their prices to fluctuate
over time. Therefore, an investment in the Portfolio may be more suitable for
long-term investors who can bear the risk of these fluctuations.
The Portfolio may invest up to 20% of its total assets in securities in
foreign issuers and may hold from time to time various foreign currencies
pending investment in foreign securities or conversion into U.S. dollars. The
Portfolio may also purchase without limitation dollar-denominated American
Depositary Receipts ("ADRs"). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to seek long term
capital appreciation. The Portfolio is a diversified investment fund that
pursues its investment objective by investing primarily in a broadly diversified
portfolio of equity securities of companies, wherever organized, that in the
judgment of Warburg, have their principal business activities and interests
outside of the United States. The Portfolio will ordinarily invest substantially
all of its assets -- but no less than 65% of its total assets -- in common
stocks, warrants and securities convertible into or exchangeable for common
stocks. Generally the Portfolio will hold no less than 65% of its total assets
in a least three countries other than the United States. The Portfolio intends
to be widely diversified across securities of many corporations located in a
number of different countries. Warburg anticipates, however, that the Portfolio
may from time to time invest a significant portion of its assets in a single
country such as Japan, which may involve special risks. See "Risk Factors and
Special Considerations -- Japanese Investments" below. In appropriate
circumstances, such as when a direct investment by the International Equity
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), invest in the
securities of closed-end investment companies that invest in foreign securities.
The Portfolio intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
POST-VENTURE CAPITAL PORTFOLIO
Because of the nature of the Post-Venture Capital Portfolio's investments and
certain strategies it may use, such as investing in Private Funds (as defined
below), an investment in the Portfolio should be considered only for the
aggressive portion of an investor's portfolio and may not be appropriate for all
investors.
The investment objective of the Post-Venture Capital Portfolio is to seek
long-term growth of capital. The Portfolio is a diversified portfolio that
pursues an aggressive investment strategy. The Portfolio pursues its investment
objective by investing primarily in equity securities of companies considered by
Warburg to be in their post-venture capital stage of development. Although the
Portfolio may invest up to 10% of its assets in venture capital and other
6
<PAGE> 95
investment funds, the Portfolio is not designed primarily to provide venture
capital financing. Rather, under normal market conditions, the Portfolio will
invest at least 65% of its total assets in equity securities of "post-venture
capital companies." A post-venture capital company is a company that has
received venture capital financing either (a) during the early stages of the
company's existence or the early stages of the development of a new product or
service or (b) as part of a restructuring or recapitalization of the company.
The investment of venture capital financing, distribution of such company's
securities to venture capital investors, or initial public offering ("IPO"),
whichever is later, will have been made within ten years prior to the
Portfolio's purchase of the company's securities.
Warburg believes that venture capital participation in a company's capital
structure can lead to revenue/earnings growth rates above those of older, public
companies such as those in the Dow Jones Industrial Average or the Fortune 500.
Venture capitalists finance start-up companies, companies in the early stages of
developing new products or services and companies undergoing a restructuring or
recapitalization, since these companies may not have access to conventional
forms of financing (such as bank loans or public issuances of stock). Venture
capitalists may hold substantial positions in companies that may have been
acquired at prices significantly below the initial public offering price. This
may create a potential adverse impact in the short-term on the market price of a
company's stock due to sales in the open market by a venture capitalist or
others who acquired the stock at lower prices prior to the company's IPO.
Warburg will consider the impact of such sales in selecting post-venture capital
investments. Venture capitalists may be individuals or funds organized by
venture capitalists which are typically offered only to large institutions, such
as pension funds and endowments, and certain accredited investors. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
Warburg has experience in researching smaller companies, companies in the
early stages of development and venture capital-financed companies. Its team of
analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 400 of the larger domestic
venture capital funds. Ms. Dater and Mr. Lurito have managed post-venture equity
securities in separate accounts for institutions since 1989 and currently manage
over $1 billion of such assets for institutions. The Portfolio will invest in
securities of post-venture capital companies that are traded on a national
securities exchange or in an organized over-the-counter market.
PRIVATE FUND INVESTMENTS. Up to 10% of the Post-Venture Capital Portfolio's
assets may be invested in United States or foreign private limited partnerships
or other investment funds ("Private Funds") that themselves invest in equity or
debt securities of (a) companies in the venture capital or post-venture capital
stages of development or (b) companies engaged in special situations or changes
in corporate control, including buyouts. In selecting Private Funds for
investment, Abbott Capital Management, LLC, the Portfolio's sub-investment
adviser with respect to Private Funds ("Abbott"), attempts to invest in a mix of
Private Funds that will provide an above average internal rate of return (i.e.,
the discount rate at which the present value of an investment's future cash
inflows (dividend income and capital gains) are equal to the cost of the
investment). Warburg believes that the Portfolio's investments in Private Funds
offer individual investors a unique opportunity to participate in venture
capital and other private investment funds, providing access to investment
opportunities typically available only to large institutions and accredited
investors. Although the Portfolio's investments in Private Funds are limited to
a maximum of 10% of the Portfolio's assets, these investments are highly
speculative and volatile and may produce gains or losses in this portion of the
Portfolio that exceed those of the Portfolio's other holdings and of more mature
companies generally.
Because Private Funds generally are investment companies for purposes of the
1940 Act, the Portfolio's ability to invest in them will be limited. In
addition, Portfolio shareholders will remain subject to the Portfolio's expenses
while also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Portfolio to dispose of interests in Private Funds is
very limited and will involve the risks described under "Risk Factors and
Special Considerations -- Non-Publicly Traded Securities; Rule 144A Securities."
In valuing the Portfolio's holdings of interests in Private Funds, the Portfolio
will be relying on the most recent reports provided by Abbott and by the Private
Funds themselves prior to calculation of the Portfolio's net asset value. These
reports, which are provided on an infrequent basis, often depend on the
subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "Net Asset Value." Debt
securities held by a Private Fund will tend to be rated below investment grade
and may be rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D
by Standard & Poor's Ratings Services ("S&P"). Securities in these ratings
categories are in payment default or have extremely poor prospects of attaining
any investment standing. For a discussion of the risks of investing in below
investment grade debt, see "Risk Factors and Special Considerations -- Below
Investment Grade Securities" below and "Investment Policies -- Below Investment
Grade Debt Securities" in the Statement of Additional Information. For a
discussion of the possible tax consequences of investing in foreign Private
Funds, see "Additional Information Concerning Taxes -- Investment in Passive
Foreign Investment Companies" in the Statement of Additional Information.
7
<PAGE> 96
The Portfolio may also hold non-publicly traded equity securities of companies
in the venture and post-venture stages of development, such as those of closely
held companies or private placements of public companies. The portion of the
Portfolio's assets invested in these non-publicly traded securities will vary
over time depending on investment opportunities and other factors. The
Portfolio's illiquid assets, including interests in Private Funds and other
illiquid non-publicly traded securities, may not exceed 15% of net assets.
OTHER STRATEGIES. The Post-Venture Capital Portfolio may invest up to 35% of
its assets in exchange-traded and over-the-counter securities that do not meet
the definition of post-venture capital companies without regard to market
capitalization. The Portfolio's assets may be invested, directly or through
Private Funds, in securities of issuers engaged at the time of purchase in
"special situations," such as a restructuring or recapitalization; an
acquisition, consolidation, merger or tender offer; or a change in corporate
control or investment by a venture capitalist.
To attempt to reduce risk, the Portfolio will diversify its investments over a
broad range of issuers operating in a variety of industries. The Portfolio may
hold securities of companies of any size, and will not limit capitalization of
companies it selects to invest in. However, due to the nature of the venture
capital to post-venture cycle, the Portfolio anticipates that the average market
capitalization of companies in which it invests will be less than $1 billion at
the time of investment. Although the Portfolio will invest primarily in U.S.
companies, up to 20% of the Portfolio's assets may be invested in securities of
issuers located in any foreign country. Equity securities in which the Portfolio
will invest are common stock, preferred stock, warrants, securities convertible
into or exchangeable for common stock and partnership interests. The Portfolio
may engage in a variety of strategies to reduce risk or seek to enhance return,
including engaging in short selling (see "Certain Investment Strategies").
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The Growth & Income Portfolio may invest up to 20% of its
total assets in debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking growth of capital and income. The International Equity Portfolio may
invest up to 35% of its total assets in investment grade debt securities (other
than money market obligations) and preferred stocks that are not convertible
into common stock for the purpose of seeking capital appreciation. The
Post-Venture Capital Portfolio may invest up to 20% of its total assets in
investment grade 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 expected to
decline. The success of such a strategy is dependent upon Warburg's ability to
accurately forecast changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated or its
rating may be reduced. Neither event will require sale of such securities,
although Warburg will consider such event in its determination of whether the
Portfolio should continue to hold the securities.
When Warburg believes that a defensive posture is warranted, each Portfolio
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
When such a defensive posture is warranted, the Emerging Markets Portfolio may
also invest temporarily without limit in other securities of U.S. companies.
INVESTMENT POLICIES OF THE GROWTH & INCOME PORTFOLIO ONLY.
Below Investment Grade Securities. Within the Growth & Income Portfolio's 20%
limitation on investments in debt securities, up to 10% of the Portfolio's
assets may be invested in debt securities rated below investment grade,
including convertible debt securities. The Portfolio's holdings of debt
securities rated below investment grade (commonly referred to as "junk bonds")
may be rated as low as C by Moody's or D by S&P at the time of purchase, or may
be unrated securities and considered to be of equivalent quality.
Asset-Backed and Mortgage-Backed Securities. In addition to the Growth &
Income Portfolio's authority to invest in money market securities but within the
20% limitation on investments in debt securities, the Portfolio may invest up to
5% of its net assets in asset-backed securities and mortgage-backed securities.
Asset-backed securities are collateralized by interests in pools of consumer
loans, with interest and principal payments ultimately depending on payments in
respect of the underlying loans by individuals (or a financial institution
providing credit enhancement). Because market experience in these securities is
limited, the market's
8
<PAGE> 97
ability to sustain liquidity through all phases of the market cycle has 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 governments 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 markets 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. Each 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 similar institutions)
that are high quality investments or, if unrated, deemed by Warburg to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Portfolios may 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, a
Portfolio would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Portfolio bears a risk of loss in
the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period in which the Portfolio seeks to assert this right. Warburg, acting under
the supervision of the Trust's Board of Trustees (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which each Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it would be beneficial
to the Portfolio and appropriate considering the factors of return and
liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or Warburg.
As a shareholder in any mutual fund, a Portfolio will bear its ratable share of
the mutual fund's expenses, including management fees, and will remain subject
to payment of the Portfolio's administrative fees and other expenses with
respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Portfolio
may invest include: direct obligations of the U.S. Treasury, obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Portfolio may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a 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 Growth & Income Portfolio may invest up to 15% of its total
assets in warrants and the International Equity and Post-Venture Capital
Portfolios may each 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.
9
<PAGE> 98
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to each Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
EMERGING MARKETS. The International Equity 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. For example, many investments in emerging markets experienced
significant declines in value due to political and currency volatility in
emerging market countries during the latter part of 1997. 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.
JAPANESE INVESTMENTS. The International Equity Portfolio may from time to time
have a large position in Japanese securities and, as a result, would be subject
to general economic and political conditions in Japan. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of its large trade surpluses Japan has
entered a difficult phase in its relations with certain trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States.
Japan has a parliamentary form of government. Since mid-1993, there have been
several changes in leadership in Japan. What, if any, effect the current
political situation will have on prospective regulatory reforms on the economy
cannot be predicted. For additional information, see "Investment
Policies -- Japanese Investments" in the Statement of Additional Information.
SMALLER CAPITALIZATION AND EMERGING GROWTH COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth and small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers"), may involve greater risks than investing in larger, more
established companies since these securities may have limited marketability and,
thus, may be more volatile than securities of larger, more established companies
or the market averages in general. Because these issuers normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. These issuers may have limited product lines, markets or
financial resources and may lack management depth. In addition, these issuers
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 these issuers 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; or litigation which, if resolved
favorably, would improve the value of the companies' securities. Although
investing in securities of these companies offers potential for above-average
returns if the companies are successful, the risk exists that the companies will
not succeed and the prices of the companies' shares could significantly decline
in value. Therefore, an investment in either Portfolio may involve a greater
degree of risk than an investment in other mutual funds that seek capital growth
by investing in better-known, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolios may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "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 each Portfolio's limitation on the purchase of illiquid
securities, unless the Board determines on an ongoing basis that an adequate
trading market exists for the security. In addition to an adequate trading
market, the Board will also consider factors such as trading activity,
availability of reliable price information and other relevant information in
determining whether a Rule 144A Security is liquid. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become uninterested for a time
in purchasing Rule 144A Securities. The
10
<PAGE> 99
Board will carefully monitor any investments by the Portfolios 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 and interests
in Private Funds) may involve a high degree of business and financial risk and
may result in substantial losses. The securities may be less liquid than
publicly traded securities and a Portfolio may take longer to liquidate these
positions than would be the case for publicly traded securities. Although these
securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio. Further, companies whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. A Portfolio's investment
in illiquid securities is subject to the risk that should the Portfolio desire
to sell any of these securities when a ready buyer is not available at a price
that is deemed to be representative of their value, the value of the Portfolio's
net assets could be adversely affected.
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 leveraging 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.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade and
comparable unrated securities (i) will likely have some quality and protective
characteristics that, in the judgment of the ratings 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, these securities generally present a
higher degree of credit risk. The risk of loss due to default by such issuers is
significantly greater because these securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, a 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 a 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.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolios and their
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolios' other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolios nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolios'
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolios' foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Portfolios' other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolios' other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. The
Portfolios will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
It is not possible to predict the Portfolios' turnover rate. High portfolio
11
<PAGE> 100
turnover rates (100% or more) may result in higher dealer mark-ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See "Dividends, Distributions and Taxes -- Taxes" below and "Investment
Policies -- Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ("Counsellors Securities"). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Although there is no intention of doing so during the coming year, each
Portfolio is authorized to engage in the following investment strategies: (i)
lending portfolio securities and (ii) entering into reverse repurchase
agreements and dollar rolls. In addition, although each Portfolio may purchase
securities on a when-issued basis and sell securities for delayed delivery, the
International Equity Portfolio has no intention of doing so during the coming
year. Detailed information concerning the Portfolios' strategies and their
related risks is contained below and in the Statement of Additional Information.
FOREIGN SECURITIES. The International Equity Portfolio will ordinarily hold no
less than 65% of its total assets in foreign securities and the Growth & Income
and Post-Venture Capital Portfolios may each invest up to 20% of its total
assets in the securities of foreign issuers. There are certain risks involved in
investing in securities of companies and governments of foreign nations which
are in addition to the usual risks inherent in U.S. investments. These risks
include those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, the lack of uniform accounting, auditing and financial
reporting standards and other regulatory practices and requirements that are
often generally less rigorous than those applied in the United States. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Portfolios, including the withholding of dividends. Foreign
securities may be subject to foreign government taxes that would reduce the net
yield on such securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Investment in foreign
securities will also result in higher operating expenses due to the cost of
converting foreign currency into U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
U.S. exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians. The risks associated with
investing in securities of non-U.S. issuers are generally heightened for
investments in securities of issuers in emerging markets.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with ADRs,
European Depositary Receipts ("EDRs") and International Depositary Receipts
("IDRs"), instruments that evidence ownership in underlying securities issued by
a foreign corporation. ADRs, EDRs and IDRs may not necessarily be denominated in
the same currency as the securities whose ownership they represent. ADRs are
typically issued by a U.S. bank or trust company. EDRs (sometimes referred to as
Continental Depositary Receipts) are issued in Europe, and IDRs (sometimes
referred to as Global Depositary Receipts) are issued outside the United States,
each typically by non-U.S. banks and trust companies.
REITS. The Growth & Income Portfolio may invest up to 15% of its total assets
in real estate investment trusts ("REITs"), which are pooled investment vehicles
that invest primarily in income-producing real estate or real estate related
loans or interests. Like regulated investment companies such as the Trust, REITs
are not taxed on income distributed to shareholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). By investing in a REIT, the Portfolio will indirectly bear its
proportionate share of any expenses paid by the REIT in addition to the expenses
of the Portfolio.
Investing in REITs involves certain risks. A REIT may be affected by changes
in the value of the underlying property owned by such REIT or by the quality of
any credit extended by the REIT. REITs are dependent on management skills, are
not diversified (except to the extent the Code requires), and are subject to the
risks of financing projects. REITs are subject to heavy cash flow dependency,
default by borrowers, self-liquidation, the possibilities of
12
<PAGE> 101
failing to qualify for the exemption from tax for distributed income under the
Code and failing to maintain their exemptions from the 1940 Act. REITs are also
subject to interest rate risks.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, each Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts and, in the case of the International Equity
Portfolio, swaps. These strategies, commonly referred to as "derivatives," may
be used (i) for the purpose of hedging against a decline in value of a
Portfolio's current or anticipated portfolio holdings, (ii) as a substitute for
purchasing or selling portfolio securities or (iii) to seek to generate income
to offset expenses or increase return. TRANSACTIONS THAT ARE NOT CONSIDERED
HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE A PORTFOLIO'S
INVESTMENT RISK. Transaction costs and any premiums associated with these
strategies, and any losses incurred, will affect a Portfolio's net asset value
and performance. Therefore, an investment in a Portfolio may involve a greater
risk than an investment in other mutual funds that do not utilize these
strategies. A Portfolio's use of these strategies may be limited by position and
exercise limits established by securities and commodities exchanges and other
applicable regulatory authorities.
Securities Options and Stock Index Options. Each Portfolio may write put and
call options on the stock and debt securities in its portfolio (in the case of
the International Equity and Post-Venture Capital Portfolios, up to 25% of each
Portfolio's net asset value), and will realize fees (referred to as "premiums")
for granting the rights evidenced by the options. The International Equity and
Post-Venture Capital Portfolios may also each 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, each Portfolio may also purchase
exchange-listed and OTC put and call options on stock indexes, and may also
write such options (in the case of each of the International Equity and
Post-Venture Capital Portfolios, up to 10% of its total assets). A stock index
measures the movement of a certain group of stocks by assigning relative values
to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Commodity Options. Each Portfolio may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although a Portfolio is limited in
the amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of a Portfolio's assets that may be at risk with
respect to futures activities.
Currency Exchange Transactions. Each Portfolio will conduct its currency
exchange transactions either (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on futures contracts (as described above), (iii) through
entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
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 International Equity 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
13
<PAGE> 102
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 International Equity 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 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 a 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. Each Portfolio may engage in options, futures,
currency transactions and swaps for, among other reasons, hedging purposes. 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, in the case of the International Equity Portfolio, 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. Each Portfolio will
engage in hedging transactions only when deemed advisable by Warburg, and
successful use of hedging transactions will depend on Warburg's ability to
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 a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. A Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities and indexes; currency, interest
rate and stock index futures contracts and options on these futures contracts;
forward currency contracts; and, in the case of the International Equity
Portfolio, 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 necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of a
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
SHORT SELLING. The Post-Venture Capital Portfolio may from time to time sell
securities short. A short sale is a transaction in which the Portfolio sells
borrowed securities in anticipation of a decline in the market price of the
securities. Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested. The current market value of the securities sold short (excluding short
sales "against the box") will not exceed 10% of the Portfolio's assets.
To deliver the securities to the buyer, the Post-Venture Capital Portfolio
must arrange through a broker to borrow the securities and, in so doing, the
Portfolio becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Portfolio will
make a profit or incur a loss as a result of a
14
<PAGE> 103
short sale depending on whether the price of the securities decreases or
increases between the date of the short sale and the date on which the Portfolio
purchases the security to replace the borrowed securities that have been sold.
The amount of any loss would be increased (and any gain decreased) by any
premium or interest the Portfolio is required to pay in connection with a short
sale.
The Post-Venture Capital Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by cash or liquid
securities deposited as collateral with the broker. In addition, the Portfolio
will place in a segregated account with its custodian or a qualified
subcustodian an amount of cash or liquid securities equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short and (ii) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). Until it replaces the borrowed securities, the Portfolio will
maintain the segregated account daily at a level so that (a) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market value
of the securities sold short and (b) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time they
were sold short.
Short Sales Against the Box. Each Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an equal
amount of the securities sold short or owns preferred stocks or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one "against the box," may be entered into by a Portfolio to, for
example, lock in a sale price for a security the Portfolio does not wish to sell
immediately. The Portfolio will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or convertible
or exchangeable preferred stocks or debt securities in connection with short
sales against the box. Not more than 10% of the Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Growth & Income
and Post-Venture Capital Portfolios may each utilize up to 20% of its total
assets to purchase securities on a when-issued basis and purchase or sell
securities on a delayed-delivery basis. In these transactions, payment for and
delivery of the securities occurs beyond the regular settlement dates. A
Portfolio will not enter into a when-issued or delayed-delivery transactions for
the purpose of leverage, but may sell the right to acquire a when-issued
security prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction if Warburg deems it advantageous to
do so. The payment obligation and the interest rate that will be received in
when-issued and delayed-delivery transactions are fixed at the time the buyer
enters into the commitment. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the prices of such
securities may be higher or lower than the prices available in the market on the
dates when the investments are actually delivered to the buyers.
A Portfolio will establish a segregated account with its custodian consisting
of cash or liquid securities in an amount equal to the amount of its when-issued
and delayed-delivery purchase commitments and will segregate the securities
underlying commitments to sell securities for delayed delivery.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that each Portfolio has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Portfolio's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS. The Trust employs Warburg as investment adviser to each
Portfolio. The Post-Venture Capital Portfolio also employs Abbott as its
sub-investment adviser. Warburg, subject to the control of the Trust's officers
and the Board, manages the investment and reinvestment of the assets of each
Portfolio in accordance with the Portfolio's investment objective and stated
investment policies. Warburg makes investment decisions for each Portfolio,
places orders to purchase or sell securities on behalf of the Portfolio and,
with respect to the Post-Venture
15
<PAGE> 104
Capital Portfolio, supervises the activities of Abbott. Warburg also employs a
support staff of management personnel to provide services to the Portfolios and
furnishes each Portfolio with office space, furnishings and equipment. Abbott,
in accordance with the investment objective and policies of the Post-Venture
Capital Portfolio, makes investment decisions for the Portfolio regarding
investments in Private Funds, effects transactions in interests in Private Funds
on behalf of the Portfolio and assists in administrative functions relating to
investments in Private Funds.
For the services provided by Warburg, the Growth & Income, International
Equity and Post-Venture Capital Portfolios pay Warburg a fee calculated at an
annual rate of .75%, 1.00% and 1.25%, respectively, of the relevant Portfolio's
average daily net assets. Warburg pays Abbott for sub-investment advisory
services out of the fee it receives from the Post-Venture Capital Portfolio.
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 a
Portfolio.
Warburg. 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 February 28,
1998, Warburg managed approximately $20.9 billion of assets, including
approximately $11.9 billion of investment company assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has
no business other than being a holding company of Warburg and its affiliates.
Lionel I. Pincus, the managing partner of WP&Co., may be deemed to control both
WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
Abbott. Abbott is an independent specialized investment firm with assets under
management of approximately $2.3 billion. Abbott is a registered investment
adviser which concentrates on venture capital, buyout and special situations
partnership investments. Abbott's management team provides full-service private
equity programs to clients. The predecessor firm to Abbott was organized in 1986
as a Delaware limited partnership and converted to a Delaware limited liability
company effective July 1, 1997. Abbott's principal business address is 50 Rowes
Wharf, Suite 240, Boston, Massachusetts 02110-3328.
PORTFOLIO MANAGERS
Growth & Income Portfolio. Brian S. Posner has been the Portfolio Manager of
the Portfolio since its inception. Mr. Posner, a Managing Director of Warburg
since January 1997, was an employee of Fidelity Investments ("Fidelity") from
1987 until December 1996. He was the vice president and portfolio manager of the
Fidelity Equity-Income II Fund (1992-December 1996); the portfolio manager of
the Fidelity Value Fund (1990-1992); assistant portfolio manager of the Fidelity
Equity-Income Fund (1989-1990); assistant portfolio manager of the Fidelity
Capital Appreciation Fund (1989); portfolio manager of the Fidelity Select
Property-Casualty Insurance Portfolio (1987-1990).
International Equity Portfolio. Richard H. King, Harold W. Ehrlich and Vincent
J. McBride serve as Co-Portfolio Managers and Nancy Nierman serves as Associate
Portfolio Manager of the International Equity Portfolio. Mr. King has been a
Portfolio Manager or Co-Portfolio Manager of the Portfolio since inception, and
Mr. Ehrlich, Mr. McBride and Ms. Nierman have served the Portfolio in their
respective capacities since April 1998. (Mr. Ehrlich and Mr. McBride served as
Associate Portfolio Managers and Research Analysts of the Portfolio from its
inception to April 1998.)
Mr. King, a Managing Director of Warburg, has been with Warburg since 1989.
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. Mr. McBride, a Senior
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.
Ms. Nierman is a Vice President of Warburg and has been with Warburg since April
1996, before which time she was an analyst with Fiduciary Trust Company
International.
Post-Venture Capital Portfolio. The Co-Portfolio Managers of the Post-Venture
Capital Portfolio have been Elizabeth B. Dater and Stephen J. Lurito since its
inception. Robert S. Janis and Christopher M. Nawn, have been Associate
Portfolio Managers and Research Analysts for the Post-Venture Capital Portfolio
since its inception.
Ms. Dater is a Managing Director of Warburg and has been a portfolio manager
of Warburg since 1978. Mr. Lurito is a Managing Director of Warburg and has been
with Warburg since 1987. Mr. Janis is a Senior Vice President of Warburg and 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 is also
a Senior Vice President of Warburg and 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 Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Mr. Held and Mr. Gray have been associated with Abbott and its
predecessor firm since 1986 and 1989, respectively.
CO-ADMINISTRATORS. The Portfolios employ Counsellors Funds Service, Inc., a
wholly owned subsidiary of Warburg ("Counsellors Service"), as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison
16
<PAGE> 105
services to the Portfolios, including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Portfolios and their
various service providers, furnishing corporate secretarial services, which
include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation, the Growth & Income Portfolio pays PFPC a fee calculated at an
annual rate of .15% of the Portfolio's first $500 million in average daily net
assets, .10% of the next $1 billion in average daily net assets and .05% of
average daily net assets over $1.5 billion; the International Equity Portfolio
pays PFPC a fee calculated at an annual rate of .12% of the Portfolio's first
$250 million in average daily net assets, .10% of the next $250 million in
average daily net assets, .08% of the next $250 million in average daily net
assets, and .05% of average daily net assets over $750 million; and the
Post-Venture Capital Portfolio pays PFPC a fee calculated at an annual rate of
.10% of the first $500 million in average daily net assets, .075% of the next $1
billion in average daily net assets, and .05% of average daily net assets over
$1.5 billion. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ("PNC"), serves as custodian of
each Portfolio's U.S. assets and State Street Bank and Trust Company ("State
Street") serves as custodian of each Portfolio's non-U.S. assets. Like PFPC, PNC
is a subsidiary of PNC Bank Corp. and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103. State Street's principal
business address is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. It has
delegated most of its responsibilities to Boston Financial Data Services, Inc.
("BFDS"), an affiliated service company. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolios. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ("Service Organizations") with whom it enters into agreements up to .40%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with a 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 a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of Portfolio shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select a
Portfolio as an investment option for a Variable Contract or Plan.
17
<PAGE> 106
All investments in the Portfolios are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by a
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of a Portfolio on any day that the
Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of one or both Portfolios during the morning of the next business day
with payment for purchases to follow no later than the Portfolio's pricing on
the next business day. If payment for purchases is not received by such time,
the Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to a Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
Portfolio may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect that Portfolio's
ability to achieve its investment objective. In such event, however, it is
anticipated that existing Variable Contract owners and Plan participants would
be permitted to continue to authorize investment in such Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for the following instructions communicated by
telephone that it reasonably believes to be genuine. Reasonable procedures will
be employed on behalf of the Portfolio to confirm that instructions communicated
by telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. The Growth & Income Portfolio declares dividends from its
net investment income quarterly and the International Equity and Post-Venture
Capital Portfolios each declare dividends from its net investment income
annually. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Distributions of net realized
long-term and short-term capital gains are declared annually and, as a general
rule, will be distributed or paid after the end of the fiscal year in which they
are earned. Dividends and distributions will automatically be reinvested in
additional shares of the relevant Portfolio at net asset value unless, in the
case of a Variable Contract, a Participating Insurance Company elects to have
dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a "regulated investment
company" within the meaning of the Code. Each Portfolio intends to distribute
all of its net income and capital gains to its shareholders (the Variable
Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital gain
distributions from a Portfolio are taxable, if at all, to the Participating
Insurance Companies and Plans and will be exempt from current taxation of the
Variable Contract owner or Plan participant if left to accumulate within the
Variable Contract or Plan. Generally, withdrawals from Variable Contracts or
Plans may be subject to ordinary income tax and, if made before age 59 1/2, a
10% penalty tax.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close
18
<PAGE> 107
the short sale. A Portfolio's use of short sales may also affect the holding
periods of certain securities held by the Portfolio if such securities are
"substantially identical" to securities used by the Portfolio to close the short
sale. The Portfolios' short selling activities will not result in unrelated
business taxable income to a tax-exempt investor.
Special Tax Matters Relating to the International Equity Portfolio. Dividends
and interest received by the Portfolio may be subject to withholding and other
taxes imposed by foreign countries. However, tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
will bear the cost of foreign tax withholding in the form of increased expenses
to the Portfolio, but generally will not be able to claim a foreign tax credit
or deduction for foreign taxes paid by the Portfolio by reason of the
tax-deferred status of Variable Contracts.
Internal Revenue Service Requirements. Each Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, 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 each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued on the basis of the closing
value on the date on which the valuation is made. Options and futures contracts
will be valued similarly. Debt obligations that mature in 60 days or less from
the valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value. Investments in Private Funds initially will be valued at cost and,
thereafter, will be valued in accordance with periodic reports received by
Abbott from the Private Funds (generally quarterly). Because the issuers of
securities held by Private Funds are generally not subject to the reporting
requirements of the federal securities laws, interim changes in value of
underlying holdings of Private Funds will not generally be reflected in the
Post-Venture Capital Portfolio's net asset value. However, Warburg will report
to the Board of Trustees information about certain holdings of Private Funds
that, in its judgment, could have a material impact on the valuation of a
Private Fund. The Board of Trustees will take these reports into account in
valuing Private Funds. Securities, options and futures contracts for which
market quotations are not readily available and other assets, including Private
Funds, will be valued at their fair value as determined in good faith pursuant
to consistently applied procedures established by the Board. Further information
regarding valuation policies is contained in the Statement of Additional
Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, each Portfolio may advertise its average annual total
return over various periods of time. These total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gain distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of a
Portfolio's return over a longer market cycle. Each Portfolio may also advertise
its aggregate total return figures for various periods, representing the
cumulative change in value of an
19
<PAGE> 108
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.
A Portfolio or a Participating Insurance Company or Plan sponsor may describe
the Portfolio's performance may be compared with (i) that of other mutual funds
as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar investment services that monitor the performance of mutual funds or as
set forth in the publications listed below; (ii) in the case of the Growth &
Income Portfolio, with the S&P 500 Index, which is an unmanaged index of common
stocks; in the case of the International Equity Portfolio, with the Morgan
Stanley Capital International Europe, Australasia, Far East ("EAFE") Index
and/or other indexes prepared by Morgan Stanley relating to securities
represented in the Portfolio, the Salomon Russell Global Equity Index, the
PT-Actuaries World Indices (jointly compiled by The Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltds.) and the S&P 500 Index, all of
which are unmanaged indexes; and, in the case of the Post-Capital Venture
Portfolio, with the Venture Capital 100 Index (compiled by Venture Capital
Journal), appropriate indexes prepared by Frank Russell Company relating to
securities represented in the Portfolio, and the S&P 500 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 Post-Venture Capital Portfolio may also make comparisons using data
and indexes compiled by the National Venture Capital Association, Venture-One
and Private Equity Analysts Newsletter and similar organizations and
publications. A Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various periods of time. In addition, each
Portfolio or a Participating Insurance Company or Plan sponsor may from time to
time compare the Portfolio's expense ratio to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio activity, which may include a discussion of significant portfolio
holdings; analysis of holdings by industry, country, credit quality and other
characteristics; and comparison and analysis of the Portfolio with respect to
relevant market and industry benchmarks. The Post-Venture Capital Portfolio may
discuss characteristics of venture capital financed companies and the benefits
expected to be achieved from investing in these companies. Each Portfolio may
also discuss the continuum of risk and return relating to different investments
and the potential impact of international securities on a portfolio otherwise
composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on March 15, 1995 under the laws
of The Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of five series have been authorized, three of which constitute the
interests in the Portfolios. The Board may classify or reclassify any of its
shares into one or more additional series without shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting
20
<PAGE> 109
rights to Plan participants, depending on the terms of the Plan's governing
documents. For a more complete discussion of voting rights, refer to the
sponsoring Participating Insurance Company separate account prospectus or the
Plan documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
Participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in a Portfolio may conflict. The Board will monitor
the Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in one or both Portfolios. As a result, a Portfolio may
be forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of a Portfolio to any Variable Contract or Plan or may suspend or terminate the
offering of shares of a Portfolio if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THIS PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
THE SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER MAY NOT LAWFULLY BE MADE.
21
<PAGE> 110
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 111
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolios' Expenses................................. 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 6
Portfolio Investments.................................... 8
Risk Factors and Special Considerations.................. 10
Portfolio Transactions and Turnover Rate................. 11
Certain Investment Strategies............................ 12
Investment Guidelines.................................... 15
Management of the Portfolios............................. 15
How to Purchase and Redeem Shares........................ 17
Dividends, Distributions and Taxes....................... 18
Net Asset Value.......................................... 19
Performance.............................................. 19
General Information...................................... 20
</TABLE>
[WARBURG PINCUS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRGIP-1-0498
<PAGE> 112
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
WARBURG PINCUS TRUST
EMERGING MARKETS PORTFOLIO
GROWTH & INCOME PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
POST-VENTURE CAPITAL PORTFOLIO
SMALL COMPANY GROWTH PORTFOLIO
P.O. Box 4906, Grand Central Station, New York, NY 10163
For information, call (800) 369-2728
CONTENTS
Page
----
Investment Objectives.........................................................1
Investment Policies...........................................................2
Management Of The Trust......................................................34
Additional Purchase And Redemption Information...............................42
Additional Information Concerning Taxes......................................43
Determination Of Performance.................................................45
Independent Accountants And Counsel..........................................48
Miscellaneous................................................................48
Financial Statements.........................................................50
Appendix -- Description of Ratings..........................................A-1
Warburg Pincus Trust ("Trust") currently offers five managed
investment funds which are described in this Statement of Additional
Information, the Emerging Markets Portfolio, the Growth & Income Portfolio, the
International Equity Portfolio, the Post-Venture Capital Portfolio and the Small
Company Growth 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, 1998, 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 obtained by calling the Trust at (800) 369-2728 or by writing
to the Trust, P.O. Box 4906, Grand Central Station, New York, NY 10163.
<PAGE> 113
INVESTMENT OBJECTIVES
The investment objective of each of the Emerging Markets
Portfolio and the Post-Venture Capital Portfolio is long-term growth of capital.
The investment objectives of the Growth & Income Portfolio are long-term growth
of capital and income. The investment objective of the International Equity
Portfolio is long-term capital appreciation. The investment objective of the
Small Company Growth Portfolio is capital growth.
INVESTMENT POLICIES
The following policies supplement the descriptions of each
Portfolio's investment objective and policies in the Prospectus.
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 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
2
<PAGE> 114
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 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
3
<PAGE> 115
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 may restrict the number of options
a Portfolio will be able to purchase on a particular security.
4
<PAGE> 116
Securities Index Options. Each Portfolio may purchase
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities 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 securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities 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 securities 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. Securities 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 securities 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 the written option until the option
expires or is exercised. This requirement may impair the
5
<PAGE> 117
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 securities 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.
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. Securities indexes are capitalization
weighted indexes which reflect the market value of the securities listed on the
indexes. A securities 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 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
securities 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
6
<PAGE> 118
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 securities index
futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Portfolio.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Portfolio that are invested in foreign securities may be
affected favorably or unfavorably by
7
<PAGE> 119
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
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
8
<PAGE> 120
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 prices in the securities market generally
or, in the case of certain indexes, in an industry or market segment, rather
than movements in the price of a particular security. The risk of imperfect
correlation increases as the composition of the Portfolio's portfolio varies
from the composition of the index. In an effort to compensate for imperfect
correlation of relative movements in the hedged position and the hedge, the
Portfolio's hedge positions may be in a greater or lesser dollar amount than the
dollar amount of the hedged position. Such "over hedging" or "under hedging" may
adversely affect the Portfolio's net investment results if market movements are
not as anticipated when the hedge is established. Securities index futures
transactions may be subject to additional correlation risks. First, all
participants
9
<PAGE> 121
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 securities 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 securities 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
predict correctly 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 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.
10
<PAGE> 122
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 Emerging Markets and
International Equity Portfolios will, and the Growth & Income, 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.
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
11
<PAGE> 123
other assets of the Portfolio, political or social instability, or domestic
developments which could affect U.S. investments in those and neighboring
countries.
Delays. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure of a Portfolio to market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on a
Portfolio's liquidity, the Portfolios will avoid investing in countries which
are known to experience settlement delays which may expose the Portfolios to
unreasonable risk of loss.
Increased Expenses. The operating expenses of the
International Equity Portfolio 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 international funds, are higher than those costs incurred
by other investment companies.
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.
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
12
<PAGE> 124
the ECU may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies.
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.
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.
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
13
<PAGE> 125
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.
Below Investment Grade Securities. While the market values of
below investment grade securities tend to react less to fluctuations in interest
rate levels than do those of investment grade 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 investment grade
securities. In addition, below investment grade securities generally present a
higher degree of credit risk. Issuers of below investment grade 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 below investment grade securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The market for below investment grade 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.
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 investment grade securities. The lack of a liquid secondary market,
as well as
14
<PAGE> 126
adverse publicity and investor perception with respect to these securities, may
have an adverse impact on market price and a Portfolio's ability to dispose of
particular issues 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 issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Portfolio to obtain
accurate market quotations for purposes of valuing the Portfolio and calculating
its net asset value.
The market value of below investment grade securities is more
volatile than that of investment grade 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, below investment grade 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.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may 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). 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 prices obtained on such securities may be higher or
lower than the prices available in the market on the dates when the investments
are actually delivered to the buyers.
When a Portfolio agrees to purchase when-issued or
delayed-delivery securities, its custodian will set aside cash 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.
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. While a short sale is made by selling a security a Portfolio
does not own, a short sale is "against the box" to the extent that a Portfolio
15
<PAGE> 127
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. If the Portfolio engages in a short sale, the
collateral for the short position will be maintained by the Portfolio's
custodian or qualified sub-custodian. While the short sale is open, the
Portfolio will maintain in a segregated account an amount of securities equal in
kind and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities. These securities constitute the
Portfolio's long position.
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). In such case, any future losses
in the Portfolio's long position should be offset by a gain in the short
position and, conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
will depend upon the amount of the security sold short relative to the amount
the Portfolio owns. There will be certain additional transaction costs
associated with short sales against the box, but the Portfolio will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
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.
Reverse Repurchase Agreements and Dollar Rolls. Each Portfolio
may enter into reverse repurchase agreements with the same parties with whom it
may enter into repurchase agreements. Reverse repurchase agreements involve the
sale of securities held by a Portfolio pursuant to its agreement to repurchase
them at a mutually agreed upon date, price and rate of interest. At the time the
Portfolio enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing cash or
liquid securities having a value not less than the repurchase price (including
accrued interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). The Portfolio's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities the Portfolio has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
decision.
16
<PAGE> 128
The Portfolios also may enter into "dollar rolls," in which
the Portfolio sells fixed-income securities for delivery in the current month
and simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio would forego principal and interest paid on such
securities. The Portfolio would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
the interest earned on the cash proceeds of the initial sale. At the time the
Portfolio enters into a dollar roll transaction, it will place in a segregated
account maintained with an approved custodian cash or liquid securities having a
value not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained. Reverse
repurchase agreements and dollar rolls that are accounted for as financings are
considered to be borrowings under the 1940 Act.
Warrants. Each Portfolio may invest up to 10% of net assets in
warrants to purchase newly created equity securities consisting of common and
preferred stock. The equity security underlying a warrant is outstanding 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.
17
<PAGE> 129
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to a Portfolio's limit on the purchase of
illiquid securities unless the Board or its delegates determines that the Rule
144A Securities are liquid. In reaching liquidity decisions, the Board or its
delegates may consider, inter alia, the following factors: (i) the unregistered
nature of the security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (iv) dealer undertakings to make a
market in the security and (v) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Borrowing. Each Portfolio may borrow up to 30% of its total
assets for temporary or emergency purposes, including to meet portfolio
redemption requests so as to permit the orderly disposition of portfolio
securities or to facilitate settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when borrowings exceed 5% of
the Portfolio's net assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the borrowing
is outstanding. Each Portfolio expects that some of its borrowings may be made
on a secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable sub-custodian, which may include the lender.
Non-Diversified Status (Emerging Markets and Small Company
Growth Portfolios). These Portfolios are classified as non-diversified within
the meaning of the 1940 Act, which means that each of these 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, each
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
18
<PAGE> 130
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.
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 (lower house) and a House of Councillors (upper
house). Various political parties are 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 lower house in June 1993, when certain members of the lower
house left the LDP and formed two new political parties. After an election for
the lower house was held on July 18, 1993 and the LDP failed to secure a
majority, seven parties formed a coalition to control the lower house 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 ("SDP") 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 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 won 239 of the 500
lower-house seats. As a result, LDP members filled all the new cabinet seats for
the first time in three years. The LDP, along with its former coalition partners
(the SDP and Shinto Sakigake) agreed to continue to work together, but only in
loose alliance. Meanwhile, many dissatisfied Diet members from the main
opposition party have left the party to join the LDP. By September 1997, enough
Diet members from the main opposition party and other parties had defected to
the LDP for the LDP to regain its simple majority in the lower house. Japan's
continuing
19
<PAGE> 131
political instability may hamper its 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 a Portfolio's investments.
Economic Background. Since the end of World War II, Japan has
experienced significant economic development. During the era of high economic
growth in the 1960's and early 1970's, the expansion was based on the
development of heavy industries such as steel and shipbuilding. In the 1970's
Japan moved into assembly industries which employ high levels of technology and
consume relatively low quantities of resources, and since then has become a
major producer of electrical and electronic products and automobiles. Since the
mid-1980's, Japan has become a major creditor nation. With the exception of the
periods associated with the oil crises of the 1970's, Japan has generally
experienced very low levels of inflation. There is no guarantee, however, that
these favorable trends will continue.
The Japanese government has called for a transformation of the
economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy. In addition, there has been a move toward
more economic liberalization and discounting in the consumer sector. These
shifts have already begun to take place and may cause disruption in the Japanese
economy.
Strains in the system have also been one of the major causes
of Japan's economic weakness. The non-performing loans of financial institutions
have hampered their ability to take on risk, thus obstructing the flow of funds
into capital outlays as well as equities. The large commercial banks are having
to bear a heavy burden of the bad-debt problem (e.g., in accepting write-offs of
loans they have extended to distressed smaller institutions, in recapitalizing
failed institutions and in stepping up contributions to the Deposit Insurance
Corporation, an organization jointly established in 1971 by the government and
private financial institutions to protect depositors). While the banking system
appears to be making some progress in its attempt to deal with non-performing
assets, it is extremely difficult to gauge the true extent of the bad-debt
problem which could lead to a crisis in the banking system.
Japan's economy is a market economy in which industry and
commerce are predominantly privately owned and operated. However, the Japanese
government is involved in establishing and meeting objectives for developing the
economy and improving the standard of living of the Japanese people.
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. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly-type industries, has contributed to the reduction of oil
consumption. However, there is no guarantee this favorable trend will continue.
20
<PAGE> 132
Economic Trends. The following tables set forth Japan's gross
domestic product and certain other economic indicators for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
<TABLE>
<CAPTION>
1997* 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private ............ (Yen)308,472 (Yen)299,440 (Yen)290,515 (Yen)286,154 (Yen)278,703 (Yen)272,294
Government ......... 50,239 48,969 47,555 45,743 44,771 43,262
Gross Fixed
Capital Formation .. 143,217 148,190 136,792 137,291 140,433 143,525
Increase (Decrease) in
Stocks ........... 828 1,058 947 50 620 1,489
Exports of Goods and
Services ............. 55,979 49,598 45,393 44,410 44,197 47,384
Imports of Goods and
Services ............. 51,331 46,900 38,272 34,387 33,343 36,891
GDP (Expenditures) ... 507,403 500,356 482,930 479,260 475,381 471,064
Change in GDP from
Preceding Year ....... 1.4% 3.6% 0.8% 0.8% 0.9% 2.8%
</TABLE>
<TABLE>
<CAPTION>
1991 1990
------- -------
<S> <C> <C>
Consumption
Expenditures
Private ............ (Yen)261,891 (Yen)249,288
Government ......... 41,356 38,807
Gross Fixed
Capital Formation .. 143,998 136,467
Increase (Decrease) in
Stocks ........... 3,453 2,430
Exports of Goods and
Services ............. 46,723 45,920
Imports of Goods and
Services ............. 39,121 42,872
GDP (Expenditures) ... 458,299 430,040
Change in GDP from
Preceding Year ....... 6.6% --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first and second quarters of 1997.
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
1992 98.7 (1.5) 105.1 1.8
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.8 0.6 107.2 0.2
1997 94.5* 1.7 108.9** 1.7
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
</TABLE>
- ------------------
* Average of the first eleven months of 1997.
** Average of the first ten months of 1997.
Currency Fluctuation. Investments by a Portfolio 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:
AVERAGE CURRENCY EXCHANGE RATES
21
<PAGE> 133
<TABLE>
<CAPTION>
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
</TABLE>
Source: International Monetary Fund, International Financial Statistics
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systemized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1997, the First Section
of the TSE listed 1,324 companies with market capitalization in excess of 273.9
trillion yen (approximately $2.1 trillion as of such date). The Second Sections
of the main Japanese Exchanges generally list smaller, less capitalized
companies than those traded on the First Sections. As of December 31, 1997, the
Second Section of the TSE listed 478 companies with market capitalization in
excess of 7 trillion yen (approximately $53.6 billion as of such date).
The OTC Market. The Japanese OTC market ("JASDAQ") is less
systemized than the stock exchanges. Trading of equity securities through the
JASDAQ market is conducted by securities firms in Japan, primarily through an
organization which acts as a "matching agent," as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, from time to time,
and especially in falling markets, become illiquid and experience short-term
price volatility and wide spreads between bid and offer prices. This combination
of limited liquidity and price volatility may have an adverse effect on the
investment performance of a Portfolio. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts a Portfolio's ability to adjust its
portfolio quickly in order to take full advantage of a significant market
increase, and conversely, during periods of rapid price declines, it restricts
the ability of a Portfolio to dispose of securities quickly in order to realize
gains previously made or to limit losses on securities held in its portfolio. In
addition, although JASDAQ has generally experienced sustained growth in
aggregate market capitalization and trading volume, there have been periods in
which aggregate market capitalization and trading volume have declined. The
Frontier Market is expected to present greater liquidity and volatility
considerations than JASDAQ.
As of December 31, 1997, 831 issues were traded through
JASDAQ, having an aggregate market capitalization in excess of 9.2 trillion yen
(approximately $70.5
22
<PAGE> 134
billion as of such date). The entry requirements for JASDAQ generally require a
minimum of two million shares outstanding at the time of registration, a minimum
of 200 shareholders (if less than 20 million shares outstanding on the day of
registration) or 400 shareholders (if 20 million or more shares outstanding on
the day of registration), minimum pre-tax profits of 10 yen per share
(approximately $.08 per share as of January 30, 1998) for the prior fiscal year,
and net assets of 200 million yen (approximately $1.6 million as of January 30,
1998) at the end of the prior fiscal year. JASDAQ has generally attracted small
growth companies or companies whose major shareholders wish to sell only a small
portion of the company's equity.
The Frontier Market is a second over-the-counter market and is
under the jurisdiction of JASDAQ, which is overseen by the Japanese Securities
and Exchange Commission. The Frontier Market has less stringent entry
requirements than those described above for JASDAQ and is designed to enable
early stage companies access to capital markets. Frontier Market companies need
not have a history of earnings, provided their spending on research and
development equals at least 3% of net sales. In addition, companies traded
through the Frontier Market are not required to have two million shares
outstanding at the time of registration. As a result, investments in companies
traded through the Frontier Market may involve a greater degree of risk than
investments in companies traded through JASDAQ. The Frontier Market was created
in July 1995, and as of the date of this Statement of Additional Information, a
limited number of issues were traded through this market.
Market Risks. Although the market for Japanese equities traded
on the First Section of the TSE is substantial in terms of trading volume and
liquidity, the TSE has nonetheless exhibited significant market volatility in
the past several years. With respect to the OTC market, trades of certain stocks
may not be effected on days when the matching of buy and sell orders for such
stocks does not occur. The liquidity of the Japanese OTC market, as well as that
of the Second Sections of the exchanges, although increasing in recent years, is
limited by the small number of publicly held shares which trade on a regular
basis. Overall, Japanese securities markets have declined significantly since
1989 which has contributed to a weakness in the Japanese economy and the impact
of a further decline cannot be ascertained.
Other 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, and the
risks of such phenomena, and the damage resulting therefrom, continue to exist.
The long-term economic effects of such geological factors on the Japanese
economy as a whole, and on the Portfolio's investments, cannot be predicted. In
addition, Japan has one of the world's highest population densities. A
significant percentage of the total population of Japan is concentrated in the
metropolitan areas of Tokyo, Yokohama, Osaka and Nagoya.
Small Capitalization and Emerging Growth Companies; Unseasoned
Issuers. (Post-Venture Capital and Small Company Growth Portfolios). Investments
in small- and medium- sized and emerging growth companies and companies with
continuous operations of less than three years ("unseasoned issuers") involve
considerations that are not applicable to investing in securities of
established, larger-
23
<PAGE> 135
capitalization issuers, including reduced and less reliable information about
issuers and markets, less stringent financial disclosure requirements,
illiquidity of securities and markets, higher brokerage commissions and fees and
greater market risk in general. In addition, securities of these companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile.
"Special situation companies" are involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; or
litigation which, if resolved favorably, would improve the value of the
company's stock. If the actual or prospective situation does not materialize as
anticipated, the market price of the securities of a "special situation company"
may decline significantly. Warburg believes, however, that if it 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 of an investment will be consummated under the terms and within the time
period contemplated.
Investment Policies of the Emerging Markets Portfolio Only
Brady Bonds. 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.
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
24
<PAGE> 136
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 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
25
<PAGE> 137
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. In addition, mortgage-backed
securities issued by certain non-government entities and collateralized mortgage
obligations may be less marketable than other securities.
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
26
<PAGE> 138
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 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
27
<PAGE> 139
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.
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
28
<PAGE> 140
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
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 Growth & Income, 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, in the case of the Growth & Income Portfolio, securities issued by
companies which invest in real estate or interests therein) and (b) securities
of companies that invest in or sponsor oil, gas or mineral exploration or
development programs.
7. For the Emerging Markets, Growth & Income, International
Equity 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,
29
<PAGE> 141
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.
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 (in the case of the Growth
& Income Portfolio, 15% of the value of that Portfolio's total 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.
30
<PAGE> 142
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 and 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 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. Notwithstanding the foregoing, in determining the market value of
portfolio investments, the Portfolio may employ outside organizations (a
"Pricing Service") which may use a matrix formula or other objective method that
takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of the Trust under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Securities, options and futures contracts for which market quotations are not
available and certain other assets of the Portfolio will be valued at their fair
value as determined in good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its delegates may value a
security at fair value if it determines that such security's value determined by
the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which The New York Stock Exchange, 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. 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
31
<PAGE> 143
by the Board.
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.
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 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
32
<PAGE> 144
brokerage and research services provided by such broker or dealer viewed in
terms of either that particular transaction or of the overall responsibilities
of Warburg. Research and other services received may be useful to Warburg in
serving both the Portfolios and its other clients and, conversely, research or
other services obtained by the placement of business of other clients may be
useful to Warburg in carrying out its obligations to the Portfolios. Research
may include furnishing advice, either directly or through publications or
writings, as to the value of securities, the advisability of purchasing or
selling specific securities and the availability of securities or purchasers or
sellers of securities; furnishing seminars, information, analyses and reports
concerning issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic factors and
trends and portfolio strategy; access to research analysts, corporate management
personnel, industry experts, economists and government officials; comparative
performance evaluation and technical measurement services and quotation
services; and products and other services (such as third party publications,
reports and analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information, including the research described above) that assist Warburg in
carrying out its responsibilities. For the fiscal year ended December 31, 1997,
$1,770, $18,374, $3,072 and $2,268 of total brokerage commissions was paid by
the Growth & Income, International Equity, Post-Venture Capital and Small
Company Growth Portfolios, respectively, to brokers and dealers who provided
such research and other services. Research received from brokers or dealers is
supplemental to Warburg's own research program. The fees to Warburg under its
advisory agreements with the Trust are not reduced by reason of its receiving
any brokerage and research services.
The following table details amounts paid by each Portfolio in
commissions to broker-dealers for execution of portfolio transactions during the
indicated fiscal year or period ended December 31.
<TABLE>
<CAPTION>
Portfolio Year Commissions
- --------- ---- -----------
<S> <C> <C>
Growth & Income 1997 $ 2,412
International Equity 1995 $ 224,678
1996 $1,056,276
1997 $1,594,509
Post-Venture Capital 1995 N/A
1996 $ 5,237
1997 $ 88,821
Small Company Growth 1995 $ 94,028
1996 $ 386,387
1997 $ 883,377
</TABLE>
Because the Emerging Markets Portfolio commenced operations
on December 31, 1997, no brokerage commissions were paid by this Portfolio for
the period ended December 31, 1997.
The table below shows the amount of outstanding repurchase
agreements
33
<PAGE> 145
that each Portfolio had, as of December 31, 1997, with Goldman, Sachs
& Co., one of the regular broker-dealers of the Trust:
<TABLE>
<S> <C>
Growth & Income Portfolio $ 304,000
International Equity $31,579,000
Small Company Growth $63,256,000
</TABLE>
Investment decisions for each Portfolio concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg or Abbott, as relevant. 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 Abbott, as the case may be, believes to be
equitable to each client, including the Portfolios. In some instances, this
investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold for a Portfolio. To the
extent permitted by law, securities to be sold or purchased for a Portfolio may
be aggregated with those to be sold or purchased for such other investment
clients in order to obtain best execution.
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 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.
34
<PAGE> 146
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. The
portfolio turnover rate of 238.12% for the Post-Venture Capital Portfolio for
the year ended December 31, 1997 was attributable to sales of securities that
were necessary to accommodate unanticipated redemption orders.
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. 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 a Portfolio may
be higher than mutual funds having similar objectives that do not utilize these
strategies.
MANAGEMENT OF THE TRUST
Officers and Board of Trustees
The names (and ages) of the Trust's Trustees and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper (63)* Trustee
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (Retail electronics
and appliances) and Phoenix Home Life Mutual
Insurance Company; Director/Trustee of
other investment companies advised by Warburg.
Jack W. Fritz (71) Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
investment companies advised by Warburg.
</TABLE>
35
<PAGE> 147
<TABLE>
<S> <C>
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1970; Director of Counsellors
Securities; Chairman of the Board of other
investment companies advised by Warburg.
Jeffrey E. Garten (51) Trustee
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for
International Trade from November 1993 to October
1995; Professor at Columbia University from
September 1992 to November 1993;
Director/Trustee of other investment
companies advised by Warburg.
Thomas A. Melfe (66) Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton & Irvine;
New York, New York 10112 Chairman of the Board, Municipal Fund for New York
Investors, Inc.; Director/Trustee of
other investment companies advised by Warburg.
Arnold M. Reichman* (49) Trustee
466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant
New York, New York 10017-3147 Secretary of Warburg; Director of The RBB Fund, Inc.;
Associated with Warburg since 1984; Director,
Secretary and Chief Operating Officer of
Counsellors Securities; Director/Trustee of
other investment companies advised by Warburg.
</TABLE>
- ------------------------
* Indicates a Trustee who is an "interested person" of the Trust as defined in
the 1940 Act.
36
<PAGE> 148
<TABLE>
<S> <C>
Alexander B. Trowbridge (68) Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) from January 1990 to January 1994; Director or
Trustee of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), Waste Management, Inc.
(solid and hazardous waste collection and disposal), IRI
International (energy services). 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); Director/Trustee of other investment companies
advised by Warburg.
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1991; Officer of Counsellors Securities and other
investment companies advised by Warburg.
Stephen Distler (44) Vice President
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1984; Officer of
Counsellors Securities and other investment
companies advised by Warburg.
Eugene P. Grace (46) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since April 1994; Attorney-at-law from September 1989 to
April 1994; Life insurance agent, New
York Life Insurance Company from 1993 to
1994; Officer of Counsellors Securities
and other investment companies advised by Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1992; Officer of other investment companies advised by
Warburg.
</TABLE>
37
<PAGE> 149
<TABLE>
<S> <C>
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc.
from September 1994 to October 1996; Associated
with BEA Associates from April 1993 to September
1994; Officer of other investment companies
advised by Warburg.
Janna Manes (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other
investment companies advised by Warburg.
</TABLE>
No employee of Warburg, PFPC Inc., the Trust's
co-administrator ("PFPC"), or any of their affiliates receives any compensation
from the Trust for acting as an officer or Trustee of the Trust. Each Trustee
who is not a director, trustee, officer or employee of Warburg, PFPC or any of
their affiliates receives an annual fee of $500, and $250 for each meeting of
the Board attended by him for his services as Trustee, and is reimbursed for
expenses incurred in connection with his attendance at Board meetings.
Trustees' Compensation
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Trustee Trust Managed by Warburg+*
--------------- ----- --------------------
<S> <C> <C>
John L. Furth** None None
Arnold M. Reichman** None None
Richard N. Cooper $1,500 $44,500
Donald J. Donahue*** $1,500 $44,500
Jack W. Fritz $1,500 $44,500
Jeffrey E. Garten**** None None
Thomas A. Melfe $1,500 $44,500
Alexander B. Trowbridge $1,500 $44,500
</TABLE>
- ----------------------------
+ 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 investment
companies advised by Warburg.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg, and, accordingly, receive no compensation from the Trust or
any other investment company advised by Warburg.
*** Mr. Donahue resigned as Trustee of the Trust effective February 6,
1998.
38
<PAGE> 150
**** Mr. Garten became a Trustee of the Trust effective February 6, 1998
and, accordingly, received no compensation from the Trust for the
fiscal year ended December 31, 1997.
As of March 31, 1998, no Trustees or officers of the Trust owned any of
the outstanding shares of the Portfolios.
Portfolio Managers
Emerging Markets Portfolio. Richard H. King, Co-Portfolio
Manager of the Emerging Markets Portfolio, also manages other Warburg Pincus
Funds. 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.
Vincent J. McBride, Co-Portfolio Manager of the Emerging
Markets Portfolio, also manages other Warburg Pincus Funds. 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.
Morid Kamshad, Associate Portfolio Manager of the Emerging
Markets Portfolio, is a Vice President of Warburg and serves there as an
international equity associate portfolio manager/research analyst. Prior to
joining Warburg, Mr. Kamshad was a senior investment manager at Pictet
Asset Management from 1995 to 1997. From 1994 to 1995 he was an investment
analyst at HSBC Asset Management, prior to which time he was a business
development manager at Air Products and Chemicals-France. Mr. Kamshad received
his M.B.A. from I.E.S.E. in Barcelona and his B.S. from the University of
Colorado.
International Equity Portfolio. Mr. King and Mr. McBride,
described above, are also Co-Portfolio Managers of the International Equity
Portfolio.
Harold W. Ehrlich, Co-Portfolio Manager of the International
Equity Portfolio, also manages other Warburg Pincus Funds. 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.
Nancy Nierman, Associate Portfolio Manager of the
International Equity Portfolio, also manages other Warburg Pincus Funds. Ms.
Nierman, a Vice President of Warburg, serves as a European equity analyst and
has been with Warburg since April 1996, before which time she was a vice
president at Fiduciary Trust Company International from 1990 to 1996 and an
international equity trader at TIAA-CREF from 1985 to 1990. She received her
B.B.A degree from Baruch College in 1985.
Growth & Income Portfolio. Brian S. Posner, Portfolio Manager
of the Growth & Income Portfolio also manages other Warburg Pincus Funds. Prior
to joining Warburg, Mr. Posner was employed from 1987 to 1996 by Fidelity
Investments, where,
39
<PAGE> 151
most recently, he was the vice president and portfolio manager of the Fidelity
Equity-Income II Fund. Mr. Posner received an undergraduate degree from
Northwestern University and his M.B.A. in finance from the University of
Chicago.
Post-Venture Capital Portfolio. Elizabeth B. Dater is
Co-Portfolio Manager of the Post-Venture Capital Portfolio and manages other
Warburg Pincus Funds. 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 with Louis Rukeyser since 1976. Ms. Dater
earned a B.A. degree from Boston University in Massachusetts.
Stephen J. Lurito is Co-Portfolio Manager of the Post-Venture
Capital Portfolio and manages other Warburg Pincus Funds. 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 University of Pennsylvania.
Robert S. Janis and Christopher M. Nawn are Associate
Portfolio Managers and Research Analysts of the Post-Venture Portfolio and of
other Warburg Pincus Funds. Prior to joining Warburg in October 1994, Mr. Janis
was a vice president and senior research analyst at U.S. Trust Company of New
York. He earned B.A. and M.B.A. degrees from the University of Pennsylvania.
Prior to joining Warburg in September 1994, Mr. Nawn was a senior sector analyst
and portfolio manager at the Dreyfus Corporation. He earned a B.A. degree from
the Colorado College and an M.B.A. degree from the University of Texas.
Raymond L. Held and Thaddeus I. Gray, Investment Managers and
Managing Directors of Abbott, manage the Post-Venture Capital Portfolio's
investments in Private Funds. Abbott also acts as sub-investment adviser for
other Warburg Pincus Funds. Prior to co-founding a predecessor of Abbott in
1986, Mr. Held had been an investment analyst and portfolio manager at
Manufacturers Hanover Investment Corporation since 1970, before which time he
had been a security analyst with Weis, Voisin, Cannon, Inc., L.M. Rosenthal &
Co., Shearson, Hammill & Co. and Standard & Poor's Corporation. Mr. Held earned
an M.B.A. from New York University, an M.A. from Columbia University and a B.A.
from Queens College.
Prior to joining a predecessor of Abbott in 1989, Mr. Gray was
an assistant vice president at Commerzbank Capital Markets Corporation, where he
managed the area responsible for underwriting and distributing all new issues of
securities. Prior to this, he was an associate with Credit Commercial de France
in Paris in the Corporate Finance Department. Mr. Gray received his B.A. in
History from the University of Pennsylvania and his M.B.A. in Finance from New
York University. He is also a Chartered Financial Analyst.
Small Company Growth Portfolio. Ms. Dater and Mr. Lurito,
described above, are also Co-Portfolio Managers of the Small Company Growth
Portfolio.
40
<PAGE> 152
Investment Advisers 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. These fees are calculated at an annual rate based on a
percentage of a Portfolio's average daily net assets. See the Prospectuses,
"Management of the Portfolio(s)." The advisory fees earned by Warburg and the
co-administration fees earned by PFPC and Counsellors Service, respectively, for
the last three fiscal years are described below.
Advisory Fees earned by Warburg for the fiscal years ended December 31 (portions
of fees waived, if any, are noted in parentheses next to the amount earned)*
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income N/A N/A N/A N/A $ 2,055 ($ 2,055)
International Equity $120,130 ($47,206) $2,217,681 ($79,157) $3,592,157 0
Post-Venture Capital ** N/A N/A $ 6,696 ($ 6,696) $ 386,073 ($55,829)
Small Company Growth $218,618 ($47,601) $2,100,487 ($10,689) $4,349,002 0
</TABLE>
* During the fiscal year ended December 31, 1995, Warburg also reimbursed
expenses of $39,973 and $8,512 to the International Equity and Small
Company Growth Portfolios, respectively. During the fiscal period ended
December 31, 1996, Warburg also reimbursed expenses of $15,007 to the
Post-Venture Capital Portfolio. During the fiscal year ended December 31,
1997, Warburg also reimbursed expenses of $23,347 to the Growth & Income
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 for the fiscal years ended December 31
(portions of fees waived, if any, are noted in parentheses next to the amount
earned)
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income N/A N/A N/A N/A $ 411 ($411)
International Equity $14,416 ($5,665) $263,565 ($2,836) $409,216 0
Post-Venture Capital N/A N/A $ 536 ($536) $ 30,886 ($30,886)
Small Company Growth $24,291 ($5,289) $233,388 ($1,188) $471,801 0
</TABLE>
41
<PAGE> 153
Co-Administration Fees earned by Counsellors Service for the fiscal years ended
December 31
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Growth & Income N/A N/A $ 274
International Equity $12,013 $221,792 $359,216
Post-Venture Capital N/A $ 536 $ 30,886
Small Company Growth $24,291 $233,388 $483,223
</TABLE>
The Emerging Markets Portfolio commenced operations on
December 31, 1997 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
each Portfolio's U.S. assets and State Street Bank and Trust Company ("State
Street") serves as custodian of the each Portfolio's non-U.S. assets. 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. State Street is
authorized to select one or more foreign banking institutions and foreign
securities depositaries as sub-custodian on behalf of the relevant Portfolio and
PNC is authorized to select one or more domestic banks or trust companies to
serve as sub-custodian on behalf of the Portfolios. PNC is an indirect, wholly
owned subsidiary of PNC Bank Corp., and its principal business address is 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.
42
<PAGE> 154
Organization of the 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 "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.
43
<PAGE> 155
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.
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
44
<PAGE> 156
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 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.
45
<PAGE> 157
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.
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, 1997, were as
follows (performance figures calculated without the waiver of fees by a
Portfolio's service provider(s), if any, are noted in italics):
<TABLE>
<CAPTION>
One-Year Since Inception (Date)
------------------------- ----------------------------
<S> <C> <C> <C> <C>
Growth & Income N/A N/A 3.89% 2.50%*
(10/31/97)
International Equity (2.26%) (2.26%) 5.85% 5.77%
(6/30/95)
Post-Venture Capital 13.34% 13.01% 8.37% 8.13%
(9/30/96)
Small Company Growth 15.73% 15.73% 22.03% 22.03%
(6/30/95)
</TABLE>
- ---------------------
46
<PAGE> 158
* Non-annualized.
The Emerging Markets Portfolio commenced operations on
December 31, 1997, 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. 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, Far East Index (the "EAFE Index"), has equaled or
exceeded that of domestic equity securities, as
47
<PAGE> 159
measured by the Standard & Poor's 500 Composite Stock Index (the "S&P 500
Index") in 14 of the last 26 years. The following table compares annual total
returns of the EAFE Index and the S&P 500 Index for the calendar years shown.
<TABLE>
<CAPTION>
EAFE INDEX VS. S&P 500 INDEX
1972-1997
ANNUAL TOTAL RETURN+
YEAR EAFE(R)INDEX S&P 500 INDEX
---- ------------ -------------
<S> <C> <C>
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 34.11
1996 4.40 20.26
1997 0.24 31.01
</TABLE>
- -----------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 26
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 Trust
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
48
<PAGE> 160
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, 1998, 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. Except for Warburg, none of the persons
listed below is the beneficial owner of these shares.
<TABLE>
<S> <C> <C>
Emerging Markets Warburg 99.96%
Growth & Income Nationwide Life Insurance Company 63.29%
NWVA-9
c/o IPO Portfolio Accounting
P.O. Box 182029,
Columbus, OH 43218-2029
Warburg 36.70%
International Equity Nationwide Variable Account II ("Nationwide II") 78.03%
c/o IPO Portfolio Accounting
P.O. Box 182029,
Columbus, OH 43218-2029
Equitable Life Insurance Company of Iowa 14.22%
Separate Account A,
604 Locust Street,
Des Moines, IA 50309-3705
Post-Venture Capital Nationwide II 43.74%
Pruco Life Flexible Premium 36.08%
Variable Annuity Account, 1111 Durham Avenue
South Plainfield, NJ 07080-2305
Fidelity Investments 9.94%
Life Insurance Company
82 Devonshire St. #R25B
Boston, MA 02109-3605
Small Company Growth Nationwide II 53.70%
</TABLE>
49
<PAGE> 161
<TABLE>
<S> <C> <C>
IDS Life Insurance Company 37.20%
Attn: Craig Lindo
IDS Tower 10 T11/1646
Minneapolis, MN 55440
</TABLE>
50
<PAGE> 162
FINANCIAL STATEMENTS
The Trust's audited financial report dated December 31, 1997,
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 Growth & Income, International Equity,
Post-Venture Capital and Small Company Growth Portfolios included therein. In
addition, the audited statement of assets and liabilities of the Emerging
Markets Portfolio dated December 31, 1997, 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 that
Portfolio. The Trust will furnish without charge a copy of its annual report
and/or the Emerging Markets Portfolio's statement of assets and liabilities upon
request by calling the Trust at (800) 369-2728.
51
<PAGE> 163
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:
F-1
<PAGE> 164
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.
2
