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Rule 497(c)
Securities Act File No. 333-19175
Investment Company Act File No. 811-07999
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PROSPECTUS
September 23, 1997
WARBURG PINCUS TRUST II
[*] FIXED INCOME PORTFOLIO
[*] GLOBAL FIXED INCOME PORTFOLIO
Warburg Pincus Trust II shares are not available directly to
individual investors but may be offered only through certain
insurance products and pension and retirement plans.
[Logo]
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PROSPECTUS September 23, 1997
Warburg Pincus Trust II (the 'Trust') is an open-end management investment
company that currently offers two investment funds, both of which are offered
pursuant to this Prospectus (the 'Portfolios'):
FIXED INCOME PORTFOLIO seeks total return consistent with prudent investment
management.
GLOBAL FIXED INCOME PORTFOLIO seeks total return consistent with prudent
investment management, consisting of a combination of interest income, currency
gains and capital appreciation.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ('Participating
Insurance Companies') for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, 'Variable Contracts') and (ii) tax-qualified
pension and retirement plans ('Plans'), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio, contained in a Statement of Additional Information, has
been filed with the Securities and Exchange Commission (the 'SEC'). 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 maintain a Web site at www.warburg.com. The
Statement of Additional Information, as amended or supplemented from time to
time, bears the same date as this Prospectus and is incorporated by reference in
its entirety into this Prospectus.
SHARES OF THE 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE TRUST'S EXPENSES
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<TABLE>
<CAPTION>
Fixed Global Fixed
Income Portfolio Income Portfolio
---------------- ----------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....................... 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................................. .48% .52%
12b-1 Fees.................................................. 0 0
Other Expenses.............................................. .51% .47%
--- ---
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)*.................................. .99% .99%
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 $ 10
3 years..................................................... $ 32 $ 32
</TABLE>
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* Absent the waiver of fees by the Portfolios' investment adviser and
co-administrator, Management Fees would equal .50% and 1.00%, Other Expenses
would equal 14.41% and 5.34%, and Total Portfolio Operating Expenses would
equal 14.91% and 6.34% for the Fixed Income and Global Fixed Income
Portfolios, respectively. Other Expenses are based upon annualized estimates
of expenses for the fiscal year ending December 31, 1997, net of any fee
waivers or expense reimbursements. The investment adviser and
co-administrator have undertaken to limit each Portfolio's Total Portfolio
Operating Expenses to the limits shown in the table above through May 1,
1998.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
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FINANCIAL HIGHLIGHTS
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(for a share outstanding throughout the period)
The following information for the period March 31, 1997 (commencement of
operations) through June 30, 1997 (unaudited) has been derived from the Trust's
semi-annual report dated June 30, 1997, copies of which may be obtained without
charge by calling the Trust at (800) 369-2728.
<TABLE>
<CAPTION>
For the Period
March 31, 1997
(Commencement of
Operations) through
June 30, 1997
(Unaudited)
-------------------
<S> <C>
FIXED INCOME PORTFOLIO
Net Asset Value, Beginning of Period................................... $10.00
------
Income from Investment Operations:
Net Investment Income............................................... 0.13
Net Gain on Securities (both realized and unrealized)............... 0.20
------
Total from Investment Operations................................ 0.33
------
Net Asset Value, End of Period......................................... $10.33
------
------
Total Return........................................................... 3.30%`D'
Ratios/Supplemental Data:
Net Assets, End of Period (000s)....................................... $568
Ratios to average daily net assets:
Operating expenses.................................................. 0.99%*
Net investment income............................................... 5.25%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements............................................ 13.92%*
Portfolio Turnover Rate................................................ 101.74%`D'
GLOBAL FIXED INCOME PORTFOLIO
Net Asset Value, Beginning of Period................................... $10.00
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Income from Investment Operations:
Net Investment Income............................................... 0.13
Net Gain on Securities (both realized and unrealized)............... 0.16
------
Total from Investment Operations................................ 0.29
------
Net Asset Value, End of Period......................................... $10.29
------
------
Total Return........................................................... 2.90%`D'
Ratios/Supplemental Data:
Net Assets, End of Period (000s)....................................... $1,595
Ratios to average daily net assets:
Operating expenses.................................................. 0.99%*
Net investment income............................................... 5.39%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements............................................ 5.35%*
Portfolio Turnover Rate................................................ 36.75%`D'
</TABLE>
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`D' Non-Annualized.
* Annualized.
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INVESTMENT OBJECTIVES AND POLICIES
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Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
'Portfolio Investments' and 'Certain Investment Strategies' for descriptions of
certain types of investments the Portfolios may make.
FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks total return consistent with prudent
investment management. The Portfolio is a non-diversified investment fund which
pursues its investment objective by investing, under normal market conditions,
at least 65% of its total assets in fixed income securities, such as corporate
bonds, debentures and notes; convertible debt securities; convertible and
non-convertible preferred stocks; government obligations; obligations issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities ('Municipal Obligations'); and repurchase agreements with
respect to portfolio securities.
Under normal market conditions, the Portfolio intends that its portfolio of
fixed income securities will have a dollar-weighted average remaining maturity
not exceeding 10 years, using for purposes of this calculation the maturity of a
security on its date of purchase. Individual issues may have maturities longer
than 10 years.
The Portfolio may hold up to 35% of its net assets in fixed income securities
rated below investment grade and may invest in unrated issues that are believed
by Warburg, Pincus Counsellors, Inc., the Portfolios' investment adviser
('Warburg'), to be of equivalent quality.
The Portfolio may invest without limit in U.S. dollar-denominated, investment
grade foreign securities, but limits to 35% of its assets the portion that may
be invested in securities of foreign issuers that either are rated below
investment grade or are denominated in a currency other than U.S. dollars.
The Portfolio may invest up to 35% of its total assets in equity securities,
including common stock, warrants and rights. For temporary defensive purposes,
the Portfolio may invest without limit in short-term money market obligations.
GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks total return consistent with prudent
investment management, consisting of a combination of interest income, currency
gains and capital appreciation. The Portfolio is a non-diversified investment
fund which pursues its objective by investing, under normal market conditions,
at least 65% of its total assets in fixed income obligations of governmental and
corporate issuers denominated in various
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currencies (including U.S. dollars and multinational currency units such as
European Currency Units ('ECUs')), including debt obligations issued or
guaranteed by the United States or foreign governments, their agencies,
instrumentalities or political subdivisions, as well as supranational entities
organized or supported by several national governments, such as the
International Bank for Reconstruction and Development (the 'World Bank') or the
European Investment Bank; corporate bonds, notes and debentures; convertible
debt securities; and convertible and non-convertible preferred stock. The
Portfolio may invest in a wide variety of fixed income obligations issued
anywhere in the world, including the United States. Issuers of these securities
will be located in at least three countries and issuers located in any one
country (other than the United States) will not represent more than 40% of the
Portfolio's total assets. In addition, the Portfolio will not invest 25% or more
of its assets in the securities issued by any one foreign government, its
agencies, instrumentalities or political subdivisions.
The Portfolio may hold up to 35% of its net assets in fixed income securities
rated below investment grade, or in unrated securities that are believed by
Warburg to be of equivalent quality.
Under normal market conditions, the Portfolio intends that its portfolio of
fixed income securities will have a dollar-weighted average maturity between 3
and 10 years, using for purposes of this calculation the maturity of a security
on its date of purchase. Individual issues may have maturities shorter or longer
than 3 to 10 years.
The Portfolio may invest up to 35% of its total assets in equity securities,
including common stock, warrants and rights. For temporary defensive purposes or
during times of international political or economic uncertainty, all of the
Portfolio's investments may be made temporarily in the United States or
denominated in U.S. dollars without regard to maturity.
PORTFOLIO INVESTMENTS
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MONEY MARKET OBLIGATIONS. Each Portfolio is authorized to invest, under
normal conditions, up to 35% of its total assets in short-term money market
obligations having remaining maturities of less than one year at the time of
purchase. These short-term instruments consist of obligations issued or
guaranteed by the United States government, its agencies or instrumentalities
('Government Securities'); bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of domestic or foreign banks, domestic
savings and loans and similar institutions) that are high quality investments
or, if unrated, deemed by Warburg to be high quality investments; commercial
paper rated no lower than A-2 by Standard & Poor's Ratings Services ('S&P'), or
Prime-2 by Moody's Investors Service, Inc. ('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;
obligations of foreign governments, their agencies or instrumentalities; and
repurchase agreements with respect to portfolio securities.
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For temporary defensive purposes or, in the case of the Global Fixed Income
Portfolio, during times of international political or economic uncertainty, each
Portfolio may invest without limit in short-term money market obligations.
Repurchase Agreements. Under normal market conditions, each Portfolio may
invest up to 20% of its total assets 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 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 each Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the Investment Company Act of 1940, as amended
(the '1940 Act').
Money Market Mutual Funds. Where Warburg believes that it would be beneficial
to the Portfolio and appropriate considering the factors of return and
liquidity, each Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio, Warburg or
the Portfolios' co-administrator, PFPC Inc. ('PFPC'). A money market mutual fund
is an investment company that invests in short-term high quality money market
instruments. A money market mutual fund generally does not purchase securities
with a remaining maturity of more than one year. 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
administration fees and other expenses with respect to assets so invested.
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by the U.S.
government in which a Portfolio may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally in
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terms of their maturities. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included among
the obligations issued by agencies and instrumentalities of the United States
are: instruments that are supported by the full faith and credit of the United
States (such as certificates issued by the Government National Mortgage
Association ('GNMA')); instruments that are supported by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks); and instruments that are supported by the credit of the instrumentality
(such as Federal National Mortgage Association ('FNMA') and Federal Home Loan
Mortgage Corporation ('FHLMC') bonds).
CONVERTIBLE SECURITIES. Convertible securities in which the Portfolios 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.
STRUCTURED SECURITIES. The Portfolios may purchase any type of publicly
traded or privately negotiated fixed income security, including mortgage-backed
securities; structured notes, bonds or debentures; and assignments of and
participations in loans.
Mortgage-Backed Securities. Mortgage-backed securities are collateralized by
mortgages or interests in mortgages and may be issued by government or
non-government entities. Mortgage-backed securities issued by GNMA, FNMA or
FHLMC provide a monthly payment consisting of interest and principal payments,
and additional payments will be made out of unscheduled prepayments of
principal. Neither the value of nor the yield on these mortgage-backed
securities or shares of the Portfolios is guaranteed by the U.S. government.
Non-government issued mortgage-backed securities may offer higher yields than
those issued by government entities, but may be subject to greater price
fluctuations. The value of mortgage-backed securities may change due to shifts
in the market's perceptions of issuers, and regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Foreclosures and
prepayments, which occur when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities on these securities.
The Portfolios' yield may be affected by reinvestment of prepayments at higher
or lower rates than the original investment. Prepayments may tend to increase
due to refinancing of mortgages as interest rates decline. In addition, like
other debt securities, the
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values of mortgage-backed securities will generally fluctuate in response to
interest rates.
Structured Notes, Bonds or Debentures. Typically, the value of the principal
and/or interest on these instruments is determined by reference to changes in
the value of specific currencies, interest rates, commodities, indexes or other
financial indicators (the 'Reference') or the relevant change in two or more
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that in
certain circumstances no principal is due at maturity and, therefore, may result
in the loss of a Portfolio's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Portfolio may invest in assignments of
and participations in loans issued by banks and other financial institutions.
When a Portfolio purchases assignments from lending financial institutions,
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 a Portfolio as the purchaser of an assignment may differ from, and
be more limited than, those held by the assigning lender.
Participations in loans will typically result in a Portfolio having a
contractual relationship with the lending financial institution, not the
borrower. A Portfolio would have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender of the
payments from the borrower. In connection with purchasing a participation, a
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 benefit directly from
any collateral supporting the loan in which it has purchased a participation. As
a result, a Portfolio purchasing a participation will assume the credit risk of
both the borrower and the lender selling the participation. In the event of the
insolvency of the lender selling the 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.
A Portfolio may have difficulty disposing of assignments and participations
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
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such securities and on a Portfolio's ability to dispose of particular
assignments or participations 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
assignments and participations also may make it more difficult for a Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
portfolio and calculating its net asset value.
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
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For certain additional risks related to each Portfolio's investments, see
'Portfolio Investments' beginning at page 5 and 'Certain Investment Strategies'
beginning at page 12.
Among the factors that may be considered in deciding whether to invest in a
security are the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history and the ability of the issuer's
management. Bond prices generally vary inversely in relation to changes in the
level of interest rates, as well as in response to other market factors and
changes in the creditworthiness of the issuers of the securities. Government
Securities are considered to be of the highest credit quality available.
Government Securities, however, will be affected by general changes in interest
rates. The price volatility of a Portfolio's shares where the Portfolio invests
in intermediate maturity bonds will be substantially less than that of long-term
bonds. An intermediate maturity bond will generally have a lower yield than that
of a long-term bond. Longer-term securities in which the Portfolios may invest
generally offer a higher current yield than is offered by shorter-term
securities, but also generally involve greater volatility of price and risk of
capital than shorter-term securities.
NON-DIVERSIFIED STATUS. Each Portfolio is classified as non-diversified under
the 1940 Act, which means that the Portfolios are 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 a 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 a
Portfolio assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
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LOWER-RATED SECURITIES. There are certain risk factors associated with
lower-rated securities. A security will be considered investment grade if it is
rated at the time of purchase within the four highest grades assigned by Moody's
or S&P. Securities rated in the fourth highest grade have speculative
characteristics, and securities rated B have speculative elements and a greater
vulnerability to default than higher-rated securities. Investors should be aware
that ratings are relative and subjective and are not absolute standards of
quality. Subsequent to its purchase by a Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of such securities by
the Portfolio, although Warburg will consider such event in its determination of
whether the Portfolio should continue to hold the securities.
The Portfolios may invest in securities rated as low as C by Moody's or D by
S&P. Each Portfolio may invest 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.
Lower-rated and comparable unrated securities (commonly referred to as 'junk
bonds') (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by such issuers is significantly greater because
medium- and lower-rated securities and unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
The market value of securities in lower-rated categories is more volatile
than that of higher quality securities. In addition, the Portfolios 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 Portfolios' ability to dispose of particular
issues and may make it more difficult for the Portfolios to obtain accurate
market quotations for purposes of valuing the Portfolios and calculating their
respective net asset values.
For a complete description of the rating systems of Moody's and S&P, see the
Appendix to the Statement of Additional Information.
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
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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
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) may involve a
high degree of business and financial risk and may result in substantial losses.
These 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 may not be 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 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.
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PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. In
addition, to the extent it is consistent with a Portfolio's investment
objective, the Portfolio also may engage in short-term trading. A Portfolio will
not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. This investment
approach and use of certain of the investment strategies described below may
result in a high portfolio turnover rate. High portfolio turnover rates (100% or
more) may result in dealer markups or underwriting commissions as well as other
transaction costs, including correspondingly higher brokerage commissions. In
addition, short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. See 'Dividends, Distributions and
Taxes -- Taxes' below and 'Investment Policies -- Portfolio Transactions' in the
Statement of Additional Information.
Newly issued Government Securities normally are purchased by a Portfolio
directly from the issuer or from an underwriter acting as a principal. Other
purchases and sales usually are placed by a Portfolio with those dealers which
Warburg determines offer the best price and execution. 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 a dealer in the after market normally are executed at a price between the
bid and asked prices.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ('Counsellors Securities'). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
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Although there is no intention of doing so during the coming year, each
Portfolio may lend portfolio securities and enter into reverse repurchase
agreements and dollar rolls. Detailed information concerning each Portfolio's
strategies and related risks is contained below and in the Statement of
Additional Information.
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, swaps and interest rate transactions. 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.
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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. The Portfolios' use of these
strategies may be limited by position and exercise limits established by
securities and commodities exchanges and the National Association of Securities
Dealers, Inc.
Securities Options and Index Options. Each Portfolio may purchase and write
(sell) covered put and call options traded on U.S. and foreign exchanges as well
as over-the-counter ('OTC') without limit on 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 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
and write without limit 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.
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 a
Portfolio could realize on its investments or require a Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Related Options. Each Portfolio may enter into interest
rate, securities index and currency futures contracts and purchase and write
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 securities index and certain other futures contracts, are settled
in cash with reference to a specified multiplier times the change in the
specified interest rate, index or exchange 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
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profits and unrealized losses on any such contracts. Although the Portfolios are
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. The Portfolios may conduct 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 and writing
exchange-traded and OTC 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 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.
Swap and Interest Rate Transactions. Each Portfolio may enter into interest
rate, index and mortgage swaps and interest rate caps, floors and collars for
hedging purposes or to seek to increase total return and may enter into currency
swaps for hedging purposes. A swap transaction is an agreement between a
Portfolio and a counterparty to act in accordance with the terms of the swap
contract. Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. 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.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, however,
is tied to a reference pool or pools of mortgages. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payment of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates.
A Portfolio will enter into interest rate, index and mortgage swaps only on a
net basis, which means that the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of
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the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Portfolio is contractually
obligated to make. If the counterparty to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the counterparty to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable by a
Portfolio under an interest rate, index or mortgage swap and the entire amount
of the payment stream payable by a Portfolio under a currency swap or an
interest rate cap, floor or collar are held in a segregated account consisting
of cash or other liquid assets, the Portfolios and Warburg believe that swaps do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to each Portfolio's borrowing restriction.
The Portfolios will not enter into interest rate, index, mortgage or currency
swaps, or interest rate cap, floor or collar transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either AA or A-1 or better by S&P or Aa or P-1 or better by Moody's or, if
unrated by such rating organizations, determined to be of comparable quality by
Warburg.
Hedging Considerations. The Portfolios may engage in options, futures and
currency, swap and interest rate transactions 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 these transactions for hedging
purposes could limit any potential gain from an increase in value of the
position hedged. In addition, the movement in the portfolio position hedged may
not be of the same magnitude as any movement in the hedge. A 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
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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. 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, indexes and currencies; interest
rate, index and currency futures contracts and options on these futures
contracts; forward currency contracts; and swap and interest rate transactions.
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.
ZERO COUPON SECURITIES. Each Portfolio may invest without limit in 'zero
coupon securities.' Zero coupon securities pay no cash income to their holders
until they mature and are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return comes from the difference
between their purchase price and their maturity value. Because interest on zero
coupon securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than are the values of securities
that distribute income regularly and may be more speculative than such other
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. Redemption of shares of a Portfolio that require
it to sell zero coupon securities prior to maturity may result in capital gains
or losses that may be substantial. In addition, a Portfolio's investments in
zero coupon securities will result in special tax consequences, which are
described below under 'Dividends, Distributions and Taxes -- Taxes.'
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may
utilize up to 20% of its total assets to purchase securities on a when-issued
basis and purchase or sell securities on a delayed-delivery basis. In these
transactions, payment for and delivery of the securities occur beyond the
regular settlement dates, normally within 30-45 days after the transaction. 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
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purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. When-issued securities may include securities purchased on a 'when, as
and if issued' basis under which the issuance of the security depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring. A Portfolio will establish a segregated
account with its custodian consisting of cash or other liquid assets 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.
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 proceeds of the sale will generally be held by the broker until
the settlement date when the Portfolio delivers securities to close out its
short position. 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 a Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
FOREIGN SECURITIES. Each Portfolio may invest in the securities of foreign
issuers. There are certain risks involved in investing in securities of
companies and governments of foreign nations which are in addition to the usual
risks inherent in domestic investments. These risks include those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
adverse political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers, the lack of
uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often less rigorous than those
applied in the United States. The yield of the Portfolios may be adversely
affected by fluctuations in the value of one or more currencies relative to the
U.S. dollar. 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. Due to the
increased exposure of the Portfolios to market and foreign exchange fluctuations
brought about by such delays and due to the corresponding negative impact on the
Portfolios'
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liquidity, the Portfolios will avoid investing in countries that are known to
experience settlement delays which may expose the Portfolios to unreasonable
risk of loss. 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. 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 may 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. 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.
REITS. Each Portfolio may invest 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 Code. A
Portfolio investing in a REIT will indirectly bear its proportionate share of
any expenses paid by the REIT in addition to the expenses of the Portfolio.
Investing in REITs involves certain risks. A REIT may be affected by changes
in the value of the underlying property owned by such REIT or by the quality of
any credit extended by the REIT. REITs are dependent on management skills, are
not diversified (except to the extent the Code requires), and are subject to the
risks of financing projects. REITs are subject to heavy cash flow dependency,
default by borrowers, self-liquidation, the possibilities of failing to qualify
for the exemption from tax for distributed income under the Code and failing to
maintain their exemptions from the 1940 Act. REITs are also subject to interest
rate risks.
ADDITIONAL STRATEGIES AVAILABLE TO THE FIXED INCOME PORTFOLIO ONLY
MUNICIPAL OBLIGATIONS. The Fixed Income Portfolio may invest in Municipal
Obligations. The two principal types of Municipal Obligations, in
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terms of the source of payment of debt service on the bonds, are general
obligation bonds and revenue bonds and the Portfolio may hold both in any
proportion. General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source but not from the general taxing
power. There are, of course, variations in the security of Municipal
Obligations, both within a particular classification and between
classifications.
The Portfolio may invest without limit in Municipal Obligations that are
repayable out of revenue streams generated from economically related projects or
facilities or Municipal Obligations whose issuers are located in the same state.
Sizeable investments in such obligations could involve an increased risk to the
Portfolio should any of such related projects or facilities experience financial
difficulties. The Portfolio intends during the coming year to limit investments
in such obligations to less than 25% of its assets.
ALTERNATIVE MINIMUM TAX BONDS. The Fixed Income Portfolio may invest without
limit in 'Alternative Minimum Tax Bonds,' which are certain bonds issued after
August 7, 1986 to finance certain non-governmental activities. While the income
from Alternative Minimum Tax Bonds is exempt from regular federal income tax, it
is a tax preference item for purposes of the federal individual and corporate
'alternative minimum tax.' The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments or tax
preference items. Available returns on Alternative Minimum Tax Bonds acquired by
the Portfolio may be lower than those from other Municipal Obligations acquired
by the Portfolio due to the possibility of federal, state and local alternative
minimum or minimum income tax liability on Alternative Minimum Tax Bonds.
VARIABLE RATE AND MASTER DEMAND NOTES. Municipal Obligations purchased by the
Fixed Income Portfolio may include variable rate and master demand notes issued
by industrial development authorities and other governmental entities. Variable
rate demand notes are tax-exempt Municipal Obligations that provide for a
periodic adjustment in the interest rate paid on the notes. Master demand notes
are tax-exempt Municipal Obligations that provide for a periodic adjustment in
the interest rate paid (usually tied to the Treasury Bill auction rate) and
permit daily changes in the amount borrowed. While there may be no active
secondary market with respect to a particular variable rate or master demand
note purchased by the Portfolio, the Portfolio may, upon the notice specified in
the note, demand payment of the principal of and accrued interest on the note at
any time and may resell the note at any time to a third party. The absence of
such an active secondary market, however, could make it difficult for the
Portfolio to dispose of the variable rate or master demand note involved in the
event the issuer of the note defaulted on its payment obligations, and the
Portfolio could, for this or other
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reasons, suffer a loss to the extent of the default plus any expenses involved
in an attempt to recover the investment.
STAND-BY COMMITMENTS. The Fixed Income Portfolio may acquire stand-by
commitments with respect to Municipal Obligations held in its portfolio. Under a
stand-by commitment, which is commonly known as a 'put', a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a
specified price. The Portfolio may pay for stand-by commitments either
separately in cash or by paying a higher price for the securities acquired with
the commitment, thus increasing the cost of the securities and reducing the
yield otherwise available from them, and will be valued at zero in determining
the Portfolio's net asset value. A stand-by commitment is not transferable by
the Portfolio, although the Portfolio can sell the underlying Municipal
Obligations 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.
INVESTMENT GUIDELINES
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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 in connection with
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.
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MANAGEMENT OF THE PORTFOLIOS
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INVESTMENT ADVISER. The Trust employs Warburg as investment adviser to each
Portfolio. 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. 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.
For the services provided by Warburg, the Fixed Income and the Global Fixed
Income Portfolios pay Warburg a fee calculated at an annual rate of .50% and
1.00%, respectively, of the relevant 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 paid by a
Portfolio.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. Effective October 15,
1997, Warburg intends to change its name from 'Warburg Pincus Counsellors, Inc.'
to 'Warburg Pincus Asset Management, Inc.' This is a change of name only and
will have no effect on the ownership or control of Warburg or any aspect of
management of the Trust's Portfolios. As of August 31, 1997, Warburg managed
approximately $20.2 billion of assets, including approximately $11.8 billion of
investment company assets. Incorporated in 1970, Warburg is indirectly
controlled by Warburg, Pincus & Co. ('WP&Co.'), which has no business other than
being a holding company of Warburg and its affiliates. Warburg's address is 466
Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGERS. Dale C. Christensen is a Co-Portfolio Manager of each of
the Portfolios. Mr. Christensen is a Managing Director of Warburg and has been
associated with Warburg since 1989, before which time he was a senior vice
president at Citibank, N.A. He has been with each Portfolio since inception. M.
Anthony E. van Daalen is a Co-Portfolio Manager of the Fixed Income Portfolio.
Mr. van Daalen is a Senior Vice President at Warburg and has been associated
with Warburg since 1992, prior to which time he was an assistant vice president
at Citibank, N.A. Laxmi C. Bhandari, also a Senior Vice President of Warburg, is
a Co-Portfolio Manager of the Global Fixed Income Portfolio. Mr. Bhandari has
been associated with Warburg since 1993, before which time he was a vice
president at the Paribas Corporation.
CO-ADMINISTRATORS. The Trust 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 Portfolios, including responding to shareholder
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inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolios
and their various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in 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, 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 Portfolio pays PFPC a fee calculated at an annual rate of .05% of the
Portfolio's average daily net assets. PFPC has its principal offices at 400
Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ('PNC') serves as custodian of the
U.S. assets of each of the Portfolios. State Street Bank and Trust Company
('State Street') also serves as custodian of the non-U.S. assets of each of the
Portfolios. Like PFPC, PNC is a 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.
TRANSFER AGENT. State Street serves as shareholder servicing agent, transfer
agent and dividend disbursing agent for the Portfolios. It has delegated to
Boston Financial Data Services, Inc., a 50% owned subsidiary ('BFDS'),
responsibility for most shareholder servicing functions. BFDS's principal
business address is 2 Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as
distributor of the shares of the Portfolios. Counsellors Securities is a wholly
owned subsidiary of Warburg and is located at 466 Lexington Avenue, New York,
New York 10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may enter into agreements with
Participating Insurance Companies and Plans or their affiliates or entities that
provide services to them ('Service Organizations') to pay a fee of up to .25%
(the 'Service Fee') of the annual average value of accounts maintained by such
Organizations with a Portfolio. A portion of the Service Fee may be borne by a
Portfolio as a transfer agency fee. In addition, a Service Organization may
directly or indirectly pay a portion of its Service Fee to the Trust's custodian
or transfer agent for costs related to Portfolio accounts it services. The
Service Fee payable to any one Service Organization is determined based upon a
number of factors, including the nature and quality
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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 significant amounts of a Portfolio's shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES IN THE PORTFOLIOS_
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies 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 Portfolios' 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
23
<PAGE>
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.
Each Portfolio reserves the right to suspend the offering of shares for a
period of time or to reject any specific purchase order. Purchase orders may be
refused if, in Warburg's opinion, they are of a size that would disrupt the
management of a Portfolio. A Portfolio may discontinue sales of its shares if
management believes that a substantial further increase in assets may adversely
affect that Portfolio's ability to achieve its investment objective. In such
event, however, it is anticipated that existing Variable Contract owners and
Plan participants would be permitted to continue to authorize investment in such
Portfolio and to reinvest any dividends or capital gains distributions.
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.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may conduct transactions by telephone. Neither a 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 each Portfolio to confirm that instructions communicated by telephone
are genuine. Such procedures include providing written confirmation of telephone
transactions and tape recording telephone instructions.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. 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.
24
<PAGE>
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.
The investments by the Portfolios 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 maturity
value and its purchase price is imputed as income to the Portfolios each year
even though the Portfolios receive no cash distribution until maturity. Under
the U.S. federal tax laws applicable to mutual funds, the Portfolios will not be
subject to tax on this income if they pay dividends to their shareholders
substantially equal to all the income received from, or imputed with respect to,
their investments during the year, including their zero coupon securities. These
dividends ordinarily will constitute taxable income to the shareholders of the
Portfolios.
Special Tax Matters Relating to the Fixed Income Portfolio. The Fixed Income
Portfolio does not expect to meet the tax requirements that would enable it to
pay exempt-interest dividends with respect to income derived from its holdings
of Municipal Obligations.
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.
25
<PAGE>
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 OTC 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, each Portfolio may advertise yield and average annual
total return of its shares over various periods of time. The yield refers to net
investment income generated by the Portfolio's shares over a specified thirty-
day period, which is then annualized (based on SEC guidelines). That is, the
amount of net investment income generated by the Portfolio's shares during that
thirty-day period is assumed to be generated over a 12-month period and is shown
as a percentage of the investment. The 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
26
<PAGE>
year, investors should bear in mind that each Portfolio seeks long term
appreciation and 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 Portfolio's 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 yield and 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 yield and
total return. Current total return figures may be obtained by calling (800)
369-2728.
In reports or other communications to investors or in advertising material, a
Portfolio or a Participating Insurance Company or Plan sponsor may describe
general economic and market conditions affecting the Portfolio. Performance may
be compared with (i) that of other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar investment services that
monitor the performance of mutual funds or as set forth in the publications
listed below; (ii) in the case of the Fixed Income Portfolio, with the Lehman
Brothers Intermediate Government/Corporate Bond Index (an unmanaged index of
government and corporate bonds calculated by Lehman Brothers); and in the case
of the Global Fixed Income Portfolio, with the Salomon Brothers World Government
Bond Index-Hedged (a hedged, market-capitalization weighted index designed to
track major government debt markets), the J.P. Morgan Traded Index (an index of
non-U.S. dollar bonds of ten countries with active bond markets); or (iii) other
appropriate indexes of investment securities or with data developed by Warburg
derived from such indexes. A Portfolio or a Participating Insurance Company may
also include evaluations published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Inc., Mutual Fund Magazine,
SmartMoney and The Wall Street Journal. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various periods of time. In
addition, 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
27
<PAGE>
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 investment activity, which may include, among
other things, a discussion or quantitative statistical or comparative analysis
of portfolio composition and significant portfolio holdings, including analysis
of holdings by sector, industry, country or geographic region, credit quality
and other characteristics. Each Portfolio may also discuss various measures of
risk, including those based on statistical or econometric analyses, the
continuum of risk and return relating to different investments and the potential
impact of foreign securities on a portfolio otherwise composed of domestic
securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on December 16, 1996 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 two series have been authorized. 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
28
<PAGE>
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.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
SHARES OF THE PORTFOLIOS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Trust's Expenses.................................................... 2
Financial Highlights.................................................... 3
Investment Objectives and Policies...................................... 4
Portfolio Investments................................................... 5
Risk Factors and Special Considerations................................. 9
Portfolio Transactions and Turnover Rate................................ 12
Certain Investment Strategies........................................... 12
Investment Guidelines................................................... 20
Management of the Portfolios............................................ 21
How to Purchase and Redeem Shares in the Portfolios..................... 23
Dividends, Distributions and Taxes...................................... 24
Net Asset Value......................................................... 25
Performance............................................................. 26
General Information..................................................... 28
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
[Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-369-2728
WWW.WARBURG.COM
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRBDF-1-0997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 23, 1997
WARBURG PINCUS TRUST II
Fixed Income Portfolio
Global Fixed Income Portfolio
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 369-2728
Contents
Page
----
Investment Objectives......................................................2
Investment Policies........................................................2
Management of the Trust....................................................27
Additional Purchase and Redemption Information.............................34
Additional Information Concerning Taxes....................................34
Determination of Performance...............................................36
Independent Accountants and Counsel........................................38
Miscellaneous..............................................................38
Financial Statements.......................................................38
Appendix -- Description Of Ratings.........................................A-1
Report of Independant Accountants..........................................F-1
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus of Warburg Pincus Trust II (the "Trust"), dated
September 23, 1997, as amended or supplemented from time to time, and is
incorporated by reference in its entirety into that Prospectus. The Trust
currently offers two managed investment funds, the Fixed Income Portfolio and
the Global Fixed Income Portfolio (together the "Portfolios" and each a
"Portfolio") which are described in this Statement of Additional Information.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance policies (together "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants.
Because this Statement of Additional Information is not itself a prospectus, no
investment in shares of a Portfolio should be made solely upon the information
contained herein. Copies of the Trust's Prospectus and information regarding
each of the Portfolios' current performance may be obtained by calling the Trust
at (800) 369-2728 or by writing to the Trust, P.O. Box 9030, Boston,
Massachusetts 02205-9030.
<PAGE>
INVESTMENT OBJECTIVES
The investment objective of the Fixed Income Portfolio is total return
consistent with prudent investment management. The investment objective of the
Global Fixed Income Portfolio is total return consistent with prudent investment
management, consisting of a combination of interest income, currency gains and
capital appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of each Portfolio's
investment objective and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
- ---------------------------------------------------
Securities Options. Each Portfolio may write covered put and call
options on stock and debt securities and may purchase such options that are
traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC").
Each Portfolio realizes fees (referred to as "premiums") for granting
the rights evidenced by the options it has written. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price for a specified time
period or at a specified time. In contrast, a call option embodies the right of
its purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price for a specified time period or at a
specified time.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Portfolio as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Portfolio as a put or call writer retains the risk of a decline in the price
of the underlying security. The size of the premiums that the Portfolio may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
In the case of options written by a Portfolio that are deemed covered
by virtue of the Portfolio's holding convertible or exchangeable preferred stock
or debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Portfolio has
written options may exceed the time within which the Portfolio must make
delivery in accordance with an exercise notice. In these instances, the
Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical
2
<PAGE>
delivery. By so doing, the Portfolio will not bear any market risk, since the
Portfolio will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed
securities, but the Portfolio may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Portfolios may write covered call options. For example, if a Portfolio
writes covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios may write (i) in-the-money call
options when Warburg, Pincus Counsellors, Inc., the Portfolios' investment
adviser ("Warburg"),* expects that the price of the underlying security will
remain flat or decline moderately during the option period, (ii) at-the-money
call options when Warburg expects that the price of the underlying security will
remain flat or advance moderately during the option period and (iii)
out-of-the-money call options when Warburg expects that the premiums received
from writing the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options Clearing
Corporation (the "Clearing Corporation") and of the securities exchange on which
the option is written.
Prior to their expirations, put and call options may be sold in closing
sale or purchase transactions (sales or purchases by the Portfolio prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Portfolio may realize a profit or loss from the
sale. An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the 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
- -------------------------
* Effective October 15, 1997, Warburg intends to change its name from
"Warburg, Pincus Counsellors, Inc." to "Warburg Pincus Asset
Management, Inc." See "Management of the Portfolios--Investment
Adviser" in the Prospectus.
3
<PAGE>
has written an option, it will realize a profit if the cost of the closing
purchase transaction is less than the premium received upon writing the original
option and will incur a loss if the cost of the closing purchase transaction
exceeds the premium received upon writing the original option. The Portfolio may
engage in a closing purchase transaction to realize a profit, to prevent an
underlying security with respect to which it has written an option from being
called or put or, in the case of a call option, to unfreeze an underlying
security (thereby permitting its sale or the writing of a new option on the
security prior to the outstanding option's expiration). The obligation of the
Portfolio under an option it has written would be terminated by a closing
purchase transaction, but the Portfolio would not be deemed to own an option as
a result of the transaction. So long as the obligation of the Portfolio as the
writer of an option continues, the Portfolio may be assigned an exercise notice
by the broker-dealer through which the option was sold, requiring the Portfolio
to deliver the underlying security against payment of the exercise price. This
obligation terminates when the option expires or the Portfolio effects a closing
purchase transaction. The Portfolio can no longer effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Portfolio's
ability to terminate options positions established in the OTC market may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in OTC transactions would fail to meet their
obligations to the Portfolio. The Portfolio, however, intends to purchase OTC
options only from dealers whose debt securities, as determined by Warburg, are
considered to be investment grade. If, as a covered call option writer, the
Portfolio is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. In either case,
the Portfolio would continue to be at market risk on the security and could face
higher transaction costs, including brokerage commissions.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or written,
or exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the Trust or a
Portfolio and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options a Portfolio
will be able to purchase on a particular security.
4
<PAGE>
Securities Index Options. Each Portfolio may purchase and write
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. Securities
index options may be based on a broad or narrow market index or 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 a 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 a Portfolio, as a covered OTC call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Portfolio's ability to
sell portfolio securities or, with
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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 liquid securities
acceptable to the broker, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded, and brokers may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
The broker will have access to amounts in the margin account if the Portfolio
fails to meet its contractual obligations. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the currency,
financial instrument or 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 also
incur brokerage costs in connection with entering into futures transactions.
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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 securities 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 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-
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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 and writing 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 and write 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 U.S. dollars and will thereby
offset, in whole or in part, the adverse effect on the U.S. dollar value of its
securities that otherwise would have resulted. Conversely, if a rise in the U.S.
dollar value of a currency in which securities to be acquired are denominated is
projected, thereby potentially increasing the cost of the securities, the
Portfolio may purchase call options on the particular
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currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. The benefit to the Portfolio
derived from purchases of currency options, like the benefit derived from other
types of options, will be reduced by premiums and other transaction costs.
Because transactions in currency exchange are generally conducted on a principal
basis, no fees or commissions are generally involved. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Portfolio may not be able to contract
to sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
the Portfolio's investments and a currency hedge may not be entirely successful
in mitigating changes in the value of the Portfolio's investments denominated in
that currency. A currency hedge, for example, should protect a Yen-denominated
bond against a decline in the Yen, but will not protect the Portfolio against a
price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency
exchange transactions for other purposes, including generating current income to
offset expenses or increase return, each Portfolio may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by the
Portfolio, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Portfolio's
assets.
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 securities prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular 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 in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the stock index
and futures
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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 an index and movements in the price of index
futures, a correct forecast of general market trends by Warburg still may not
result in a successful hedging transaction.
A Portfolio will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Portfolio of hedging
transactions will be subject to Warburg's ability to predict trends in currency,
interest rate or securities markets, as the case may be, and to correctly
predict movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Portfolio's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. As described in the Prospectus, each Portfolio will comply with
guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolio on securities indexes and currencies; 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 that are acceptable as collateral to the appropriate
regulatory authority.
For example, a call option written by the Portfolio on securities may
require the Portfolio to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Portfolio on
an index may require the Portfolio to own portfolio securities that correlate
with the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise price on a current basis. A put option
written by the Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. The Portfolio may enter into fully or partially offsetting
transactions so that its net position, coupled with any segregated assets (equal
to any remaining obligation), equals its net obligation. Asset coverage may be
achieved by other means when consistent with applicable regulatory policies.
Additional Information on Investment Practices
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Foreign Investments.
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General. The Fixed Income Portfolio may not invest more than 35% of its
assets in securities denominated in a currency other than U.S. dollars.
Investors should recognize that investing in foreign companies involves certain
risks, including those discussed below, which are not typically associated with
investing in U.S. issuers. Since the Global Fixed Income Portfolio will be
investing substantially, and the Fixed Income may be investing, in securities
denominated in currencies other than the U.S. dollar, and since the Portfolios
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 U.S.
dollar. A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Portfolio's
assets denominated in that foreign currency. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed by a Portfolio with respect to its foreign
investments. The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign exchange
markets. Changes in the exchange rate may result over time from the interaction
of many factors directly or indirectly affecting economic and political
conditions in the United States and a particular foreign country, including
economic and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and the
extent of government surpluses or deficits in the United States and the
particular foreign country, all of which are in turn sensitive to the monetary,
fiscal and trade policies pursued by the governments of the United States and
other foreign countries important to international trade and finance.
Governmental intervention may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in response to
economic forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls or
taxes, to affect the exchange rates of their currencies. A Portfolio may use
hedging techniques with the objective of protecting against loss through the
fluctuation of the value 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. Many of the foreign securities held by a Portfolio will
not be registered with, nor the issuers thereof be subject to reporting
requirements of, the SEC. Accordingly, there may be less publicly available
information about such securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies. In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those countries.
Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payments positions.
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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. To the extent that each Portfolio invests in
foreign securities, the operating expenses of the Fixed Income Portfolio may,
and the Global Fixed Income Portfolio can, be expected to be higher than those
of an investment company investing exclusively in U.S. securities, since the
expenses of each Portfolio associated with foreign investing, such as custodial
costs, valuation costs and communication costs, may be higher than those costs
incurred by other investment companies not investing in foreign securities.
Foreign Debt Securities. The returns on foreign debt securities reflect
interest rates and other market conditions prevailing in those countries and the
effect of gains and losses in the denominated currencies against the U.S.
dollar, which have had a substantial impact on investment in foreign fixed
income securities. The relative performance of various countries' fixed income
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Year-to-year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign government securities in which the Portfolios may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
U.S. Government Securities. 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
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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.
Loan Participations and Assignments. The Portfolios 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 Portfolios' 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 a Portfolio having a contractual relationship only with
the Lender, not with the Borrower. A 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, a
Portfolio generally will have no right to enforce compliance by the Borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the Borrower, and the Portfolio may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, a 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, a 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. A Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the Borrower is determined by Warburg
to be creditworthy.
When a 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 a 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. A 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 a 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
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Participations and Assignments also may make it more difficult for a Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
portfolio and calculating its net asset value.
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.
Below Investment Grade Securities. Each Portfolio may hold up to 35% of
its net assets in fixed income securities rated below investment grade and as
low as C by Moody's Investors Service, Inc. ("Moody's") or D by Standard &
Poor's Ratings Services ("S&P"), and in comparable unrated securities considered
to be of equivalent quality. While the market values of medium and lower-rated
securities and unrated securities of comparable quality tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium and lower-rated securities and unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium and lower-rated securities and unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness.
The market for medium- and lower-rated and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
The Portfolios 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 Portfolios
anticipate that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
these securities does exist, it generally is not as liquid as the secondary
market for higher-rated securities. The lack of a liquid secondary market, as
well as adverse publicity and investor perception with respect to these
securities, may have an adverse impact on market price and the ability to
dispose of particular issues when necessary to meet the liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Portfolios to obtain
accurate market quotations for purposes of valuing the Portfolios and
calculating their net asset values.
The market value of securities in lower-rated categories is more
volatile than that of higher quality securities. Factors adversely impacting the
market value of these securities will
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adversely impact the Portfolios' net asset value. The Portfolios will rely on
the judgment, analysis and experience of Warburg in evaluating the
creditworthiness of an issuer. In this evaluation, Warburg will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. Each Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings of such securities. Recent adverse publicity regarding
lower-rated bonds may have depressed the prices for such securities to some
extent. Whether investor perceptions will continue to have a negative effect on
the price of such securities is uncertain.
Lending of Portfolio Securities. Each 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 a 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. From time to time, a
Portfolio may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Portfolio and that is acting as a "finder."
By lending its securities, a 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. 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 or possible decline in the value of the
loaned securities during the period in which the Portfolio seeks to assert its
rights.
Reverse Repurchase Agreements and Dollar Rolls. The Portfolios may
enter into reverse repurchase agreements with the same parties with whom they
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
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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 cash equivalent 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). A 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 a Portfolio's obligation to repurchase the securities, and the
Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The Portfolios also may enter into "dollar rolls," in which the
Portfolios sell fixed-income securities for delivery in the current month and
simultaneously contract to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, a Portfolio would forego principal and interest paid on such securities.
The Portfolio would be compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. At the time the Portfolio
enters into a dollar roll transaction, it will place in a segregated account
maintained with an approved custodian cash or other liquid assets 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 are considered to be borrowings under the 1940 Act.
Zero Coupon Securities. The Portfolios 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
Portfolios anticipate that they 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 Portfolios must pay each year and, in order to generate
cash necessary to pay such dividends, the Portfolios may liquidate portfolio
securities at a time when they would not otherwise have done so. At present, the
U.S. Treasury and certain U.S. agencies issue stripped Government Securities. In
addition, in the recent past, a number of banks and brokerage firms have
separated the principal portions from the coupon portions of U.S. Treasury bonds
and notes and sold them separately in the form of receipts or certificates
representing undivided interests on these instruments.
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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.
If a 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 value to the securities sold short.
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 the Portfolio
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. 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.
Municipal Obligations. (Fixed Income Portfolio) Municipal Obligations
are debt obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities. Municipal Obligations
are issued by governmental entities to obtain funds for various public purposes,
including the construction of a wide range of public facilities, the refunding
of outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity bonds
that are issued by or on behalf of public authorities to finance various
privately-operated facilities are included within the term Municipal Obligations
if the interest paid thereon is exempt from federal income tax.
The two principal types of Municipal Obligations, in terms of the
source of payment of debt service on the bonds, consist of "general obligation"
and "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenues derived from a
particular facility or class of facilities or in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Consequently, the credit quality of revenue bonds is
usually directly related to the credit standing of the user of the facility
involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized,
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however, that ratings are general and are not absolute standards of quality, and
Municipal Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations of the same maturity and interest
rate with different ratings may have the same yield. Subsequent to its purchase
by the Fixed Income Portfolio, an issue of Municipal Obligations may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. Warburg will consider such an event in determining
whether the Portfolio should continue to hold the obligation. See the Appendix
attached hereto for further information concerning the ratings of Moody's and
S&P and their significance.
Among other instruments, the Fixed Income Portfolio may purchase short
term Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes
and other forms of short term loans. Such notes are issued with a short term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
The yields on Municipal Obligations are dependent upon a variety of
factors, including general economic and monetary conditions, money market
factors, conditions of the municipal bond market, size of a particular offering,
maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is also
the possibility that as a result of litigation or other conditions, the power or
ability of any one or more issuers to pay, when due, principal of and interest
on its, or their, Municipal Obligations may be materially affected.
Variable Rate and Master Demand Notes. (Fixed Income Portfolio) The
Fixed Income Portfolio may invest in variable rate and master demand notes.
Variable rate demand notes ("VRDNs") are obligations issued by corporate or
governmental entities which contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
not to exceed seven days. The interest rates are adjustable at intervals ranging
from daily to up to every six months to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments are typically based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic adjustment
in the interest rate paid (usually tied to the Treasury Bill auction rate) and
permit daily changes in the principal amount borrowed. While there may be no
active secondary market with respect to a particular VRDN purchased by a
Portfolio, the Portfolio may, upon the notice specified in the note, demand
payment of the principal of and accrued interest on the note at any time and may
resell the note at any time to a third party. The absence of such an active
secondary market, however, could make it difficult for the Portfolio to dispose
of the VRDN involved in the event
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the issuer of the note defaulted on its payment obligations, and the Portfolio
could, for this or other reasons, suffer a loss to the extent of the default.
Stand-By Commitment Agreements. (Fixed Income Portfolio) The Portfolios
may acquire "stand-by commitments" with respect to securities held in their
portfolios. Under a stand-by commitment, a dealer agrees to purchase at a
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 a Portfolio may also be referred to as "put"
options. A stand-by commitment is not transferable by a 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 Portfolios intend 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
Portfolios will acquire stand-by commitments only in order to facilitate
portfolio liquidity and do not intend to exercise their rights under stand-by
commitments for trading purposes.
The amount payable to a 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 Portfolios expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolios may pay for stand-by commitments
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to such commitments (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 a Portfolio's
portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
The Portfolios would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their 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 a Portfolio would be valued at zero in determining net asset value.
Where a 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 Internal Revenue Service has issued a revenue ruling to the effect
that a registered investment company will be treated for federal income tax
purposes as the owner of
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Municipal Obligations acquired subject to a stand-by commitment and the interest
on the Municipal Obligations will be tax exempt to a Portfolio.
Depositary Receipts. The assets of a Portfolio may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs, CDRs,
IDRs and GDRs are typically issued by non-U.S. banks and trust companies that
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in U.S. securities markets and EDRs (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European securities
markets and all non-U.S. securities markets, respectively.
Warrants. A Portfolio may purchase warrants issued by domestic and
foreign companies 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 non-publicly traded and 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 calendar days and, with
respect to the Fixed Income Portfolio, VRDNs and master demand notes providing
for settlement upon more than seven days notice by the 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. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the
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potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by the
SEC allows for a broader institutional trading market for securities otherwise
subject to restriction on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to qualified institutional buyers. Warburg
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid and
therefore subject to the Portfolio's limits on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board may consider,
inter alia, the following factors: (i) the unregistered nature of the security;
(ii) the frequency of trades and quotes for the security; (iii) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (iv) dealer undertakings to make a market in the security
and (v) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
Borrowing. Each Portfolio may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption requests
so as to permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Portfolio's net
assets. Although the principal of such borrowings will be fixed, the Portfolio's
assets may change in value during the time the borrowing is outstanding. Each
Portfolio expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender.
Non-Diversified Status. Each Portfolio is classified as non-diversified
within the meaning of the 1940 Act, which means that it is not limited by such
Act in the proportion of its assets that it may invest in securities of a single
issuer. Each Portfolio's investments will be
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limited, however, in order to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended (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 be invested in the
securities of a single issuer and the Portfolio will not own more than 10% of
the outstanding voting securities of a single issuer.
Other Investment Limitations
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The investment limitations numbered 1 through 9 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 10 through 13
may be changed by a vote of the Board at any time.
A Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow from banks for
temporary or emergency purposes and (ii) 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. 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. 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.
4. 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.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Portfolio may invest in (i) securities secured by real estate, mortgages or
interests therein and (ii) securities of companies that invest in or sponsor
oil, gas or mineral exploration or development programs.
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6. Make short sales of securities or maintain a short position, except
that the Portfolio may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short sales
"against the box."
7. Issue any senior security except as permitted under the 1940 Act.
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 or securities on a forward commitment or
delayed-delivery basis.
10. 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.
11. 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 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.
12. Invest more than 15% of the value 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, (a) repurchase agreements with maturities
greater than seven days, (b) VRDNs and master demand notes providing for
settlement upon more than seven days notice by the Portfolio and (c) time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
13. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
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General. If a percentage restriction (other than the percentage
limitation set forth in No. 1, above) is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of the
Portfolio's assets will not constitute a violation of such restriction.
Portfolio Valuation
- -------------------
The Prospectus discusses the time at which the net asset value of each
Portfolio is determined for purposes of sales and redemptions. The following is
a description of the procedures used by each Portfolio in valuing its assets.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an OTC market will be valued at the most recent sale as of the time
the valuation is made or, in the absence of sales, at the mean between the bid
and asked quotations. If there are no such quotations, the value of the
securities will be taken to be the highest bid quotation on the exchange or
market. Options or futures contracts will be valued similarly. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. 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, a 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 a 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 (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 a Portfolio's net asset value is not calculated. As a result,
calculation of a Portfolio's net asset value may not take place
contemporaneously with the determination of the prices of certain portfolio
securities used in such calculation. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of regular trading on the NYSE will not be reflected in the Portfolios'
calculation of net asset value unless the Board or its delegates deemed that the
event would materially affect net asset value, in which case an adjustment may
be made. All assets and liabilities initially expressed in foreign currency
values
24
<PAGE>
will be converted into U.S. dollar values at the prevailing rate as quoted by a
Pricing Service. If such quotations are not available, the rate of exchange will
be determined in good faith pursuant to consistently applied procedures
established by the Board. No brokerage commissions are typically paid on
purchases and sales of U.S. Government Securities.
Portfolio Transactions
- ----------------------
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objectives. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or OTC, 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. 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.
Warburg will select specific portfolio investments and effect
transactions for each Portfolio and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to a
Portfolio and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving both the Portfolios and its other clients
and, conversely, research or other services obtained by the placement of
business of other clients may be useful to Warburg in carrying out its
obligations to the Portfolios. Research may include furnishing advice, either
directly or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods,
25
<PAGE>
legislative developments, changes in accounting practices, economic factors and
trends and portfolio strategy; access to research analysts, corporate management
personnel, industry experts, economists and government officials; comparative
performance evaluation and technical measurement services and quotation
services; and products and other services (such as third party publications,
reports and analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information, including the research described above) that assist Warburg in
carrying out its responsibilities. Research received from brokers or dealers is
supplemental to Warburg's own research program. The fees to Warburg under its
advisory agreements with the Trust are not reduced by reason of its receiving
any brokerage and research services.
Investment decisions for each Portfolio concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg. Such other investment clients may invest in the same securities as 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 believes to be equitable to each client, including the
Portfolios. In some instances, this investment procedure may adversely affect
the price paid or received by a Portfolio or the size of the position obtained
or sold for a Portfolio. To the extent permitted by law, Warburg may aggregate
the securities to be sold or purchased for a Portfolio with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for a Portfolio may be executed through
Counsellors Securities Inc., the Trust's distributor ("Counsellors Securities"),
if, in Warburg's judgment, the use of Counsellors Securities is likely to result
in price and execution at least as favorable as those of other qualified
brokers, and if, in the transaction, Counsellors Securities charges the
Portfolio a commission rate consistent with those charged by Counsellors
Securities to comparable unaffiliated customers in similar transactions. All
transactions with affiliated brokers will comply with Rule 17e-1 under the 1940
Act. 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.
26
<PAGE>
Portfolio Turnover
- ------------------
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 Portfolios do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the
Portfolios deem it desirable to sell or purchase securities. Certain practices
that may be employed by each Portfolio could result in high portfolio turnover.
For example, portfolio securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a security may be sold
and another of comparable quality purchased at approximately the same time to
take advantage of what Warburg believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such as changes in
the overall demand for, or supply of, various types of securities. In addition,
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.
MANAGEMENT OF THE TRUST
Officers and Board of Trustees
- ------------------------------
The names (and ages) of the Trust's Trustees and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
Richard N. Cooper (63).....................Trustee
Harvard University Professor at Harvard University;
1737 Cambridge Street National Intelligence Counsel
Cambridge, Massachusetts 02138 from June 1995 until January 1997;
Director or Trustee of Circuit
City Stores, Inc. (retail electronics
and appliances) and Phoenix Home Life
Mutual Insurance Company
27
<PAGE>
Donald J. Donahue (73).....................Trustee
27 Signal Road Chairman of Magma Copper Company
Stamford, Connecticut 06902 from December 1987 until December
1995; Chairman and Director of NAC
Holdings from September 1990-June
1993; Director of Chase Brass
Industries, Inc. since December 1994;
Director of Pioneer Companies, Inc.
(chlor-alkali chemicals) and
predecessor companies since 1990 and
Vice Chairman since December 1995.
Jack W. Fritz (70).........................Trustee
2425 North Fish Creek Road Private investor; Consultant
P.O. Box 483 and Director of Fritz
Wilson, Wyoming 83014 Broadcasting, Inc. and Fritz
Communications (developers and
operators of radio stations);
Director of Advo, Inc. (direct mail
advertising).
John L. Furth** (66).......................Chairman of the Board and Trustee
466 Lexington Avenue Vice Chairman and Director of
New York, New York 10017-3147 Warburg; Associated with Warburg
since 1970; Director of Counsellors
Securities; Chairman of the Board and
Officer of other investment companies
advised by Warburg.
Thomas A. Melfe (65).......................Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan
New York, New York 10112 Leisure Newton & Irvine; Chairman of
the Board, Municipal Fund for New
York Investors, Inc.*
Arnold M. Reichman** (49)..................Trustee
466 Lexington Avenue Senior Managing Director, Chief
New York, New York 10017-3147 Operating Officer and Assistant
Secretary of Warburg; Associated with
Warbrug since 1984; Director,
Secretary and Chief Operating Officer
of Counsellors Securities;
Director/Trustee of other investment
companies advised by Warburg.
- ----------------------------
** Indicates a Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
28
<PAGE>
Alexander B. Trowbridge (67)...............Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners,
Washington, DC 20004 Inc. (business consulting) from
January 1990-November 1996; President
of the National Association of
Manufacturers from 1980-1990;
Director or Trustee of New England
Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), WMX
Technologies Inc. (solid and
hazardous waste collection and
disposal), The Rouse Company (real
estate development), Harris Corp.
(electronics and communications
equipment), The Gillette Co.
(personal care products) and Sun
Company Inc. (petroleum refining and
marketing).
Eugene L. Podsiadlo (40)...................President
466 Lexington Avenue Managing Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1991;
Vice President of Citibank, N.A. from
1987-1991; Senior Vice President of
Counsellors Securities and President
of other investment companies advised
by Warburg.
Stephen Distler (44).......................Vice President
466 Lexington Avenue Managing Director, Controller and
New York, New York 10017-3147 Assistant Secretary of Warburg;
Associated with Warburg since 1984;
Treasurer of Counsellors Securities;
Vice President of other investment
companies advised by Warburg.
Eugene P. Grace (46).......................Vice President and Secretary
466 Lexington Avenue Associated with Warburg since April
New York, New York 10017-3147 1994; Attorney-at-law from September
1989-April 1994; life insurance
agent, New York Life Insurance
Company from 1993-1994; General
Counsel and Secretary, Home Unity
Savings Bank from 1991-1992; Vice
President, Chief Compliance Officer
and Assistant Secretary of
Counsellors Securities; Vice
President and Secretary of other
investment companies advised by
Warburg.
29
<PAGE>
Howard Conroy (43).........................Vice President and Chief Financial
466 Lexington Avenue Officer Associated with Warburg since
New York, New York 10017-3147 1992; Associatedwith Martin Geller,
C.P.A. from 1990-1992; Vice
President, Finance with
Gabelli/Rosenthal & Partners, L.P.
until 1990; Vice President, Treasurer
and Chief Financial Officer of other
investment companies advised by
Warburg.
Daniel S. Madden, CPA (31).................Treasurer and Chief Accounting
466 Lexington Avenue Officer 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;
Associated with Ernst & Young LLP
from 1990 to 1993. Treasurer and
Chief Accounting Officer of other
investment companies advised by
Warburg.
Janna Manes (29)...........................Assistant Secretary
466 Lexington Avenue Associated with Warburg since 1996;
New York, New York 10017-3147 Associated with the law firm of
Willkie Farr & Gallagher from
1993-1996; Assistant Secretary of
other investment companies advised by
Warburg.
30
<PAGE>
No employee of Warburg or PFPC Inc., the Trust's co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Trust
for acting as an officer or Trustee of the Trust. Each Trustee who is not a
director, trustee, officer or employee of Warburg, PFPC or any of their
affiliates receives an annual fee of $500 and $250 for each meeting of the Board
attended by him for his services as Trustee and is reimbursed for expenses
incurred in connection with his attendance at Board meetings.
Trustees' Compensation
- ----------------------
(estimated for the fiscal year ended December 31, 1997)+
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Trust Managed by Warburg*
- ---------------- ----------------- ------------------------
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $1,500 $44,500
Donald J. Donahue $1,500 $44,500
Jack W. Fritz $1,500 $44,500
Thomas A. Melfe $1,500 $44,500
Alexander B. Trowbridge $1,500 $44,500
- --------------------------
+ Estimates of future payments to be made pursuant to existing
arrangements.
* Each Trustee also serves as a Director or Trustee of 23 other
investment companies advised by Warburg.
** Mr. Furth and Mr. Reichman are considered to be interested persons of
the Trust and Warburg, as defined under Section 2(a)(19) of the 1940
Act, and, accordingly, receive no compensation from the Trust or any
other investment company managed by Warburg.
As of September 1, 1997, no Trustees or officers of the Trust owned any
of the outstanding shares of the Portfolios.
Portfolio Managers
- ------------------
Mr. Dale C. Christensen, Co-Portfolio Manager of each of the
Portfolios, earned a B.S. in Agriculture from the University of Alberta and a
B.Ed. in Mathematics from the University of Calgary, both located in Canada. Mr.
Christensen is also Co-Portfolio Manager of Warburg Pincus Global Fixed Income
Fund, Warburg Pincus Fixed Income Fund, Warburg Pincus Intermediate Maturity
Government Fund and Warburg Pincus New York Intermediate Municipal Fund. Mr.
Christensen directs the fixed income group at Warburg, which he joined in 1989,
31
<PAGE>
providing portfolio management for Warburg Pincus Funds and institutional
clients around the world. Mr. Christensen was a vice president in the
International Private Banking division and the domestic pension fund management
division at Citicorp from 1984 to 1989. Prior to that, Mr. Christensen was a
fixed income portfolio manager at CIC Asset Management from 1982 to 1984.
Mr. M. Anthony E. van Daalen, Co-Portfolio Manager of the Fixed Income
Portfolio, earned a B.A. degree from Wesleyan University and a M.B.A. degree
from New York University. Mr. van Daalen is also Co-Portfolio Manager of Warburg
Pincus Fixed Income Fund and Warburg Pincus Intermediate Maturity Government
Fund. He has been a Portfolio Manager for Warburg Pincus Funds since joining
Warburg in 1992, specializing in government and high yield bonds. Mr. van Daalen
was an assistant vice president, portfolio manager at Citibank in the Private
Banking Group from 1985 to 1991. Prior to that Mr. van Daalen was a retail
banking manager at The Connecticut Bank and Trust Co. from 1983 to 1985 and an
analyst at Goldstein/Krall Market Research from 1982 to 1983.
Laxmi C. Bhandari, Co-Portfolio Manager of the Global Fixed Income
Portfolio, earned a Ph.D in Finance and a M.B.A. from the University of Chicago,
his P.G.D.M. degree (M.B.A. equivalent) from the Indian Institute of Management,
Ahmedabad, India and B.Com. degree from Rajasthan University, India. He has also
been a Co-Portfolio Manager of Warburg Pincus Global Fixed Income Fund since
joining Warburg in 1993, specializing in derivative-based products. Mr. Bhandari
was a vice president in charge of arbitrage trading at the Paribas Corporation
from 1991 to 1993. Prior to that Mr. Bhandari was a vice president of asset
liability management at Chemical Bank from 1987 to 1991 and an assistant
professor of advanced portfolio management and advanced corporate finance at the
University of Alberta from 1982 to 1987.
Investment Adviser and Co-Administrators
- ----------------------------------------
Warburg serves as investment adviser to each Portfolio, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to the
Trust and PFPC serves as a co-administrator to the Trust pursuant to separate
written agreements (the "Advisory Agreements," the "Counsellors Service
Co-Administration Agreement" and the "PFPC Co-Administration Agreement,"
respectively). The services provided by, and the fees payable by the Trust to,
Warburg under the Advisory Agreements, Counsellors Service under the Counsellors
Service Co-Administration Agreement and PFPC under the PFPC Co-Administration
Agreement are described in the Prospectus.
Custodian and Transfer Agent
- ----------------------------
PNC Bank, National Association ("PNC") serves as custodian of each
Portfolio's U.S. assets and also provides certain custodial services for each
Portfolio in connection with purchase and sale of the Portfolio shares. State
Street Bank and Trust Company ("State Street") serves as custodian of each
Portfolio's non-U.S. assets. Under the custodian agreement, PNC and State Street
each (i) maintains a separate account or accounts in the name of the relevant
Portfolio, (ii) holds and transfers portfolio securities on account of the
relevant Portfolio, (iii) makes receipts and disbursements of money on behalf of
the relevant Portfolio, (iv) collects and receives all income and other payments
and distributions on account of the relevant Portfolio's
32
<PAGE>
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Trust's custodial arrangements. PNC is an indirect wholly owned
subsidiary of PNC Bank Corp., and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19101. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
State Street Bank and Trust Company ("State Street") serves as the
shareholder servicing, transfer and dividend disbursing agent of the Trust
pursuant to a Transfer Agency and Service Agreement, under which State Street
(i) issues and redeems shares of each Portfolio, (ii) addresses and mails all
communications by the Trust to record owners of Portfolio shares, including
reports to shareholders, dividend and distribution notices and proxy material
for its meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts and (iv) makes periodic reports to the Board concerning
the transfer agent's operations with respect to the Trust. State Street has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
("BFDS"), responsibility for most shareholder servicing functions. BFDS's
principal business address is 2 Heritage Drive, Boston, Massachusetts 02171.
Organization of the Trust
- -------------------------
The Trust was organized as an unincorporated Massachusetts business
trust under the name "Warburg, Pincus Trust II."
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.
33
<PAGE>
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.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally affecting
the Trust and its shareholders is intended to be only a summary and is not
intended as a substitute for careful tax planning by prospective shareholders.
Shareholders are advised to consult the sponsoring Participating Insurance
Company separate account prospectus or the Plan documents or other informational
materials supplied by Plan sponsors and their own tax advisers with respect to
the particular tax consequences to them of an investment in a Portfolio.
Each Portfolio intends to qualify as a "regulated investment company"
under Subchapter M of the Code. If it qualifies as a regulated investment
company, a Portfolio will pay no federal income taxes on its taxable net
investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to shareholders.
To qualify under Subchapter M, a Portfolio must, among other things: (i)
distribute to its shareholders the sum of at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains) plus at least 90% of its net
tax-exempt interest income; (ii) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
the sale or other disposition of securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures, and forward
contracts) derived with respect to its business of investing in such securities
or foreign currencies; and (iii) diversify its holdings so that, at the end of
each
34
<PAGE>
fiscal quarter of the Portfolio (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. Government Securities and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the Portfolio's total assets and to
not more than 10% of the outstanding voting securities of the issuer, and (b)
not more than 25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. Government Securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses.
In addition, each Portfolio intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the Code, each Portfolio will be required to diversify its investments
so that on the last day of each calendar quarter no more than 55% of the value
of its assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any three
investments and no more than 90% is represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For the purposes of Section 817(h), obligations of the United States Treasury
and each U.S. government agency or instrumentality are treated as securities of
separate issuers. The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a Variable Contract owner's
control of the investments of a separate account may cause the Variable Contract
owner, rather than the Participating Insurance Company, to be treated as the
owner of the assets held by the separate account. If the Variable Contract owner
is considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in the
Variable Contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued. In the event that rules or regulations are adopted, there can be no
assurance that the Portfolios will be able to operate as currently described, or
that the Trust will not have to change the investment goal or investment
policies of a Portfolio. While a Portfolio's investment goal is fundamental and
may be changed only by a vote of a majority of the Portfolio's outstanding
shares, the Board reserves the right to modify the investment policies of a
Portfolio as necessary to prevent any such prospective rules and regulations
from causing a Variable Contract owner to be considered the owner of the shares
of the Portfolio underlying the separate account.
A Portfolio's short sales against the box, if any, and transactions, if
any, in foreign currencies, forward contracts, options and futures contracts
(including options, futures contracts and forward contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses recognized by the Portfolio
(i.e., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Portfolio, defer Portfolio losses and cause the
Portfolio to be subject to hyperinflationary currency rules. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (i) will require a Portfolio to
mark-to-market certain types of its positions (i.e., treat them as if they were
closed out) and (ii) may cause the Portfolio to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding income and
excise taxes. Each Portfolio will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any foreign currency, forward
35
<PAGE>
contract, option, futures contract or hedged investment so that (a) neither the
Portfolio nor its shareholders will be treated as receiving a materially greater
amount of capital gains or distributions than actually realized or received, (b)
the Portfolio will be able to use substantially all of its losses for the fiscal
years in which the losses actually occur and (c) the Portfolio will continue to
qualify as a regulated investment company.
As described in the Prospectus, because shares of a Portfolio may only
be purchased through Variable Contracts and Plans, it is anticipated that
dividends and distributions will be exempt from current taxation if left to
accumulate within the Variable Contracts or Plans.
Investment in Passive Foreign Investment Companies
- --------------------------------------------------
If a Portfolio purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the
Portfolio may be subject to federal income tax on a portion of an "excess
distribution" or gain from the disposition of the shares, even though the income
may have to be distributed by the Portfolio to its shareholders, the Variable
Contracts and Plans. In addition, gain on the disposition of shares in a PFIC
generally is treated as ordinary income even though the shares are capital
assets in the hands of the Portfolio. Certain interest charges may be imposed on
the Portfolio with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
A Portfolio may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Portfolio compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Portfolio.
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 its PFIC stock at the end
of each year. In this case, a Portfolio would report gains as ordinary income
and could deduct losses to the extent of previously recognized gains. The
elections, once made, would be effective for all subsequent taxable years of a
Portfolio, unless revoked with the consent of the Internal Revenue Service. 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
stock.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return or yield in
advertisements or in reports and other communications to shareholders. The
aggregate total return for the fiscal periods ended June 30, 1997, were as
follows (performance figures calculated without the waiver of fees by a
Portfolio's service provider(s), if any, are noted in parentheses):
36
<PAGE>
Since Inception (3/31/97)
-------------------------
Fixed Income Portfolio 3.30%* (-0.20%)*
Global Fixed Income Portfolio 2.90%* 1.60%*
- ---------------------
* Non-annualized.
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.
Yield is calculated by annualizing the net investment income generated
by a Portfolio over a specified thirty-day period according to the following
formula:
YIELD = 2[( a-b +1)6***-1]
---
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
Each Portfolio's 30-day annualized current yield as of June 30, 1997 was as
follows (figures calculated without the waiver of fees by a Portfolio's service
provider(s), if any, are noted in parentheses):
Fixed Income Portfolio 5.20% (-7.98%)
Global Fixed Income Portfolio 4.97% (-0.21%)
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
- ---------------------
** As used here, "n" is an exponent.
*** As used here, "6" is an exponent.
37
<PAGE>
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."
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 statement of assets and liabilities
for the Trust that appears in this Statement of Additional Information have been
audited by Coopers & Lybrand, whose report thereon appears elsewhere herein and
have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
The Trust's unaudited financial report dated June 30, 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 Portfolios included therein. The Trust will furnish
without charge a copy of its Semiannual Report upon request by calling the Trust
at (800) 369-2728.
The Trust's statement of assets and liabilities dated as of March 12,
1997 follows the Report of Independent Accountants.
MISCELLANEOUS
As of August 31, 1997, Warburg Pincus Counsellors, Inc. owned of record
100% of the Trust's outstanding shares.
38
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
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 it normally
exhibits 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.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
<PAGE>
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." 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.
A-2
<PAGE>
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B". The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Short-Term Note Ratings
- -----------------------
The following summarizes the two highest ratings used by S&P for
short-term notes:
SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus sign designation.
SP-2 - Loans bearing this designation evidence a satisfactory capacity
to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
A-3
<PAGE>
MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of high
quality with margins of protection ample although not so large as in the
preceding group.
Commercial Paper Ratings
- ------------------------
The following summarizes the two highest ratings for commercial paper
used by S&P and Moody's, respectively:
Commercial paper rated A-1 by S&P's 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. 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.
Municipal Obligations Ratings
- -----------------------------
The following summarizes the ratings used by S&P for Municipal
Obligations:
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 adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories.
A-4
<PAGE>
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
A-5
<PAGE>
The following summarizes the highest four municipal ratings used by
Moody's:
Aaa - Bonds which 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 which are rated as are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
A-6
<PAGE>
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Warburg, Pincus Trust II:
We have audited the accompanying Statement of Assets and Liabilities of Warburg,
Pincus Trust II (the "Trust"), comprised of the Fixed Income Portfolio and
Global Fixed Income Portfolio, as of March 12, 1997. This financial statement is
the responsibility of the Trust's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Warburg, Pincus Trust II as of
March 12, 1997 in conformity with generally accepted accounting principles.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 14, 1997
F-1
<PAGE>
WARBURG, PINCUS TRUST II
STATEMENT OF ASSETS AND LIABILITIES
as of March 12, 1997
Assets:
Cash $100,000
Deferred Organizational Costs 18,600
Deferred Offering Costs 44,720
-------
Total Assets 163,320
-------
Liabilities:
Accrued Organizational Costs 18,600
Accrued Offering Costs 44,720
-------
Total Liabilities 63,320
-------
Net Assets $100,000
=======
Net Asset Value, Redemption and Offering
Price Per Share ($.001 par value applicable
to 5,000 shares outstanding of the Fixed
Income Portfolio and 5,000 shares outstanding
of the Global Fixed Income Portfolio). $10.00
======
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE>
WARBURG, PINCUS TRUST II
Notes to Financial Statement
March 12, 1997
1. Organization:
Warburg, Pincus Trust II (the "Trust"), consisting of the Fixed Income Portfolio
and the Global Fixed Income Portfolio was organized on December 16, 1996 under
the laws of the Commonwealth of Massachusetts. The Trust is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Trust's Declaration of Trust authorizes its Board to issue an
unlimited number of full and fractional shares of beneficial interest, $.001 par
value per share. Shares of two series have been authorized. The Board may
classify or reclassify any of its shares into one or more additional series
without shareholder approval. The Trust has not commenced operations except
those related to organizational matters and the sale of 5,000 Shares of the
Fixed Income Portfolio and 5,000 Shares of the Global Fixed Income Portfolio,
respectively, (the "Initial Shares") to Warburg, Pincus Counsellors, Inc., the
Trust's investment adviser (the "Adviser"), on March 12, 1997.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Trust and are being amortized
over sixty months commencing with operations. In the event any of the Initial
Shares of the Trust are redeemed by any holder thereof during the period that
the Trust is amortizing its organizational costs, the redemption proceeds
payable to the holder thereof by the Trust will be reduced by unamortized
organizational costs in the same ratio as the number of Initial Shares being
redeemed bears to the number of Initial Shares outstanding at the time of
redemption. Offering costs, including initial registration costs, have been
deferred and will be charged to expense during the fund's first year of
operation.
Certain officers and a director of the Trust are also officers and a director of
the Adviser. These officers and director are paid no fees by the Trust for
serving as an officer or director of the Trust.
F-3
