<PAGE>
As filed with the U.S. Securities and Exchange Commission
on January 2, 1997
Securities Act File No.
Investment Company Act File No.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF [x]
1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [x]
ACT OF 1940
Amendment No. [ ]
(Check appropriate box or boxes)
Warburg, Pincus Trust II
.........................................................
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................ ...............
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
.........................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
<PAGE>2
Approximate Date of Proposed Public Offering: As soon as
practicable after the effective date of this Registration
Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed
Title of Proposed Maximum
Securities Maximum Aggregate Amount of
Being Amount Being Offering Price Offering Registration
Registered Registered per Unit Price Fee
----------- ---------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares of
beneficial
interest,
$.001 par
value per
share Indefinite* * Indefinite* $0
- -----------------------
</TABLE>
DECLARATION PURSUANT TO RULE 24f-2
* An indefinite number of shares of beneficial interest of the
Registrant is being registered by this Registration Statement pursuant
to Rule 24f-2 under the Investment Company Act of 1940, as amended
(the "1940 Act").
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended (the "1933 Act"), or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>3
WARBURG, PINCUS TRUST II
FORM N-1A
CROSS REFERENCE SHEET
--------------------------------------
Part A Prospectus Heading
Item No.
1. Cover Page.............................. Cover Page
2. Synopsis................................ The Trust's Expenses
3. Condensed Financial Information......... Not Applicable
4. General Description of Registrant....... Cover Page;
Investment
Objectives and
Policies; Portfolio
Investments; Risk
Factors and Special
Considerations;
Certain Investment
Strategies;
Investment
Guidelines; General
Information
5. Management of the Fund.................. Management of the
Portfolios
6. Capital Stock and Other Securities...... General Information
7. Purchase of
Securities Being
Offered................................ How to Purchase and Redeem
Shares in the Portfolios;
Management of the
Portfolios; Net Asset
Value
8. Redemption or Repurchase................ How to Purchase and Redeem
Shares in the Portfolios
9. Legal Proceedings....................... Not Applicable
Part B Heading for the Statement
Item No. of Additional Information
- ---------------------------------- -------------------------
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Contents
12. General Information
and History......... Management of the Trust
<PAGE>4
13. Investment Objectives Investment Objectives; Investment
and Policies................. Policies
14. Management of the
Registrant................... Management of the Trust; See
Prospectus--"Management of the
Portfolios"
15. Control Persons and
Principal Holders of
Securities................... Management of the Trust
16. Investment Advisory
and Other Services........... Management of the Trust; See
Prospectus--"Management of the
Portfolios"
17. Brokerage Allocation......... Investment Policies; See Pros-
pectus-"Portfolio Transactions
and Turnover Rate"
18. Capital Stock and Management of the Trust--
Other Securities............. Organization of the Trust; See
Prospectus--"General Information"
19. Purchase, Redemption
and Pricing of
Securities Being
Offered...................... Additional Purchase and Redemp-
tion Information; See
Prospectus--"How to Purchase and
Redeem Shares in the
Portfolios"; "Net Asset Value"
20. Tax Status................... Additional Information Concerning
Taxes; See Prospectus--
"Dividends, Distributions and
Taxes"
21. Underwriters................. Investment Policies--Portfolio
Transactions; See Prospectus--
"Management of the Portfolios"
22. Calculation of
Performance Data.............. Determination of Performance
23. Financial Statements.......... Financial Statements
Part C
------
Information required to be included in Part C is set forth after the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
, 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]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 2, 1997
PROSPECTUS , 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') and is
available for reference, along with other related materials, on the SEC Internet
Web site (http://www.sec.gov). The Statement of Additional Information is also
available upon request and without charge by calling the Trust at (800)
369-2728. The Statement of Additional Information, as amended from time to time,
bears the same date as this Prospectus and is incorporated by reference in its
entirety into this Prospectus.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENTS IN SHARES OF THE TRUST INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
THE TRUST'S EXPENSES
- --------------------------------------------------------------------------------
<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.......................................... % %
12b-1 Fees............................................... 0 0
Other Expenses........................................... % %
--- ---
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................................................... $ $
3 years.................................................. $ $
</TABLE>
- --------------------------------------------------------------------------------
* 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 % and %, and Total Portfolio Operating Expenses would equal
% and % 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 has undertaken to limit each
Portfolio's Total Portfolio Operating Expenses through December 31, 1997.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of a Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, each Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
'Portfolio Investments' and 'Certain Investment Strategies' for descriptions of
certain types of investments the Portfolios may make.
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
3
<PAGE>
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
- --------------------------------------------------------------------------------
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, a Division
of The McGraw Hill Companies, Inc. ('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
4
<PAGE>
instrumentalities; and repurchase agreements with respect to portfolio
securities.
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
5
<PAGE>
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally in
terms of their maturities. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included among
the obligations issued by agencies and instrumentalities of the United States
are: instruments that are supported by the full faith and credit of the United
States (such as certificates issued by the Government National Mortgage
Association ('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
6
<PAGE>
mortgages as interest rates decline. In addition, like other debt securities,
the 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
7
<PAGE>
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 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
For certain additional risks related to each Portfolio's investments, see
'Portfolio Investments' beginning at page 4 and 'Certain Investment Strategies'
beginning at page 11.
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.
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
8
<PAGE>
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 '1933 Act'), but that can be sold to 'qualified institutional
buyers' in accordance with Rule 144A under the 1933 Act ('Rule 144A
Securities'). A Rule 144A Security will be considered illiquid and therefore
subject to each Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the
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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.
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. It is not possible to predict the
portfolio turnover rates for the Portfolios; however, each Portfolio's annual
turnover rate should not exceed 200%. High portfolio turnover rates (100% or
more) may result in dealer mark ups or underwriting commissions as well as other
transaction costs, including correspondingly higher brokerage commissions. In
addition, short-term gains realized from portfolio 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
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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.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg,
each Portfolio may, but is not required to, engage in a number of strategies
involving options, futures and forward currency contracts. These strategies,
commonly referred to as 'derivatives,' may be used (i) for the purpose of
hedging against a decline in value of the Portfolio's current or anticipated
portfolio holdings, (ii) as a substitute for purchasing or selling portfolio
securities or (iii) to seek to generate income to offset expenses or increase
return. TRANSACTIONS THAT ARE NOT CONSIDERED HEDGING SHOULD BE CONSIDERED
SPECULATIVE AND MAY SERVE TO INCREASE 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. and by the Code.
Securities 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 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
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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 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.
Hedging Considerations. The Portfolios may engage in options, futures and
currency transactions for, among other reasons, hedging purposes. A hedge is
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designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as 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 correctly predict movements in the hedge and the hedged
position and the correlation between them, which could prove to be inaccurate.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or trends.
Additional Considerations. To the extent that a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out an option or futures position without
incurring substantial losses, if at all. 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; and forward currency contracts. The use of these strategies may
require that the Portfolio maintain cash or other liquid assets that are
acceptable as collateral to the appropriate regulatory authority in a segregated
account with its custodian or a designated sub-custodian to the extent the
Portfolio's obligations with respect to these strategies are not otherwise
'covered' through ownership of the underlying security, financial instrument or
currency or by other portfolio positions or by other means consistent with
applicable regulatory policies. Segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of 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
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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
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.
INTEREST RATE, INDEX, MORTGAGE AND CURRENCY SWAPS; INTEREST RATE CAPS, FLOORS
AND COLLARS. 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.
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 at interest rates equal to two specified 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 their respective rights to make or receive payments in specified
currencies. The
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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 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 other party 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 other party 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 other party 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.
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 is referred to as
one 'against the box.' 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. Although prior to delivery
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the Portfolio will have to pay an amount equal to any dividends paid on the
securities sold short, the Portfolio will receive the dividends from the
securities sold short or the dividends from the preferred stock or interest from
the debt securities convertible or exchangeable into the securities sold short,
plus a portion of the interest earned from the proceeds of the short sale. The
Portfolio will deposit, in a segregated account with its custodian or a
qualified subcustodian, the securities sold short or convertible or exchangeable
preferred stocks or debt securities in connection with short sales against the
box. Each Portfolio will endeavor to offset transaction costs associated with
short sales against the box with the income from the investment of the cash
proceeds. Not more than 10% of a Portfolio's net assets (taken at current value)
may be held as collateral for short sales against the box at any one time.
The extent to which a Portfolio may make short sales may be limited by the
requirement contained in the Code. See 'Dividends, Distributions and Taxes' for
other tax considerations applicable to short sales.
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' 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
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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.
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 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.
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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 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
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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. In addition, up to 5% of each Portfolio's total assets may
be invested in warrants. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets 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.
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 endowment funds, foundations and other
institutions and individuals. As of December 31, 1996, Warburg managed
approximately $ billion of assets, including approximately $ billion of
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investment company assets. Incorporated in 1970, Warburg is a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York
general partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Warburg
through its ownership of a class of voting preferred stock of Warburg. Warburg
G.P. has no business other than being a holding company of Warburg and its
subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
PORTFOLIO MANAGERS. Dale C. Christensen is a co-portfolio manager of each of
the Portfolios. Mr. Christensen is a managing director of EMW and has been
associated with EMW 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 has been a vice president and co-portfolio manager at Warburg since 1992,
prior to which time he was an assistant vice president at Citibank, N.A. Laxmi
C. Bhandari, also a vice president of Warburg, is a co-portfolio manager of the
Global Fixed Income Portfolio. Mr. Bhandari has been a co-portfolio manager at
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
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between the Portfolios
and their various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in other
regulatory filings as necessary and monitoring and developing compliance
procedures for the Portfolios. As compensation, each Portfolio pays Counsellors
Service a fee calculated at an annual rate of .10% of the Portfolio's average
daily net assets.
The Trust employs PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp. ('PFPC'), as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation the Fixed Income Portfolio pays PFPC a fee calculated at an annual
rate of .05% of the Portfolio's average daily net assets and the Global Fixed
Income Portfolio pays PFPC a fee calculated at an annual rate of .12% of the
Portfolio's first $250 million in average daily net assets, .10% of the next
$250 million in average daily net assets, .08% of the next $250 million in
average daily net assets, and .05% of average daily net assets over $750
million. PFPC has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809.
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CUSTODIANS. PNC Bank, National Association ('PNC') serves as custodian of the
assets of each of the Portfolios. Fiduciary Trust Company International
('Fiduciary') also serves as custodian of the Global Fixed Income Portfolio's
assets. Like PFPC, PNC is a subsidiary of PNC Bank Corp. and its principal
business address is Broad and Chestnut Streets, Philadelphia, Pennsylvania
19101. Fiduciary's principal business address is Two World Trade Center, New
York, New York 10048.
TRANSFER AGENT. State Street Bank and Trust Company ('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. The principal business address of State Street is 225
Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTOR. Counsellors Securities serves without compensation as
distributor of the shares of the Portfolios. Counsellors Securities is a wholly
owned subsidiary of Warburg and is located at 466 Lexington Avenue, New York,
New York 10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Participating Insurance
Companies and Plans or their affiliates or entities that provide services to
them ('Service Organizations') with whom it enters into agreements up to .25%
(the 'Service Fee') of the annual average value of accounts maintained by such
Organizations with a Portfolio. A Service Organization may directly or
indirectly pay a portion of this Service Fee to a Portfolio's custodian or
transfer agent for costs related to accounts of the Service Organizations'
clients or customers. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
the services provided, the operations processing requirements of the
relationship and the standardized fee schedule of the Service Organization.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to qualified recipients who support the sale of shares of a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. In some instances, these incentives may be offered only to certain
institutions whose representatives provide services in connection with the sale
or expected sale of significant amounts of a Portfolio's shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
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HOW TO PURCHASE AND REDEEM SHARES IN THE PORTFOLIOS_
Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select a
Portfolio as an investment option for a Variable Contract or Plan.
PURCHASES. All investments in the Portfolios are credited to a Participating
Insurance Company's separate account immediately upon acceptance of an
investment by a Portfolio. Each Participating Insurance Company receives orders
from its contract owners to purchase or redeem shares of a Portfolio on any day
that the Portfolio calculates its net asset value (a 'business day'). That
night, all orders received by the Participating Insurance Company prior to the
close of regular trading on the New York Stock Exchange Inc. (the 'NYSE')
(currently 4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of a Portfolio during the morning of the next business day. These orders
are executed at the net asset value (described below under 'Net Asset Value')
computed at the close of regular trading on the NYSE on the previous business
day in order to provide a match between the contract owners' orders to the
Participating Insurance Company and that Participating Insurance Company's
orders to a Portfolio.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account. Participants
should contact their Plan sponsor for information concerning the appropriate
procedure for investing in the Portfolio.
Each Portfolio reserves the right to 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.
REDEMPTIONS. Shares of a Portfolio may be redeemed on any business day.
Redemption orders which are received by a Participating Insurance Company or
Plan or its agent prior to the close of regular trading on the NYSE on any
business day and transmitted to the Trust or its specified agent during the
morning of the next business day will be processed at the net asset value
computed at the close of regular trading on the NYSE on the previous business
day. Redemption proceeds will normally be wired to the
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Participating Insurance Company or Plan the business day following receipt of
the redemption order, but in no event later than seven days after receipt of
such order.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio calculates its dividends from
net investment income. Net investment income includes interest accrued and
dividends earned on the Portfolio's portfolio securities for the applicable
period less applicable expenses. Each Portfolio declares dividends from its net
investment income annually. Net investment income earned on weekends and when
the NYSE is not open will be computed as of the next business day. Distributions
of net realized long-term and short-term capital gains are declared annually
and, as a general rule, will be distributed or paid after the end of the fiscal
year in which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the relevant Portfolio at net asset value
unless, in the case of a Variable Contract, a Participating Insurance Company
elects to have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
Each Portfolio intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. Each Portfolio intends to distribute
all of its net income and capital gains to its shareholders (the Variable
Contracts and Plans).
Because shares of the Portfolios may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital gain
distributions from a Portfolio are taxable, if at all, to the Participating
Insurance Companies and Plans and will be exempt from current taxation of the
Variable Contract owner or Plan participant if left to accumulate within the
Variable Contract or Plan. Generally, withdrawals from Variable Contracts or
Plans may be subject to ordinary income tax and, if made before age 59 1/2, a
10% penalty tax.
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.
Certain provisions of the Code may require that a gain recognized by a
Portfolio upon the closing of a short sale be treated as a short-term capital
gain, and that a loss recognized by the Portfolio upon the closing of a short
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sale be treated as a long-term capital loss, regardless of the amount of time
that the Portfolio held the securities used to close the short sale. A
Portfolio's use of short sales may also affect the holding periods of certain
securities held by the Portfolio if such securities are 'substantially
identical' to securities used by the Portfolio to close the short sale. The
Portfolio's short selling activities will not result in unrelated business
taxable income to a tax-exempt investor.
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
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Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Washington's Birthday, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when one of the holidays falls on a
Saturday or Sunday, respectively. The net asset value per share of each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the NASDAQ National Market System) or foreign securities exchange or
traded in an 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
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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-
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day period, which is then annualized. 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. These total return figures show the average percentage change in
value of an investment in the Portfolio from the beginning of the measuring
period to the end of the measuring period. The figures reflect changes in the
price of the Portfolio's shares assuming that any income dividends and/or
capital gain distributions made by the Portfolio during the period were
reinvested in shares of the Portfolio. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as from commencement of the Portfolio's operations or on a year-by-year,
quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that 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
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<PAGE>
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.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio activity, which may include a discussion of significant portfolio
holdings and analysis of holdings by industry, country, credit quality and other
characteristics. Each Portfolio may also discuss the continuum of risk and
return relating to different investments and the potential impact of foreign
securities on a portfolio otherwise composed of domestic securities.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various periods of time. In addition, each Portfolio or a Participating
Insurance Company or Plan sponsor may from time to time compare the Portfolio's
expense ratio to that of investment companies with similar objectives and
policies, based on data generated by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on 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
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<PAGE>
vote by individual Portfolio on all matters except where otherwise required by
law. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
members holding office have been elected by shareholders. Shareholders of record
of no less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. A meeting will be called for the purpose
of voting on the removal of a Trustee at the written request of holders of 10%
of the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
Participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in a Portfolio may conflict. The Board will monitor
the Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in one or both Portfolios. As a result, a Portfolio may
be forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell shares
of a Portfolio to any Variable Contract or Plan or may suspend or terminate the
offering of shares of a Portfolio if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios may be obtained by calling the
Trust at (800) 369-2728.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
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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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TABLE OF CONTENTS
<TABLE>
<S> <C>
The Trust's Expenses.................................................... 2
Investment Objectives and Policies...................................... 3
Portfolio Investments................................................... 4
Risk Factors and Special Considerations................................. 8
Portfolio Transactions and Turnover Rate................................ 10
Certain Investment Strategies........................................... 11
Investment Guidelines................................................... 19
Management of the Portfolios............................................ 19
How to Purchase and Redeem Shares in the Portfolios..................... 22
Dividends, Distributions and Taxes...................................... 23
Net Asset Value......................................................... 24
Performance............................................................. 24
General Information..................................................... 26
</TABLE>
P.O. BOX 9030, BOSTON, MA 02205-9030
800-369-2728
TRBDF-1-0296
[Logo]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
Subject to Completion dated January 2, 1997
STATEMENT OF ADDITIONAL INFORMATION
_________, 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
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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..................................................37
Independent Accountants and Counsel...........................................38
Financial Statements..........................................................38
Appendix -- Description Of Ratings...........................................A-1
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus of Warburg Pincus Trust II (the "Trust"), dated
________, 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
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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
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Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio will have the absolute right to receive from
the issuer of the underlying security an equal number of shares to replace the
borrowed securities, but the Portfolio may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Portfolios may write covered call options. For example, if a Portfolio
writes covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios may write (i) in-the-money call
options when Warburg, Pincus Counsellors, Inc., the Portfolios' investment
adviser ("Warburg"), expects that the price of the underlying security will
remain flat or decline moderately during the option period, (ii) at-the-money
call options when Warburg expects that the price of the underlying security will
remain flat or advance moderately during the option period and (iii)
out-of-the-money call options when Warburg expects that the premiums received
from writing the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options Clearing
Corporation (the "Clearing Corporation") and of the securities exchange on which
the option is written.
Prior to their expirations, put and call options may be sold in closing
sale or purchase transactions (sales or purchases by the Portfolio prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Portfolio may realize a profit or loss from the
sale. An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the OTC market. When the Portfolio has purchased an option and engages in a
closing sale transaction, whether the Portfolio realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Portfolio initially paid for the original option
plus the related transaction costs. Similarly, in cases where the Portfolio has
written an option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the original option
and will incur a loss if the cost of the
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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.
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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. The ability of the Portfolio to trade in
futures contracts and options on futures contracts may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specified non-U.S. currency at a specified price, date, time and place. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific interest rate
sensitive financial instrument (debt security) at a specified price, date, time
and place. Securities indexes are capitalization weighted indexes which reflect
the market value of the securities listed on the indexes. A securities index
futures contract is an agreement to be settled by delivery of an amount of cash
equal to a specified multiplier times the difference between the value of the
index at the close of the last trading day on the contract and the price at
which the agreement is made.
No consideration is paid or received by a Portfolio upon entering into
a futures contract. Instead, the Portfolio is required to deposit in a
segregated account with its custodian an amount of cash or cash equivalent
liquid assets, 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
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less valuable, a process known as "marking-to-market." The Portfolios will also
incur brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Portfolio
may elect to close the position by taking an opposite position, which will
operate to terminate the Portfolio's existing position in the contract.
Positions in futures contracts and options on futures contracts (described
below) may be closed out only on the exchange on which they were entered into
(or through a linked exchange). No secondary market for such contracts exists.
Although the Portfolios intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio had insufficient cash, it might have to sell securities to meet
daily variation margin requirements at a time when it would be disadvantageous
to do so. In addition, if the transaction is entered into for hedging purposes,
in such circumstances the Portfolio may realize a loss on a futures contract or
option that is not offset by an increase in the value of the hedged position.
Losses incurred in futures transactions and the costs of these transactions will
affect the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase and write put
and call options on foreign currency, interest rate and 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.
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Currency Exchange Transactions. The value in U.S. dollars of the assets
of a Portfolio that are invested in foreign securities may be affected favorably
or unfavorably by changes in exchange control regulations, and the Portfolio may
incur costs in connection with conversion between various currencies. Currency
exchange transactions may be from any non-U.S. currency into U.S. dollars or
into other appropriate currencies. Each Portfolio will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on such contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing 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
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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 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
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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 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 other 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
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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
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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.
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
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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 a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board and Student Loan Marketing
Association. Each Portfolio may also invest in instruments that are supported by
the right of the issuer to borrow from the U.S. Treasury and instruments that
are supported by the credit of the instrumentality. Because the U.S. government
is not obligated by law to provide support to an instrumentality it sponsors, a
Portfolio will invest in obligations issued by such an instrumentality only if
Warburg determines that the credit risk with respect to the instrumentality does
not make its securities unsuitable for investment by the Portfolio.
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
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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 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 Group ("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
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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 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 E.M. Warburg, Pincus & Co., Inc. ("EMW") 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
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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 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
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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.
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 kind and amount to the securities sold
short or securities convertible into or exchangeable for such equivalent
securities. These securities constitute the Portfolio 's long position.
The Portfolios do not intend to engage in short sales against the box
for investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security), or when a Portfolio wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Portfolio's long position should be offset by a gain in
the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Portfolio owns. There will be certain additional
transaction costs associated with short sales against the box, but the Portfolio
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
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
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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, 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
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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 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.
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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.
American, European and Continental Depositary Receipts. The assets of a
Portfolio may be invested in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs").
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe
typically by non-U.S. banks and trust companies that evidence ownership of
either foreign or domestic securities. Generally, ADRs in registered form are
designed for use in U.S. securities markets and EDRs and CDRs in bearer form are
designed for use in European securities markets.
Warrants. Each Portfolio may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by a
Portfolio as part of a unit or attached to securities at the time of purchase).
Because a warrant does not carry with it the right to dividends or voting rights
with respect to the securities which it entitles a holder to purchase, and
because it does not represent any rights in the assets of the issuer, warrants
may be considered more speculative than certain other types of investments.
Also, the value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to its expiration date.
Non-Publicly Traded and Illiquid Securities. A Portfolio may not invest
more than 15% of its net assets in 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
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assets that it may invest in securities of a single issuer. Each Portfolio's
investments will be limited, however, in order to qualify as a "regulated
investment company" for purposes of the Code. See "Additional Information
Concerning Taxes." To qualify, 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 14
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)
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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.
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. Invest in warrants (other than warrants acquired by the Portfolio as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Portfolio's net assets.
14. Make additional investments (including roll-overs) if the Portfolio's
borrowings exceed 5% of its net assets.
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
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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
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will be converted into U.S. dollar values at the prevailing rate as quoted by a
Pricing Service. If such quotations are not available, the rate of exchange will
be determined in good faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
- ----------------------
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment 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,
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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.
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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 (62).................Trustee
Harvard University National Intelligence Counsel
1737 Cambridge Street Professor at Harvard University;
Cambridge, Massachusetts 02138 Director or Trustee of Circuit City
Stores, Inc. (retail electronics
and appliances) and Phoenix Home
Life Mutual Insurance Company
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<PAGE>
Donald J. Donahue (72).......................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 (69)...........................Trustee
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting,
Wilson, Wyoming 83014 Inc. and Fritz Communications
(developers and operators of radio
stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (66)..........................Chairman of the Board and Trustee
466 Lexington Avenue Vice Chairman and Director of EMW;
New York, New York 10017-3147 Associated with E.M. Warburg,
Pincus & Co., Inc. ("EMW") since
1970; Officer of other investment
companies advised by Warburg.
Thomas A. Melfe (64).........................Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan
New York, New York 10112 Leisure Newton & Irvine; Chairman
of the Board, Municipal Fund for
New York Investors, Inc.
Arnold M. Reichman* (48).....................Trustee
466 Lexington Avenue Managing Director and Assistant
New York, New York 10017-3147 Secretary of EMW; Associated with
EMW since 1984; Senior Vice
President, Secretary and Chief
Operating Officer of Counsellors
Securities; Officer of other
investment companies advised by
Warburg.
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<PAGE>
Alexander B. Trowbridge (67).................Trustee
1155 Connecticut Avenue, N.W. President of Trowbridge Partners,
Suite 700 Inc. (business consulting) from
Washington, DC 20036 January 1990-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), P.H.H.
Corporation (fleet auto management;
housing and plant relocation
service), WMX Technologies Inc.
(solid and hazardous waste
collection and disposal), The Rouse
Company (real estate development),
SunResorts International Ltd.
(hotel and real estate management),
Harris Corp. (electronics and
communications equipment), The
Gillette Co. (personal care
products) and Sun Company Inc.
(petroleum refining and marketing).
Eugene L. Podsiadlo (39).....................President
466 Lexington Avenue Managing Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1991;
Vice President of Citibank, N.A.
from 1987-1991; Senior Vice
President of Counsellors Securities
and other investment companies
advised by Warburg.
Stephen Distler (43).........................Vice President
466 Lexington Avenue Managing Director, Controller and
New York, New York 10017-3147 Assistant Secretary of EMW;
Associated with EMW since 1984;
Treasurer of Counsellors
Securities; Vice President,
Treasurer and Chief Accounting
Officer or Vice President and Chief
Financial Officer of other
investment companies advised by
Warburg.
Eugene P. Grace (45).........................Vice President and Secretary
466 Lexington Avenue Associated with EMW since April
New York, New York 10017-3147 1994; Attorney-at-law from
September 1989-April 1994; life
insurance agent, New York Life
Insurance Company from 1993-1994;
General Counsel and Secretary, Home
Unity Savings Bank from 1991-1992;
Vice President and Chief Compliance
Officer of Counsellors Securities;
Vice President and Secretary of
other investment companies advised
by Warburg.
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<PAGE>
Howard Conroy (42)...........................Vice President and Chief Financial
466 Lexington Avenue Officer Associated with EMW since
New York, New York 10017-3147 1992; Associated with Martin
Geller, C.P.A. from 1990-1992; Vice
President, Finance with
Gabelli/Rosenthal & Partners, L.P.
until 1990; Vice President,
Treasurer and Chief Accounting
Officer of other investment
companies advised by Warburg.
Daniel S. Madden, CPA (31)...................Treasurer and Chief Accounting
466 Lexington Avenue Officer Associated with EMW 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 EMW since 1996;
York 10017-3147 Associated New York, New with the
law firm of Willkie Farr &
Gallagher from 1993-1996; Assistant
Secretary of other investment
companies advised by Warburg.
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<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 $48,000
Donald J. Donahue $1,500 $48,000
Jack W. Fritz $1,500 $48,000
Thomas A. Melfe $1,500 $48,000
Alexander B. Trowbridge $1,500 $48,000
- --------------------------
+ Estimates of future payments to be made pursuant to existing arrangements.
* Each Trustee also serves as a Director or Trustee of 22 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 December 27, 1996, 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,
providing portfolio management for Warburg Pincus Funds and institutional
clients around the
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<PAGE>
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 EMW 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 the Fixed
Income Portfolio's assets and also provides certain custodial services for the
Global Fixed Income Portfolio in connection with purchase and sale of the
Portfolio's shares. Fiduciary Trust Company International ("Fiduciary") serves
as custodian of the Global Fixed Income Portfolio's assets. Under the custodian
agreement, PNC and Fiduciary each (i) maintains a separate account or accounts
in the name of the relevant Portfolio, (ii) holds and transfers portfolio
securities on account of the relevant Portfolio, (iii) makes receipts and
disbursements of money on behalf of the relevant Portfolio, (iv) collects and
receives all income and other payments and distributions on
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account of the relevant Portfolio's portfolio securities held by it and (v)
makes periodic reports to the Board concerning the Trust's custodial
arrangements. PNC is an indirect wholly owned subsidiary of PNC Bank Corp., and
its principal business address is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19101. The principal business address of Fiduciary is Two World
Trade Center, New York, New York 10048.
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. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110.
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.
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<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 at least 90% of its taxable net investment income
(for this purpose consisting of taxable net investment income and net realized
short-term capital gains); (ii) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
the sale or other disposition of securities, or other income (including, but not
limited to, gains from options, futures, and forward contracts) derived with
respect to its business of investing in securities; (iii) derive less than 30%
of its annual gross income from the sale or other
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disposition of securities, options, futures or forward contracts held for less
than three months; and (iv) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. Government Securities and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the Portfolio's total assets and to
not more than 10% of the outstanding voting securities of the issuer, and (b)
not more than 25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. Government Securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses. In meeting these
requirements, a Portfolio may be restricted in the selling of securities held by
the Portfolio for less than three months and in the utilization of certain of
the investment techniques described above and in the Trust's Prospectus. As a
regulated investment company, a Portfolio will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Portfolio's taxable ordinary
income for the calendar year and at least 98% of the excess of its capital gains
over capital losses realized during the one-year period ending October 31 during
such year, together with any undistributed, untaxed amounts of ordinary income
and capital gains from the previous calendar year. The Portfolios expect to pay
the dividends and make the distributions necessary to avoid the application of
this excise tax.
In addition, each Portfolio intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the Code, each Portfolio will be required to diversify its investments
so that on the last day of each calendar quarter no more than 55% of the value
of its assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any three
investments and no more than 90% is represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For the purposes of Section 817(h), obligations of the United States Treasury
and each U.S. government instrumentality are treated as securities of separate
issuers. The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a Variable Contract owner's
control of the investments of a separate account may cause the Variable Contract
owner, rather than the Participating Insurance Company, to be treated as the
owner of the assets held by the separate account. If the Variable Contract owner
is considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in the
Variable Contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued. In the event that rules or regulations are adopted, there can be no
assurance that the Portfolios will be able to operate as currently described, or
that the Trust will not have to change the investment goal or investment
policies of a Portfolio. While a Portfolio's investment goal is fundamental and
may be changed only by a vote of a majority of the Portfolio's outstanding
shares, the Board reserves the right to modify the investment policies of a
Portfolio as necessary to prevent any such prospective rules and
-35-
<PAGE>
regulations from causing a Variable Contract owner to be considered the owner of
the shares of the Portfolio underlying the separate account.
A Portfolio's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Portfolio (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Portfolio, defer
Portfolio losses and cause the Portfolio to be subject to hyperinflationary
currency rules. These rules could therefore affect the character, amount and
timing of distributions to shareholders. These provisions also (i) will require
a Portfolio to mark-to-market certain types of its positions (i.e., treat them
as if they were closed out) and (ii) may cause the Portfolio to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. Each Portfolio will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any foreign currency, forward contract, option, futures
contract or hedged investment so that (a) neither the Portfolio nor its
shareholders will be treated as receiving a materially greater amount of capital
gains or distributions than actually realized or received, (b) the Portfolio
will be able to use substantially all of its losses for the fiscal years in
which the losses actually occur and (c) the Portfolio will continue to qualify
as a regulated investment company.
As described in the Prospectus, because shares of a Portfolio may only
be purchased through Variable Contracts and Plans, it is anticipated that
dividends and distributions will be exempt from current taxation if left to
accumulate within the Variable Contracts or Plans.
Investment in Passive Foreign Investment Companies
- --------------------------------------------------
If a Portfolio purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the
Portfolio may be subject to federal income tax on a portion of an "excess
distribution" or gain from the disposition of the shares, even though the income
may have to be distributed by the Portfolio to its shareholders, the Variable
Contracts and Plans. In addition, gain on the disposition of shares in a PFIC
generally is treated as ordinary income even though the shares are capital
assets in the hands of the Portfolio. Certain interest charges may be imposed on
the Portfolio with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
A Portfolio may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Portfolio compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Portfolio.
On April 1, 1992 proposed regulations of the Internal Revenue Service
(the "IRS") were published providing a mark-to-market election for regulated
investment companies. The IRS subsequently issued a notice indicating that final
regulations will provide that regulated
-36-
<PAGE>
investment companies may elect the mark-to-market election for tax years ending
after March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of a Portfolio is unclear. If the Portfolio
is not able to make the foregoing election, it may be able to avoid the interest
charge (but not the ordinary income treatment) on disposition of the stock by
electing, under proposed regulations, each year to mark-to-market the stock
(that is, treat it as if it were sold for fair market value). Such an election
could result in acceleration of income to the Portfolio. Recently proposed
legislation would codify the mark-to-market election for regulated investment
companies.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return or yield
in advertisements or in reports and other communications to shareholders.
Total return is calculated by finding the average annual compounded rates of
return for the one-, five-, and ten- (or such shorter period as the Portfolio
has been offered) year periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
P (1 + T) [*GRAPHIC OMITTED-SEE FOOTNOTE BELOW] = ERV. For purposes of this
formula, "P" is a hypothetical investment of $1,000; "T" is average annual
total return; "n" is number of years; and "ERV" is the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the one-,
five- or ten-year periods (or fractional portion 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)[**GRAPHIC OMITTED-SEE FOOTNOTE BELOW] -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.
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
- -------------------------
* The expression (1 + T) is being raised to the nth power.
** The expression (a-b + 1) is being raised to the 6th power.
-37-
<PAGE>
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Portfolio's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Performance quotations for the Portfolios include the
effect of deducting each Portfolio's expenses, but may not include charges and
expenses attributable to any particular Variable Contract or Plan, which would
reduce the returns described in this section. See the Prospectus, "Performance."
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 statements of assets and liabilities
for the Portfolios that appear in this Statement of Additional Information have
been audited by Coopers & Lybrand, whose report thereon appears elsewhere herein
and have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
Each Portfolio's statement of assets and liabilities follows the Report
of Independent Accountants.
-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.
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
A-1
<PAGE>
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.
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
A-2
<PAGE>
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:
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.
A-3
<PAGE>
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.
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.
A-4
<PAGE>
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.
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.
A-5
<PAGE>
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.
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-6
<PAGE>C-1
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements included in Part B (to be
filed by amendment):
(1) Reports of Independent Accountants
(2) Statements of Assets and Liabilities
(b) Exhibits:
Exhibit No. Description of Exhibit
- ----------- -----------------------
1 Agreement and Declaration of Trust.
2 By-Laws.
3 Not applicable.
4 Forms of Share Certificates.*
5 Form of Investment Advisory Agreements.*
6 Form of Distribution Agreement.*
7 Not applicable.
8 Form of Custodian Agreements.*
9(a) Form of Transfer Agency Agreement.*
(b) Forms of Co-Administration Agreements.*
____________________________
* To be filed by amendment.
<PAGE>C-2
10(a) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Trust.*
(b) Opinion and Consent of Sullivan & Worcester,
Massachusetts counsel to the Trust.*
11 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants.*
12 Not Applicable.
13 Form of Purchase Agreement.*
14 Not Applicable.
15 Not Applicable
16 Not Applicable.
17 Financial Data Schedules.*
_______________________
* To be filed by amendment.
Item 25. Persons Controlled by or Under Common Control
with Registrant
---------------------------------------------
All of the outstanding shares of beneficial interest of Registrant on
the date Registrant's Registration Statement becomes effective will be owned by
Warburg, Pincus Counsellors, Inc. ("Warburg"), a corporation formed under New
York law.
Item 26. Number of Holders of Securities
-------------------------------
It is anticipated that Warburg will hold all Registrant's shares of
beneficial interest, par value $0.001 per share, on the date Registrant's
Registration Statement becomes effective.
Item 27. Indemnification
----------------
Registrant, officers and directors of Warburg, of Counsellors
Securities Inc. ("Counsellors Securities") and of Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. These policies provide insurance for any "Wrongful
Act" of an officer, director or trustee. Wrongful Act is defined as breach of
duty, neglect, error, misstatement, misleading statement, omission or other act
done or wrongfully attempted by an officer, director or trustee in connection
with the operation of Registrant. Insurance coverage does not extend to (a)
conflicts of interest or gaining in fact any profit or advantage
<PAGE>C-3
to which one is not legally entitled, (b) intentional non-compliance with any
statute or regulation or (c) commission of dishonest, fraudulent acts or
omissions. Insofar as it relates to Registrant, the coverage is limited in
amount and, in certain circumstances, is subject to a deductible.
Under Section 8.1 of the Declaration of Trust (the "Declaration"), the
Trustees and officers of Registrant, in incurring any debts, liabilities or
obligations, or in taking or omitting any other actions for or in connection
with Registrant, are or shall be deemed to be acting as Trustees or officers of
Registrant and not in their own capacities. No Trustee, officer, employee or
agent of Registrant shall be subject to any personal liability whatsoever in
tort, contract, or otherwise, to any other person or persons in connection with
the assets or affairs of Registrant or of any series of the Registrant (a
"Portfolio") save only that arising from his own willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office or the discharge of his functions. Registrant (or if the matter
relates only to a particular Portfolio, that Portfolio) shall be solely liable
for any and all debts, claims, demands, judgments, decrees, liabilities or
obligations of any and every kind, against or with respect to Registrant or such
Portfolio in tort, contract or otherwise in connection with the assets or the
affairs of Registrant or such Portfolio and all persons dealing with Registrant
or any Portfolio shall be deemed to have agreed that resort shall be had solely
to the Trust Property (as defined in the Declaration) of Registrant or the
Portfolio Assets (as defined in the Declaration) of such Portfolio, as the case
may be, for the payment or performance thereof.
Section 8.2 of the Declaration further limits the liability of the
Trustees by providing that a Trustee shall not be liable for errors of judgment
or mistakes of fact or law. Furthermore, (i) the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any officer,
agent, employee, consultant, Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, Dividend Disbursing Agent, Shareholder Servicing
Agent or Accounting Agent (as such terms are defined in the Declaration) of
Registrant, nor shall any Trustee be responsible for the act or omission of any
other Trustee; (ii) the Trustees may take advice of counsel or other experts
with respect to the meaning and operation of the Declaration and their duties as
Trustees, and shall be under no liability for any act or omission in accordance
with such advice or for failing to follow such advice; and (iii) in discharging
their duties, the Trustees, when acting in good faith, shall be entitled to rely
upon the books of account of Registrant and upon written reports made to the
Trustees by any officer appointed by them, any independent public accountant,
and (with respect to the subject matter of the contract involved) any officer,
partner or responsible employee of a contracting party appointed by the
<PAGE>C-4
Trustees pursuant to Section 5.2 of the Declaration. The Trustees are not
required to give any bond or surety or any other security for the performance of
their duties.
Under Section 8.4 of the Declaration any past or present Trustee or
officer of Registrant (including persons who serve at Registrant's request as
directors, officers or trustees or another organization in which Registrant has
any interest as a shareholder, creditor or otherwise (hereinafter referred to as
a "Covered Person")) is indemnified against liability and all expenses
reasonably incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding to which he may be a party
or otherwise involved by reason of his being or having been a Covered Person, or
with which he may be or have been threatened, while in office or thereafter, be
reason or having been a Covered Person. This provision does not authorize
indemnification when it is determined, in the manner specified in the
Declaration that such Covered Person has not acted in good faith in the
reasonable belief that his actions were in or not opposed to the best interests
of Registrant. Moreover, this provision does not authorize indemnification when
it is determined, in the manner specified in the Declaration, that such Covered
Person would otherwise be liable to Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of his
duties. Expenses may be paid by Registrant in advance of the final disposition
of any action, suit or proceeding upon receipt of an undertaking by such Covered
Person to repay such expenses to Registrant in the event that it is ultimately
determined that indemnification of such expenses is not authorized under the
Declaration and either (i) the Covered Person provides security for such
undertaking, (ii) Registrant is insured against losses from such advances or
(iii) the disinterested Trustees or independent legal counsel determines, in the
manner specified in the Declaration, that there is reason to believe the Covered
Person will be found to be entitled to indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to Trustees, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission ("SEC") such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
or indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
<PAGE>C-5
the Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of
Investment Adviser
--------------------------------
Warburg is a wholly owned subsidiary of Warburg, Pincus Counsellors
G.P., acts as investment adviser to Registrant. Warburg renders investment
advice to a wide variety of individual and institutional clients. The list
required by this Item 28 of officers and directors of Warburg, together with
information as to their other business, profession, vocation or employment of a
substantial nature during the past two years, is incorporated by reference to
Schedules A and D of Form ADV filed by Warburg (SEC File No. 801-07321).
Item 29. Principal Underwriter
----------------------
(a) Counsellors Securities will act as distributor for Registrant.
Counsellors Securities currently acts as distributor for The RBB Fund, Inc.;
Warburg Pincus Balanced Fund, Warburg Pincus Capital Appreciation Fund; Warburg
Pincus Cash Reserve Fund; Warburg Pincus Emerging Growth Fund; Warburg Pincus
Emerging Markets Fund; Warburg Pincus Fixed Income Fund; Warburg Pincus Global
Fixed Income Fund; Warburg Pincus Global Post-Venture Capital Fund; Warburg
Pincus Growth & Income Fund; Warburg Pincus Health Sciences Fund, Inc.; Warburg
Pincus Institutional Fund, Inc.; Warburg Pincus Intermediate Maturity Government
Fund; Warburg Pincus International Equity Fund; Warburg Pincus Japan Growth
Fund; Warburg Pincus Japan OTC Fund; Warburg Pincus New York Intermediate
Municipal Fund; Warburg Pincus New York Tax Exempt Fund; Warburg Pincus
Post-Venture Capital Fund; Warburg Pincus Small Company Growth Fund; Warburg
Pincus Small Company Value Fund; Warburg Pincus Strategic Value Fund; Warburg
Pincus Tax Free Fund and Warburg Pincus Trust;
(b) For information relating to each director and officer of
Counsellors Securities, reference is made to Form BD (SEC File No. 15-654) filed
by Counsellors Securities under the Securities Exchange Act of 1934.
(c) None.
Item 30. Location of Accounts and Records
---------------------------------
(1) Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
(Registrant's Agreement and Declaration of Trust,
By-laws and minute books)
<PAGE>C-6
(2) Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as investment adviser)
(3) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-administrator)
(4) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as co-administrator)
(5) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its function as transfer
agent and dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer
agent and dividend disbursing agent)
(8) PNC Bank, National Association
Broad & Chestnut Streets
Philadelphia, Pennsylvania 19101
(records relating to its functions as custodian)
(9) Fiduciary Trust Company International
Two World Trade Center
New York, New York 10048
(records relating to its functions as custodian)
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
(a) Registrant hereby undertakes to call a meeting of its shareholders
for the purpose of voting upon the question of removal of a trustee or trustees
of Registrant when requested in
<PAGE>C-7
writing to do so by the holders of at least 10% of Registrant's outstanding
shares. Registrant undertakes further, in connection with the meeting, to comply
with the provisions of Section 16(c) of the 1940 Act relating to communications
with the shareholders of certain common-law trusts.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
(c) Registrant hereby undertakes to file a post-effective amendment,
with financial statements of the Fixed Income Portfolio and the Global Fixed
Income Portfolio which need not be certified with four to six months from the
effective date of Registrant's Registration Statement under the Act.
<PAGE>C-8
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State of
New York, on the 2nd day of January, 1997.
WARBURG, PINCUS TRUST II
By:/s/ Eugene P. Grace
Eugene P. Grace
President
ATTEST:
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
Signature Title Date
- --------- ----- ----
/s/ Eugene P. Grace President, Trustee January 2, 1997
- ------------------------- and Secretary
Eugene P. Grace
/s/ Howard Conroy Vice President and January 2, 1997
- ------------------------- Chief Financial Officer
Howard Conroy
<PAGE>13
INDEX TO EXHIBITS
-----------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
1 Agreement and Declaration of Trust
2 By-Laws.
<PAGE>
WARBURG, PINCUS TRUST II
----------------------------------
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
Dated: December 16, 1996
Principal Office:
Warburg Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Massachusetts Office and Name and Address of
Resident Agent:
Bryan G. Tyson
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
<PAGE>i
TABLE OF CONTENTS
-----------------
Page
----
RECITALS................................................................... 1
ARTICLE 1. THE TRUST ..................................................... 2
SECTION 1.1. Name .................................................... 2
SECTION 1.2. Location ................................................ 2
SECTION 1.3. Nature of Trust.......................................... 2
SECTION 1.4. Definitions.............................................. 3
SECTION 1.5. Real Property to be Converted into Personal Property..... 6
ARTICLE 2. PURPOSE OF THE TRUST............................................ 6
ARTICLE 3. POWERS OF THE TRUSTEES.......................................... 7
SECTION 3.1. Powers in General....................................... 7
(a) Investments.................................... 8
(b) Disposition of Assets.......................... 8
(c) Ownership Powers............................... 8
(d) Form of Holding................................ 8
(e) Reorganization, etc............................ 8
(f) Voting Trusts, etc............................. 8
(g) Contracts, etc................................. 9
(h) Guaranties, etc................................ 9
(i) Partnerships, etc.............................. 9
(j) Insurance...................................... 9
(k) Pensions, etc.................................. 9
(l) Power of Collection and Litigation............. 10
(m) Issuance and Repurchase of Shares.............. 10
(n) Offices........................................ 10
(o) Expenses....................................... 10
(p) Agents, etc.................................... 10
(q) Accounts....................................... 11
(r) Valuation...................................... 11
(s) Indemnification................................ 11
(t) General........................................ 11
SECTION 3.2. Borrowings; Financings; Issuance of Securities.......... 11
SECTION 3.3. Deposits ............................................... 11
SECTION 3.4. Allocations............................................. 12
SECTION 3.5. Further Powers; Limitations............................. 12
ARTICLE 4. TRUSTEES AND OFFICERS........................................... 12
SECTION 4.1. Number, Designation, Election, Term, etc................ 12
(a) Initial Trustee................................ 12
(b) Number......................................... 13
(c) Election and Term.............................. 13
(d) Resignation and Retirement..................... 13
<PAGE>ii
(e) Removal........................................ 13
(f) Vacancies...................................... 14
(g) Acceptance of Trusts........................... 14
(h) Effect of Death, Resignation, etc.............. 14
(i) Conveyance..................................... 14
(j) No Accounting.................................. 15
SECTION 4.2. Trustees' Meetings; Participation by Telephone, etc..... 15
SECTION 4.3. Committees; Delegation.................................. 15
SECTION 4.4. Officers ............................................... 15
SECTION 4.5. Compensation of Trustees and Officers................... 16
SECTION 4.6. Ownership of Shares and Securities of the Trust......... 16
SECTION 4.7. Right of Trustees and Officers to Own Property
or to Engage in Business; Authority
of Trustees to Permit Others to Do Likewise...... 16
SECTION 4.8. Reliance on Experts.................................... 17
SECTION 4.9. Surety Bonds........................................... 17
SECTION 4.10. Apparent Authority of Trustees and Officers............ 17
SECTION 4.11. Other Relationships Not Prohibited..................... 17
SECTION 4.12. Payment of Trust Expenses.............................. 18
SECTION 4.13. Ownership of the Trust Property........................ 18
ARTICLE 5. DELEGATION OF MANAGERIAL RESPONSIBILITIES...................... 19
SECTION 5.1. Appointment; Action by Less than All Trustees.......... 19
SECTION 5.2. Certain Contracts...................................... 19
(a) Advisory...................................... 19
(b) Administration................................ 20
(c) Distribution.................................. 20
(d) Custodian..................................... 20
(e) Transfer and Dividend Disbursing Agency....... 20
(f) Shareholder Servicing......................... 21
(g) Accounting.................................... 21
ARTICLE 6. PORTFOLIOS AND SHARES.......................................... 21
SECTION 6.1. Description of Portfolios and Shares................... 21
(a) Shares: Portfolios; Series of Shares.......... 21
(b) Establishment, etc. of Portfolios;
Authorization of Shares..................... 22
(c) Character of Separate Portfolios and Shares
Thereof..................................... 23
(d) Consideration for Shares...................... 23
SECTION 6.2. Establishment and Designation of Certain Portfolios;
General Provisions for All Portfolios.............. 23
(a) Assets Belonging to Portfolios................ 23
(b) Liabilities of Portfolios..................... 24
(c) Dividends..................................... 24
(d) Liquidation................................... 25
(f) Redemption by Shareholder..................... 25
(g) Redemption at the Option of the Trust......... 25
(h) Net Asset Value............................... 26
(i) Transfer...................................... 26
(j) Equality...................................... 26
(k) Rights of Fractional Shares................... 26
<PAGE>iii
(l) Conversion Rights............................. 27
SECTION 6.3. Ownership of Shares.................................... 27
SECTION 6.4. Investments in the Trust............................... 27
SECTION 6.5. No Preemptive Rights................................... 27
SECTION 6.6. Status of Shares....................................... 27
ARTICLE 7. SHAREHOLDERS' VOTING POWERS AND MEETINGS....................... 28
SECTION 7.1. Voting Powers.......................................... 28
SECTION 7.2. Number of Votes and Manner of Voting; Proxies.......... 28
SECTION 7.3. Meetings .............................................. 29
SECTION 7.4. Record Dates........................................... 29
SECTION 7.5. Quorum and Required Vote............................... 29
SECTION 7.6. Action by Written Consent.............................. 30
SECTION 7.7. Inspection of Records.................................. 30
SECTION 7.8. Additional Provisions.................................. 30
ARTICLE 8. LIMITATION OF LIABILITY; INDEMNIFICATION.........................30
SECTION 8.1. Trustees, Shareholders, etc. Not Personally Liable;
Notice................................................. 30
SECTION 8.2. Trustees' Good Faith Action; Expert Advice;
No Bond or Surety...................................... 31
SECTION 8.3. Indemnification of Shareholders........................ 31
SECTION 8.4. Indemnification of Trustees, Officers, etc............. 32
SECTION 8.5. Compromise Payment..................................... 33
SECTION 8.6. Indemnification Not Exclusive, etc..................... 33
SECTION 8.7. Liability of Third Persons Dealing with Trustees....... 33
ARTICLE 9. DURATION; REORGANIZATION; AMENDMENTS........................... 33
SECTION 9.1. Duration and Termination of Trust...................... 33
SECTION 9.2. Reorganization......................................... 34
SECTION 9.3. Amendments; etc........................................ 34
SECTION 9.4. Filing of Copies of Declaration and Amendments......... 35
ARTICLE 10. MISCELLANEOUS................................................. 35
SECTION 10.1. Governing Law.......................................... 35
SECTION 10.2. Counterparts........................................... 35
SECTION 10.3. Reliance by Third Parties.............................. 36
SECTION 10.4. References; Headings................................... 36
SECTION 10.5. Use of the Name "Warburg, Pincus....................... 36
SIGNATURES.................................................................
ACKNOWLEDGMENTS............................................................
<PAGE>1
AGREEMENT AND DECLARATION OF TRUST
OF
WARBURG, PINCUS TRUST II
------------------------
This AGREEMENT AND DECLARATION OF TRUST, made at Boston, Massachusetts
this 16th day of December, 1996 by and between the Settlor and the Trustee whose
signature is set forth below (the "Initial Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, Raymond P. Czwakiel, an individual residing in Milton,
Massachusetts (the "Settlor"), proposes to deliver to the Initial Trustee the
sum of one hundred dollars ($100.00) lawful money of the United States of
America in trust hereunder and to authorize the Initial Trustee and all other
Persons acting as Trustees hereunder to employ such funds, and any other funds
coming into their hands or the hands of their successor or successors as such
Trustees, to carry on the business of an investment company, and as such of
buying, selling, investing in or otherwise dealing in and with stocks, bonds,
debentures, warrants, options, futures contracts and other securities and
interests therein, or calls or puts with respect to any of the same, or such
other and further investment media and other property as the Trustees may deem
advisable, which are not prohibited by law or the terms of this Declaration; and
WHEREAS, the Initial Trustee is willing to accept such sum, together
with any and all additions thereto and the income or increments thereof, upon
the terms, conditions and trusts hereinafter set forth; and
WHEREAS, it is proposed that the assets held by the Trustees be
divided into separate portfolios, each with its own separate investment assets,
investment objectives, policies and purposes, and that the beneficial interest
in each such portfolio shall be divided into transferable Shares of Beneficial
Interest, a separate Series of Shares for each portfolio, all in accordance with
the provisions hereinafter set forth; and
WHEREAS, it is desired that the trust established hereby (the "Trust")
be managed and operated as a trust with transferable shares under the laws of
Massachusetts, of the type commonly known as and referred to as a Massachusetts
business trust, in accordance with the provisions hereinafter set forth;
NOW, THEREFORE the Initial Trustee, for himself and his successors as
Trustees, hereby declares, and agrees with the Settlor, for himself and for all
Persons who shall hereafter become holders of Shares of Beneficial Interest of
the Trust, of any Series, that the Trustees will hold the sum delivered to them
upon the execution hereof, and all other and further cash, securities and other
property of every type and description which they may in
<PAGE>2
any way acquire in their capacity as such Trustees, together with the income
therefrom and the proceeds thereof, IN TRUST NEVERTHELESS, to manage and dispose
of the same for the benefit of the holders from time to time of the Shares of
Beneficial Interest of the several Series being issued and to be issued
hereunder and in the manner and subject to the provisions hereof, to wit:
ARTICLE 1.
----------
THE TRUST
---------
SECTION 1.1. Name. The name of the Trust shall be
"WARBURG, PINCUS TRUST II",
and so far as may be practicable the Trustees shall conduct the Trust's
activities, execute all documents and sue or be sued under that name, which name
(and the word "Trust" wherever used in this Agreement and Declaration of Trust,
except where the context otherwise requires) shall refer to the Trustees in
their capacity as Trustees, and not individually or personally, and shall not
refer to the officers, agents or employees of the Trust or of such Trustees, or
to the holders of the Shares of Beneficial Interest of the Trust, of any Series.
If the Trustees determine that the use of such name is not practicable, legal or
convenient at any time or in any jurisdiction, or if the Trust is required to
discontinue the use of such name pursuant to Section 10.5 hereof, then subject
to that Section, the Trustees may use such other designation, or they may adopt
such other name for the Trust as they deem proper, and the Trust may hold
property and conduct its activities under such designation or name.
SECTION 1.2. Location. The Trust shall have an office in Boston,
Massachusetts, unless changed by the Trustees to another location in
Massachusetts or elsewhere, but such office need not be the sole or principal
office of the Trust. The Trust may have such other offices or places of business
as the Trustees may from time to time determine to be necessary or expedient.
SECTION 1.3. Nature of Trust. The Trust shall be a trust with
transferable shares under the laws of The Commonwealth of Massachusetts, of the
type referred to in Section 1 of Chapter 182 of the Massachusetts General Laws
and commonly termed a Massachusetts business trust. The Trust is not intended to
be, shall not be deemed to be, and shall not be treated as, a general
partnership, limited partnership, limited liability partnership, joint venture,
corporation, limited liability company or joint stock company. The Shareholders
shall be beneficiaries and their relationship to the Trustees shall be solely in
that capacity in accordance with the rights conferred upon them hereunder.
SECTION 1.4. Definitions. As used in this Agreement and Declaration of
Trust, the following terms shall have the meanings set forth below unless the
context thereof otherwise requires:
<PAGE>3
"Accounting Agent" shall have the meaning designated in
Section 5.2(g) hereof.
"Administrator" shall have the meaning designated in Section
5.2(b) hereof.
"Affiliated Person" shall have the meaning assigned to such
term in the 1940 Act.
"Bylaws" shall mean the Bylaws of the Trust, as amended from time to
time.
"Certificate of Designation" shall have the meaning designated in
Section 6.1(b) hereof.
"Certificate of Termination" shall have the meaning designated in
Section 6.1(b) hereof.
"Commission" shall have the meaning assigned to such term in the 1940
Act.
"Contracting Party" shall have the meaning designated in the preamble
to Section 5.2.
"Covered Person" shall have the meaning designated in Section 8.4
hereof.
"Custodian" shall have the meaning designated in Section 5.2(d)
hereof.
"Declaration" and "Declaration of Trust" shall mean this Agreement and
Declaration of Trust and all amendments or modifications thereof as from time to
time in effect. References in this Agreement and Declaration of Trust to
"hereof", "herein" and "hereunder" shall be deemed to refer to the Declaration
of Trust generally, and shall not be limited to the particular text, Article or
Section in which such words appear.
"Disabling Conduct" shall have the meaning designated in Section 8.4
hereof.
"Distributor" shall have the meaning designated in Section 5.2(c)
hereof.
"Dividend Disbursing Agent" shall have the meaning designated in
Section 5.2(e) hereof.
"General Items" shall have the meaning designated in Section 6.2(a)
hereof.
"Initial Trustee" shall have the meaning assigned to such term in the
preamble hereto.
"Investment Adviser" shall have the meaning designated in Section
5.2(a) hereof.
"Majority of the Trustees" shall mean a majority of the Trustees in
office at the time in question. At any time at which there shall be only one (1)
Trustee in office, such term shall such Trustee.
"Majority Shareholder Vote," as used with respect to the election of
any Trustee at a meeting of Shareholders, shall mean the vote for the election
of such Trustee of a plurality of all outstanding Shares of the Trust, without
regard to Series, represented in person or by
<PAGE>4
proxy and entitled to vote thereon, provided that a quorum (as determined in
accordance with Section 7.5 hereof) is present, and as used with respect to any
other action required or permitted to be taken by Shareholders, shall mean the
vote for such action of the holders of that number of all outstanding Shares
(or, where a separate vote of Shares of any particular Series is to be taken,
the affirmative vote of that number of the outstanding Shares of that Series) of
the Trust which consists of: (i) a majority of all Shares (or of Shares of the
particular Series) represented in person or by proxy and entitled to vote on
such action at the meeting of Shareholders at which such action is to be taken,
provided that a quorum (as determined in accordance with the Bylaws) is present;
or (ii) if such action is to be taken by written consent of Shareholders, a
majority of all Shares (or of Shares of the particular Series) issued and
outstanding and entitled to vote on such action; provided, that (iii) as used
with respect to any action requiring the affirmative vote of "a majority of the
outstanding voting securities", as the quoted phrase is defined in the 1940 Act,
of the Trust or of any Portfolio, "Majority Shareholder Vote" means the vote for
such action at a meeting of Shareholders of the smallest majority of all
outstanding Shares of the Trust (or of Shares of the particular Portfolio)
entitled to vote on such action which satisfies such 1940 Act voting
requirement.
"1940 Act" shall mean the provisions of the Investment Company Act of
1940 and the rules and regulations thereunder, both as amended from time to
time, and any order or orders thereunder which may from time to time be
applicable to the Trust.
"Person" shall mean and include individuals, as well as corporations,
limited liability companies, limited partnerships, limited liability
partnerships, general partnerships, joint stock companies, joint ventures,
associations, banks, trust companies, land trusts, business trusts or other
organizations established under the laws of any jurisdiction, whether or not
considered to be legal entities, and governments and agencies and political
subdivisions thereof.
"Portfolio" or "Portfolios" shall mean one or more of the separate
components of the assets of the Trust which are now or hereafter established and
designated under or in accordance with the provisions of Article 6 hereof.
"Portfolio Assets" shall have the meaning designated in Section 6.2(a)
hereof.
"Principal Underwriter" shall have the meaning designated in Section
5.2(c) hereof.
"Prospectus," as used with respect to any Portfolio or Series of
Shares, shall mean the prospectus relating to such Portfolio or Series which
constitutes part of the currently effective Registration Statement of the Trust
under the Securities Act of 1933, as such prospectus may be amended or
supplemented from time to time.
"Securities" shall mean any and all bills, notes, bonds, debentures or
other obligations or evidences of indebtedness, certificates of deposit,
bankers' acceptances, commercial paper, repurchase agreements or other money
market instruments; stocks, shares or other equity ownership interests; and
warrants, options or other instruments representing rights to subscribe for,
purchase, receive or otherwise acquire or to sell, transfer, assign or otherwise
dispose of, and scrip, certificates, receipts or other instruments evidencing
any ownership
<PAGE>5
rights or interests in, any of the foregoing and "when issued" and "delayed
delivery" contracts for securities, issued, guaranteed or sponsored by any
governments, political subdivisions or governmental authorities, agencies or
instrumentalities, by any individuals, firms, companies, corporations,
syndicates, associations or trusts, or by any other organizations or entities
whatsoever, irrespective of their forms or the names by which they may be
described, whether or not they be organized and operated for profit, and whether
they be domestic or foreign with respect to The Commonwealth of Massachusetts or
the United States of America.
"Securities of the Trust" shall mean any Securities issued by the
Trust.
"Series" shall mean one or more of the series of Shares authorized by
the Trustees to represent the beneficial interest in one or more of the
Portfolios.
"Settlor" shall have the meaning stated in the first "Whereas" clause
set forth above.
"Shareholder" shall mean as of any particular time any Person shown of
record at such time on the books of the Trust as a holder of outstanding Shares
of any Series, and shall include a pledgee into whose name any such Shares are
transferred in pledge.
"Shareholder Servicing Agent" shall have the meaning designated in
Section 5.2(f) hereof.
"Shares" shall mean the transferable units into which the beneficial
interest in the Trust and each Portfolio of the Trust (as the context may
require) shall be divided from time to time, and includes fractions of Shares as
well as whole Shares. All references herein to "Shares" which are not
accompanied by a reference to any particular Series or Portfolio shall be deemed
to apply to outstanding Shares without regard to Series.
"Single Class Voting," as used with respect to any matter to be acted
upon at a meeting or by written consent of Shareholders, shall mean a style of
voting in which each holder of one or more Shares shall be entitled to one vote
on the matter in question for each Share standing in his name on the records of
the Trust, irrespective of Series, and all outstanding Shares of all Series vote
as a single class.
"Statement of Additional Information," as used with respect to any
Portfolio or Series of Shares, shall mean the statement of additional
information relating to such Portfolio or Series, which constitutes part of the
currently effective Registration Statement of the Trust under the Securities Act
of 1933, as such statement of additional information may be amended or
supplemented from time to time.
"Transfer Agent" shall have the meaning defined in Section 5.2(e)
hereof.
"Trust" shall have the meaning designated in the fourth "Whereas"
clause set forth above.
"Trust Property" shall mean, as of any particular time, any and all
property which shall have been transferred, conveyed or paid to the Trust or the
Trustees, and all interest,
<PAGE>6
dividends, income, earnings, profits and gains therefrom, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, and which at such time is owned or held by, or
for the account of, the Trust or the Trustees, without regard to the Portfolio
to which such property is allocated.
"Trustees" shall mean, collectively, the Initial Trustee, so long as
he shall continue in office, and all other individuals who at the time in
question have been duly elected or appointed as Trustees of the Trust in
accordance with the provisions hereof and who have qualified and are then in
office. At any time at which there shall be only one (1) Trustee in office, such
term shall mean such single Trustee.
SECTION 1.5. Real Property to be Converted into Personal Property.
Notwithstanding any other provision hereof, any real property at any time
forming part of the Trust Property shall be held in trust for sale and
conversion into personal property at such time or times and in such manner and
upon such terms as the Trustees shall approve, but the Trustees shall have power
until the termination of this Trust to postpone such conversion as long as they
in their uncontrolled discretion shall think fit, and for the purpose of
determining the nature of the interest of the Shareholders therein, all such
real property shall at all times be considered as personal property.
ARTICLE 2.
----------
PURPOSE OF THE TRUST
--------------------
The purpose of the Trust shall be to engage in the business of being
an investment company, and as such of subscribing for, purchasing or otherwise
acquiring, holding for investment or trading in, borrowing, lending and selling
short, selling, assigning, negotiating or exchanging and otherwise disposing of,
and turning to account, realizing upon and generally dealing in and with, in any
manner, (a) Securities of all kinds, (b) precious metals and other minerals,
contracts to purchase and sell, and other interests of every nature and kind in,
such metals or minerals, and (c) rare coins and other numismatic items, and all
as the Trustees in their discretion shall determine to be necessary, desirable
or appropriate, and to exercise and perform any and every act, thing or power
necessary, suitable or desirable for the accomplishment of such purpose, the
attainment of any of the objectives or the furtherance of any of the powers
given hereby which are lawful purposes, objects or powers of a trust with
transferable shares of the type commonly termed a Massachusetts business trust;
and to do every other act or acts or thing or things incidental or appurtenant
to or growing out of or in connection with the aforesaid objectives, purposes or
powers, or any of them, which a trust of the type commonly termed a
Massachusetts business trust is not now or hereafter prohibited from doing,
exercising or performing.
<PAGE>7
ARTICLE 3.
----------
POWERS OF THE TRUSTEES
----------------------
SECTION 3.1. Powers in General. The Trustees shall have, without other
or further authorization, full, entire, exclusive and absolute power, control
and authority over, and management of, the business of the Trust and over the
Trust Property, to the same extent as if the Trustees were the sole owners of
the business and property of the Trust in their own right, and with such powers
of delegation as may be permitted by this Declaration, subject only to such
limitations as may be expressly imposed by this Declaration of Trust or by
applicable law. The enumeration of any specific power or authority herein shall
not be construed as limiting the aforesaid power or authority or any specific
power or authority. Without limiting the foregoing, the Trustees may adopt
Bylaws not inconsistent with this Declaration of Trust providing for the conduct
of the business and affairs of the Trust and may amend and repeal them to the
extent that such Bylaws do not reserve that right to the Shareholders; they may
select, and from time to time change, the fiscal year of the Trust; they may
adopt and use a seal for the Trust, provided, that unless otherwise required by
the Trustees, it shall not be necessary to place the seal upon, and its absence
shall not impair the validity of, any document, instrument or other paper
executed and delivered by or on behalf of the Trust; they may from time to time
in accordance with the provisions of Section 6.1 hereof establish one or more
Portfolios to which they may allocate such of the Trust Property, subject to
such liabilities, as they shall deem appropriate, each such Portfolio to be
operated by the Trustees as a separate and distinct investment medium and with
separately defined investment objectives and policies and distinct investment
purposes, all as established by the Trustees, or from time to time changed by
them; they may as they consider appropriate elect and remove officers and
appoint and terminate agents and consultants and hire and terminate employees,
any one or more of the foregoing of whom may be a Trustee; they may appoint from
their own number, and terminate, any one or more committees consisting of one or
more Trustees, including without implied limitation an Executive Committee,
which may, when the Trustees are not in session and subject to the 1940 Act,
exercise some or all of the power and authority of the Trustees as the Trustees
may determine; in accordance with Section 5.2 they may employ one or more
Investment Advisers, Administrators and Custodians and may authorize any
Custodian to employ subcustodians or agents and to deposit all or any part of
such assets in a system or systems for the central handling of Securities,
retain Transfer, Dividend Disbursing, Accounting or Shareholder Servicing Agents
or any of the foregoing, provide for the distribution of Shares by the Trust
through one or more Distributors, Principal Underwriters or otherwise, set
record dates or times for the determination of Shareholders entitled to
participate in, benefit from or act with respect to various matters; and in
general they may delegate to any officer of the Trust, to any committee of the
Trustees and to any employee, Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, Dividend Disbursing Agent, or any other agent or
consultant of the Trust, such authority, powers, functions and duties as they
consider desirable or appropriate for the conduct of the business and affairs of
the Trust, including without implied limitation the power and authority to act
in the name of the Trust and of the Trustees, to sign documents and to act as
attorney-in-fact for
<PAGE>8
the Trustees. Without limiting the foregoing and to the extent not inconsistent
with the 1940 Act or other applicable law, the Trustees shall have power and
authority:
(a) Investments. To invest and reinvest cash and other
property; to buy, for cash or on margin, and otherwise acquire and
hold, Securities created or issued by any Persons, including
Securities maturing after the possible termination of the Trust; to
make payment therefor in any lawful manner in exchange for any of the
Trust Property; and to hold cash or other property uninvested without
in any event being bound or limited by any present or future law or
custom in regard to investments by trustees;
(b) Disposition of Assets. To lend, sell, exchange,
mortgage, pledge, hypothecate, grant security interests in, encumber,
negotiate, convey, transfer or otherwise dispose of, and to trade in,
any and all of the Trust Property, free and clear of all trusts, for
cash or on terms, with or without advertisement, and on such terms as
to payment, security or otherwise, all as they shall deem necessary or
expedient;
(c) Ownership Powers. To vote or give assent, or exercise
any and all other rights, powers and privileges of ownership with
respect to, and to perform any and all duties and obligations as
owners of, any Securities or other property forming part of the Trust
Property, the same as any individual might do; to exercise powers and
rights of subscription or otherwise which in any manner arise out of
ownership of Securities, and to receive powers of attorney from, and
to execute and deliver proxies or powers of attorney to, such Person
or Persons as the Trustees shall deem proper, receiving from or
granting to such Person or Persons such power and discretion with
relation to Securities or other property of the Trust, all as the
Trustees shall deem proper;
(d) Form of Holding. To hold any Security or other property
in a form not indicating any trust, whether in bearer, unregistered or
other negotiable form, or in the name of the Trustees or of the Trust,
or of the Portfolio to which such Securities or property belong, or in
the name of a Custodian, subcustodian or other nominee or nominees, or
otherwise, upon such terms, in such manner or with such powers, as the
Trustees may determine, and with or without indicating any trust or
the interest of the Trustees therein;
(e) Reorganization, etc. To consent to or participate in any
plan for the reorganization, consolidation or merger of any
corporation or issuer, any Security of which is or was held in the
Trust or any Portfolio; to consent to any contract, lease, mortgage,
purchase or sale of property by such corporation or issuer, and to pay
calls or subscriptions with respect to any Security forming part of
the Trust Property;
(f) Voting Trusts, etc. To join with other holders of any
Securities in acting through a committee, depository, voting trustee
or otherwise, and in that connection to deposit any Security with, or
transfer any Security to, any such committee, depository or trustee,
and to delegate to them such power and authority
<PAGE>9
with relation to any Security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay,
and to pay, such portion of the expenses and compensation of such
committee, depository or trustee as the Trustees shall deem proper;
(g) Contracts, etc. To enter into, make and perform all such
obligations, contracts, agreements and undertakings of every kind and
description, with any Person or Persons, as the Trustees shall in
their discretion deem expedient in the conduct of the business of the
Trust, for such terms as they shall see fit, whether or not extending
beyond the term of office of the Trustees, or beyond the possible
expiration of the Trust; to amend, extend, release or cancel any such
obligations, contracts, agreements or understandings; and to execute,
acknowledge, deliver and record all written instruments which they may
deem necessary or expedient in the exercise of their powers;
(h) Guaranties, etc. To endorse or guarantee the payment of
any notes or other obligations of any Person; to make contracts of
guaranty or suretyship, or otherwise assume liability for payment
thereof; and to mortgage and pledge the Trust Property or any part
thereof to secure any of or all such obligations;
(i) Partnerships, etc. To enter into joint ventures, general
or limited partnerships and any other combinations or associations;
(j) Insurance. To purchase and pay for entirely out of Trust
Property such insurance as they may deem necessary or appropriate for
the conduct of the business, including, without limitation, insurance
policies insuring the assets of the Trust and payment of distributions
and principal on its portfolio investments, and insurance policies
insuring the Shareholders, Trustees, officers, employees, agents,
consultants, Investment Advisers, managers, Administrators,
Distributors, Principal Underwriters, or other independent
contractors, or any thereof (or any Person connected therewith), of
the Trust, individually, against all claims and liabilities of every
nature arising by reason of holding, being or having held any such
office or position, or by reason of any action alleged to have been
taken or omitted by any such Person in any such capacity, including
any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such Person against such liability;
(k) Pensions, etc. To pay pensions for faithful service, as
deemed appropriate by the Trustees, and to adopt, establish and carry
out pension, profit-sharing, share bonus, share purchase, savings,
thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the
Trust;
(l) Power of Collection and Litigation. To collect, sue for
and receive all sums of money coming due to the Trust, to employ
counsel, and to commence, engage
<PAGE>10
in, prosecute, intervene in, join, defend, compound, compromise,
adjust or abandon, in the name of the Trust, any and all actions,
suits, proceedings, disputes, claims, controversies, demands or other
litigation or legal proceedings relating to the Trust, the business of
the Trust, the Trust Property, or the Trustees, officers, employees,
agents and other independent contractors of the Trust, in their
capacity as such, at law or in equity, or before any other bodies or
tribunals, and to compromise, arbitrate or otherwise adjust any
dispute to which the Trust may be a party, whether or not any suit is
commenced or any claim shall have been made or asserted;
(m) Issuance and Repurchase of Shares. To issue, sell,
repurchase, redeem, retire, cancel, acquire, hold, resell, reissue,
dispose of, transfer, and otherwise deal in Shares of any Series, and,
subject to Article 6 hereof, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares of any
Series, any of the Portfolio Assets belonging to the Portfolio to
which such Series relates, whether constituting capital or surplus or
otherwise, to the full extent now or hereafter permitted by applicable
law; provided, that any Shares belonging to the Trust shall not be
voted, directly or indirectly;
(n) Offices. To have one or more offices, and to carry on
all or any of the operations and business of the Trust, in any of the
States, Districts or Territories of the United States, and in any and
all foreign countries, subject to the laws of such State, District,
Territory or country;
(o) Expenses. To incur and pay any and all such expenses and
charges as they may deem advisable (including without limitation
appropriate fees to themselves as Trustees), and to pay all such sums
of money for which they may be held liable by way of damages, penalty,
fine or otherwise;
(p) Agents, etc. To retain and employ any and all such
servants, agents, employees, attorneys, brokers, investment advisers,
accountants, architects, engineers, builders, escrow agents,
depositories, consultants, ancillary trustees, custodians, agents for
collection, insurers, banks and officers, as they think best for the
business of the Trust or any Portfolio, to supervise and direct the
acts of any of the same, and to fix and pay their compensation and
define their duties;
(q) Accounts. To determine, and from time to time change,
the method or form in which the accounts of the Trust shall be kept;
(r) Valuation. Subject to the requirements of the 1940 Act,
to determine from time to time the value of all or any part of the
Trust Property and of any services, Securities, property or other
consideration to be furnished to or acquired by the Trust, and from
time to time to revalue all or any part of the Trust Property in
accordance with such appraisals or other information as is, in the
Trustees' sole judgment, necessary and satisfactory;
<PAGE>11
(s) Indemnification. In addition to the mandatory
indemnification provided for in Article 8 hereof and to the extent
permitted by law, to indemnify or enter into agreements with respect
to indemnification with any Person with whom this Trust has dealings
including, without limitation, any independent contractor, to such
extent as the Trustees determine; and
(t) General. To do all such other acts and things and to
conduct, operate, carry on and engage in such other lawful businesses
or business activities as they shall in their sole and absolute
discretion consider to be incidental to the business of the Trust or
any Portfolio as an investment company, and to exercise all powers
which they shall in their discretion consider necessary, useful or
appropriate to carry on the business of the Trust or any Portfolio, to
promote any of the purposes for which the Trust is formed, whether or
not such things are specifically mentioned herein, in order to protect
or promote the interests of the Trust or any Portfolio, or otherwise
to carry out the provisions of this Declaration.
SECTION 3.2. Borrowings; Financings; Issuance of Securities. The
Trustees shall have the power to borrow or in any other manner raise such sum or
sums of money, and to incur such other indebtedness for goods or services, or
for or in connection with the purchase or other acquisition of property, as they
shall deem advisable for the purposes of the Trust, in any manner and on any
terms, and to evidence the same by negotiable or non-negotiable Securities which
may mature at any time or times, even beyond the possible date of termination of
the Trust; to issue securities of any type for such cash, property, services or
other considerations, and at such time or times and upon such terms, as they may
deem advisable; and to reacquire any such Securities. Any such Securities of the
Trust may, at the discretion of the Trustees, be made convertible into Shares of
any Series, or may evidence the right to purchase, subscribe for or otherwise
acquire Shares of any Series, at such times and on such terms as the Trustees
may prescribe.
SECTION 3.3. Deposits. Subject to the requirements of the 1940 Act,
the Trustees shall have power to deposit any moneys or Securities included in
the Trust Property with any one or more banks, trust companies or other banking
institutions, whether or not such deposits will draw interest. Such deposits are
to be subject to withdrawal in such manner as the Trustees may determine, and
the Trustees shall have no responsibility for any loss which may occur by reason
of the failure of the bank, trust company or other banking institution with
which any such moneys or Securities have been deposited, other than liability
based on their gross negligence or willful default.
SECTION 3.4. Allocations. The Trustees shall have power to determine
whether moneys or other assets received by the Trust shall be charged or
credited to income or capital, or allocated between income and capital,
including the power to amortize or fail to amortize any part or all of any
premium or discount, to treat any part or all of the profit resulting from the
maturity or sale of any asset, whether purchased at a premium or at a discount,
as income or capital, or to apportion the same between income and capital, to
apportion the sale price of any asset between income and capital, and to
determine in what manner any expenses or disbursements are to be borne as
between income and capital, whether or not in the absence of
<PAGE>12
the power and authority conferred by this Section 3.4 such assets would be
regarded as income or as capital or such expense or disbursement would be
charged to income or to capital; to treat any dividend or other distribution on
any investment as income or capital, or to apportion the same between income and
capital; to provide or fail to provide reserves, including reserves for
depreciation, amortization or obsolescence in respect of any Trust Property in
such amounts and by such methods as they shall determine; to allocate less than
all of the consideration paid for Shares of any Series to the shares of
beneficial interest account of the Portfolio to which such Shares relate and to
allocate the balance thereof to paid-in capital of that Portfolio, and to
reallocate such amounts from time to time; all as the Trustees may reasonably
deem proper.
SECTION 3.5. Further Powers; Limitations. The Trustees shall have
power to do all such other matters and things, and to execute all such
instruments, as they deem necessary, proper or desirable in order to carry out,
promote or advance the interests of the Trust, although such matters or things
are not herein specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Declaration of Trust, the presumption shall
be in favor of a grant of power to the Trustees. The Trustees shall not be
required to obtain any court order to deal with the Trust Property. The Trustees
may limit their right to exercise any of their powers through express
restrictive provisions in the instruments evidencing or providing the terms for
any Securities of the Trust or in other contractual instruments adopted on
behalf of the Trust.
ARTICLE 4.
----------
TRUSTEES AND OFFICERS
---------------------
SECTION 4.1. Number, Designation, Election, Term, etc.
(a) Initial Trustee. Upon his execution of this Declaration
of Trust or a counterpart hereof or some other writing in which he
accepts such Trusteeship and agrees to the provisions hereof, the
individual whose signature is affixed hereto as Initial Trustee shall
become the Initial Trustee hereof.
(b) Number. The Trustees serving as such, whether named
below or hereafter becoming Trustees, may, by a written instrument
signed by a Majority of the Trustees (or by an officer of the Trust
pursuant to the vote of a Majority of the Trustees), increase or
decrease the number of Trustees to a number other than the number
theretofore determined. No decrease in the number of Trustees shall
have the effect of removing any Trustee from office prior to the
expiration of his term, but the number of Trustees may be decreased in
conjunction with the removal of a Trustee pursuant to subsection (e)
of this Section 4.1.
(c) Election and Term. The Trustees shall be elected by the
Shareholders of the Trust at the first meeting of Shareholders
immediately prior to the initial public offering of Shares of the
Trust, and the term of office of any Trustees in office before
<PAGE>13
such election shall terminate at the time of such election. Subject to
Section 16(a) of the 1940 Act and to the preceding sentence of this
subsection (c), the Trustees shall have the power to set and alter the
terms of office of the Trustees, and at any time to lengthen or
shorten their own terms or make their terms of unlimited duration, to
elect their own successors and, pursuant to subsection (f) of this
Section 4.1, to appoint Trustees to fill vacancies; provided, that
Trustees shall be elected by a Majority Shareholder Vote at any such
time or times as the Trustees shall determine that such action is
required under Section 16(a) of the 1940 Act or, if not so required,
that such action is advisable; and further provided, that, after the
initial election of Trustees by the Shareholders, the term of office
of any incumbent Trustee shall continue until the termination of this
Trust or his earlier death, resignation, retirement, bankruptcy,
adjudicated incompetency or other incapacity or removal, or if not so
terminated, until the election of such Trustee's successor in office
has become effective in accordance with this subsection (c).
(d) Resignation and Retirement. Any Trustee may resign his
trust or retire as a Trustee, by a written instrument signed by him
and delivered to the other Trustees or to any officer of the Trust,
and such resignation or retirement shall take effect upon such
delivery or upon such later date as is specified in such instrument.
(e) Removal. Any Trustee may be removed with or without
cause at any time: (i) by written instrument, signed by at least
two-thirds (2/3) of the number of Trustees prior to such removal,
specifying the date upon which such removal shall become effective; or
(ii) by vote of Shareholders holding not less than two-thirds (2/3) of
the Shares of each Series then outstanding, cast in person or by proxy
at any meeting called for the purpose; or (iii) by a written
declaration signed by Shareholders holding not less than two-thirds
(2/3) of the Shares of each Series then outstanding and filed with the
Trust's Custodian.
(f) Vacancies. Any vacancy or anticipated vacancy resulting
from any reason, including an increase in the number of Trustees, may
(but need not unless required by the 1940 Act) be filled by a Majority
of the Trustees, subject to the provisions of Section 16(a) of the
1940 Act, through the appointment in writing of such other individual
as such remaining Trustees in their discretion shall determine;
provided, that if there shall be no Trustees in office, such vacancy
or vacancies shall be filled by vote of the Shareholders. Any such
appointment or election shall be effective upon such individual's
written acceptance of his appointment as a Trustee and his agreement
to be bound by the provisions of this Declaration of Trust, except
that any such appointment in anticipation of a vacancy to occur by
reason of retirement, resignation or increase in the number of
Trustees to be effective at a later date shall become effective only
at or after the effective date of said retirement, resignation or
increase in the number of Trustees.
(g) Acceptance of Trusts. Any individual appointed as a
Trustee under subsection (f), and any individual elected as a Trustee
under subsection (c) of this Section 4.1 who was not, immediately
prior to such election, acting as a Trustee, shall
<PAGE>14
accept such appointment or election in writing and agree in such
writing to be bound by the provisions hereof, and whenever such
individual shall have executed such writing and any conditions to such
appointment or election shall have been satisfied, such individual
shall become a Trustee and the Trust Property shall vest in the new
Trustee, together with the continuing Trustees, without any further
act or conveyance.
(h) Effect of Death, Resignation, etc. No vacancy, whether
resulting from the death, resignation, retirement, removal or
incapacity of any Trustee, an increase in the number of Trustees or
otherwise, shall operate to annul or terminate the Trust hereunder or
to revoke or terminate any existing agency or contract created or
entered into pursuant to the terms of this Declaration of Trust. Until
such vacancy is filled as provided in this Section 4.1, the Trustees
in office (if any), regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties
imposed upon the Trustees by this Declaration. A written instrument
certifying the existence of such vacancy signed by a Majority of the
Trustees shall be conclusive evidence of the existence of such
vacancy.
(i) Conveyance. In the event of the resignation or removal
of a Trustee or his otherwise ceasing to be a Trustee, such former
Trustee or his legal representative shall, upon request of the
continuing Trustees, execute and deliver such documents as may be
required for the purpose of consummating or evidencing the conveyance
to the Trust or the remaining Trustees of any Trust Property held in
such former Trustee's name, but the execution and delivery of such
documents shall not be requisite to the vesting of title to the Trust
Property in the remaining Trustees, as provided in subsection (g) of
this Section 4.1 and in Section 4.13 hereof
(j) No Accounting. Except to the extent required by the 1940
Act or under circumstances which would justify his removal for cause,
no Person ceasing to be a Trustee (nor the estate of any such Person)
shall be required to make an accounting to the Shareholders or
remaining Trustees upon such cessation.
SECTION 4.2. Trustees' Meetings; Participation by Telephone, etc. An
annual meeting of Trustees shall be held not later than the last day of the
fourth month after the end of each fiscal year of the Trust and special meetings
may be held from time to time, in each case, upon the call of such officers as
may be thereunto authorized by the Bylaws or vote of the Trustees, or by any two
(2) Trustees, or pursuant to a vote of the Trustees adopted at a duly
constituted meeting of the Trustees, and upon such notice as shall be provided
in the Bylaws. The Trustees may act with or without a meeting, and a written
consent to any matter, signed by a Majority of the Trustees, shall be equivalent
to action duly taken at a meeting of the Trustees, duly called and held. Except
as otherwise provided by the 1940 Act or other applicable law, or by this
Declaration of Trust or the Bylaws, any action to be taken by the Trustees may
be taken by a majority of the Trustees present at a meeting of Trustees (a
quorum, consisting of at least a Majority of the Trustees, being present),
within or without Massachusetts. If authorized by the Bylaws, all or any one or
more Trustees may participate in a meeting of the Trustees or any Committee
thereof by means of conference telephone or similar means of communication by
means of which all Persons participating in the meeting
<PAGE>15
can hear each other, and participation in a meeting pursuant to such means of
communication shall constitute presence in person at such meeting. The minutes
of any meeting thus held shall be prepared in the same manner as a meeting at
which all participants were present in person.
SECTION 4.3. Committees; Delegation. The Trustees shall have power,
consistent with their ultimate responsibility to supervise the affairs of the
Trust, to delegate from time to time to an Executive Committee, and to one or
more other Committees, or to any single Trustee, the doing of such things and
the execution of such deeds or other instruments, either in the name of the
Trust or the names of the Trustees or as their attorney or attorneys in fact, or
otherwise as the Trustees may from time to time deem expedient; and any
agreement, deed, mortgage, lease or other instrument or writing executed by the
Trustee or Trustees or other Person to whom such delegation was made shall be
valid and binding upon the Trustees and upon the Trust.
SECTION 4.4. Officers. The Trustees shall elect such officers or
agents, who shall have such powers, duties and responsibilities as the Trustees
may deem to be advisable, and as they shall specify by resolution or in the
Bylaws. Except as may be provided in the Bylaws, any officer elected by the
Trustees may be removed at any time with or without cause. Any two (2) or more
offices may be held by the same individual.
SECTION 4.5. Compensation of Trustees and Officers. The Trustees shall
fix the compensation of all officers and Trustees. Without limiting the
generality of any of the provisions hereof, the Trustees shall be entitled to
receive reasonable compensation for their general services as such, and to fix
the amount of such compensation, and to pay themselves or any one or more of
themselves such compensation for special services, including legal, accounting,
or other professional services, as they in good faith may deem reasonable. No
Trustee or officer resigning and (except where a right to receive compensation
for a definite future period shall be expressly provided in a written agreement
with the Trust, duly approved by the Trustees) no Trustee or officer removed
shall have any right to any compensation as such Trustee or officer for any
period following his resignation or removal, or any right to damages on account
of his removal, whether his compensation be by the month, by the year or
other-wise.
SECTION 4.6. Ownership of Shares and Securities of the Trust. Any
Trustee, and any officer, employee or agent of the Trust, and any organization
in which any such Person is interested, may acquire, own, hold and dispose of
Shares of any Series and other Securities of the Trust for his or its individual
account, and may exercise all rights of a holder of such Shares or Securities to
the same extent and in the same manner as if such Person were not such a
Trustee, officer, employee or agent of the Trust; subject, in the case of
Trustees and officers, to the same limitations as directors or officers (as the
case may be) of a Massachusetts business corporation; and the Trust may issue
and sell or cause to be issued and sold and may purchase any such Shares or
other Securities from any such Person or any such organization, subject only to
the general limitations, restrictions or other provisions applicable to the sale
or purchase of Shares of such Series or other Securities of the Trust generally.
<PAGE>16
SECTION 4.7. Right of Trustees and Officers to Own Property or to
Engage in Business; Authority of Trustees to Permit Others to Do Likewise. The
Trustees, in their capacity as Trustees, and (unless otherwise specifically
directed by vote of the Trustees) the officers of the Trust in their capacity as
such, shall not be required to devote their entire time to the business and
affairs of the Trust. Except as otherwise specifically provided by vote of the
Trustees, or by agreement in any particular case, any Trustee or officer of the
Trust may acquire, own, hold and dispose of, for his own individual account, any
property, and acquire, own, hold, carry on and dispose of, for his own
individual account, any business entity or business activity, whether similar or
dissimilar to any property or business entity or business activity invested in
or carried on by the Trust, and without first offering the same as an investment
opportunity to the Trust, and may exercise all rights in respect thereof as if
he were not a Trustee or officer of the Trust. The Trustees shall also have
power, generally or in specific cases, to permit employees or agents of the
Trust to have the same rights (or lesser rights) to acquire, hold, own and
dispose of property and businesses, to carry on businesses, and to accept
investment opportunities without offering them to the Trust, as the Trustees
have by virtue of this Section 4.7.
SECTION 4.8. Reliance on Experts. The Trustees and officers may
consult with counsel, engineers, brokers, appraisers, auctioneers, accountants,
investment bankers, securities analysts or other Persons (any of which may be a
firm in which one or more of the Trustees or officers is or are members or
otherwise interested) whose profession gives authority to a statement made by
them on the subject in question, and who are reasonably deemed by the Trustees
or officers in question to be competent, and the advice or opinion of such
Persons shall be full and complete personal protection to all of the Trustees
and officers in respect of any action taken or suffered by them in good faith
and in reliance on or in accordance with such advice or opinion. In discharging
their duties, Trustees and officers, when acting in good faith, may rely upon
financial statements of the Trust represented to them to be correct by any
officer of the Trust having charge of its books of account, or stated in a
written report by an independent certified public accountant fairly to present
the financial position of the Trust. The Trustees and officers may rely, and
shall be personally protected in acting, upon any instrument or other document
believed by them to be genuine.
SECTION 4.9. Surety Bonds. No Trustee, officer, employee or agent of
the Trust shall, as such, be obligated to give any bond or surety or other
security for the performance of any of his duties, unless required by applicable
law or regulation, or unless the Trustees shall otherwise determine in any
particular case.
SECTION 4.10. Apparent Authority of Trustees and Officers. No
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer of the Trust shall be bound to make any inquiry concerning the
validity of any transaction purporting to be made by the Trustees or by such
officer, or to make inquiry concerning or be liable for the application of money
or property paid, loaned or delivered to or on the order of the Trustees or of
such officer.
<PAGE>17
SECTION 4.11. Other Relationships Not Prohibited. The fact that:
(a) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or
for any Contracting Party (as defined in Section 5.2 hereof), or of or
for any parent or affiliate of any Contracting Party, or that the
Contracting Party or any parent or affiliate thereof is a Shareholder
or has an interest in the Trust or any Portfolio, or that
(b) any Contracting Party may have a contract providing for
the rendering of any similar services to one or more other
corporations, trusts, associations, partnerships, limited partnerships
or other organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption
of services, duties and responsibilities to, for or of the Trust and/or the
Trustees or disqualify any Shareholder, Trustee or officer of the Trust from
voting upon or executing the same or create any liability or accountability to
the Trust or to the holders of Shares of any Series; provided, that, in the case
of any relationship or interest referred to in the preceding clause (i) on the
part of any Trustee or officer of the Trust, either (x) the material facts as to
such relationship or interest have been disclosed to or are known by the
Trustees not having any such relationship or interest and the contract involved
is approved in good faith by a majority of such Trustees not having any such
relationship or interest (even though such unrelated or disinterested Trustees
are less than a quorum of all of the Trustees), (y) the material facts as to
such relationship or interest and as to the contract have been disclosed to or
are known by the Shareholders entitled to vote thereon and the contract involved
is specifically approved in good faith by vote of the Shareholders, or (z) the
specific contract involved is fair to the Trust as of the time it is authorized,
approved or ratified by the Trustees or by the Shareholders.
SECTION 4.12. Payment of Trust Expenses. The Trustees are authorized
to pay or to cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, and according to any
allocation to particular Portfolios made by them pursuant to Section 6.2(b)
hereof, all expenses, fees, charges, taxes and liabilities incurred or arising
in connection with the business and affairs of the Trust or in connection with
the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the services of the Trust's
officers, employees, Investment Adviser, Administrator, Distributor, Principal
Underwriter, auditor, counsel, Custodian, Transfer Agent, Dividend Disbursing
Agent, Accounting Agent, Shareholder Servicing Agent, and such other agents,
consultants, and independent contractors and such other expenses and charges as
the Trustees may deem necessary or proper to incur.
SECTION 4.13. Ownership of the Trust Property. Legal title to all the
Trust Property shall be vested in the Trustees as joint tenants, except that the
Trustees shall have power to cause legal title to any Trust Property to be held
by or in the name of one or more of the Trustees, or in the name of the Trust,
or of any particular Portfolio, or in the name of any other Person as nominee,
on such terms as the Trustees may determine; provided, that the
<PAGE>18
interest of the Trust and of the respective Portfolio therein is appropriately
protected. The right, title and interest of the Trustees in the Trust Property
shall vest automatically in each Person who may hereafter become a Trustee. Upon
the termination of the term of office of a Trustee as provided in Section
4.1(c), (d) or (e) hereof, such Trustee shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title and
interest of such Trustee in the Trust Property shall vest automatically in the
remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered pursuant
to Section 4.1(i) hereof.
ARTICLE 5.
----------
DELEGATION OF MANAGERIAL RESPONSIBILITIES
-----------------------------------------
SECTION 5.1. Appointment; Action by Less than All Trustees. The
Trustees shall be responsible for the general operating policy of the Trust and
for the general supervision of the business of the Trust conducted by officers,
agents, employees or advisers of the Trust or by independent contractors, but
the Trustees shall not be required personally to conduct all the business of the
Trust and, consistent with their ultimate responsibility as stated herein, the
Trustees may appoint, employ or contract with one or more officers, employees
and agents to conduct, manage and/or supervise the operations of the Trust, and
may grant or delegate such authority to such officers, employees and/or agents
as the Trustees may, in their sole discretion, deem to be necessary or
desirable, without regard to whether such authority is normally granted or
delegated by trustees. With respect to those matters of the operation and
business of the Trust which they shall elect to conduct themselves, except as
otherwise provided by this Declaration or the Bylaws, if any, the Trustees may
authorize any single Trustee or defined group of Trustees, or any committee
consisting of a number of Trustees less than the whole number of Trustees then
in office without specification of the particular Trustees required to be
included therein, to act for and to bind the Trust, to the same extent as the
whole number of Trustees could do, either with respect to one or more particular
matters or classes of matters, or generally.
SECTION 5.2. Certain Contracts. Subject to compliance with the
provisions of the 1940 Act, but notwithstanding any limitations of present and
future law or custom in regard to delegation of powers by trustees generally,
the Trustees may, at any time and from time to time in their discretion and
without limiting the generality of their powers and authority otherwise set
forth herein, enter into one or more contracts with any one or more
corporations, trusts, associations, partnerships, limited partnerships or other
types of organizations, or individuals ("Contracting Party"), to provide for the
performance and assumption of some or all of the following services, duties and
responsibilities to, for or on behalf of the Trust and/or any Portfolio, and/or
the Trustees, and to provide for the performance and assumption of such other
services, duties and responsibilities in addition to those set forth below, as
the Trustees may deem appropriate:
(a) Advisory. One or more investment advisory or management
agreements, each with an investment manager or advisor (each, an
"Investment Advisor") whereby the Investment Adviser shall undertake
to furnish the Trust such
<PAGE>19
management, investment advisory or supervisory, administrative,
accounting, legal, statistical and research facilities and services,
and such other facilities and services, if any, as the Trustees shall
from time to time consider desirable, all upon such terms and
conditions as the Trustees may in their discretion determine to be not
inconsistent with this Declaration, the applicable provisions of the
1940 Act or any applicable provisions of the Bylaws. Any such advisory
or management agreement and any amendment thereto shall be subject to
approval by a Majority Shareholder Vote at a meeting of the
Shareholders of the Trust. Notwithstanding any provisions of this
Declaration, the Trustees may authorize the Investment Adviser
(subject to such general or specific instructions as the Trustees may
from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities of the Trust on behalf of the
Trustees or may authorize any officer or employee of the Trust or any
Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of the Investment Adviser (and all without further
action by the Trustees). Any such purchases, sales, loans and
exchanges shall be deemed to have been authorized by all of the
Trustees. The Trustees may, in their sole discretion, call a meeting
of Shareholders in order to submit to a vote of Shareholders at such
meeting the approval of continuance of any such investment advisory or
management agreement. If the Shareholders of any Portfolio should fail
to approve any such investment advisory or management agreement, the
Investment Adviser may nonetheless serve as Investment Adviser with
respect to any other Portfolio whose Shareholders shall have approved
such contract.
(b) Administration. One or more agreements, each with a
provider of administrative and clerical services whereby the other
party shall, as agent for the Trustees, but subject to the general
supervision of the Trustees and in conformity with any policies of the
Trustees with respect to the operations of the Trust and each
Portfolio, supervise all or any part of the operations of the Trust
and each Portfolio, and shall provide all or any part of the
administrative and clerical personnel, office space and office
equipment and services appropriate for the efficient administration
and operations of the Trust and each Portfolio (any such agent being
herein referred to as an "Administrator").
(c) Distribution. One or more agreements, each with a broker
or dealer in securities providing for the sale of Shares of any one or
more Series to net the Trust not less than the net asset value per
Share (as described in Section 6.2(h) hereof) and pursuant to which the
Trust may appoint the other party to such agreement as its principal
underwriter or sales agent for the distribution of such Shares. The
agreement shall contain such terms and conditions as the Trustees may
in their discretion determine to be not inconsistent with this
Declaration, the applicable provisions of the 1940 Act and any
applicable provisions of the Bylaws (any such agent being herein
referred to as a "Distributor" or a "Principal Underwriter", as the
case may be).
(d) Custodian. One or more agreements, each with a bank or
trust company having an aggregate capital, surplus and undivided
profits (as shown in its last published report) of at least two
million dollars ($2,000,000) as custodian of the Securities and cash
of the Trust and of each Portfolio and of the accounting records in
<PAGE>20
connection therewith (any such bank or trust company so appointed
being herein referred to as a "Custodian").
(e) Transfer and Dividend Disbursing Agency. One or more
agreements, each with an agent to maintain records of the ownership of
outstanding Shares, the issuance and redemption and the transfer
thereof (any such agent being herein referred to as a "Transfer
Agent"), and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and/or the instructions
of any particular Shareholder to reinvest any such dividends (any such
agent being herein referred to as a "Dividend Disbursing Agent").
(f) Shareholder Servicing. One or more agreements, each with
an agent to provide service with respect to the relationship of the
Trust and its Shareholders, records with respect to Shareholders and
their Shares, and similar matters (any such agent being herein
referred to as a "Shareholder Servicing Agent").
(g) Accounting. One or more agreements, each with an agent
to handle all or any part of the accounting responsibilities, whether
with respect to the Trust's properties, Shareholders or otherwise (any
such agent being herein referred to as an "Accounting Agent").
The same Person may be the Contracting Party for some or all of the services,
duties and responsibilities to, for and of the Trust and/or the Trustees, and
the contracts with respect thereto may contain such terms interpretive of or in
addition to the delineation of the services, duties and responsibilities
provided for, including provisions that are not inconsistent with the 1940 Act
relating to the standard of duty of and the rights to indemnification of the
Contracting Party and others, as the Trustees may determine. Nothing herein
shall preclude, prevent or limit the Trust or a Contracting Party from entering
into sub-contractual arrangements relative to any of the matters referred to in
subsections (a) through (g) of this Section 5.2.
ARTICLE 6.
----------
PORTFOLIOS AND SHARES
---------------------
SECTION 6.1. Description of Portfolios and Shares.
(a) Shares; Portfolios; Series of Shares. The beneficial
interest in the Trust shall be divided into Shares having a nominal or
par value of one mill ($.001) per Share, of which an unlimited number
may be issued. Without limitation of any other powers accorded to them
by Article 3 of this Declaration or otherwise, the Trustees shall have
the authority (without any requirement of Shareholder approval) at any
time or from time to time,
<PAGE>21
(i) to establish and designate one or more
separate, distinct and independent
Portfolios, in addition to the Fixed
Income Portfolio and the Global Fixed
Income Portfolio established and
designated in Section 6.2 hereof, into
which the assets of the Trust shall be
divided;
(ii) to authorize a separate Series of Shares
for each such additional Portfolio (each
of which Series shall represent
beneficial interests only in the
Portfolio with respect to which such
Series was authorized);
(iii) to fix and determine the relative rights
and preferences of Shares of the
respective Series as to rights of
redemption and the price, terms and
manner of redemption, special and
relative rights as to dividends and
other distributions and on liquidation,
sinking or purchase fund provisions,
conversion rights, and conditions under
which the Shareholders of the several
Series shall have separate voting rights
or no voting rights; and
(iv) to classify or reclassify any unissued
Shares, or any Shares of any Series
previously issued and reacquired by the
Trust, into Shares of one or more other
Series that may be established and
designated from time to time.
Except as otherwise provided as to a particular Portfolio herein, or in the
Certificate of Designation therefor, the Trustees shall have all the rights and
powers, and be subject to all the duties and obligations, with respect to each
such Portfolio and the assets and affairs thereof as they have under this
Declaration with respect to the Trust and the Trust Property in general.
(b) Establishment, etc. of Portfolios; Authorization of
Shares. The establishment and designation of any Portfolio in addition
to the Portfolios established and designated in Section 6.2 hereof and
the authorization of the Shares thereof shall be effective upon the
execution by a Majority of the Trustees (or by an officer of the Trust
pursuant to the vote of a Majority of the Trustees) of an instrument
setting forth such establishment and designation and the relative
rights and preferences of the Shares of such Portfolio and the manner
in which the same may be amended (a "Certificate of Designation"), and
may provide that the number of Shares of such Series which may be
issued is unlimited, or may limit the number issuable. At any time
that there are no Shares outstanding of any particular Portfolio
previously established and designated, including any Portfolio
established and designated in Section 6.2 hereof, the Trustees may by
an instrument executed by a Majority of the Trustees (or by an officer
of the Trust pursuant to the vote of a Majority of the Trustees)
terminate such Portfolio and the establishment and designation thereof
and the authorization of its Shares (a "Certificate of Termination").
Each Certificate of Designation, Certificate of Termination and any
instrument amending a Certificate of Designation shall have the
<PAGE>22
status of an amendment to this Declaration of Trust, and shall be
filed and become effective as provided in Section 9.4 hereof.
(c) Character of Separate Portfolios and Shares Thereof.
Each Portfolio established hereunder shall be a separate component of
the assets of the Trust, and the holders of Shares of the Series
representing the beneficial interest in the assets of that Portfolio
shall be considered Shareholders of such Portfolio, but such
Shareholders shall also be considered Shareholders of the Trust for
purposes of receiving reports and notices and, except as otherwise
provided herein or in the Certificate of Designation of a particular
Portfolio as to such Portfolio, or as required by the 1940 Act or
other applicable law, the right to vote, all without distinction by
Series.
(d) Consideration for Shares. The Trustees may issue Shares
of any Series for such consideration (which may include property
subject to, or acquired in connection with the assumption of,
liabilities) and on such terms as they may determine (or for no
consideration if pursuant to a Share dividend or split-up), all
without action or approval of the Shareholders. All Shares when so
issued on the terms determined by the Trustees shall be fully paid and
non-assessable (but may be subject to mandatory contribution back to
the Trust as provided in Section 6.2(h) hereof).
SECTION 6.2. Establishment and Designation of Certain Portfolios;
General Provisions for All Portfolios. Without limiting the authority of the
Trustees set forth in Section 6.1(a) hereof to establish and designate further
Portfolios, there are hereby established and designated the following two (2)
Portfolio(s): the Fixed Income Portfolio and the Global Fixed Income Portfolio.
The Shares of such Portfolios, and the Shares of any further Portfolios that may
from time to time be established and designated by the Trustees shall (unless
the Trustees otherwise determine with respect to some further Portfolio at the
time of establishing and designating the same) have the following relative
rights and preferences:
(a) Assets Belonging to Portfolios. Any portion of the Trust
Property allocated to a particular Portfolio, and all consideration
received by the Trust for the issue or sale of Shares of such
Portfolio, together with all assets in which such consideration is
invested or reinvested, all interest, dividends, income, earnings,
profits and gains therefrom, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of
such proceeds in whatever form the same may be, shall be held by the
Trustees in trust for the benefit of the holders of Shares of that
Portfolio and shall irrevocably belong to that Portfolio for all
purposes, and shall be so recorded upon the books of account of the
Trust, and the Shareholders of such Portfolio shall not have, and
shall be conclusively deemed to have waived, any claims to the assets
of any Portfolio of which they are not Shareholders. Such
consideration, assets, interest, dividends, income, earnings, profits,
gains and proceeds, together with any General Items allocated to that
Portfolio as provided in the following sentence, are herein referred
to collectively as "Portfolio Assets" of such Portfolio, and as assets
"belonging to" that Portfolio. In the event that there are any assets,
income, earnings, profits, and proceeds thereof, funds, or payments
which are not readily identifiable as belonging to
<PAGE>23
any particular Portfolio (collectively "General Items"), the Trustees
shall allocate such General Items to and among any one or more of the
Portfolios established and designated from time to time in such manner
and on such basis as they, in their sole discretion, deem fair and
equitable; and any General Items so allocated to a particular
Portfolio shall belong to and be part of the Portfolio Assets of that
Portfolio. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Portfolios for all purposes.
(b) Liabilities of Portfolios. The assets belonging to each
particular Portfolio shall be charged with the liabilities in respect
of that Portfolio and all expenses, costs, charges and reserves
attributable to that Portfolio, and any general liabilities, expenses,
costs, charges or reserves of the Trust which are not readily
identifiable as pertaining to any particular Portfolio shall be
allocated and charged by the Trustees to and among any one or more of
the Portfolios established and designated from time to time in such
manner and on such basis as the Trustees in their sole discretion deem
fair and equitable. The indebtedness, expenses, costs, charges and
reserves allocated and so charged to a particular Portfolio are herein
referred to as "liabilities of" that Portfolio. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the Shareholders of all
Portfolios for all purposes. Any creditor of any Portfolio may look
only to the assets of that Portfolio to satisfy such creditor's debt.
(c) Dividends. Dividends and distributions on Shares of a
particular Portfolio may be paid with such frequency as the Trustees
may determine, which may be daily or otherwise pursuant to a standing
resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, to the Shareholders of that Portfolio,
from such of the income, accrued or realized, and capital gains,
realized or unrealized, and out of the assets belonging to that
Portfolio, as the Trustees may determine, after providing for actual
and accrued liabilities of that Portfolio. All dividends and
distributions on Shares of a particular Portfolio shall be distributed
pro rata to the Shareholders of that Portfolio in proportion to the
number of such Shares held by such holders at the date and time of
record established for the payment of such dividends or distributions,
except that in connection with any dividend or distribution program or
procedure the Trustees may determine that no dividend or distribution
shall be payable on Shares as to which the Shareholder's purchase
order and/or payment have not been received by the time or times
established by the Trustees under such program or procedure, or that
dividends or distributions shall be payable on Shares which have been
tendered by the holder thereof for redemption or repurchase, but the
redemption or repurchase proceeds of which have not yet been paid to
such Shareholder. Such dividends and distributions may be made in cash
or Shares of that Portfolio or a combination thereof as determined by
the Trustees, or pursuant to any program that the Trustees may have in
effect at the time for the election by each Shareholder of the mode of
the making of such dividend or distribution to that Shareholder. Any
such dividend or distribution paid in Shares will be paid at the net
asset value thereof as determined in accordance with subsection (g) of
this Section 6.2.
<PAGE>24
(d) Liquidation. In the event of the liquidation or
dissolution of the Trust, the Shareholders of each Portfolio of which
Shares are outstanding shall be entitled to receive, when and as
declared by the Trustees, the excess of the Portfolio Assets over the
liabilities of such Portfolio. The assets so distributable to the
Shareholders of any particular Portfolio shall be distributed among
such Shareholders in proportion to the number of Shares of that
Portfolio held by them and recorded on the books of the Trust. The
liquidation of any particular Portfolio may be authorized by vote of a
Majority of the Trustees, subject to the affirmative vote of "a
majority of the outstanding voting securities" of that Portfolio, as
the quoted phrase is defined in the 1940 Act, determined in accordance
with clause (iii) of the definition of "Majority Shareholder Vote" in
Section 1.4 hereof.
(e) Redemption by Shareholder. Each holder of Shares of a
particular Portfolio shall have the right at such times as may be
permitted by the Trust, but no less frequently than once each week, to
require the Trust to redeem all or any part of his Shares of that
Portfolio at a redemption price equal to the net asset value per Share
of that Portfolio next determined in accordance with subsection (g) of
this Section 6.2 after the Shares are properly tendered for
redemption; provided, that the Trustees may from time to time, in
their discretion, determine and impose a fee for such redemption.
Payment of the redemption price shall be in cash; provided, however,
that if the Trustees determine, which determination shall be
conclusive, that conditions exist which make payment wholly in cash
unwise or undesirable, the Trust may make payment wholly or partly in
Securities or other assets belonging to such Portfolio at the value of
such Securities or assets used in such determination of net asset
value. Notwithstanding the foregoing, the Trust may postpone payment
of the redemption price and may suspend the right of the holders of
Shares of any Portfolio to require the Trust to redeem Shares of that
Portfolio during any period or at any time when and to the extent
permissible under the 1940 Act.
(f) Redemption at the Option of the Trust. Each Share of any
Portfolio shall be subject to redemption at the option of the Trust at
the redemption price which would be applicable if such Share were then
being redeemed by the Shareholder pursuant to subsection (e) of this
Section 6.2: (i) at any time, if the Trustees determine in their sole
discretion that failure to so redeem may have materially adverse
consequences to the holders of the Shares of the Trust or of any
Portfolio, or (ii) upon such other conditions with respect to
maintenance of Shareholder accounts of a minimum amount as may from
time to time be determined by the Trustees and set forth in the then
current Prospectus of such Portfolio. Upon such redemption the holders
of the Shares so redeemed shall have no further right with respect
thereto other than to receive payment of such redemption price.
(g) Net Asset Value. The net asset value per Share of any
Series at any time shall be the quotient obtained by dividing the
value of the net assets of such Portfolio at such time (being the
current value of the assets belonging to such Portfolio, less its then
existing liabilities) by the total number of Shares of that Series
then outstanding, all determined in accordance with the methods and
procedures, including
<PAGE>25
without limitation those with respect to rounding, established by the
Trustees from time to time. The Trustees may determine to maintain the
net asset value per Share of any Series at a designated constant
dollar amount and in connection therewith may adopt procedures not
inconsistent with the 1940 Act for the continuing declaration of
income attributable to that Portfolio as dividends payable in
additional Shares of that Series at the designated constant dollar
amount and for the handling of any losses attributable to that
Portfolio. Such procedures may provide that in the event of any loss
each Shareholder shall be deemed to have contributed to the shares of
beneficial interest account of that Portfolio his pro rata portion of
the total number of Shares required to be canceled in order to permit
the net asset value per Share of that Series to be maintained, after
reflecting such loss, at the designated constant dollar amount. Each
Shareholder of the Trust shall be deemed to have expressly agreed, by
his investment in any Portfolio with respect to which the Trustees
shall have adopted any such procedure, to make the contribution
referred to in the preceding sentence in the event of any such loss.
(h) Transfer. All Shares of the Trust shall be transferable,
but transfers of Shares of a particular Portfolio will be recorded on
the Share transfer records of the Trust applicable to that Portfolio
only at such times as Shareholders shall have the right to require the
Trust to redeem Shares of that Portfolio and at such other times as
may be permitted by the Trustees.
(i) Equality. All Shares of each Series shall represent an
equal proportionate interest in the assets belonging to that Portfolio
(subject to the liabilities of that Portfolio), and each Share of any
particular Series shall be equal to each other Share thereof, but the
provisions of this sentence shall not restrict any distinctions
permissible under subsection (c) of this Section 6.2 that may exist
with respect to dividends and distributions on Shares of the same
Series. The Trustees may from time to time divide or combine the
Shares of any particular Series into a greater or lesser number of
Shares of that Series without thereby changing the proportionate
beneficial interest in the assets belonging to that Portfolio or in
any way affecting the rights of the holders of Shares of any other
Series.
(j) Rights of Fractional Shares. Any fractional Share of any
Series shall carry proportionately all the rights and obligations of a
whole Share of that Series, including rights and obligations with
respect to voting, receipt of dividends and distributions, redemption
of Shares, and liquidation of the Trust or of the Portfolio to which
they pertain.
(k) Conversion Rights. Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the authority to
provide that holders of Shares of any Series shall have the right to
convert said Shares into Shares of one or more other Series in
accordance with such requirements and procedures as the Trustees may
establish.
<PAGE>26
SECTION 6.3. Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or of a Transfer Agent or similar agent for
the Trust, which books shall be maintained separately for the Shares of each
Series that has been authorized. Certificates evidencing the ownership of Shares
need not be issued except as the Trustees may otherwise determine from time to
time, and the Trustees shall have power to call outstanding Share certificates
and to replace them with book entries. The Trustees may make such rules as they
consider appropriate for the issuance of Share certificates, the use of
facsimile signatures, the transfer of Shares and similar matters. The record
books of the Trust as kept by the Trust or any Transfer Agent or similar agent,
as the case may be, shall be conclusive as to who are the Shareholders and as to
the number of Shares of each Series held from time to time by each such
Shareholder.
The holders of Shares of each Series shall upon demand disclose to the
Trustees in writing such information with respect to their direct and indirect
ownership of Shares of such Portfolio as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code of 1986, as amended (or any
successor statute), or to comply with the requirements of any other authority.
SECTION 6.4. Investments in the Trust. The Trustees may accept
investments in any Portfolio of the Trust from such Persons and on such terms
and for such consideration, not inconsistent with the provisions of the 1940
Act, as they from time to time authorize. The Trustees may authorize any
Distributor, Principal Underwriter, Custodian, Transfer Agent or other Person to
accept orders for the purchase of Shares that conform to such authorized terms
and to reject any purchase orders for Shares, whether or not conforming to such
authorized terms.
SECTION 6.5. No Preemptive Rights. No Shareholder, by virtue of
holding Shares of any Series, shall have any preemptive or other right to
subscribe to any additional Shares of that Series, or to any shares of any other
Series, or any other Securities issued by the Trust.
SECTION 6.6. Status of Shares. Every Shareholder, by virtue of having
become a Shareholder, shall be held to have expressly assented and agreed to the
terms hereof and to have become a party hereto. Shares shall be deemed to be
personal property, giving only the rights provided herein. Ownership of Shares
shall not entitle the Shareholder to any title in or to the whole or any part of
the Trust Property or right to call for a partition or division of the same or
for an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. The death of a Shareholder during the continuance of the Trust shall
not operate to terminate the Trust or any Portfolio, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Declaration of Trust.
<PAGE>27
ARTICLE 7.
----------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
SECTION 7.1. Voting Powers. The Shareholders shall have power to vote
only (i) for the election or removal of Trustees as provided in Sections 4.1(c)
and (e) hereof, (ii) with respect to the approval or termination in accordance
with the 1940 Act of any contract with a Contracting Party as provided in
Section 5.2 hereof as to which Shareholder approval is required by the 1940 Act,
(iii) with respect to any termination or reorganization of the Trust or any
Portfolio to the extent and as provided in Sections 9.1 and 9.2 hereof, (iv)
with respect to any amendment of this Declaration of Trust to the extent and as
provided in Section 9.3 hereof, (v) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or any Portfolio, or the
Shareholders of any of them (provided, however, that a Shareholder of a
particular Portfolio shall not in any event be entitled to maintain a derivative
or class action on behalf of any other Portfolio or the Shareholders thereof),
and (vi) with respect to such additional matters relating to the Trust as may be
required by the 1940 Act, this Declaration of Trust, the Bylaws or any
registration of the Trust with the Commission (or any successor agency) or any
State, or as the Trustees may consider necessary or desirable. If and to the
extent that the Trustees shall determine that such action is required by law or
by this Declaration, they shall cause each matter required or permitted to be
voted upon at a meeting or by written consent of Shareholders to be submitted to
a separate vote of the outstanding Shares of each Portfolio entitled to vote
thereon; provided, that (i) when expressly required by the 1940 Act or by other
law, actions of Shareholders shall be taken by Single Class Voting of all
outstanding Shares of each Series whose holders are entitled to vote thereon;
and (ii) when the Trustees determine that any matter to be submitted to a vote
of Shareholders affects only the rights or interests of Shareholders of one or
more but not all Portfolios, then only the Shareholders of the Portfolios so
affected shall be entitled to vote thereon.
SECTION 7.2. Number of Votes and Manner of Voting; Proxies. On each
matter submitted to a vote of the Shareholders, each holder of Shares of any
Series shall be entitled to a number of votes equal to the number of Shares of
such Series standing in his name on the books of the Trust. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy with respect to Shares held in the name of two (2) or more
Persons shall be valid if executed by any one of them unless at or prior to
exercise of the proxy the Trust receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the challenger.
Until Shares are issued, the Trustees may exercise all rights of Shareholders
and may take any action required by law, this Declaration of Trust or the Bylaws
to be taken by Shareholders.
SECTION 7.3. Meetings. Meetings of Shareholders may be called by the
Trustees from time to time for the purpose of taking action upon any matter
requiring the vote or authority of the Shareholders as herein provided, or upon
any other matter deemed by the
<PAGE>28
Trustees to be necessary or desirable. Written notice of any meeting of
Shareholders shall be given or caused to be given by the Trustees by mailing
such notice at least seven (7) days before such meeting, postage prepaid,
stating the time, place and purpose of the meeting, to each Shareholder at the
Shareholder's address as it appears on the records of the Trust. The Trustees
shall promptly call and give notice of a meeting of Shareholders for the purpose
of voting upon removal of any Trustee of the Trust when requested to do so in
writing by Shareholders holding not less than ten percent (10%) of the Shares
then outstanding. If the Trustees shall fail to call or give notice of any
meeting of Shareholders for a period of thirty (30) days after written
application by Shareholders holding at least ten percent (10%) of the Shares
then outstanding requesting that a meeting be called for any other purpose
requiring action by the Shareholders as provided herein or in the Bylaws, then
Shareholders holding at least ten percent (10%) of the Shares then outstanding
may call and give notice of such meeting, and thereupon the meeting shall be
held in the manner provided for herein in case of call thereof by the Trustees.
SECTION 7.4. Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution, or
for the purpose of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding thirty (30) days (except at or
in connection with the termination of the Trust), as the Trustees may determine;
or without closing the transfer books the Trustees may fix a date and time not
more than sixty (60) days prior to the date of any meeting of Shareholders or
other action as the date and time of record for the determination of
Shareholders entitled to vote at such meeting or any adjournment thereof or to
be treated as Shareholders of record for purposes of such other action, and any
Shareholder who was a Shareholder at the date and time so fixed shall be
entitled to vote at such meeting or any adjournment thereof or to be treated as
a Shareholder of record for purposes of such other action, even though he has
since that date and time disposed of his Shares, and no Shareholder becoming
such after that date and time shall be so entitled to vote at such meeting or
any adjournment thereof or to be treated as a Shareholder of record for purposes
of such other action.
SECTION 7.5. Quorum and Required Vote. A majority of the Shares
entitled to vote shall be a quorum for the transaction of business at a
Shareholders' meeting, but any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held within a reasonable
time after the date set for the original meeting without the necessity of
further notice. A Majority Shareholder Vote at a meeting of which a quorum is
present shall decide any question, except when a different vote is required or
permitted by any provision of the 1940 Act or other applicable law or by this
Declaration of Trust or the By-Laws, or when the Trustees shall in their
discretion require a larger vote or the vote of a majority or larger fraction of
the Shares of one or more particular Series.
SECTION 7.6. Action by Written Consent. Subject to the provisions of
the 1940 Act and other applicable law, any action taken by Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
matter (or such larger proportion thereof or of the Shares of any particular
Series as shall be required by the 1940 Act or by any express provision of this
Declaration of Trust or the Bylaws or as shall be permitted by the Trustees)
<PAGE>29
consent to the action in writing and if the writings in which such consent is
given are filed with the records of the meetings of Shareholders, to the same
extent and for the same period as proxies given in connection with a
Shareholders' meeting. Such consent shall be treated for all purposes as a vote
taken at a meeting of Shareholders.
SECTION 7.7. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
stockholders of a Massachusetts business corporation under the Massachusetts
Business Corporation Law.
SECTION 7.8. Additional Provisions. The Bylaws may include further
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof.
ARTICLE 8.
----------
LIMITATION OF LIABILITY; INDEMNIFICATION
----------------------------------------
SECTION 8.1. Trustees, Shareholders, etc. Not Personally Liable;
Notice. The Trustees and officers of the Trust, in incurring any debts,
liabilities or obligations, or in taking or omitting any other actions for or in
connection with the Trust, are or shall be deemed to be acting as Trustees or
officers of the Trust and not in their own capacities. No Shareholder shall be
subject to any personal liability whatsoever in tort, contract or otherwise to
any other Person or Persons in connection with the assets or the affairs of the
Trust or of any Portfolio, and subject to Section 8.4 hereof, no Trustee,
officer, employee or agent of the Trust shall be subject to any personal
liability whatsoever in tort, contract, or otherwise, to any other Person or
Persons in connection with the assets or affairs of the Trust or of any
Portfolio, save only that arising from his own willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office or the discharge of his functions. The Trust (or if the matter
relates only to a particular Portfolio, that Portfolio) shall be solely liable
for any and all debts, claims, demands, judgments, decrees, liabilities or
obligations of any and every kind, against or with respect to the Trust or such
Portfolio in tort, contract or otherwise in connection with the assets or the
affairs of the Trust or such Portfolio, and all Persons dealing with the Trust
or any Portfolio shall be deemed to have agreed that resort shall be had solely
to the Trust Property of the Trust or the Portfolio Assets of such Portfolio, as
the case may be, for the payment or performance thereof.
The Trustees shall use their best efforts to ensure that every note,
bond, contract, instrument, certificate or undertaking made or issued by the
Trustees or by any officers or officer shall give notice that this Declaration
of Trust is on file with the Secretary of The Commonwealth of Massachusetts and
shall recite to the effect that the same was executed or made by or on behalf of
the Trust or by them as Trustees or Trustee or as officers or officer, and not
individually, and that the obligations of such instrument are not binding upon
any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, or the particular Portfolio in question, as
the case may be, but the omission thereof shall not operate to bind any Trustees
or Trustee or officers or officer or Shareholders or
<PAGE>30
Shareholder individually, or to subject the Portfolio Assets of any Portfolio to
the obligations of any other Portfolio.
SECTION 8.2. Trustees' Good Faith Action; Expert Advice; No Bond or
Surety. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. Subject to Section 8.4 hereof, a
Trustee shall be liable for his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and for nothing else, and shall not be liable for errors of
judgment or mistakes of fact or law. Subject to the foregoing, (i) the Trustees
shall not be responsible or liable in any event for any neglect or wrongdoing of
any officer, agent, employee, consultant, Investment Adviser, Administrator,
Distributor or Principal Underwriter, Custodian or Transfer Agent, Dividend
Disbursing Agent, Shareholder Servicing Agent or Accounting Agent of the Trust,
nor shall any Trustee be responsible for the act or omission of any other
Trustee; (ii) the Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust and their
duties as Trustees, and shall be under no liability for any act or omission in
accordance with such advice or for failing to follow such advice; and (iii) in
discharging their duties, the Trustees, when acting in good faith, shall be
entitled to rely upon the books of account of the Trust and upon written reports
made to the Trustees by any officer appointed by them, any independent public
accountant, and (with respect to the subject matter of the contract involved)
any officer, partner or responsible employee of a Contracting Party appointed by
the Trustees pursuant to Section 5.2 hereof. The Trustees as such shall not be
required to give any bond or surety or any other security for the performance of
their duties.
SECTION 8.3. Indemnification of Shareholders. If any Shareholder (or
former Shareholder) of the Trust shall be charged or held to be personally
liable for any obligation or liability of the Trust solely by reason of being or
having been a Shareholder and not because of such Shareholder's acts or
omissions or for some other reason, the Trust (upon proper and timely request by
the Shareholder) shall assume the defense against such charge and satisfy any
judgment thereon, and the Shareholder or former Shareholder (or the heirs,
executors, administrators or other legal representatives thereof, or in the case
of a corporation or other entity, its corporate or other general successor)
shall be entitled (but solely out of the assets of the Portfolio of which such
Shareholder or former Shareholder is or was the holder of Shares) to be held
harmless from and indemnified against all loss and expense arising from such
liability.
SECTION 8.4. Indemnification of Trustees, Officers, etc. Subject to
the limitations set forth hereinafter in this Section 8.4, the Trust shall
indemnify (from the assets of the Portfolio or Portfolios to which the conduct
in question relates) each of its Trustees and officers (including Persons who
serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise [hereinafter, together with such Person's heirs, executors,
administrators or personal representative, referred to as a "Covered Person"])
against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees, incurred by any
Covered Person in connection with the defense or disposition of any action, suit
or other proceeding,
<PAGE>31
whether civil or criminal, before any court or administrative or legislative
body, in which such Covered Person may be or may have been involved as a party
or otherwise or with which such Covered Person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee or officer, director or trustee, except with respect to any
matter as to which it has been determined that such Covered Person (i) did not
act in good faith in the reasonable belief that such Covered Person's action was
in or not opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office (either and both
of the conduct described in (i) and (ii) being referred to hereafter as
"Disabling Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by a court or
other body before whom the proceeding was brought that the Covered Person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Trust as defined in Section
2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. Expenses, including accountants' and counsel
fees so incurred by any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or penalties), may be paid
from time to time by the Portfolio or Portfolios to which the conduct in
question related in advance of the final disposition of any such action, suit or
proceeding; provided, that the Covered Person shall have undertaken to repay the
amounts so paid to such Portfolio or Portfolios if it is ultimately determined
that indemnification of such expenses is not authorized under this Article 8 and
(i) the Covered Person shall have provided security for such undertaking, (ii)
the Trust shall be insured against losses arising by reason of any lawful
advances, or (iii) a majority of a quorum of the disinterested Trustees, or an
independent legal counsel in a written opinion, shall have determined, based on
a review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
SECTION 8.5. Compromise Payment. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 8.4 hereof,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (i) by a majority of a quorum of the
disinterested Trustees or (ii) by an independent legal counsel in a written
opinion. Approval by the Trustees pursuant to clause (i) or by independent legal
counsel pursuant to clause (ii) shall not prevent the recovery from any Covered
Person of any amount paid to such Covered Person in accordance with either of
such clauses as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good faith
in the reasonable belief that such Covered Person's action was in or not opposed
to the best interests of the Trust or to have been liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
<PAGE>32
SECTION 8.6. Indemnification Not Exclusive, etc. The right of
indemnification provided by this Article 8 shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article 8, a "disinterested" Person is one against whom none of the
actions, suits or other proceedings in question, and no other action, suit or
other proceeding on the same or similar grounds is then or has been pending or
threatened. Nothing contained in this Article 8 shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees and
officers, and other Persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such Person.
SECTION 8.7. Liability of Third Persons Dealing with Trustees. No
person dealing with the Trustees shall be bound to make any inquiry concerning
the validity of any transaction made or to be made by the Trustees or to see to
the application of any payments made or property transferred to the Trust or
upon its order.
ARTICLE 9.
----------
DURATION; REORGANIZATION; AMENDMENTS
------------------------------------
SECTION 9.1. Duration and Termination of Trust. Unless terminated as
provided herein, the Trust shall continue without limitation of time and,
without limiting the generality of the foregoing, no change, alteration or
modification with respect to any Portfolio or Series of Shares shall operate to
terminate the Trust. The Trust (or any particular Portfolio of the Trust) may be
terminated at any time by a Majority of the Trustees, subject to the favorable
vote of the holders of not less than a majority of the Shares outstanding and
entitled to vote of each Portfolio of the Trust or of such particular Portfolio,
as the case may be, or by an instrument or instruments in writing without a
meeting, consented to by the holders of not less than a majority of such Shares,
or by such greater or different vote of Shareholders of any Series as may be
established by the Certificate of Designation by which such Series was
authorized. Upon termination, after paying or otherwise providing for all
charges, taxes, expenses and liabilities, whether due or accrued or anticipated
as may be determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining assets of
the Trust or of each particular Portfolio to distributable form in cash,
Securities or other property, or any combination thereof, and distribute the
proceeds to the Shareholders of the Trust or of each particular Portfolio, in
conformity with the provisions of Section 6.2(d) hereof.
SECTION 9.2. Reorganization. The Trustees may sell, convey and transfer
all or substantially all of the assets of the Trust, or the assets belonging to
any one or more Portfolios, to another trust, partnership, association or
corporation organized under the laws of any state of the United States, or may
transfer such assets to another Portfolio of the Trust, in exchange for cash,
Shares or other Securities (including, in the case of a transfer to another
Portfolio of the Trust, Shares of such other Portfolio), or to the extent
permitted by law then in effect may merge or consolidate the Trust or any
Portfolio with any other Trust or any corporation, partnership, or association
organized under the laws of any state of the United States, all upon such terms
and conditions and for such consideration when and as authorized
<PAGE>33
by vote or written consent of a Majority of the Trustees and approved by the
affirmative vote of the holders of not less than a majority of the Shares
outstanding and entitled to vote of each Portfolio whose assets are affected by
such transaction, or by an instrument or instruments in writing without a
meeting, consented to by the holders of not less than a majority of such Shares,
and/or by such other vote of any Series as may be established by the Certificate
of Designation with respect to such Series. Following such transfer, the
Trustees shall distribute the cash, Shares or other Securities or other
consideration received in such transaction (giving due effect to the assets
belonging to and indebtedness of, and any other differences among, the various
Portfolios of which the assets have so been transferred) among the Shareholders
of the Portfolio of which the assets have been so transferred; and if all of the
assets of the Trust have been so transferred, the Trust shall be terminated.
Nothing in this Section 9.2 shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations, and to
sell, convey or transfer less than substantially all of the Trust Property or
the assets belonging to any Portfolio to such organizations or entities.
SECTION 9.3. Amendments; etc. All rights granted to the Shareholders
under this Declaration of Trust are granted subject to the reservation of the
right to amend this Declaration of Trust as herein provided, except that no
amendment shall repeal the limitations on personal liability of any Shareholder
or Trustee or the prohibition of assessment upon the Shareholders (otherwise
than as permitted under Section 6.2(g) hereof) without the express consent of
each Shareholder or Trustee involved. Subject to the foregoing, the provisions
of this Declaration of Trust (whether or not related to the rights of
Shareholders) may be amended at any time, so long as such amendment does not
adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is not
in contravention of applicable law, including the 1940 Act, by an instrument in
writing signed by a Majority of the Trustees (or by an officer of the Trust
pursuant to the vote of a Majority of the Trustees). Any amendment to this
Declaration of Trust that adversely affects the rights of all Shareholders may
be adopted at any time by an instrument in writing signed by a Majority of the
Trustees (or by an officer of the Trust pursuant to a vote of a Majority of the
Trustees) when authorized to do so by the vote in accordance with Section 7.1
hereof of Shareholders holding a majority of all the Shares outstanding and
entitled to vote, without regard to Series, or if said amendment adversely
affects the rights of the Shareholders of less than all of the Portfolios, by
the vote of the holders of a majority of all the Shares entitled to vote of each
Portfolio so affected. Subject to the foregoing, any such amendment shall be
effective when the instrument containing the terms thereof and a certificate
(which may be a part of such instrument) to the effect that such amendment has
been duly adopted, and setting forth the circumstances thereof, shall have been
executed and acknowledged by a Trustee or officer of the Trust.
SECTION 9.4. Filing of Copies of Declaration and Amendments. The
original or a copy of this Declaration and of each amendment hereto (including
each Certificate of Designation and Certificate of Termination), shall be kept
at the office of the Trust where it may be inspected by any Shareholder, and one
copy of each such instrument shall be filed with the Secretary of The
Commonwealth of Massachusetts, as well as with any other governmental office
where such filing may from time to time be required by the laws of
Massachusetts, but
<PAGE>34
such filing shall not be a prerequisite to the effectiveness of this Declaration
or of any such amendment. A restated Declaration, integrating into a single
instrument all of the provisions of this Declaration which are then in effect
and operative, may be executed from time to time by a Majority of the Trustees
and shall, upon filing with the Secretary of The Commonwealth of Massachusetts,
be conclusive evidence of all amendments contained therein and may thereafter be
referred to in lieu of the original Declaration and the various amendments
thereto.
ARTICLE 10.
-----------
MISCELLANEOUS
-------------
SECTION 10.1. Governing Law. This Declaration of Trust is executed and
delivered in The Commonwealth of Massachusetts and with reference to the laws
thereof, and the rights of all parties and the construction and effect of every
provision hereof shall be subject to and construed according to the laws of said
Commonwealth.
SECTION 10.2. Counterparts. This Declaration of Trust and any
amendment thereto may be simultaneously executed in several counterparts, each
of which so executed shall be deemed to be an original, and such counterparts,
together, shall constitute but one and the same instrument, which shall be
sufficiently evidenced by any such original counterpart.
SECTION 10.3. Reliance by Third Parties. Any certificate executed by
an individual who, according to the records in the office of the Secretary of
The Commonwealth of Massachusetts appears to be a Trustee hereunder, certifying
to: (a) the number or identity of Trustees or Shareholders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of any
vote passed as a meeting of Trustees or Shareholders, (d) the fact that the
number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration of Trust, (e)
the form of any Bylaw adopted, or the identity of any officers elected, by the
Trustees, or (f) the existence or non-existence of any fact or facts which in
any manner relate to the affairs of the Trust, shall be conclusive evidence as
to the matters so certified in favor of any Person dealing with the Trustees, or
any of them, and the successors of such Person.
SECTION 10.4. References; Headings. The masculine gender shall include
the feminine and neuter genders. Headings are placed herein for convenience of
reference only and shall not be taken as a part of this Declaration or control
or affect the meaning, construction or effect hereof.
SECTION 10.5. Use of the Name "Warburg, Pincus". Warburg, Pincus
Counsellors, Inc. ("WPCI") has consented to the use by the Trust of the
identifying name "Warburg, Pincus" which is a property right of WPCI. The Trust
will only use the name "Warburg, Pincus" as a component of its name and for no
other purpose, and will not purport to grant to any third party the right to use
the name "Warburg, Pincus" for any purpose. WPCI or any corporate affiliate of
WPCI may use or grant to others the right to use the name "Warburg, Pincus" as
all or a portion of a corporate or business name or for any commercial purpose,
<PAGE>35
including a grant of such right to any other investment company. At the request
of WPCI, the Trust will take such action as may be required to provide its
consent to the use of such name by WPCI, or any corporate affiliate of WPCI, or
by any Person to whom WPCI or an affiliate of WPCI shall have granted the right
to the use of the name "Warburg, Pincus". Upon the termination of any investment
advisory or management agreement into which WPCI and the Trust may enter, the
Trust shall, upon request by WPCI, cease to use the name "Warburg, Pincus" as a
component of its name, and shall not use such name or initials as a part of its
name or for any other commercial purpose, and shall cause its officers and
Trustees to take any and all actions which WPCI may request to effect the
foregoing and to reconvey to WPCI or such corporate affiliate any and all rights
to such name.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
seal, for himself and his assigns, and has thereby accepted the Trusteeship as
the Initial Trustee of Warburg, Pincus Trust II hereby granted and agreed to the
provisions hereof, all as of the day and year first above written.
/s/ Bryan G. Tyson
_________________________________
Bryan G. Tyson
The undersigned Settlor of Warburg, Pincus Trust II hereby accepts,
approves and authorizes the foregoing Agreement and Declaration of Trust of
Warburg, Pincus Trust II.
/s/ Raymond P. Czwakiel
________________________________
Raymond P. Czwakiel
<PAGE>40
ACKNOWLEDGMENTS
---------------
M A S S A C H U S E T T S
Suffolk, ss.: December 16, 1996
Then personally appeared the above-named Bryan G. Tyson and
acknowledged the foregoing instrument to be his free act and deed.
Before me
/s/ Rosalind Karinsky
Notary Public
My commission expires: 1/16/98
M A S S A C H U S E T T S
Suffolk, ss.: December 16, 1996
Then personally appeared the above-named Raymond P. Czwakiel and
acknowledged the foregoing instrument to be his free act and deed.
Before me
/s/ Rosalind Kaninsky
Notary Public
My commission expires: 1/16/98
<PAGE>1
WARBURG, PINCUS TRUST II
BYLAWS
These Articles are the Bylaws of Warburg, Pincus Trust II, a trust
with transferable shares established under the laws of The Commonwealth of
Massachusetts (the "Trust"), pursuant to an Agreement and Declaration of Trust
of the Trust (the "Declaration") made the 16th day of December, 1996, and filed
in the office of the Secretary of the Commonwealth. These Bylaws have been
adopted by the Trustees pursuant to the authority granted by Section 3.1 of the
Declaration.
All words and terms capitalized in these Bylaws, unless otherwise
defined herein, shall have the same meanings as they have in the Declaration.
ARTICLE 1.
----------
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
---------------------------------------
SECTION 1.1. Meetings. A meeting of the Shareholders of the Trust
shall be held whenever called by the Trustees and whenever election of a Trustee
or Trustees by Shareholders is required by the provisions of the 1940 Act.
Meetings of Shareholders shall also be called by the Trustees when requested in
writing by Shareholders holding at least ten percent (10%) of the Shares then
outstanding for the purpose of voting upon removal of any Trustee, or if the
Trustees shall fail to call or give notice of any such meeting of Shareholders
for a period of thirty (30) days after such application, then Shareholders
holding at least ten percent (10%) of the Shares then outstanding may call and
give notice of such meeting. Notice of Shareholders' meetings shall be given as
provided in the Declaration.
SECTION 1.2. Presiding Officer; Secretary. The Trustees present at any
Shareholders' meeting shall elect one of their number as chairman of the
meeting. Unless otherwise provided for by the Trustees, the Secretary of the
Trust shall be the secretary of all meetings of Shareholders and shall record
the minutes thereof.
SECTION 1.3. Authority of Chairman of Meeting to Interpret Declaration
and Bylaws. At any Shareholders' meeting the chairman of the meeting shall be
empowered to determine the construction or interpretation of the Declaration or
these Bylaws, or any part thereof or hereof, and his ruling shall be final.
SECTION 1.4. Voting: Quorum. At each meeting of Shareholders, except
as otherwise provided by the Declaration, every holder of record of Shares
entitled to vote shall be
<PAGE>2
entitled to a number of votes equal to the number of Shares standing in his name
on the Share register of the Trust. Shareholders may vote by proxy and the form
of any such proxy may be prescribed from time to time by the Trustees. A quorum
shall exist if the holders of a majority of the outstanding Shares of the Trust
entitled to vote without regard to Series are present in person or by proxy, but
any lesser number shall be sufficient for adjournments. At all meetings of the
Shareholders, votes shall be taken by ballot for all matters which may be
binding upon the Trustees pursuant to Section 7.1 of the Declaration. On other
matters, votes of Shareholders need not be taken by ballot unless otherwise
provided for by the Declaration or by vote of the Trustees, or as required by
the 1940 Act, but the chairman of the meeting may in his discretion authorize
any matter to be voted upon by ballot.
SECTION 1.5. Inspectors. At any meeting of Shareholders, the chairman
of the meeting may appoint one or more Inspectors of Election or Balloting to
supervise the voting at such meeting or any adjournment thereof. If Inspectors
are not so appointed, the chairman of the meeting may, and on the request of any
Shareholder present or represented and entitled to vote shall, appoint one or
more Inspectors for such purpose. Each Inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of Inspector of Election or Balloting, as the case may be, at such
meeting with strict impartiality and according to the best of his ability. If
appointed, Inspectors shall take charge of the polls and, when the vote is
completed, shall make a certificate of the result of the vote taken and of such
other facts as may be required by law.
SECTION 1.6. Shareholders' Action in Writing. Nothing in this Article
I shall limit the power of the Shareholders to take any action by means of
written instruments without a meeting, as permitted by Section 7.6 of the
Declaration.
ARTICLE 2.
----------
TRUSTEES AND TRUSTEES' MEETINGS
-------------------------------
SECTION 2.1. Number of Trustees. There shall initially be one (1)
Trustee, and the number of Trustees shall thereafter be such number as from time
to time shall be fixed by a vote adopted by a Majority of the Trustees.
SECTION 2.2. Regular Meetings of Trustees. Regular meetings of the
Trustees may be held without call or notice at such places and at such times as
the Trustees may from time to time determine; provided, that notice of such
determination, and of the time, place and purposes of the first regular meeting
thereafter, shall be given to each absent Trustee in accordance with Section 2.4
hereof.
<PAGE>3
SECTION 2.3. Special Meetings of Trustees. Special meetings of the
Trustees may be held at any time and at any place when called by the President
or the Treasurer or by two (2) or more Trustees, or if there shall be fewer than
three (3) Trustees, by any Trustee; provided, that notice of the time, place and
purposes thereof is given to each Trustee in accordance with Section 2.4 hereof
by the Secretary or an Assistant Secretary or by the officer or the Trustees
calling the meeting.
SECTION 2.4. Notice of Meetings. Notice of any regular or special
meeting of the Trustees shall be sufficient if given in writing to each Trustee,
and if sent by mail at least five (5) days, or by telegram, Federal Express or
other similar delivery service at least twenty-four (24) hours before the
meeting, addressed to his usual or last known business or residence address, or
if delivered to him in person at least twenty-four (24) hours before the
meeting. Notice of a special meeting need not be given to any Trustee who was
present at an earlier meeting, not more than thirty-one (31) days prior to the
subsequent meeting, at which the subsequent meeting was called. Notice of a
meeting may be waived by any Trustee by written waiver of notice, executed by
him before or after the meeting, and such waiver shall be filed with the records
of the meeting. Attendance by a Trustee at a meeting shall constitute a waiver
of notice, except where a Trustee attends a meeting for the purpose of
protesting prior thereto or at its commencement the lack of notice.
SECTION 2.5. Quorum; Presiding Officer. At any meeting of the
Trustees, a Majority of the Trustees shall constitute a quorum. Any meeting may
be adjourned from time to time by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice. Unless the Trustees have elected otherwise,
either generally or in a particular case, the Trustees present at each meeting
shall elect one of their number as chairman of such meeting.
SECTION 2.6. Participation by Telephone. One or more of the Trustees
may participate in a meeting thereof or of any Committee of the Trustees by
means of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
SECTION 2.7. Location of Meetings. Trustees' meetings may be held at
any place within or without Massachusetts.
SECTION 2.8. Votes. Voting at Trustees' meetings may be conducted
orally, by show of hands or, if requested by any Trustee, by written ballot. The
results of all voting shall be recorded by the Secretary in the minute book.
<PAGE>4
SECTION 2.9. Rulings of Chairman. All other rules of conduct adopted
and used at any Trustees' meeting shall be determined by the chairman of such
meeting, whose ruling on all procedural matters shall be final.
SECTION 2.10. Trustees' Action in Writing. Nothing in this Article 2
shall limit the power of the Trustees to take action by means of a written
instrument without a meeting, as provided in Section 4.2 of the Declaration.
SECTION 2.11. Resignations. Any Trustee may resign at any time by
written instrument signed by him and delivered to the President or the Secretary
or to a meeting of the Trustees. Such resignation shall be effective upon
receipt unless specified to be effective at some other time.
ARTICLE 3.
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OFFICERS
--------
SECTION 3.1. Officers of the Trust. The officers of the Trust shall
consist of a President, a Treasurer and a Secretary, and may include one or more
Vice Presidents, Assistant Treasurers and Assistant Secretaries, and such other
officers as the Trustees may designate. Any person may hold more than one
office.
SECTION 3.2. Time and Terms of Election. The President, the Treasurer
and the Secretary shall be elected by the Trustees at their first meeting and
shall hold office until their successors shall have been duly elected and
qualified, and may be removed at any meeting by the affirmative vote of a
Majority of the Trustees. All other officers of the Trust may be elected or
appointed at any meeting of the Trustees. Such officers shall hold office for
any term, or indefinitely, as determined by the Trustees, and shall be subject
to removal, with or without cause, at any time by the Trustees.
SECTION 3.3. Resignation and Removal. Any officer may resign at any
time by giving written notice to the Trustees. Such resignation shall take
effect at the time specified therein, and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
If the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise, the
Trustees may choose a successor, who shall hold office for the unexpired term in
respect of which such vacancy occurred. Except to the extent expressly provided
in a written agreement with the Trust, no officer resigning or removed shall
have any right to any compensation for any period following such resignation or
removal, or any right to damage on account of such removal.
<PAGE>5
SECTION 3.4. Fidelity Bond. The Trustees may, in their discretion,
direct any officer appointed by them to furnish at the expense of the Trust a
fidelity bond approved by the Trustees, in such amount as the Trustees may
prescribe.
SECTION 3.5. President. Unless the Trustees otherwise provide, the
President shall preside at all meetings of the Shareholders and of the Trustees.
The President, subject to the supervision of the Trustees, shall have general
charge and supervision of the business, property, affairs and personnel of the
Trust and such other powers and duties as the Trustees may prescribe.
SECTION 3.6. Vice Presidents. In the absence or disability of the
President, the Vice President or, if there shall be more than one, the Vice
Presidents in the order of their seniority or as otherwise designated by the
Trustees, shall exercise all of the powers and duties of the President. The Vice
Presidents shall have the power to execute bonds, notes, mortgages and other
contracts, agreements and instruments in the name of the Trust, and shall do and
perform such other duties as the Trustees or the President shall direct.
SECTION 3.7. Treasurer and Assistant Treasurers. The Treasurer shall
be the chief financial officer of the Trust, and shall have the custody of the
Trust's funds and Securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys, and other valuable effects in the name and to the credit of the Trust,
in such depositories as may be designated by the Trustees, taking proper
vouchers for such disbursements, shall have such other duties and powers as may
be prescribed from time to time by the Trustees, and shall render to the
Trustees, whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Trust. If no Controller is
elected, the Treasurer shall also have the duties and powers of the Controller,
as provided in these Bylaws. Any Assistant Treasurer shall have such duties and
powers as shall be prescribed from time to time by the Trustees or the
Treasurer, and shall be responsible to and shall report to the Treasurer. In the
absence or disability of the Treasurer, the Assistant Treasurer or, if there
shall be more than one, the Assistant Treasurers in the order of their seniority
or as otherwise designated by the Trustees shall have the powers and duties of
the Treasurer.
SECTION 3.8. Chief Accounting Officer and Assistant Accounting
Officers. If a Chief Accounting Officer is elected, he shall be the chief
accounting officer of the Trust and shall be in charge of its books of account
and accounting records and of its accounting procedures, and shall have such
duties and powers as are commonly incident to the office of a controller, and
such other duties and powers as may be prescribed from time to time by the
Trustees. The Controller shall be responsible to
<PAGE>6
and shall report to the Trustees, but in the ordinary conduct of the Trust's
business, shall be under the supervision of the Treasurer. Any Assistant
Accounting Officer shall have such duties and powers as shall be prescribed from
time to time by the Trustees or the Chief Accounting Officer, and shall be
responsible to and shall report to the Chief Accounting Officer. In the absence
or disability of the Chief Accounting Officer, the Assistant Accounting Officer
or, if there shall be more than one, the Assistant Accounting Officers in the
order of their seniority or as otherwise designated by the Trustees shall have
the powers and duties of the Chief Accounting Officer.
SECTION 3.9. Secretary and Assistant Secretaries. The Secretary shall,
if and to the extent requested by the Trustees, attend all meetings of the
Trustees, any Committee of the Trustees and/or the Shareholders and record all
votes and the minutes of proceedings in a book to be kept for that purpose,
shall give or cause to be given notice of all meetings of the Trustees, any
Committee of the Trustees, and of the Shareholders and shall perform such other
duties as may be prescribed by the Trustees. The Secretary, or in his absence
any Assistant Secretary, shall affix the Trust's seal to any instrument
requiring it, and when so affixed, it shall be attested by the signature of the
Secretary or an Assistant Secretary. The Secretary shall be the custodian of the
Share records and all other books, records and papers of the Trust (other than
financial) and shall see that all books, reports, statements, certificates and
other documents and records required by law are properly kept and filed. In the
absence or disability of the Secretary, the Assistant Secretary or, if there
shall be more than one, the Assistant Secretaries in the order of their
seniority or as otherwise designated by the Trustees shall have the powers and
duties of the Secretary.
SECTION 3.10. Substitutions. In case of the absence or disability of
any officer of the Trust, or for any other reason that the Trustees may deem
sufficient, the Trustees may delegate for the time being the powers or duties,
or any of them, of such officer to any other officer, or to any Trustee.
SECTION 3.11. Execution of Deeds, etc. Except as the Trustees may
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Trust shall be signed or endorsed
on behalf of the Trust by the President, one of the Vice Presidents or the
Treasurer.
SECTION 3.12. Power to Vote Securities. Unless otherwise ordered by
the Trustees, the Treasurer and the Secretary each shall have full power and
authority on behalf of the Trust to give proxies for and/or to attend and to act
and to vote at any meeting of stockholders of any corporation in which the Trust
may hold stock, and at any such meeting the Treasurer or the
<PAGE>7
Secretary, as the case may be, his proxy shall possess and may exercise any and
all rights and powers incident to the ownership of such stock which, as the
owner thereof, the Trust might have possessed and exercised if present. The
Trustees, by resolution from time to time, or, in the absence thereof, either
the Treasurer or the Secretary, may confer like powers upon any other person or
persons as attorneys and proxies of the Trust.
ARTICLE 4.
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COMMITTEES
----------
SECTION 4.1. Power of Trustees to Designate Committees. The Trustees,
by vote of a Majority of the Trustees, may elect from their number an Executive
Committee and any other Committees and may delegate thereto some or all of their
powers except those which by law, by the Declaration or by these Bylaws may not
be delegated; provided, that the Executive Committee shall not be empowered to
elect the President, the Treasurer or the Secretary, to amend the Bylaws, to
exercise the powers of the Trustees under this Section 4.1 or under Section 4.3
hereof, or to perform any act for which the action of a Majority of the Trustees
is required by law, by the Declaration or by these Bylaws. The members of any
such Committee shall serve at the pleasure of the Trustees.
SECTION 4.2. Rules for Conduct of Committee Affairs. Except as
otherwise provided by the Trustees, each Committee elected or appointed pursuant
to this Article 4 may adopt such standing rules and regulations for the conduct
of its affairs as it may deem desirable, subject to review and approval of such
rules and regulations by the Trustees at the next succeeding meeting of the
Trustees, but in the absence of any such action or any contrary provisions by
the Trustees, the business of each Committee shall be conducted, so far as
practicable, in the same manner as provided herein and in the Declaration for
the Trustees.
SECTION 4.3. Trustees May Alter, Abolish, etc., Committees. The
Trustees may at any time alter or abolish any Committee, change the membership
of any Committee, or revoke, rescind or modify any action of any Committee or
the authority of any Committee with respect to any matter or class of matters;
provided, that no such action shall impair the rights of any third parties.
SECTION 4.4. Minutes; Review by Trustees. Any Committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees.
<PAGE>8
ARTICLE 5.
----------
SEAL
----
The seal of the Trust shall consist of a flat-faced circular die with
the word "Massachusetts", together with the name of the Trust, the words "Trust
Seal", and the year of its organization cut or engraved thereon, but, unless
otherwise required by the Trustees, the seal shall not be necessary to be placed
on, and its absence shall not impair the validity of, any document instrument or
other paper executed and delivered by or on behalf of the Trust.
ARTICLE 6.
----------
SHARES
------
SECTION 6.1. Issuance of Shares. The Trustees may issue Shares of any
or all Series either in certificated or uncertificated form, they may issue
certificates to the holders of Shares of a Series which was originally issued in
uncertificated form, and if they have issued Shares of any Series in
certificated form, they may at any time discontinue the issuance of Share
certificates for such Series and may, by written notice to such Shareholders of
such Series require the surrender of their Share certificates to the Trust for
cancellation, which surrender and cancellation shall not affect the ownership of
Shares for such Series.
SECTION 6.2. Uncertificated Shares. For any Series of Shares for which
the Trustees issue Shares without certificates, the Trust or the Transfer Agent
may either issue receipts therefor or may keep accounts upon the books of the
Trust for the record holders of such Shares, who shall in either case be deemed,
for all purposes hereunder, to be the holders of such Shares as if they had
received certificates therefor and shall be held to have expressly assented and
agreed to the terms hereof and of the Declaration.
SECTION 6.3. Share Certificates. For any Series of Shares for which
the Trustees shall issue Share certificates, each Shareholder of such Series
shall be entitled to a certificate stating the number of Shares owned by him in
such form as shall be prescribed from time to time by the Trustees. Such
certificate shall be signed by the President or a Vice-President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Trust. Such signatures may be facsimiles if the certificate is
countersigned by a Transfer Agent, or by a Registrar, other than a Trustee,
officer or employee of the Trust. In case any officer who has signed or whose
facsimile signature has been placed on such certificate shall cease to be such
officer before such certificate is issued, it may be issued by the Trust with
the same effect as if he were such officer at the time of its issue.
<PAGE>9
SECTION 6.4. Lost, Stolen, etc., Certificates. If any certificate for
certificated Shares shall be lost, stolen, destroyed or mutilated, the Trustees
may authorize the issuance of a new certificate of the same tenor and for the
same number of Shares in lieu thereof. The Trustees shall require the surrender
of any mutilated certificate in respect of which a new certificate is issued,
and may, in their discretion, before the issuance of a new certificate, require
the owner of a lost, stolen or destroyed certificate, or the owner's legal
representative, to make an affidavit or affirmation setting forth such facts as
to the loss, theft or destruction as they deem necessary, and to give the Trust
a bond in such reasonable sum as the Trustees direct, in order to indemnify the
Trust.
SECTION 6.5 Record Transfer of Pledged Shares. A pledgee of Shares
pledged as collateral security shall be entitled to a new certificate in his
name as pledgee, in the case of certificated Shares, or to be registered as the
holder in pledge of such Shares in the case of uncertificated Shares; provided,
that the instrument of pledge substantially describes the debt or duty that is
intended to be secured thereby. Any such new certificate shall express on its
face that it is held as collateral security, and the name of the pledgor shall
be stated thereon, and any such registration of uncertificated Shares shall be
in a form which indicates that the registered holder holds such Shares in
pledge. After such issue or registration, and unless and until such pledge is
released, such pledgee and his successors and assigns shall alone be entitled to
the rights of a Shareholder, and entitled to vote such Shares.
ARTICLE 7.
----------
CUSTODIAN
---------
The Trust shall at all times employ a bank or trust company having a
capital, surplus and undivided profits of at least Two Million Dollars
($2,000,000) as Custodian of the capital assets of the Trust. The Custodian
shall be compensated for its services by the Trust upon such basis as shall be
agreed upon from time to time between the Trust and the Custodian.
ARTICLE 8.
----------
AMENDMENTS
----------
SECTION 8.1. Bylaws Subject to Amendment. These Bylaws may be altered,
amended or repealed, in whole or in part, at any time by vote of the holders of
a majority of the Shares (or whenever there shall be more than one Series of
Shares, of the holders of a majority of the Shares of each Series) issued,
outstanding and entitled to vote. The Trustees, by vote of a Majority of the
Trustees, may alter, amend or repeal these Bylaws, in whole or in part,
including Bylaws adopted by the Shareholders, except with
<PAGE>10
respect to any provision hereof which by law, the Declaration or these Bylaws
requires action by the Shareholders. Bylaws adopted by the Trustees may be
altered, amended or repealed by the Shareholders.
SECTION 8.2. Notice of Proposal to Amend Bylaws Required. No proposal
to amend or repeal these Bylaws or to adopt new Bylaws shall be acted upon at a
meeting unless either (i) such proposal is stated in the notice or in the waiver
of notice, as the case may be, of the meeting of the Trustees or Shareholders at
which such action is taken, or (ii) all of the Trustees or Shareholders, as the
case may be, are present at such meeting and all agree to consider such proposal
without protesting the lack of notice.
