<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on April 7, 1998
Securities Act File No. 333-19175
Investment Company Act File No. 811-07999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 2 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 3 [x]
(Check appropriate box or boxes)
Warburg, Pincus Trust II
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(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
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(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: APRIL 30, 1998
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on April 30, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
----------------------------------
TITLE OF SECURITIES BEING REGISTERED:
SHARES OF BENEFICIAL INTEREST, PAR VALUE $.001
<PAGE> 3
WARBURG, PINCUS TRUST II
FORM N-1A
CROSS REFERENCE SHEET
Part A
Item No. Prospectus Heading
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1. Cover Page............................. Cover Page
2. Synopsis............................... The Portfolios' 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; Management of the
Portfolios; Net Asset Value
8. Redemption or Repurchase............... How to Purchase and Redeem
Shares
9. Legal Proceedings...................... Not Applicable
<PAGE> 4
Part B Heading for the Statement of
Item No. Additional Information
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10. Cover Page.............................. Cover Page
11. Table of Contents....................... Contents
12. General Information and History......... Management of the Trust
13. Investment Objectives and Policies...... Investment Objectives;
Investment 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
Prospectus-"Portfolio
Transactions and Turnover
Rate"
18. Capital Stock and Other Securities...... Management of the Trust--
Organization of the Trust;
See Prospectus--
"General Information"
19. Purchase, Redemption and Pricing of
Securities Being Offered................ Additional Purchase and
Redemption Information; See
Prospectus--"How to Purchase
and Redeem Shares"; "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.................... Report of Independent
Accountants; Financial
Statements
Part C
<PAGE> 5
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> 6
PROSPECTUS
April 30, 1998
WARBURG PINCUS TRUST II
---------------- 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.
[WARBURG PINCUS LOGO]
<PAGE> 7
PROSPECTUS April 30, 1998
Warburg Pincus Trust II (the "Trust") is an open-end management investment
company that currently offers two investment funds, one of which is offered
pursuant to this Prospectus (the "Portfolios"):
The FIXED INCOME PORTFOLIO seeks total return consistent with prudent investment
management.
Shares of the Portfolio are not available directly to individual investors but
may be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. The
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolio that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about the Portfolio has been filed with the Securities and Exchange Commission
(the "SEC"). The SEC maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Portfolio. The Statement of Additional
Information is also available upon request and without charge by calling the
Trust at (800) 369-2728. Warburg Pincus Funds maintains a Web site at
www.warburg.com. The Statement of Additional Information, as amended or
supplemented from time to time, bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR
ENDORSED BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE PORTFOLIO INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE> 8
THE PORTFOLIO'S EXPENSES
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<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 0
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees........................................... .32%
12b-1 Fees................................................ 0
Other Expenses............................................ .67%
===
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)*................................ .99%
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 year.................................................... $10
3 years................................................... $32
</TABLE>
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* Annual Portfolio Operating Expenses are based upon annualized estimates of
expenses for the fiscal year ending December 31, 1998, net of any fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Management Fees would equal .50%. Other Expenses would equal 12.54% and Total
Portfolio Operating Expenses would equal 13.04%. The investment adviser and
co-administrator have undertaken to limit the Portfolio's Total Portfolio
Operating Expenses to the limits shown in the table above through December 31,
1999.
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The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a shareholder of the Portfolio. THE TABLE DOES NOT
REFLECT ADDITIONAL CHARGES AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE
VARIABLE CONTRACTS OR PLANS; SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE
PROSPECTUS OF THE SPONSORING PARTICIPATING INSURANCE COMPANY SEPARATE ACCOUNT OR
IN THE PLAN DOCUMENTS OR OTHER INFORMATIONAL MATERIALS SUPPLIED BY PLAN
SPONSORS. The Example should not be considered a representation of past or
future expenses; actual Portfolio expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, the Portfolio's
actual performance will vary and may result in a return greater or less than 5%.
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FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information for the period March 31, 1997 (commencement of
operations) through December 31, 1997 has been derived from information audited
by Coopers & Lybrand L.L.P., independent accountants, whose report dated
February 9, 1998 is incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Portfolio is
contained in the Trust's annual report, dated December 31, 1997, copies of which
may be obtained without charge by calling the Trust at (800) 369-2728.
<TABLE>
<CAPTION>
For the Period
March 31, 1997
(Commencement of
Operations) through
December 31, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
-----------
Income from Investment Operations:
Net Investment Income..................................... 0.44
Net Gain on Securities and Foreign Currency Related Items
(both realized and unrealized).......................... 0.45
-----------
Total from Investment Operations.......................... 0.89
-----------
Less Distributions:
Dividends from Net Investment Income...................... (0.41)
Distributions in excess of Net Investment Income.......... (0.31)
Distributions from Realized Gains......................... (0.20)
-----------
Total Distributions....................................... (0.92)
NET ASSET VALUE, END OF PERIOD.............................. $ 9.97
===========
Total Return................................................ 8.96%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $599
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 0.99%@*
Net Investment Income..................................... 5.29%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements............................... 12.05%*
Portfolio Turnover Rate..................................... 138.28%+
Average Commission Rate..................................... $0.0600#
</TABLE>
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+ Non-Annualized.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
* Annualized.
# Comprised by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fixed Income Portfolio seeks total return consistent with prudent
investment management. The Portfolio's objective is a fundamental policy and may
not be amended without first obtaining the approval of a majority of the
outstanding shares of the Portfolio. Any investment involves risk and,
therefore, there can be no assurance that the Portfolio will achieve its
investment objective. See "Portfolio Investments" and "Certain Investment
Strategies" for descriptions of certain types of investments the Portfolio may
make.
The Portfolio is a non-diversified 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 Asset Management, Inc., the Portfolio's 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.
PORTFOLIO INVESTMENTS
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MONEY MARKET OBLIGATIONS. The 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
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<PAGE> 11
or, if unrated, deemed by Warburg to be high quality investments; commercial
paper rated no lower than A-2 by Standard & Poor's Ratings Services ("S&P"), or
Prime-2 by Moody's Investors Service, Inc. ("Moody's") or the equivalent from
another major rating service or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating categories;
obligations of foreign governments, their agencies or instrumentalities; and
repurchase agreements with respect to portfolio securities.
For temporary defensive purposes, the Portfolio may invest without limit in
short-term money market obligations.
Repurchase Agreements. Under normal market conditions, the 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, the Portfolio
would acquire any underlying security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Portfolio to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Portfolio's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Portfolio bears a risk of loss in
the event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying securities during the
period while the Portfolio seeks to assert this right. Warburg, acting under the
supervision of the Trust's Board of Trustees (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which the Portfolio
enters into repurchase agreements to evaluate this risk. A repurchase agreement
is considered to be a loan under the 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, the Portfolio may invest up to 5% of its assets in securities of
money market mutual funds that are unaffiliated with the Portfolio or Warburg. 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, the Portfolio will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Portfolio's administration fees and other expenses with respect
to assets so invested.
5
<PAGE> 12
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Portfolio
may invest include direct obligations of the U.S. Treasury and obligations
issued by U.S. government agencies and instrumentalities. Included among direct
obligations of the United States are Treasury Bills, Treasury Notes and Treasury
Bonds, which differ principally in 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 Portfolio may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock.
STRUCTURED SECURITIES. The Portfolio 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 Portfolio 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 Portfolio's yield may be affected
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<PAGE> 13
by reinvestment of prepayments at higher or lower rates than the original
investment. Prepayments may tend to increase due to refinancing of mortgages as
interest rates decline. In addition, like other debt securities, the 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 the 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. The Portfolio may invest in assignments of and
participations in loans issued by banks and other financial institutions.
When the 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 the 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 the Portfolio having a
contractual relationship with the lending financial institution, not the
borrower. The 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, the
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, the Portfolio, in 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.
7
<PAGE> 14
The Portfolio may have difficulty disposing of assignments and participations
because there is no liquid market for such securities. The lack of a liquid
secondary market will have an adverse impact on the value of such securities and
on the 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 the Portfolio to assign a
value to these securities for purposes of valuing the Portfolio's portfolio and
calculating its net asset value.
WARRANTS. The Portfolio may invest up to 10% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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For certain additional risks related to the Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
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 the 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 Portfolio 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. The Portfolio is classified as non-diversified under
the 1940 Act, which means that the Portfolio is not limited by the 1940 Act in
the proportion of its assets that it may invest in the obligations of a single
issuer. The Portfolio will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. Being non-diversified means
that the Portfolio may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the
Portfolio assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a
8
<PAGE> 15
result of changes in the financial condition or in the market's assessment of
the issuers.
BELOW INVESTMENT GRADE SECURITIES. There are certain risk factors associated
with below investment grade securities. A security will be considered investment
grade if it is rated at the time of purchase within the four highest grades
assigned by Moody's or S&P. Securities rated in the fourth highest grade have
speculative characteristics, and securities rated B have speculative elements
and a greater vulnerability to default than higher-rated securities. Investors
should be aware that ratings are relative and subjective and are not absolute
standards of quality. Subsequent to its purchase by the 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 Portfolio may invest in securities rated as low as C by Moody's or D by
S&P. The 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.
Below investment grade and comparable unrated securities (commonly referred to
as "junk bonds") (i) will likely have some quality and protective
characteristics that, in the judgment of the 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, below investment grade securities
generally present a higher degree of credit risk. The risk of loss due to
default by such issuers is significantly greater because below investment grade
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, the Portfolio may have
difficulty disposing of certain of these securities because there may be a thin
trading market. The lack of a liquid secondary market for certain securities may
have an adverse impact on the Portfolio's ability to dispose of particular
issues and may make it more difficult for the Portfolio to obtain accurate
market quotations for purposes of valuing the Portfolio and calculating its
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.
9
<PAGE> 16
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolio may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to the Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolio to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A Securities. The Board will carefully monitor any investments by the
Portfolio in Rule 144A Securities. The Board may adopt guidelines and delegate
to Warburg the daily function of determining and monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and the
Portfolio may take longer to liquidate these positions than would be the case
for publicly traded securities. Although these securities may be resold in
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. The Portfolio's investment in illiquid
securities is subject to the risk that should the Portfolio desire to sell any
of these securities when a ready buyer is not available at a price that is
deemed to be representative of their value, the value of the Portfolio's net
assets could be adversely affected.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment but increases an
investor's risk in the event of a decline in the value of the underlying
security and can result in a complete loss of the amount invested in the
warrant. In addition, the price of a warrant tends to be more volatile than, and
may not correlate exactly to, the price of the underlying security. If the
market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolio and its
shareholders by Warburg and certain of its affiliates (the "Warburg Service
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<PAGE> 17
Providers") and the Portfolio's other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolio nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolio's
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolio's foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Portfolio's other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolio's other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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The Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the Portfolio. The Portfolio
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. This investment
approach and use of certain of the investment strategies described below may
result in a high portfolio turnover rate. High portfolio turnover rates (100% or
more) may result in higher dealer mark-ups or underwriting commissions as well
as other transaction costs, including correspondingly higher brokerage
commissions. In addition, short-term gains realized from portfolio 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 the Portfolio
directly from the issuer or from an underwriter acting as a principal. Other
purchases and sales usually are placed by the Portfolio with those dealers which
Warburg determines offer the best price and execution. The purchase price paid
by the Portfolio to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and
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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 the
Portfolio are placed by Warburg with broker-dealers that it selects, including
Counsellors Securities Inc., the Portfolio's distributor ("Counsellors
Securities"). The Portfolio may utilize Counsellors Securities in connection
with a purchase or sale of securities when Warburg believes that the charge for
the transaction does not exceed usual and customary levels and when doing so is
consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
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Although there is no intention of doing so during the coming year, the
Portfolio may lend portfolio securities. Detailed information concerning the
Portfolio's strategies and related risks is contained below and in the Statement
of Additional Information.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, the Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts, swaps and interest rate transactions. These
strategies, commonly referred to as "derivatives," may be used (i) for the
purpose of hedging against a decline in value of the Portfolio's current or
anticipated portfolio holdings, (ii) as a substitute for purchasing or selling
portfolio securities or (iii) to seek to generate income to offset expenses or
increase return. TRANSACTIONS THAT ARE NOT CONSIDERED HEDGING SHOULD BE
CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE THE PORTFOLIO'S INVESTMENT
RISK. Transaction costs and any premiums associated with these strategies, and
any losses incurred, will affect the Portfolio's net asset value and
performance. Therefore, an investment in the Portfolio may involve a greater
risk than an investment in other mutual funds that do not utilize these
strategies. The Portfolio's use of these strategies may be limited by position
and exercise limits established by securities and commodities exchanges and
other applicable regulatory authorities.
Securities Options and Index Options. The Portfolio may purchase and write
(sell) covered put and call options traded on U.S. and foreign exchanges as well
as over-the-counter ("OTC") without limit on the net asset value of the stock
and debt securities in its portfolio and will realize fees (referred to as
"premiums") for granting the rights evidenced by the options. The purchaser of a
put option on a security has the right to compel the purchase by the writer of
the underlying security, while the purchaser of a call option on a security has
the right to purchase the underlying security from the writer. In addition to
purchasing and writing options on securities, the Portfolio may also purchase
and write without limit exchange-listed and OTC put and call options on
securities indexes. A securities index measures the movement of a certain group
of securities by assigning relative values to the securities included in the
index.
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The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation a
Portfolio could realize on its investments or require the Portfolio to hold
securities it would otherwise sell.
Futures Contracts and Related Options. The 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 the Portfolio's net asset value, after taking into account unrealized profits
and unrealized losses on any such contracts. Although the Portfolio is limited
in the amount of assets that may be invested in futures transactions, there is
no overall limit on the percentage of the Portfolio's assets that may be at risk
with respect to futures activities.
Currency Exchange Transactions. The Portfolio may conduct currency exchange
transactions either (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on futures contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing and writing
exchange-traded and OTC currency options. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date at a
price set at the time of the contract. An option on a foreign currency operates
similarly to an option on a security. Risks associated with currency forward
contracts and purchasing currency options are similar to those described in this
Prospectus for futures contracts and securities index options. In addition, the
use of currency transactions could result in losses from the imposition of
foreign exchange controls, suspension of settlement or other governmental
actions or unexpected events.
Swap and Interest Rate Transactions. The Portfolio may enter into interest
rate, index and mortgage swaps and interest rate caps, floors and collars for
hedging purposes or to seek to increase total return and may enter into currency
swaps for hedging purposes. A swap transaction is an agreement
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between the Portfolio and a counterparty to act in accordance with the terms of
the swap contract. Interest rate swaps involve the exchange by the 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 the Portfolio with another party of the respective
amounts payable with respect to a notional principal amount related to one or
more indexes. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. Currency
swaps involve the exchange of cash flows on a notional amount of two or more
currencies based on their relative future values. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payment of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling the interest rate floor.
An interest rate collar is the combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates.
The 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 counterparty to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the counterparty to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable by
the Portfolio under an interest rate, index or mortgage swap and the entire
amount of the payment stream payable by the 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 Portfolio and Warburg believe
that swaps do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Portfolio's borrowing
restriction.
The Portfolio will not enter into interest rate, index, mortgage or currency
swaps, or interest rate cap, floor or collar transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either AA or A-1 or better by S&P or Aa or P-1 or better by Moody's or,
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if unrated by such rating organizations, determined to be of comparable quality
by Warburg.
Hedging Considerations. The Portfolio may engage in options, futures and
currency, swap and interest rate transactions for, among other reasons, hedging
purposes. A hedge is designed to offset a loss on a portfolio position with a
gain in the hedge position; at the same time, however, a properly correlated
hedge will result in a gain in the portfolio position being offset by a loss in
the hedge position. As a result, the use of these transactions for hedging
purposes could limit any potential gain from an increase in value of the
position hedged. In addition, the movement in the portfolio position hedged may
not be of the same magnitude as any movement in the hedge. The Portfolio will
engage in hedging transactions only when deemed advisable by Warburg, and
successful use of hedging transactions will depend on Warburg's ability to
predict correctly movements in the hedge and the hedged position and the
correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that the Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. The Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. The Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities, indexes and currencies; interest
rate, index and currency futures contracts and options on these futures
contracts; forward currency contracts; and swap and interest rate transactions.
The use of these strategies may require that the Portfolio maintain cash or
liquid securities in a segregated account with its custodian or a designated
sub-custodian to the extent the Portfolio's obligations with respect to these
strategies are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
ZERO COUPON SECURITIES. The 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
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interest on zero coupon securities is not paid on a current basis, the values of
securities of this type are subject to greater fluctuations than are the values
of securities that distribute income regularly and may be more speculative than
such other securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall. Redemption of shares of the 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, the 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. The Portfolio may
utilize up to 20% of its total assets to purchase securities on a when-issued
basis and purchase or sell securities on a delayed-delivery basis. In these
transactions, payment for and delivery of the securities occur beyond the
regular settlement dates. The Portfolio will not enter into a when-issued or
delayed-delivery transaction for the purpose of leverage, but may sell the right
to acquire a when-issued security prior to its acquisition or dispose of its
right to deliver or receive securities in a delayed-delivery transaction if
Warburg deems it advantageous to do so. The payment obligation and the interest
rate that will be received in when-issued and delayed-delivery transactions are
fixed at the time the buyer enters into the commitment. Due to fluctuations in
the value of securities purchased or sold on a when-issued or delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers. 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. The Portfolio will establish a
segregated account with its custodian consisting of cash or liquid assets in an
amount equal to the amount of its when-issued and delayed-delivery purchase
commitments, and will segregate the securities underlying commitments to sell
securities for delayed delivery.
SHORT SALES AGAINST THE BOX. The Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an equal
amount of the securities sold short or owns preferred stocks or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one "against the box", may be entered into by the Portfolio to,
for example, lock-in a sale price for a security the Portfolio does not wish to
sell immediately. The proceeds of the sale will generally be held by the broker
until the settlement date when the Portfolio delivers securities to close out
its short position. The Portfolio will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or convertible
or exchangeable preferred stocks or debt securities in connection with short
sales against the box. Not more than 10% of the Portfolio's net
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assets (taken at current value) may be held as collateral for short sales
against the box at any one time.
FOREIGN SECURITIES. The 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 Portfolio 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 Portfolio to market and foreign exchange fluctuations
brought about by such delays and due to the corresponding negative impact on the
Portfolio's liquidity, the Portfolio will avoid investing in countries that are
known to experience settlement delays which may expose the Portfolio 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 Portfolio, including the withholding of dividends. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
positions. Investment in foreign securities may also result in higher operating
expenses due to the cost of converting foreign currency into U.S. dollars, the
payment of fixed brokerage commissions on foreign exchanges, which generally are
higher than commissions on U.S. exchanges, higher valuation and communications
costs and the expense of maintaining securities with foreign custodians.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
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REITS. The 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. The
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.
MUNICIPAL OBLIGATIONS. The 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 Portfolio may invest without limit in
"Alternative Minimum Tax Bonds," which are certain bonds issued after August 7,
1986 to finance certain non-governmental activities. While the income from
Alternative Minimum Tax Bonds is exempt from regular federal income tax, it is a
tax preference item for purposes of the federal individual and corporate
"alternative minimum tax." The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments or tax
preference items. Available returns on Alternative Minimum Tax Bonds acquired by
the Portfolio may be lower than those from other Municipal Obligations acquired
by the Portfolio due to the possibility of
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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
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 Portfolio may acquire stand-by commitments with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, which is commonly known as a "put", a dealer agrees to purchase, at
the Portfolio's option, specified Municipal Obligations at a specified price.
The Portfolio may pay for stand-by commitments either separately in cash or by
paying a higher price for the securities acquired with the commitment, thus
increasing the cost of the securities and reducing the yield otherwise available
from them, and will be valued at zero in determining the Portfolio's net asset
value. A stand-by commitment is not transferable by the Portfolio, although the
Portfolio can sell the underlying Municipal Obligations to a third party at any
time. The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. The Portfolio intends to enter into stand-by commitments only with
brokers, dealers and banks that, in the opinion of Warburg, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, Warburg will periodically review relevant financial information
concerning the issuer's assets, liabilities and contingent claims. The Portfolio
will acquire stand-by commitments only in order to facilitate portfolio
liquidity and does not intend to exercise its rights under stand-by commitments
for trading purposes.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Portfolio may enter into
reverse repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio pursuant to its agreement to repurchase them at
a mutually agreed upon date, price and rate of interest.
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The Portfolio also may enter into "dollar rolls," in which the Fund sells fixed-
income securities for delivery in the current month and simultaneously contracts
to repurchase similar but not identical (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Portfolio
would forego principal and interest paid on such securities. The Portfolio would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
At the time the Portfolio enters into a reverse repurchase agreement or dollar
roll, it will establish and maintain a segregated account with an approved
custodian containing cash or liquid securities having a value not less than the
repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Portfolio's liquidity and ability to manage
its assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements and dollar rolls that are
accounted for as financings are considered to be borrowings under the 1940 Act.
INVESTMENT GUIDELINES
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The Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. The Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets in connection with
borrowings. Whenever borrowings (including reverse repurchase agreements) exceed
5% of the value of the Portfolio's total assets, the Portfolio will not make any
investments (including roll-overs). Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the Board, subject to the limitations
contained in the 1940 Act. A complete list of investment restrictions that the
Portfolio has adopted identifying additional restrictions that cannot be changed
without the approval of the majority of the Portfolio's outstanding shares is
contained in the Statement of Additional Information.
MANAGEMENT OF THE PORTFOLIO
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INVESTMENT ADVISER. The Trust employs Warburg as investment adviser to the
Portfolio. Warburg, subject to the control of the Trust's officers and the
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Board, manages the investment and reinvestment of the assets of the Portfolio in
accordance with the Portfolio's investment objective and stated investment
policies. Warburg makes investment decisions for the Portfolio and places orders
to purchase or sell securities on behalf of the Portfolio. Warburg also employs
a support staff of management personnel to provide services to the Portfolio and
furnishes the Portfolio with office space, furnishings and equipment.
For the services provided by Warburg, the Portfolio pays Warburg a fee
calculated at an annual rate of .50%, of its average daily net assets. Warburg
and the Trust's co-administrators may voluntarily waive a portion of their fees
from time to time and temporarily limit the expenses to be paid by the
Portfolio.
Warburg is a professional investment advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of February 28, 1998,
Warburg managed approximately $20.9 billion of assets, including approximately
$11.9 billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has no business
other than being a holding company of Warburg and its affiliates. Warburg's
address is 466 Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGERS. Dale C. Christensen and M. Anthony E. van Daalen have been
Co-Portfolio Managers of the Portfolio since its inception. Mr. Christensen, a
Managing Director of Warburg, has been associated with Warburg since 1989. Mr.
van Daalen, a Senior Vice President of Warburg, has been associated with Warburg
since 1992.
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 Portfolio, including responding to shareholder inquiries and providing
information on shareholder investments. Counsellors Service also performs a
variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Portfolio and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual and semiannual reports, assisting in the preparation of tax returns and
monitoring and developing compliance procedures for the Portfolio. As
compensation, the Portfolio pays Counsellors Service a fee calculated at an
annual rate of .10% of its average daily net assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation the Portfolio pays PFPC a fee calculated at an
21
<PAGE> 28
annual rate of .05% of its average daily net assets. PFPC has its principal
offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ("PNC") serves as custodian of the
U.S. assets of the Portfolio. State Street Bank and Trust Company ("State
Street") serves as custodian of the non-U.S. assets of the Portfolio. Like PFPC,
PNC is a subsidiary of PNC Bank Corp. and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103. The principal business address
of State Street is 225 Franklin Street, Boston, Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolio. It has delegated
most of its responsibilities to Boston Financial Data Services, Inc. ("BFDS"),
an affiliated service company. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolio. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may enter into agreements with
Participating Insurance Companies and Plans or their affiliates or entities that
provide services to them ("Service Organizations") to pay a fee of up to .40%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with the Portfolio. A portion of the Service Fee may be borne by
the Portfolio as a transfer agency fee. In addition, a Service Organization may
directly or indirectly pay a portion of its Service Fee to the Trust's custodian
or transfer agent for costs related to Portfolio accounts it services. The
Service Fee payable to any one Service Organization is determined based upon a
number of factors, including the nature and quality of the services provided,
the operations processing requirements of the relationship and the standardized
fee schedule of the Service Organization.
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of the
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of Portfolio shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage the Portfolio's day-
to-day operations and are directly responsible to the Board. The Board sets
22
<PAGE> 29
broad policies for the Portfolio and chooses the Trust's officers. A list of the
Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
- --------------------------------------------------------------------------------
Individual investors may not purchase or redeem shares of the Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make the Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select
the Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolio are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by the
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of the Portfolio on any day that
the Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of the Portfolio during the morning of the next business day, with
payment for purchases to follow no later than the Portfolio's pricing on the
next business day. If payment for purchases is not received by such time, the
Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to the Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of the Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
The Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its
23
<PAGE> 30
investment objective and policies, or would otherwise potentially be adversely
affected. The Portfolio may discontinue sales of its shares if management
believes that a substantial further increase in assets may adversely affect the
Portfolio's ability to achieve its investment objective. In such event, however,
it is anticipated that existing Variable Contract owners and Plan participants
would be permitted to continue to authorize investment in the Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for following instructions communicated by telephone
that it reasonably believes to be genuine. Reasonable procedures will be
employed on behalf of the Portfolio to confirm that instructions communicated by
telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Portfolio calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Portfolio's portfolio securities for the applicable period less
applicable expenses. The Portfolio declares dividends from its net investment
income annually. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Distributions of net
realized long-term and short-term capital gains are declared annually and, as a
general rule, will be distributed or paid after the end of the fiscal year in
which they are earned. Dividends and distributions will automatically be
reinvested in additional shares of the Portfolio at net asset value unless, in
the case of a Variable Contract, a Participating Insurance Company elects to
have dividends or distributions paid in cash.
TAXES. For a discussion of the tax status of a Variable Contract or Plan,
refer to the sponsoring Participating Insurance Company separate account
prospectus or Plan documents or other informational materials supplied by Plan
sponsors.
The Portfolio intends to qualify each year as a "regulated investment company"
within the meaning of the Code. The Portfolio intends to distribute all of its
net income and capital gains to its shareholders (the Variable Contracts and
Plans).
Because shares of the Portfolio may be purchased only through Variable
Contracts and Plans, it is anticipated that any income dividends or capital gain
distributions from the Portfolio are taxable, if at all, to the Participating
Insurance Companies and Plans and will be exempt from current taxation of the
Variable Contract owner or Plan participant if left to accumulate within the
Variable Contract or Plan. Generally, withdrawals from Variable Contracts or
Plans may be subject to ordinary income tax and, if made before age 59 1/2, a
10% penalty tax.
24
<PAGE> 31
The investments by the Portfolio in zero coupon securities may create special
tax consequences. Zero coupon securities do not make interest payments, although
a portion of the difference between a zero coupon security's maturity value and
its purchase price is imputed as income to the Portfolio each year even though
the Portfolio receives no cash distribution until maturity. Under the U.S.
federal tax laws applicable to mutual funds, the Portfolio 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
Portfolio.
Constructive Sales. If the Portfolio effects a short sale of securities at a
time when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Portfolio closes out the short
sale with securities other than the appreciated securities held at the time of
the short sale and if certain other conditions are satisfied. Uncertainty
regarding the tax consequences of effecting short sales may limit the extent to
which the Portfolio may effect short sales. The Portfolio's short selling
activities will not result in unrelated business taxable income to a tax-exempt
investor.
Special Tax Matters Relating to the Portfolio. The 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. The Portfolio intends to comply with
the diversification requirements currently imposed by the Internal Revenue
Service on separate accounts of insurance companies as a condition of
maintaining the tax-deferred status of Variable Contracts. See the Statement of
Additional Information for more specific information.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and on the preceding Friday or subsequent Monday when one of the holidays falls
on a Saturday or Sunday, respectively. The net asset value per share of the
Portfolio generally changes every day.
The net asset value per share of the Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange
25
<PAGE> 32
or traded in an OTC market will be valued on the basis of the closing value on
the date on which the valuation is made. Options and futures contracts will be
valued similarly. Debt obligations that mature in 60 days or less from the
valuation date are valued on the basis of amortized cost, unless the Board
determines that using this valuation method would not reflect the investments'
value. Securities, options and futures contracts for which market quotations are
not readily available and other assets will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, the Portfolio may advertise yield and average annual total
return of its shares over various periods of time. The yield refers to net
investment income generated by the Portfolio's shares over a specified thirty-
day period, which is then annualized (based on SEC guidelines). That is, the
amount of net investment income generated by the Portfolio's shares during that
thirty-day period is assumed to be generated over a 12-month period and is shown
as a percentage of the investment. The total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gain distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolio include the effect of deducting the
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of the Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing the Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that the Portfolio seeks long term appreciation
and that such return may not be representative of a Portfolio's return over a
longer market cycle. The Portfolio may also advertise its aggregate total return
figures for various periods, representing the cumulative
26
<PAGE> 33
change in value of an investment in the Portfolio for the specific period (again
reflecting changes in the 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.
A Portfolio or a Participating Insurance Company or Plan sponsor may compare
the Portfolio's performance with (i) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below; (ii) with the Lehman Brothers Intermediate
Government/Corporate Bond Index (an unmanaged index of government and corporate
bonds calculated by Lehman Brothers); or (iii) other appropriate indexes of
investment securities or with data developed by Warburg derived from such
indexes. The Portfolio or a Participating Insurance Company may also include
evaluations published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various periods of time. In addition, the
Portfolio or a Participating Insurance Company or Plan sponsor may from time to
time compare the Portfolio's expense ratio to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, the
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, the Portfolio and its portfolio managers may render periodic
updates of Portfolio investment activity, which may include discussion of
significant portfolio holdings; analysis of holdings by industry, country,
credit quality and other characteristics; and comparison and analysis of the
Portfolio with respect to relevant market and industry benchmarks. The Portfolio
may also discuss various measures of risk, including those based on statistical
or econometric analyses, the continuum of
27
<PAGE> 34
risk and return relating to different investments and the potential impact of
international securities on a portfolio otherwise composed of U.S. securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
TRUST ORGANIZATION. The Trust was organized on 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, one of which constitutes the
interests in the Portfolio. The Board may classify or reclassify any of its
shares into one or more additional series without shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of the Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. The Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
participant-directed Plans which elect to make the Portfolio an investment
option for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners and Plan
participants participating in the Portfolio may conflict. The Board will monitor
the Portfolio for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts and/or Plans to
withdraw its investments in the Portfolio. As a result, the Portfolio may be
forced to sell securities at disadvantageous prices and orderly portfolio
management could be disrupted. In addition, the Board may refuse to sell
28
<PAGE> 35
shares of the Portfolio to any Variable Contract or Plan or may suspend or
terminate the offering of shares of the Portfolio if such action is required by
law or regulatory authority or is in the best interests of the shareholders of
the Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolio, as well as certain statistical
characteristics of the Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIO'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIO, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PORTFOLIO. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
SHARES OF THE PORTFOLIO IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
29
<PAGE> 36
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Portfolio's Expenses................................. 2
Financial Highlights..................................... 3
Investment Objective and Policies........................ 4
Portfolio Investments.................................... 4
Risk Factors and Special Considerations.................. 8
Portfolio Transactions and Turnover Rate................. 11
Certain Investment Strategies............................ 12
Investment Guidelines.................................... 20
Management of the Portfolio.............................. 20
How to Purchase and Redeem Shares........................ 23
Dividends, Distributions and Taxes....................... 24
Net Asset Value.......................................... 25
Performance.............................................. 26
General Information...................................... 28
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRFIX-1-0498
<PAGE> 37
PROSPECTUS
April 30, 1998
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.
[WARBURG PINCUS LOGO]
<PAGE> 38
PROSPECTUS April 30, 1998
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"):
The FIXED INCOME PORTFOLIO seeks total return consistent with prudent investment
management.
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.
Shares of a Portfolio are not available directly to individual investors but may
be offered only to certain (i) life insurance companies ("Participating
Insurance Companies") for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance contracts (together, "Variable Contracts") and (ii) tax-qualified
pension and retirement plans ("Plans"), including participant-directed Plans
which elect to make a Portfolio an investment option for Plan participants. A
Portfolio may not be available in every state due to various insurance
regulations.
This Prospectus briefly sets forth certain information about the Portfolios that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. This Prospectus should be read in
conjunction with the prospectus of the separate account of the specific
insurance product that accompanies this Prospectus or with the Plan documents or
other informational materials supplied by Plan sponsors. Additional information
about each Portfolio has been filed with the Securities and Exchange Commission
(the "SEC"). The SEC maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Portfolios. The Statement of Additional
Information is also available upon request and without charge by calling the
Trust at (800) 369-2728. Warburg Pincus Funds maintains a Web site at
www.warburg.com. The Statement of Additional Information, as amended or
supplemented from time to time, bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR
ENDORSED BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 39
THE PORTFOLIOS' 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 Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees........................................... .32% .29%
12b-1 Fees................................................ 0 0
Other Expenses............................................ .67% .70%
=== ===
Total Portfolio Operating Expenses (after fee waivers and
expense reimbursements)*................................ .99% .99%
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 year.................................................... $10 $10
3 years................................................... $32 $32
</TABLE>
- --------------------------------------------------------------------------------
* Annual Portfolio Operating Expenses are based upon annualized estimates of
expenses for the fiscal year ending December 31, 1998, net of any fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Management Fees would equal .50% and 1.00%, Other Expenses would equal 12.54%
and 4.58%, and Total Portfolio Operating Expenses would equal 13.04% and 5.58%
for the Fixed Income and Global Fixed Income Portfolios, respectively. The
investment adviser and co-administrator have undertaken to limit each
Portfolio's Total Portfolio Operating Expenses to the limits shown in the
table above through December 31, 1999.
---------------------------
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> 40
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information for the period March 31, 1997 (commencement of
operations) through December 31, 1997 has been derived from information audited
by Coopers & Lybrand L.L.P., independent accountants, whose report dated
February 9, 1998 is incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Portfolios is
contained in the Trust's annual report, dated December 31, 1997, copies of which
may be obtained without charge by calling the Trust at (800) 369-2728.
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the Period
March 31, 1997
(Commencement of
Operations) through
December 31, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
-----------
Income from Investment Operations:
Net Investment Income..................................... 0.44
Net Gain on Securities and Foreign Currency Related Items
(both realized and unrealized).......................... 0.45
-----------
Total from Investment Operations.......................... 0.89
-----------
Less Distributions:
Dividends from Net Investment Income...................... (0.41)
Distributions in excess of Net Investment Income.......... (0.31)
Distributions from Realized Gains......................... (0.20)
-----------
Total Distributions....................................... (0.92)
-----------
NET ASSET VALUE, END OF PERIOD.............................. $9.97
===========
Total Return................................................ 8.96%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $599
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 0.99%@*
Net Investment Income..................................... 5.29%*
Decrease reflected in above operating expense ratios due
to waivers/reimbursements............................... 12.05%*
Portfolio Turnover Rate..................................... 138.28%+
Average Commission Rate..................................... $0.0600#
</TABLE>
- --------------------------------------------------------------------------------
+ Non-Annualized.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
* Annualized.
# Computed by dividing the total amount of commissions paid by the total number
of shares purchased and sold during the period for which there was a
commission charged.
3
<PAGE> 41
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
For the Period
March 31, 1997
(Commencement of
Operations) through
December 31, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
-----------
Income from Investment Operations:
Net Investment Income..................................... 0.45
Net Loss on Securities and Foreign Currency Related Items
(both realized and unrealized).......................... (0.15)
-----------
Total from Investment Operations.......................... 0.30
-----------
Less Distributions:
Dividends from Net Investment Income...................... (0.44)
Distributions in excess of Net Investment Income.......... (0.11)
Distributions from Realized Gains......................... (0.07)
Distributions in excess of Realized Gains................. (0.21)
-----------
Total Distributions....................................... (0.83)
-----------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.47
===========
Total Return................................................ 2.62%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000s)............................ $1,596
Ratios to Average Daily Net Assets:
Operating Expenses........................................ 0.99%@*
Net Investment Income..................................... 5.67%*
Decrease reflected in above operating expense ratio due to
waivers/reimbursements.................................. 4.59%*
Portfolio Turnover Rate..................................... 129.81%+
</TABLE>
- --------------------------------------------------------------------------------
+ Non-Annualized.
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements had no effect on the Portfolio's
expense ratio.
* Annualized.
4
<PAGE> 42
INVESTMENT OBJECTIVES AND POLICIES
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Each Portfolio's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Portfolio. Any investment involves risk and, therefore, there can be no
assurance that any Portfolio will achieve its investment objective. See
"Portfolio Investments" and "Certain Investment Strategies" for descriptions of
certain types of investments the Portfolios may make.
FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks total return consistent with prudent
investment management. The Portfolio is a non-diversified investment fund which
pursues its investment objective by investing, under normal market conditions,
at least 65% of its total assets in fixed income securities, such as corporate
bonds, debentures and notes; convertible debt securities; convertible and
non-convertible preferred stocks; government obligations; obligations issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities ("Municipal Obligations"); and repurchase agreements with
respect to portfolio securities.
Under normal market conditions, the Portfolio intends that its portfolio of
fixed income securities will have a dollar-weighted average remaining maturity
not exceeding 10 years, using for purposes of this calculation the maturity of a
security on its date of purchase. Individual issues may have maturities longer
than 10 years.
The Portfolio may hold up to 35% of its net assets in fixed income securities
rated below investment grade and may invest in unrated issues that are believed
by Warburg Pincus Asset Management, 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 currencies (including U.S. dollars and
multinational currency units such as
5
<PAGE> 43
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 ("S&P"), or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or the equivalent from another major rating service
or, if unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; obligations of foreign
governments, their agencies or instrumentalities; and repurchase agreements with
respect to portfolio securities.
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<PAGE> 44
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 or Warburg. 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. U.S. government securities in which a Portfolio
may invest include direct obligations of the U.S. Treasury and obligations
issued by U.S. government agencies and instrumentalities. Included among direct
obligations of the United States are Treasury Bills, Treasury Notes and Treasury
Bonds, which differ principally in 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
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<PAGE> 45
maturities of greater than 10 years at the date of issuance. Included among the
obligations issued by agencies and instrumentalities of the United States are:
instruments that are supported by the full faith and credit of the United States
(such as certificates issued by the Government National Mortgage Association
("GNMA")); instruments that are supported by the right of the issuer to borrow
from the U.S. Treasury (such as securities of Federal Home Loan Banks); and
instruments that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds).
CONVERTIBLE SECURITIES. Convertible securities in which the Portfolios may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock.
STRUCTURED SECURITIES. The Portfolios may purchase any type of publicly traded
or privately negotiated fixed income security, including mortgage-backed
securities; structured notes, bonds or debentures; and assignments of and
participations in loans.
Mortgage-Backed Securities. Mortgage-backed securities are collateralized by
mortgages or interests in mortgages and may be issued by government or
non-government entities. Mortgage-backed securities issued by GNMA, FNMA or
FHLMC provide a monthly payment consisting of interest and principal payments,
and additional payments will be made out of unscheduled prepayments of
principal. Neither the value of nor the yield on these mortgage-backed
securities or shares of the Portfolios is guaranteed by the U.S. government.
Non-government issued mortgage-backed securities may offer higher yields than
those issued by government entities, but may be subject to greater price
fluctuations. The value of mortgage-backed securities may change due to shifts
in the market's perceptions of issuers, and regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Foreclosures and
prepayments, which occur when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities on these securities.
The Portfolios' yield may be affected by reinvestment of prepayments at higher
or lower rates than the original investment. Prepayments may tend to increase
due to refinancing of mortgages as interest rates decline. In addition, like
other debt securities, the 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
8
<PAGE> 46
the value of specific currencies, interest rates, commodities, indexes or other
financial indicators (the "Reference") or the relevant change in two or more
References. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased depending upon changes in the
applicable Reference. The terms of the structured securities may provide that in
certain circumstances no principal is due at maturity and, therefore, may result
in the loss of a Portfolio's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Portfolio may invest in assignments of
and participations in loans issued by banks and other financial institutions.
When a Portfolio purchases assignments from lending financial institutions,
the Portfolio will acquire direct rights against the borrower on the loan.
However, since assignments are generally arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations
acquired by a Portfolio as the purchaser of an assignment may differ from, and
be more limited than, those held by the assigning lender.
Participations in loans will typically result in a Portfolio having a
contractual relationship with the lending financial institution, not the
borrower. A Portfolio would have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender of the
payments from the borrower. In connection with purchasing a participation, a
Portfolio generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the loan, nor any rights of
set-off against the borrower, and the Portfolio may not benefit directly from
any collateral supporting the loan in which it has purchased a participation. As
a result, a Portfolio purchasing a participation will assume the credit risk of
both the borrower and the lender selling the participation. In the event of the
insolvency of the lender selling the participation, the Portfolio may be treated
as a general creditor of the lender and may not benefit from any set-off between
the lender and the borrower.
A Portfolio may have difficulty disposing of assignments and participations
because there is no liquid market for such securities. The lack of a liquid
secondary market will have an adverse impact on the value of 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
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<PAGE> 47
value to these securities for purposes of valuing the Portfolio's portfolio and
calculating its net asset value.
WARRANTS. Each Portfolio may invest up to 10% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period.
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
For certain additional risks related to each Portfolio's investments, see
"Portfolio Investments" and "Certain Investment Strategies" in this Prospectus.
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 they 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.
BELOW INVESTMENT GRADE SECURITIES. There are certain risk factors associated
with below investment grade 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
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<PAGE> 48
speculative elements and a greater vulnerability to default than higher-rated
securities. Investors should be aware that ratings are relative and subjective
and are not absolute standards of quality. Subsequent to its purchase by a
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Portfolio. Neither event
will require sale of such securities by the Portfolio, although Warburg will
consider such event in its determination of whether the Portfolio should
continue to hold the securities.
The Portfolios may invest in securities rated as low as C by Moody's or D by
S&P. Each Portfolio may invest in unrated securities considered to be of
equivalent quality. Securities that are rated C by Moody's are the lowest rated
class and can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Debt rated D by S&P is in default or is expected
to default upon maturity or payment date.
Below investment grade and comparable unrated securities (commonly referred to
as "junk bonds") (i) will likely have some quality and protective
characteristics that, in the judgment of the 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, below investment grade securities
generally present a higher degree of credit risk. The risk of loss due to
default by such issuers is significantly greater because below investment grade
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
The market value of below investment grade securities is more volatile than
that of investment grade securities. In addition, the Portfolios may have
difficulty disposing of certain of these securities because there may be a thin
trading market. The lack of a liquid secondary market for certain securities may
have an adverse impact on the Portfolios' ability to dispose of particular
issues and may make it more difficult for the Portfolios to obtain accurate
market quotations for purposes of valuing the Portfolios and calculating their
respective net asset values.
For a complete description of the rating systems of Moody's and S&P, see the
appendix to the Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Portfolios may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to each Portfolio's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the
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<PAGE> 49
Board will also consider factors such as trading activity, availability of
reliable price information and other relevant information in determining whether
a Rule 144A Security is liquid. This investment practice could have the effect
of increasing the level of illiquidity in the Portfolios to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A Securities. The Board will carefully monitor any investments by the
Portfolios in Rule 144A Securities. The Board may adopt guidelines and delegate
to Warburg the daily function of determining and monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and a
Portfolio may take longer to liquidate these positions than would be the case
for publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Portfolio. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded. A Portfolio's investment in illiquid securities
is subject to the risk that should the Portfolio desire to sell any of these
securities when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Portfolio's net assets could be
adversely affected.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment but increases an
investor's risk in the event of a decline in the value of the underlying
security and can result in a complete loss of the amount invested in the
warrant. In addition, the price of a warrant tends to be more volatile than, and
may not correlate exactly to, the price of the underlying security. If the
market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
YEAR 2000 COMPLIANCE. Many services provided to the Portfolios and their
shareholders by Warburg and certain of its affiliates (the "Warburg Service
Providers") and the Portfolios' other service providers rely on the functioning
of their respective computer systems. Many computer systems cannot distinguish
the year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000 Issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Portfolio
operations.
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<PAGE> 50
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Portfolios nor can there be any assurance that
the Year 2000 Issue will not have an adverse effect on the Portfolios'
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely effect the
Portfolios' foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Portfolios' other service providers will be adapted in time for the year 2000.
To further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Portfolios' other major
service providers. The Warburg Service Providers will be monitoring the Year
2000 Issue in an effort to ensure appropriate preparation.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
- --------------------------------------------------------------------------------
A Portfolio will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the relevant Portfolio. A
Portfolio will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with its investment objective and policies. This
investment approach and use of certain of the investment strategies described
below may result in a high portfolio turnover rate. High portfolio turnover
rates (100% or more) may result in higher dealer mark-ups or underwriting
commissions as well as other transaction costs, including correspondingly higher
brokerage commissions. In addition, short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. See "Dividends,
Distributions and Taxes -- Taxes" below and "Investment Policies -- Portfolio
Transactions" in the Statement of Additional Information.
Newly issued Government Securities normally are purchased by a Portfolio
directly from the issuer or from an underwriter acting as a principal. Other
purchases and sales usually are placed by a Portfolio with those dealers which
Warburg determines offer the best price and execution. The purchase price paid
by a Portfolio to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from a dealer in the after market normally are executed at a price between the
bid and asked prices.
All orders for transactions in securities or options on behalf of a Portfolio
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Portfolios' distributor ("Counsellors Securities"). A
Portfolio may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the
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<PAGE> 51
transaction does not exceed usual and customary levels and when doing so is
consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------
Although there is no intention of doing so during the coming year, each
Portfolio may lend portfolio securities. Detailed information concerning each
Portfolio's strategies and related risks is contained below and in the Statement
of Additional Information.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, each Portfolio
may, but is not required to, engage in a number of strategies involving options,
futures, forward currency contracts, swaps and interest rate transactions. These
strategies, commonly referred to as "derivatives," may be used (i) for the
purpose of hedging against a decline in value of the Portfolio's current or
anticipated portfolio holdings, (ii) as a substitute for purchasing or selling
portfolio securities or (iii) to seek to generate income to offset expenses or
increase return. 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 other applicable
regulatory authorities.
Securities Options and Index Options. Each Portfolio may purchase and write
(sell) covered put and call options traded on U.S. and foreign exchanges as well
as over-the-counter ("OTC") without limit on the net asset value of the stock
and debt securities in its portfolio and will realize fees (referred to as
"premiums") for granting the rights evidenced by the options. The purchaser of a
put option on a security has the right to compel the purchase by the writer of
the underlying security, while the purchaser of a call option on a security has
the right to purchase the underlying security from the writer. In addition to
purchasing and writing options on securities, each Portfolio may also purchase
and write without limit exchange-listed and OTC put and call options on
securities indexes. A securities index measures the movement of a certain group
of securities by assigning relative values to the securities included in the
index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation a
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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.
Swap and Interest Rate Transactions. Each Portfolio may enter into interest
rate, index and mortgage swaps and interest rate caps, floors and collars for
hedging purposes or to seek to increase total return and may enter into currency
swaps for hedging purposes. A swap transaction is an agreement between a
Portfolio and a counterparty to act in accordance with the terms of the swap
contract. Interest rate swaps involve the exchange by a Portfolio with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. Index swaps involve
the exchange by a Portfolio with another party of the respective amounts payable
with respect to a notional principal amount related to one or more indexes.
Mortgage swaps are similar to interest rate swaps in that they
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represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. Currency
swaps involve the exchange of cash flows on a notional amount of two or more
currencies based on their relative future values. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payment of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling the interest rate floor.
An interest rate collar is the combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates.
A Portfolio will enter into interest rate, index and mortgage swaps only on a
net basis, which means that the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Portfolio is contractually
obligated to make. If the counterparty to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the counterparty to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable by a
Portfolio under an interest rate, index or mortgage swap and the entire amount
of the payment stream payable by a Portfolio under a currency swap or an
interest rate cap, floor or collar are held in a segregated account consisting
of cash or other liquid assets, the Portfolios and Warburg believe that swaps do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to each Portfolio's borrowing restriction.
The Portfolios will not enter into interest rate, index, mortgage or currency
swaps, or interest rate cap, floor or collar transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either AA or A-1 or better by S&P or Aa or P-1 or better by Moody's or, if
unrated by such rating organizations, determined to be of comparable quality by
Warburg.
Hedging Considerations. The Portfolios may engage in options, futures and
currency, swap and interest rate transactions for, among other reasons, hedging
purposes. A hedge is designed to offset a loss on a portfolio position with a
gain in the hedge position; at the same time, however, a properly correlated
hedge will result in a gain in the portfolio position being offset by a
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loss in the hedge position. As a result, the use of these transactions for
hedging purposes could limit any potential gain from an increase in value of the
position hedged. In addition, the movement in the portfolio position hedged may
not be of the same magnitude as any movement in the hedge. A Portfolio will
engage in hedging transactions only when deemed advisable by Warburg, and
successful use of hedging transactions will depend on Warburg's ability to
predict correctly movements in the hedge and the hedged position and the
correlation between them, which could prove to be inaccurate. Even a well-
conceived hedge may be unsuccessful to some degree because of unexpected market
behavior or trends.
Additional Considerations. To the extent that a Portfolio engages in the
strategies described above, the Portfolio may experience losses greater than if
these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Portfolio may be unable to close out a position without incurring
substantial losses, if at all. The Portfolio is also subject to the risk of a
default by a counterparty to an off-exchange transaction.
Asset Coverage. Each Portfolio will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Portfolio on securities, indexes and currencies; interest
rate, index and currency futures contracts and options on these futures
contracts; forward currency contracts; and swap and interest rate transactions.
The use of these strategies may require that the Portfolio maintain cash or
liquid securities in a segregated account with its custodian or a designated
sub-custodian to the extent the Portfolio's obligations with respect to these
strategies are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
ZERO COUPON SECURITIES. Each Portfolio may invest without limit in "zero
coupon securities." Zero coupon securities pay no cash income to their holders
until they mature and are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return comes from the difference
between their purchase price and their maturity value. Because interest on zero
coupon securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than are the values of securities
that distribute income regularly and may be more speculative than such other
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. Redemption of shares of a Portfolio that require
it to sell zero coupon securities prior to maturity may result in capital gains
or losses that may be substantial. In addition, a Portfolio's investments
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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. 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 liquid assets in an
amount equal to the amount of its when-issued and delayed-delivery purchase
commitments, and will segregate the securities underlying commitments to sell
securities for delayed delivery.
SHORT SALES AGAINST THE BOX. Each Portfolio may enter into a short sale of
securities such that when the short position is open the Portfolio owns an equal
amount of the securities sold short or owns preferred stocks or debt securities,
convertible or exchangeable without payment of further consideration, into an
equal number of securities sold short. This kind of short sale, which is
referred to as one "against the box", may be entered into by a Portfolio to, for
example, lock-in a sale price for a security the Portfolio does not wish to sell
immediately. The proceeds of the sale will generally be held by the broker until
the settlement date when the Portfolio delivers securities to close out its
short position. The Portfolio will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or convertible
or exchangeable preferred stocks or debt securities in connection with short
sales against the box. Not more than 10% of a Portfolio's net assets (taken at
current value) may be held as collateral for short sales against the box at any
one time.
FOREIGN SECURITIES. Each Portfolio may invest in the securities of foreign
issuers. There are certain risks involved in investing in securities of
companies and governments of foreign nations which are in addition to the usual
risks inherent in domestic investments. These risks include those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
adverse political and economic developments and the possible imposition of
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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 operating
expenses due to the cost of converting foreign currency into U.S. dollars, the
payment of fixed brokerage commissions on foreign exchanges, which generally are
higher than commissions on U.S. exchanges, higher valuation and communications
costs and the expense of maintaining securities with foreign custodians.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
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.
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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. 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
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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 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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each Portfolio may enter into
reverse repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio pursuant to its agreement to repurchase them at
a mutually agreed upon date, price and rate of interest. Each Portfolio also may
enter into "dollar rolls," in which the Portfolio sells fixed-income securities
for delivery in the current month and simultaneously contracts to repurchase
similar but not identical (same type, coupon and maturity) securities on a
specified future date. During the roll period, a Portfolio would forego
principal and interest paid on such securities. The Portfolio would be
compensated by the difference between the current sales
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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 a Portfolio enters into a reverse repurchase agreement or dollar
roll, it will establish and maintain a segregated account with an approved
custodian containing cash or liquid securities having a value not less than the
repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). Each 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 and dollar rolls that are
accounted for as financings are considered to be borrowings under the 1940 Act.
INVESTMENT GUIDELINES
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Each Portfolio may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ("illiquid securities"), including (i) securities issued as
part of a privately negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
(iii) time deposits maturing in more than seven calendar days; and (iv) certain
Rule 144A Securities. Each Portfolio may borrow from banks for temporary or
emergency purposes, such as meeting anticipated redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Portfolio may
not exceed 30% of its total assets, and may pledge its assets in connection with
borrowings. Whenever borrowings (including reverse repurchase agreements) exceed
5% of the value of a Portfolio's total assets, the Portfolio will not make any
investments (including roll-overs). Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the Board, subject to the limitations
contained in the 1940 Act. A complete list of investment restrictions that each
Portfolio has adopted identifying additional restrictions that cannot be changed
without the approval of the majority of the Portfolio's outstanding shares is
contained in the Statement of Additional Information.
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
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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 advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of February 28, 1998,
Warburg managed approximately $20.9 billion of assets, including approximately
$11.9 billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has no business
other than being a holding company of Warburg and its affiliates. Warburg's
address is 466 Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGERS. Dale C. Christensen has been a Co-Portfolio Manager and
the Portfolio Manager of the Fixed Income and Global Fixed Income Portfolios,
respectively, since their inception. Mr. Christensen, a Managing Director of
Warburg, has been associated with Warburg since 1989. M. Anthony E. van Daalen
has been a Co-Portfolio Manager of the Fixed Income Portfolio since its
inception. Mr. van Daalen is a Senior Vice President at Warburg and has been
associated with Warburg since 1992.
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 and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
The Trust employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
each Portfolio's net asset value, provides all accounting services for the
Portfolio and assists in related aspects of the Portfolio's operations. As
compensation each Portfolio pays PFPC a fee calculated at an annual rate of .05%
of the Portfolio's average daily net assets. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
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CUSTODIANS. PNC Bank, National Association ("PNC") serves as custodian of the
U.S. assets of each of the Portfolios. State Street Bank and Trust Company
("State Street") serves as custodian of the non-U.S. assets of each of the
Portfolios. Like PFPC, PNC is a subsidiary of PNC Bank Corp. and its principal
business address is 1600 Market Street, Philadelphia, Pennsylvania 19103. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Portfolios. It has
delegated most of its responsibilities to Boston Financial Data Services, Inc.
("BFDS"), an affiliated service company. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves without compensation as distributor
of the shares of the Portfolios. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may enter into agreements with
Participating Insurance Companies and Plans or their affiliates or entities that
provide services to them ("Service Organizations") to pay a fee of up to .40%
(the "Service Fee") of the annual average value of accounts maintained by such
Organizations with a Portfolio. A portion of the Service Fee may be borne by a
Portfolio as a transfer agency fee. In addition, a Service Organization may
directly or indirectly pay a portion of its Service Fee to the Trust's custodian
or transfer agent for costs related to Portfolio accounts it services. The
Service Fee payable to any one Service Organization is determined based upon a
number of factors, including the nature and quality of the services provided,
the operations processing requirements of the relationship and the standardized
fee schedule of the Service Organization.
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of a
Portfolio, consisting of securities dealers who have sold Portfolio shares or
others, including banks and other financial institutions, under special
arrangements. Incentives may include opportunities to attend business meetings,
conferences, sales or training programs for recipients' employees or clients and
other programs or events and may also include opportunities to participate in
advertising or sales campaigns and/or shareholder services and programs
regarding one or more Warburg Pincus Funds. Warburg or its affiliates may pay
for travel, meals and lodging in connection with these promotional activities.
In some instances, these incentives may be offered only to certain institutions
whose representatives provide services in connection with the sale or expected
sale of Portfolio shares.
TRUSTEES AND OFFICERS. The officers of the Trust manage each Portfolio's
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for each Portfolio and chooses the Trust's officers. A list of
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the Trustees and officers and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
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Individual investors may not purchase or redeem shares of a Portfolio
directly; shares may be purchased or redeemed only through Variable Contracts
offered by separate accounts of Participating Insurance Companies or through
Plans, including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants. Please refer to the prospectus of the
sponsoring Participating Insurance Company separate account or to the Plan
documents or other informational materials supplied by Plan sponsors for
instructions on purchasing or selling a Variable Contract and on how to select a
Portfolio as an investment option for a Variable Contract or Plan.
All investments in the Portfolios are credited to a Participating Insurance
Company's separate account immediately upon acceptance of an investment by a
Portfolio. Each Participating Insurance Company receives orders from its
contract owners to purchase or redeem shares of a Portfolio on any day that the
Portfolio calculates its net asset value (a "business day"). That night, all
orders received by the Participating Insurance Company prior to the close of
regular trading on The New York Stock Exchange, Inc. (the "NYSE") (currently
4:00 p.m., Eastern time) on that business day are aggregated, and the
Participating Insurance Company places a net purchase or redemption order for
shares of a Portfolio during the morning of the next business day, with payment
for purchases to follow no later than the Portfolios' pricing on the next
business day. If payment for purchases is not received by such time, the
Participating Insurance Company could be held liable for resulting fees or
losses. These orders are executed at the net asset value (described below under
"Net Asset Value") computed at the close of regular trading on the NYSE on the
previous business day in order to provide a match between the contract owners'
orders to the Participating Insurance Company and that Participating Insurance
Company's orders to a Portfolio. Redemption proceeds will normally be wired to
the Participating Insurance Company the business day following receipt of the
redemption order, but in no event later than seven days after receipt of such
order.
Plan participants may invest in shares of a Portfolio through their Plan by
directing the Plan trustee to purchase shares for their account, in a manner
similar to that described above for contract owner purchases through
Participating Insurance Companies. Participants should contact their Plan
sponsor for information concerning the appropriate procedure for investing in
the Portfolio.
Each Portfolio reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in Warburg's judgment, the Portfolio would be
unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely
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affected. A Portfolio may discontinue sales of its shares if management believes
that a substantial further increase in assets may adversely affect that
Portfolio's ability to achieve its investment objective. In such event, however,
it is anticipated that existing Variable Contract owners and Plan participants
would be permitted to continue to authorize investment in such Portfolio and to
reinvest any dividends or capital gains distributions.
TELEPHONE TRANSACTIONS. Participating Insurance Companies, Plans or their
agents may elect to conduct transactions by telephone. Neither the Portfolio nor
its agents will be liable for following instructions communicated by telephone
that it reasonably believes to be genuine. Reasonable procedures will be
employed on behalf of the Portfolio to confirm that instructions communicated by
telephone are genuine. Such procedures may include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific identifying information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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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
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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.
Constructive Sales. If a Portfolio effects a short sale of securities at a
time when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Portfolio closes out the short
sale with securities other than the appreciated securities held at the time of
the short sale and if certain other conditions are satisfied. Uncertainty
regarding the tax consequences of effecting short sales may limit the extent to
which the Portfolio may effect short sales. A 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
- --------------------------------------------------------------------------------
Each Portfolio's net asset value per share is calculated as of the close of
regular trading on the NYSE on each business day, Monday through Friday, except
on days when the NYSE is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and on the preceding Friday or subsequent Monday when one of the holidays falls
on a Saturday or Sunday, respectively. The net asset value per share of each
Portfolio generally changes every day.
The net asset value per share of each Portfolio is computed by dividing the
value of the Portfolio's net assets by the total number of its shares
outstanding.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an 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
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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-
day period, which is then annualized (based on SEC guidelines). That is, the
amount of net investment income generated by the Portfolio's shares during that
thirty-day period is assumed to be generated over a 12-month period and is shown
as a percentage of the investment. The total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
of the measuring period to the end of the measuring period. The figures reflect
changes in the price of the Portfolio's shares assuming that any income
dividends and/or capital gain distributions made by the Portfolio during the
period were reinvested in shares of the Portfolio. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Portfolio's operations or on a
year-by-year, quarterly or current year-to-date basis).
Total returns quoted for the Portfolios include the effect of deducting each
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract or Plan. Accordingly, the prospectus of the
sponsoring Participating Insurance Company separate account or Plan documents or
other informational materials supplied by Plan sponsors should be carefully
reviewed for information on relevant charges and expenses. Excluding these
charges and expenses from quotations of each Portfolio's performance has the
effect of increasing the performance quoted, and the effect of these charges
should be considered when comparing a Portfolio's performance to that of other
mutual funds.
When considering average annual total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one 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 the Portfolio's share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be
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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.
A Portfolio or a Participating Insurance Company or Plan sponsor may compare a
Portfolio's performance with (i) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below; (ii) in the case of the 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,
Mutual Fund Magazine, SmartMoney, The Wall Street Journal and Worth.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various periods of time. In addition, each Portfolio or a Participating
Insurance Company or Plan sponsor may from time to time compare the Portfolio's
expense ratio to that of investment companies with similar objectives and
policies, based on data generated by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio or a Participating Insurance Company or Plan sponsor may also describe
the general biography or work experience of the portfolio managers of the
Portfolio and may include quotations attributable to the portfolio managers
describing approaches taken in managing the Portfolio's investments, research
methodology underlying stock selection or the Portfolio's investment objective.
In addition, a Portfolio and its portfolio managers may render periodic updates
of Portfolio investment activity, which may include discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Portfolio with
respect to relevant market and industry benchmarks. Each Portfolio may also
discuss various measures of risk,
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including those based on statistical or econometric analyses, the continuum of
risk and return relating to different investments and the potential impact of
international securities on a portfolio otherwise composed of U.S. securities.
GENERAL INFORMATION
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TRUST ORGANIZATION. The Trust was organized on December 16, 1996 under the
laws of The Commonwealth of Massachusetts as a "Massachusetts business trust."
The Trust's Declaration of Trust authorizes the Board to issue an unlimited
number of full and fractional shares of beneficial interest, $.001 par value per
share. Shares of two series have been authorized. The Board may classify or
reclassify any of its shares into one or more additional series without
shareholder approval.
VOTING RIGHTS. When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to (i) Variable
Contracts offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other and (ii) Plans including
participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. Due to differences of tax treatment and other
considerations, the interests of various Variable Contract owners 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
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Contract or Plan or may suspend or terminate the offering of shares of a
Portfolio if such action is required by law or regulatory authority or is in the
best interests of the shareholders of the Portfolio.
SHAREHOLDER COMMUNICATIONS. Participating Insurance Companies and Plan
trustees will receive semiannual and audited annual reports, each of which
includes a list of the investment securities held by the Portfolio and a
statement of the performance of the Portfolio. Periodic listings of the
investment securities held by the Portfolios, as well as certain statistical
characteristics of a Portfolio, may be obtained by calling the Trust at (800)
369-2728 or on the Warburg Pincus Funds Web site at www.warburg.com.
Since the prospectuses of the Portfolios are combined in this single
Prospectus, it is possible that a Portfolio may become liable for a
misstatement, inaccuracy or omission in this Prospectus with regard to the other
Portfolio.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION OR THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE PORTFOLIOS, AND IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE 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 Portfolios' Expenses................................. 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 5
Portfolio Investments.................................... 6
Risk Factors and Special Considerations.................. 10
Portfolio Transactions and Turnover Rate................. 13
Certain Investment Strategies............................ 14
Investment Guidelines.................................... 22
Management of the Portfolios............................. 22
How to Purchase and Redeem Shares........................ 25
Dividends, Distributions and Taxes....................... 26
Net Asset Value.......................................... 27
Performance.............................................. 28
General Information...................................... 30
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 4906, GRAND CENTRAL STATION
NEW YORK, NY 10163
800-369-2728
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRBDF-1-0498
<PAGE> 70
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
WARBURG PINCUS TRUST II
Fixed Income Portfolio
Global Fixed Income Portfolio
P.O. Box 4096, Grand Central Station, New York, New York 10163
For information, call (800) 369-2728
CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Investment Objectives........................................................2
Investment Policies..........................................................2
Management of the Trust......................................................28
Additional Purchase and Redemption Information...............................34
Additional Information Concerning Taxes......................................34
Determination of Performance.................................................37
Independent Accountants and Counsel..........................................38
Miscellaneous................................................................38
Financial Statements.........................................................38
Appendix -- Description Of Ratings...........................................A-1
</TABLE>
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Warburg Pincus Trust II (the "Trust"),
dated April 30, 1998, 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 4096, Grand Central
Station, New York, New York 10163.
<PAGE> 71
INVESTMENT OBJECTIVES
The investment objective of the Fixed Income Portfolio is
total return consistent with prudent investment management. The investment
objective of the Global Fixed Income Portfolio is total return consistent with
prudent investment management, consisting of a combination of interest income,
currency gains and capital appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of each
Portfolio's investment objective and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Portfolio may write covered put and
call options on stock and debt securities and may purchase such options that are
traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC").
Each Portfolio realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price for
a specified time period or at a specified time. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price for a specified
time period or at a specified time.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Portfolio
as the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Portfolio as a put or call writer retains the risk of a decline in the price
of the underlying security. The size of the premiums that the Portfolio may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
In the case of options written by a Portfolio that are deemed
covered by virtue of the Portfolio's holding convertible or exchangeable
preferred stock or debt securities, the time required to convert or exchange and
obtain physical delivery of the underlying common
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stock with respect to which the Portfolio has written options may exceed the
time within which the Portfolio must make delivery in accordance with an
exercise notice. In these instances, the Portfolio may purchase or temporarily
borrow the underlying securities for purposes of physical delivery. By so doing,
the Portfolio will not bear any market risk, since the Portfolio will have the
absolute right to receive from the issuer of the underlying security an equal
number of shares to replace the borrowed securities, but the Portfolio may incur
additional transaction costs or interest expenses in connection with any such
purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which the Portfolios may write covered call options. For example,
if a Portfolio writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Portfolio will compensate for the decline in the value of the cover
by purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration
dates between one and nine months from the date written. The exercise price of
the options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios may write (i) in-the-money call
options when Warburg Pincus Asset Management, Inc., the Portfolios' investment
adviser ("Warburg"), expects that the price of the underlying security will
remain flat or decline moderately during the option period, (ii) at-the-money
call options when Warburg expects that the price of the underlying security will
remain flat or advance moderately during the option period and (iii)
out-of-the-money call options when Warburg expects that the premiums received
from writing the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the Options Clearing
Corporation (the "Clearing Corporation") and of the securities exchange on which
the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by the Portfolio
prior to the exercise of options that it has purchased or 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
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the Portfolio initially paid for the original option plus the related
transaction costs. Similarly, in cases where the Portfolio has written an
option, it will realize a profit if the cost of the closing purchase transaction
is less than the premium received upon writing the original option and will
incur a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. The Portfolio may engage in a closing
purchase transaction to realize a profit, to prevent an underlying security with
respect to which it has written an option from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). The obligation of the Portfolio under an option it has
written would be terminated by a closing purchase transaction, but the Portfolio
would not be deemed to own an option as a result of the transaction. So long as
the obligation of the Portfolio as the writer of an option continues, the
Portfolio may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Portfolio to deliver the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Portfolio effects a closing purchase transaction. The
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Portfolio's ability to terminate options positions established in the OTC
market may be more limited than for exchange-traded options and may also involve
the risk that securities dealers participating in OTC transactions would fail to
meet their obligations to the Portfolio. The Portfolio, however, intends to
purchase OTC options only from dealers whose debt securities, as determined by
Warburg, are considered to be investment grade. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. In either
case, the Portfolio would continue to be at market risk on the security and
could face higher transaction costs, including brokerage commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Trust or a Portfolio and other clients of Warburg and certain of its affiliates
may be considered to be such a group. A securities exchange may order the
liquidation of positions
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<PAGE> 74
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.
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
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<PAGE> 75
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 respect to currency options,
currencies at a time when such sale might be advantageous. In the event of
insolvency of the other party, the Portfolio may be unable to liquidate a dealer
option.
Futures Activities. Each Portfolio may enter into foreign
currency, interest rate and securities index futures contracts and purchase and
write (sell) related options traded on exchanges designated by the Commodity
Futures Trading Commission (the "CFTC") or consistent with CFTC regulations on
foreign exchanges. These transactions may be entered into for "bona fide
hedging" purposes as defined in CFTC regulations and other permissible purposes
including hedging against changes in the value of portfolio securities due to
anticipated changes in currency values, interest rates and/or market conditions
and increasing return.
A Portfolio will not enter into futures contracts and related
options for which the aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC exceed 5% of the Portfolio's net asset value after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into. The Portfolios reserve the right to engage in transactions
involving futures contracts and options on futures contracts to the extent
allowed by CFTC regulations in effect from time to time and in accordance with a
Portfolio's policies. Although each Portfolio is limited in the amount of assets
it may invest in futures transactions (as described above and in the
Prospectus), there is no overall limit on the percentage of Portfolio assets
that may be at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified non-U.S. currency at a specified price, date,
time and place. An interest rate futures contract provides for the future sale
by one party and the purchase by the other party of a certain amount of a
specific interest rate sensitive financial instrument (debt security) at a
specified price, date, time and place. Securities indexes are capitalization
weighted indexes which reflect the market value of the securities listed on the
indexes. A securities index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Portfolio upon
entering into a futures contract. Instead, the Portfolio is required to deposit
in a segregated account with its custodian an amount of cash or liquid
securities acceptable to the broker, equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the exchange on which the
contract is traded, and brokers may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract, assuming all contractual
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obligations have been satisfied. The broker will have access to amounts in the
margin account if the Portfolio fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the currency, financial instrument or securities index
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as
"marking-to-market." The Portfolios will also incur brokerage costs in
connection with entering into futures transactions.
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
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potential loss related to the purchase of an option on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the point of sale, there are no daily cash
payments by the purchaser to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Portfolio.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Portfolio that are invested in foreign securities may be
affected favorably or unfavorably by changes in exchange control regulations,
and the Portfolio may incur costs in connection with conversion between various
currencies. Currency exchange transactions may be from any non-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
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Portfolio may not position hedge to an extent greater than the aggregate market
value (at the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which the Portfolio's securities are denominated will reduce the U.S. dollar
value of the securities, even if their value in the foreign currency remains
constant. The use of currency hedges does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. For example, in order to protect against
diminutions in the U.S. dollar value of securities it holds, a Portfolio may
purchase currency put options. If the value of the currency does decline, the
Portfolio will have the right to sell the currency for a fixed amount in U.S.
dollars and will thereby offset, in whole or in part, the adverse effect on the
U.S. dollar value of its securities that otherwise would have resulted.
Conversely, if a rise in the U.S. dollar value of a currency in which securities
to be acquired are denominated is projected, thereby potentially increasing the
cost of the securities, the Portfolio may purchase call options on the
particular 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
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futures contracts sold by the Portfolio, an increase in the value of the futures
contracts could only mitigate, but not totally offset, the decline in the value
of the Portfolio's assets.
In hedging transactions based on an index, whether a Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular security. The risk of
imperfect correlation increases as the composition of the Portfolio's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, the Portfolio's hedge positions may be in a greater or lesser dollar
amount than the dollar amount of the hedged position. Such "over hedging" or
"under hedging" may adversely affect the Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.
Securities index futures transactions may be subject to additional correlation
risks. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the stock index
and futures 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 predict
correctly movements in the directions of the hedge and the hedged position and
the correlation between them, which predictions could prove to be inaccurate.
This requires different skills and techniques than predicting changes in the
price of individual securities, and there can be no assurance that the use of
these strategies will be successful. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Losses incurred in hedging transactions and the costs of these transactions will
affect the Portfolio's performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectus, each Portfolio will comply
with guidelines established by the U.S. Securities and Exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Portfolio on securities indexes and currencies; and currency, interest
rate and index futures contracts and options on these futures contracts. These
guidelines may, in certain instances, require segregation by the Portfolio of
cash or liquid securities.
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
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without additional consideration) or to segregate assets (as described above)
sufficient to purchase and deliver the securities if the call is exercised. A
call option written by the Portfolio on an index may require the Portfolio to
own portfolio securities that correlate with the index or to segregate assets
(as described above) equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Portfolio may require the
Portfolio to segregate assets (as described above) equal to the exercise price.
The Portfolio could purchase a put option if the strike price of that option is
the same or higher than the strike price of a put option sold by the Portfolio.
If the Portfolio holds a futures or forward contract, the Portfolio could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. The Portfolio may
enter into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Additional Information on Investment Practices
Foreign Investments. 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.
Foreign Currency Exchange. Since the Global Fixed Income
Portfolio will be investing substantially, and the Fixed Income Portfolio 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
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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.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Delays. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure of a Portfolio to market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on a
Portfolio's liquidity, the Portfolios will avoid investing in countries which
are known to experience settlement delays which may expose the Portfolios to
unreasonable risk of loss.
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, as well as the rate of the
investment advisory fees, though similar to such expenses of some other
international funds, are higher than those costs incurred by other investment
companies.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed income securities. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have
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been significant, and negative returns have been experienced in various markets
from time to time.
The foreign government securities in which the Portfolios may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
General. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payments positions. A Portfolio may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many, if not all, of
the foregoing considerations apply to such investments as well.
U.S. Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. Government Securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Federal National Mortgage Association, Federal Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board and Student Loan
Marketing Association. Each Portfolio may also invest in instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury and
instruments that are supported by the credit of the instrumentality. Because the
U.S. government is not obligated by law to provide support to an instrumentality
it sponsors, a Portfolio will invest in obligations issued
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by such an instrumentality only if Warburg determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Portfolio.
Loan Participations and Assignments. The Portfolios may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of the Portfolios' investments in Loans
are expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in a Portfolio having a contractual
relationship only with the Lender, not with the Borrower. A Portfolio will have
the right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the Borrower. In connection with purchasing
Participations, a Portfolio generally will have no right to enforce compliance
by the Borrower with the terms of the loan agreement relating to the Loan, nor
any rights of set-off against the Borrower, and the Portfolio may not directly
benefit from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a Portfolio will assume the credit risk of both the
Borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Portfolio may be treated as
a general creditor of the Lender and may not benefit from any set-off between
the Lender and the Borrower. A Portfolio will acquire Participations only if the
Lender interpositioned between the Portfolio and the Borrower is determined by
Warburg to be creditworthy.
When a Portfolio purchases Assignments from Lenders, the
Portfolio will acquire direct rights against the Borrower on the Loan. However,
since Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by a Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Portfolio may have difficulty disposing of them because there is
no liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on a Portfolio's
ability to dispose of particular Participations or Assignments when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the Borrower. The lack
of a liquid market for 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.
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Below Investment Grade Securities. Each Portfolio may hold up
to 35% of its net assets in fixed income securities rated below investment grade
and as low as C by Moody's Investors Service, Inc. ("Moody's") or D by Standard
& Poor's Ratings Services ("S&P"), and in comparable unrated securities
considered to be of equivalent quality. While the market values of below
investment grade securities tend to react less to fluctuations in interest rate
levels than do those of investment grade securities, the market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, below investment grade securities generally present a
higher degree of credit risk. Issuers of below investment grade securities are
often highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their 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 below investment grade securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
The market for below investment grade securities is relatively
new and has not weathered a major economic recession. Any such recession could
disrupt severely the market for such securities and may adversely affect the
value of such securities and the ability of the issuers of such securities to
repay principal and pay interest thereon.
The 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 investment grade 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 below investment grade securities is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact the 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, below investment grade 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.
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Lending of Portfolio Securities. Each Portfolio may lend
portfolio securities to brokers, dealers and other financial organizations that
meet capital and other credit requirements or other criteria established by the
Trust's Board of Trustees (the "Board"). These loans, if and when made, may not
exceed 20% of a Portfolio's total assets taken at value. A Portfolio will not
lend portfolio securities to Warburg or its affiliates unless it has applied for
and received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. Government
Securities, which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Portfolio. From time to time, a
Portfolio may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Portfolio and that is acting as a "finder."
By lending its securities, a Portfolio can increase its income
by continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. Each Portfolio
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Portfolio must receive at least 100% cash collateral or
equivalent securities of the type discussed in the preceding paragraph from the
borrower; (ii) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (iii) the
Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities and any increase in market
value; (v) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Board must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon the Portfolio's ability to recover the loaned securities or
dispose of the collateral for the loan or possible decline in the value of the
loaned securities during the period in which the Portfolio seeks to assert its
rights.
Reverse Repurchase Agreements and Dollar Rolls. Reverse
repurchase agreements and dollar rolls involve the risk that the market value of
the securities retained in lieu of sale may decline below the price of the
securities a 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.
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
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interest coupons and custodial receipts or certificates of participation
representing interests in such stripped debt obligations and coupons. A zero
coupon security pays no interest to its holder prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face or par value
and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities that make
current distributions of interest. The Portfolios anticipate that they will not
normally hold zero coupon securities to maturity. Federal tax law requires that
a holder of a zero coupon security accrue a portion of the discount at which the
security was purchased as income each year, even though the holder receives no
interest payment on the security during the year. Such accrued discount will be
includible in determining the amount of dividends the Portfolios must pay each
year and, in order to generate cash necessary to pay such dividends, the
Portfolios may liquidate portfolio securities at a time when they would not
otherwise have done so. At present, the U.S. Treasury and certain U.S. agencies
issue stripped Government Securities. In addition, in the recent past, a number
of banks and brokerage firms have separated the principal portions from the
coupon portions of U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests on these
instruments.
Short Sales "Against the Box." In a short sale, a Portfolio
sells a borrowed security and has a corresponding obligation to the lender to
return the identical security. The seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. While a short sale is made by selling a security a Portfolio
does not own, a short sale is "against the box" to the extent that a Portfolio
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. If the Portfolio engages in a short sale, the
collateral for the short position will be maintained by the Portfolio's
custodian or qualified sub-custodian. While the short sale is open, the
Portfolio will maintain in a segregated account an amount of securities equal in
kind and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities. These securities constitute the
Portfolio's long position.
The Portfolios do not intend to engage in short sales against
the box for investment purposes. A Portfolio may, however, make a short sale as
a hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Portfolio (or a security
convertible or exchangeable for such security). In such case, any future losses
in the Portfolio's long position should be offset by a gain in the short
position and, conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
will depend upon the amount of the security sold short relative to the amount
the Portfolio owns. There will be certain additional transaction costs
associated with short sales against the box, but the Portfolio will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.
If a Portfolio effects a short sale of securities at a time
when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale.
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However, such constructive sale treatment may not apply if the Portfolio closes
out the short sale with securities other than the appreciated securities held at
the time of the short sale and if certain other conditions are satisfied.
Uncertainty regarding the tax consequences of effecting short sales may limit
the extent to which a Portfolio may effect short sales.
Municipal Obligations. (Fixed Income Portfolio) Municipal
Obligations are debt obligations issued by or on behalf of states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities. Municipal Obligations
are issued by governmental entities to obtain funds for various public purposes,
including the construction of a wide range of public facilities, the refunding
of outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity bonds
that are issued by or on behalf of public authorities to finance various
privately-operated facilities are included within the term Municipal Obligations
if the interest paid thereon is exempt from federal income tax.
The two principal types of Municipal Obligations, in terms of
the source of payment of debt service on the bonds, consist of "general
obligation" and "revenue" issues. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Consequently, the credit quality of revenue bonds is
usually directly related to the credit standing of the user of the facility
involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, 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.
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The yields on Municipal Obligations are dependent upon a
variety of factors, including general economic and monetary conditions, money
market factors, conditions of the municipal bond market, size of a particular
offering, maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Obligations may be materially affected.
Variable Rate and Master Demand Notes. (Fixed Income
Portfolio) The Fixed Income Portfolio may invest in variable rate and master
demand notes. Variable rate demand notes ("VRDNs") are obligations issued by
corporate or governmental entities which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest upon a short notice period
not to exceed seven days. The interest rates are adjustable at intervals ranging
from daily to up to every six months to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments are typically based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic
adjustment in the interest rate paid (usually tied to the Treasury Bill auction
rate) and permit daily changes in the principal amount borrowed. While there may
be no active secondary market with respect to a particular VRDN purchased by a
Portfolio, the Portfolio may, upon the notice specified in the note, demand
payment of the principal of and accrued interest on the note at any time and may
resell the note at any time to a third party. The absence of such an active
secondary market, however, could make it difficult for the Portfolio to dispose
of the VRDN involved in the event 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
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intend to enter into stand-by commitments only with brokers, dealers and banks
that, in the opinion of Warburg, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, Warburg will
periodically review relevant financial information concerning the issuer's
assets, liabilities and contingent claims. The Portfolios will acquire stand-by
commitments only in order to facilitate portfolio liquidity and do not intend to
exercise their rights under stand-by commitments for trading purposes.
The amount payable to a Portfolio upon its exercise of a
stand-by commitment is normally (i) the Portfolio's acquisition cost of the
securities (excluding any accrued interest which the Portfolio paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Portfolio owned the securities,
plus (ii) all interest accrued on the securities since the last interest payment
date during that period.
The Portfolios expect that stand-by commitments will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Portfolios may pay for stand-by
commitments either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such commitments (thus reducing the
yield to maturity otherwise available for the same securities). The total amount
paid in either manner for outstanding stand-by commitments held in a Portfolio's
portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
The Portfolios would acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment would
not affect the valuation or assumed maturity of the underlying securities.
Stand-by commitments acquired by a Portfolio would be valued at zero in
determining net asset value. Where a Portfolio paid any consideration directly
or indirectly for a stand-by commitment, its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Portfolio. Stand-by commitments would not affect the average weighted
maturity of the Portfolio's portfolio.
The Internal Revenue Service has issued a revenue ruling to
the effect that a registered investment company will be treated for federal
income tax purposes as the owner of Municipal Obligations acquired subject to a
stand-by commitment and the interest on the Municipal Obligations will be tax
exempt to a Portfolio.
Warrants. A Portfolio may purchase warrants issued by domestic
and foreign companies to purchase newly created equity securities consisting of
common and preferred stock. The equity security underlying a warrant is
outstanding at the time the warrant is issued or is issued together with the
warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a warrant may decline
because of a decline in the value of the underlying security, the passage of
time, changes in interest rates or in the dividend or other policies of the
company whose equity underlies the warrant or a change in the perception as to
the future
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price of the underlying security, or any combination thereof. Warrants generally
pay no dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. A Portfolio may
not invest more than 15% of its net assets in non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market, repurchase agreements which have a maturity of longer
than seven days, time deposits maturing in more than seven calendar days and,
with respect to the Fixed Income Portfolio, VRDNs and master demand notes
providing for settlement upon more than seven days notice by the Portfolio.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the 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.
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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 sub-custodian, which may include the lender.
Non-Diversified Status. Each Portfolio is classified as
non-diversified within the meaning of the 1940 Act, which means that it is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. Each Portfolio's investments will be limited,
however, in order to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). See "Additional
Information Concerning Taxes." To qualify, each Portfolio will comply with
certain requirements, including limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
its total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of a single issuer.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be
changed without the affirmative vote of the holders of a majority of a
Portfolio's outstanding shares. Such majority is defined as the lesser of (i)
67% or more of the shares present at the meeting, if the holders of more than
50% of the outstanding shares of the Portfolio are present or represented by
proxy, or (ii) more than 50% of the outstanding shares. Investment limitations
10 through 13 may be changed by a vote of the Board at any time.
A Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow from banks for
temporary or emergency purposes and (ii) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings
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and any other transactions constituting borrowing by the Portfolio may not
exceed 30% of the value of the Portfolio's total assets. For purposes of this
restriction, short sales, the entry into currency transactions, options, futures
contracts, options on futures contracts, forward commitment transactions and
dollar roll transactions that are not accounted for as financings (and the
segregation of assets in connection with any of the foregoing) shall not
constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Portfolio may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the extent that
the investment in restricted securities and the sale of securities in accordance
with the Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Portfolio may invest in (i) securities secured by real estate, mortgages or
interests therein and (ii) securities of companies that invest in or sponsor
oil, gas or mineral exploration or development programs.
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.
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11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Portfolio's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) VRDNs and master demand notes providing for
settlement upon more than seven days notice by the Portfolio and (c) time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
13. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
General. If a percentage restriction (other than the
percentage limitation set forth in No. 1, above) is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of the
Portfolio's assets will not constitute a violation of such restriction.
Portfolio Valuation
The Prospectus discusses the time at which the net asset value
of each Portfolio is determined for purposes of sales and redemptions. The
following is a description of the procedures used by each Portfolio in valuing
its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an OTC market will be valued at the most recent
sale as of the time the valuation is made or, in the absence of sales, at the
mean between the bid and asked quotations. If there are no such quotations, the
value of the securities will be taken to be the highest bid quotation on the
exchange or market. Options or futures contracts will be valued similarly. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board.
Amortized cost involves valuing a portfolio instrument at its initial cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. Notwithstanding the foregoing, in determining the market value of
portfolio investments, a Portfolio may employ outside organizations (a "Pricing
Service") which may use a matrix, formula or other objective method that takes
into consideration market indexes, matrices, yield curves and other specific
adjustments. The procedures of Pricing Services are reviewed periodically by the
officers of the Trust under the general supervision and responsibility of the
Board, which may replace a Pricing Service at
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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, Inc. (the "NYSE")
is open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which 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. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service. If such
quotations are not available, the rate of exchange will be determined in good
faith pursuant to consistently applied procedures established by the Board. No
brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objectives. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or OTC, depending
on where it appears that the best price or execution will be obtained. The
purchase price paid by a Portfolio to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of securities from dealers, acting as either principals or agents in
the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed. There is generally no stated
commission in the case of securities traded in domestic or foreign OTC markets,
but the price of securities traded in OTC markets includes an undisclosed
commission or mark-up. U.S. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for each Portfolio and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security,
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the financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. Warburg may, in its discretion, effect transactions in
portfolio securities with dealers who provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to a Portfolio and/or other accounts over which Warburg exercises
investment discretion. Warburg may place portfolio transactions with a broker or
dealer with whom it has negotiated a commission that is in excess of the
commission another broker or dealer would have charged for effecting the
transaction if Warburg determines in good faith that such amount of commission
was reasonable in relation to the value of such brokerage and research services
provided by such broker or dealer viewed in terms of either that particular
transaction or of the overall responsibilities of Warburg. Research and other
services received may be useful to Warburg in serving both the Portfolios and
its other clients and, conversely, research or other services obtained by the
placement of business of other clients may be useful to Warburg in carrying out
its obligations to the Portfolios. Research may include furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities;
furnishing seminars, information, analyses and reports concerning issuers,
industries, securities, trading markets and methods, legislative developments,
changes in accounting practices, economic factors and trends and portfolio
strategy; access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance evaluation
and technical measurement services and quotation services; and products and
other services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and accessories
that deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to Warburg's own
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, securities to be sold
or purchased for a Portfolio may be aggregated with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for a Portfolio may be executed
through Counsellors Securities Inc., the Trust's distributor ("Counsellors
Securities"), if, in Warburg's judgment, the use of Counsellors Securities is
likely to result in price and execution at least as favorable as those of other
qualified brokers, and if, in the transaction, Counsellors Securities charges
the Portfolio a commission rate consistent with those charged by Counsellors
Securities to comparable unaffiliated customers in similar transactions. All
transactions with affiliated
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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.
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.
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<PAGE> 97
MANAGEMENT OF THE TRUST
Officers and Board of Trustees
The names (and ages) of the Trust's Trustees and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper (63)* Trustee
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (Retail electronics
and appliances) and Phoenix Home Life Mutual
Insurance Company; Director/Trustee of other investment
companies advised by Warburg.
Jack W. Fritz (71) Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
investment companies advised by Warburg.
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1970; Director of Counsellors
Securities,; Chairman of the Board of other investment companies
advised by Warburg.
Jeffrey E. Garten (51) Trustee
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for International
Trade from November 1993 to October 1995; Professor at Columbia
University from September 1992 to November 1993; Director/Trustee
of other investment companies advised by Warburg.
</TABLE>
28
<PAGE> 98
<TABLE>
<S> <C>
Thomas A. Melfe (66) Trustee
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton & Irvine;
New York, New York 10112 Chairman of the Board, Municipal Fund for New York
Investors, Inc.; Director/Trustee of
other investment companies advised by Warburg.
Arnold M. Reichman* (49) Trustee
466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant
New York, New York 10017-3147 Secretary of Warburg; Director of The RBB Fund, Inc.;
Associated with Warburg since 1984; Director,
Secretary and Chief Operating Officer of
Counsellors Securities; Director/Trustee of
other investment companies advised by Warburg.
Alexander B. Trowbridge (68) Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) from January 1990 to January 1994; Director or
Trustee of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), Waste Management, Inc.
(solid and hazardous waste collection and disposal), The
Rouse Company (real estate development), IRI International
(energy services), Harris Corp. (electronics and
communications equipment), The Gillette Co. (personal
care products) and Sun Company Inc. (petroleum refining
and marketing); Director/Trustee of other investment
companies advised by Warburg.
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1991; Officer of Counsellors Securities and other
investment companies advised by Warburg.
Stephen Distler (44) Vice President
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1984; Officer of
Counsellors Securities and other investment
companies advised by Warburg.
</TABLE>
* Indicates a Trustee who is an "interested person" of the Trust as
defined in the 1940 Act.
29
<PAGE> 99
<TABLE>
<S> <C>
Eugene P. Grace (46) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since April 1994; Attorney-at-law from September 1989 to
April 1994; Life insurance agent, New York Life Insurance
Company from 1993 to 1994; Officer of Counsellors
Securities and other investment companies advised by
Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1992; Officer of other investment companies advised by
Warburg.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc.
from September 1994 to October 1996; Associated
with BEA Associates from April 1993 to September
1994; Officer of other investment companies
advised by Warburg.
Janna Manes (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other
investment companies advised by Warburg.
</TABLE>
No employee of Warburg 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.
30
<PAGE> 100
Trustees' Compensation
(for the fiscal year ended December 31, 1997)+
<TABLE>
<CAPTION>
Name of Director Total Total Compensation from
Compensation from all Investment Companies
Trust Managed by Warburg*
<S> <C> <C>
John L. Furth** None None
Arnold M. Reichman** None None
Richard N. Cooper $1,500 $44,500
Donald J. Donahue*** $1,500 $44,500
Jack W. Fritz $1,500 $44,500
Jeffrey E. Garten**** None None
Thomas A. Melfe $1,500 $44,500
Alexander B. Trowbridge $1,500 $44,500
</TABLE>
- -----------------------
+ Estimates of future payments to be made pursuant to existing
arrangements.
* Each Trustee serves as a Director or Trustee of 24 investment companies
advised by Warburg.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg, and, accordingly, receive no compensation from the Trust or
any other investment company advised by Warburg.
*** Mr. Donahue resigned as Trustee of the Trust effective February 6,
1998.
**** Mr. Garten became a Trustee of the Trust effective February 6, 1998
and, accordingly, received no compensation from the Trust for the
fiscal year ended December 31, 1997.
As of March 31, 1998, no Trustees or officers of the Trust owned any of
the outstanding shares of the Portfolios.
Portfolio Managers
Dale C. Christensen, Co-Portfolio Manager and Portfolio
Manager of the Fixed Income and Global Fixed Income Portfolios, respectively,
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 also manages other Warburg Pincus Funds. 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 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.
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
31
<PAGE> 101
York University. Mr. van Daalen also manages other Warburg Pincus Funds. 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.
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. These fees
are calculated at an annual rate based on a percentage of a Portfolio's average
daily net assets. See the Prospectus, "Management of the Portfolios." The
advisory fees earned by Warburg and the co-administration fees earned by PFPC
and Counsellors Service, respectively, for the period from March 31, 1997
(commencement of operations) to December 31, 1997 are described below.
Fees earned by Warburg, PFPC and Counsellors Service, with waivers (if any):
<TABLE>
<CAPTION>
Counsellors
Warburg PFPC Service
--------------------- --------------------- -----------
Earned Waived Earned Waived
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Fixed Income $2,166 ($2,166) $216 ($216) $433
Global Fixed Income $12,047 ($12,047) $602 ($602) $1,205
</TABLE>
* During the period ended December 31, 1997, Warburg also reimbursed
expenses of $53,791 and $50,728 to the Fixed Income and Global Fixed
Income Growth Portfolios, respectively.
Custodians and Transfer Agent
PNC Bank, National Association ("PNC") serves as custodian of
each Portfolio's U.S. assets and State Street Bank and Trust Company ("State
Street") serves as custodian of each Portfolio's non-U.S. assets. Each custodian
serves pursuant to separate custodian agreements (the "Custodian Agreements").
Under the Custodian Agreements PNC and State Street each (i) maintains a
separate account or accounts in the name of the relevant Portfolio, (ii) holds
and transfers portfolio securities on account of the relevant Portfolio, (iii)
makes receipts and disbursements of money on behalf of the relevant Portfolio,
(iv) collects and receives all income and other payments and distributions on
account of the relevant Portfolio's portfolio securities held by it and (v)
makes periodic reports to the Board concerning the Trust's custodial
arrangements.
32
<PAGE> 102
PNC may delegate its duties under its Custodian Agreement with the Trust to a
wholly owned direct or indirect subsidiary of PNC or PNC Bank Corp. upon notice
to the Trust and upon the satisfaction of certain other conditions. State Street
is authorized to select one or more foreign banking institutions and foreign
securities depositaries as sub-custodian on behalf of the relevant Portfolio and
PNC is authorized to select one or more domestic banks or trust companies to
serve as sub-custodian on behalf of the Portfolios. PNC is an indirect wholly
owned subsidiary of PNC Bank Corp., and its principal business address is 1600
Market Street, Philadelphia, Pennsylvania 19103. The principal business address
of State Street is 225 Franklin Street, Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of the Trust pursuant to a Transfer
Agency and Service Agreement, under which State Street (i) issues and redeems
shares of each Portfolio, (ii) addresses and mails all communications by the
Trust to record owners of Portfolio shares, including reports to shareholders,
dividend and distribution notices and proxy material for its meetings of
shareholders, (iii) maintains shareholder accounts and, if requested,
sub-accounts and (iv) makes periodic reports to the Board concerning the
transfer agent's operations with respect to the Trust. State Street has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
("BFDS"), responsibility for most shareholder servicing functions. BFDS's
principal business address is 2 Heritage Drive, Boston, Massachusetts 02171.
Organization of the Trust
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of a
Portfolio. However, the Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from a Portfolio's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the relevant Portfolio would be unable to meet
its obligations, a possibility that Warburg believes is remote and immaterial.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
relevant Portfolio. The Trustees intend to conduct the operations of the Trust
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Trust.
All shareholders of a Portfolio, upon liquidation, will
participate ratably in the Portfolio's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees. Shares are transferable but
have no preemptive, conversion or subscription rights.
33
<PAGE> 103
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
As described in the Prospectus, shares of the Portfolios may
not be purchased or redeemed by individual investors directly but may be
purchased or redeemed only through Variable Contracts offered by separate
accounts of Participating Insurance Companies and through Plans, including
participant-directed Plans which elect to make a Portfolio an investment option
for Plan participants. The offering price of each Portfolio's shares is equal to
its per share net asset value. Additional information on how to purchase and
redeem a Portfolio's shares and how such shares are priced is included in the
Prospectus under "Net Asset Value."
Under the 1940 Act, a Portfolio may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (A Portfolio may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, a Portfolio
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Trust intends to comply with Rule 18f-1 promulgated
under the 1940 Act with respect to redemptions in kind.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Trust and its shareholders is intended to be only a summary and is
not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult the sponsoring Participating
Insurance Company separate account prospectus or the Plan documents or other
informational materials supplied by Plan sponsors and their own tax advisers
with respect to the particular tax consequences to them of an investment in a
Portfolio.
Each Portfolio intends to qualify as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, a Portfolio will pay no federal income taxes on its taxable
net investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to shareholders.
To qualify under Subchapter M, a Portfolio must, among other things: (i)
distribute to its shareholders the sum of at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains) plus at least 90% of its net
tax-exempt interest income; (ii) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
34
<PAGE> 104
the sale or other disposition of securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures, and forward
contracts) derived with respect to its business of investing in such securities
or foreign currencies; and (iii) diversify its holdings so that, at the end of
each fiscal quarter of the Portfolio (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. Government Securities and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the Portfolio's total assets and to
not more than 10% of the outstanding voting securities of the issuer, and (b)
not more than 25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. Government Securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses.
In addition, each Portfolio intends to comply with the
diversification requirements of Section 817(h) of the Code related to the
tax-deferred status of insurance company separate accounts. To comply with
regulations under Section 817(h) of the Code, each Portfolio will be required to
diversify its investments so that on the last day of each calendar quarter no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% is represented by any two investments, no more than 80% is
represented by any three investments and no more than 90% is represented by any
four investments. Generally, all securities of the same issuer are treated as a
single investment. For the purposes of Section 817(h), obligations of the United
States Treasury and each U.S. government agency or instrumentality are treated
as securities of separate issuers. The Treasury Department has indicated that it
may issue future pronouncements addressing the circumstances in which a Variable
Contract owner's control of the investments of a separate account may cause the
Variable Contract owner, rather than the Participating Insurance Company, to be
treated as the owner of the assets held by the separate account. If the Variable
Contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the Variable Contract owner's gross income. It is not known what
standards will be set forth in such pronouncements or when, if at all, these
pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Portfolios will be able to operate
as currently described, or that the Trust will not have to change the investment
goal or investment policies of a Portfolio. While a Portfolio's investment goal
is fundamental and may be changed only by a vote of a majority of the
Portfolio's outstanding shares, the Board reserves the right to modify the
investment policies of a Portfolio as necessary to prevent any such prospective
rules and regulations from causing a Variable Contract owner to be considered
the owner of the shares of the Portfolio underlying the separate account.
A Portfolio's short sales against the box, if any, and
transactions, if any, in foreign currencies, forward contracts, options and
futures contracts (including options, futures contracts and forward contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses recognized by
the Portfolio (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Portfolio, defer Portfolio
losses and cause the Portfolio to be subject to hyperinflationary currency
rules. These rules could therefore affect the character,
35
<PAGE> 105
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.
Recently, legislation was enacted that provides a
mark-to-market election for regulated investment companies effective for taxable
years beginning after December 31, 1997. This election would result in a
Portfolio being treated as if it had sold and repurchased all of its PFIC stock
at the end of each year. In this case, a Portfolio would report gains as
ordinary income and could deduct losses to the extent of previously recognized
gains. The elections, once made, would be effective for all subsequent taxable
years of a Portfolio, unless revoked with the consent of the Internal Revenue
Service. By making the election, a Portfolio could potentially ameliorate the
adverse tax consequences with respect to its ownership of shares in a PFIC, but
in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock.
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<PAGE> 106
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return or
yield in advertisements or in reports and other communications to shareholders.
The aggregate total returns for the Fixed Income and Global Fixed Income
Portfolios for the fiscal period from March 31, 1997 (commencement of
operations) to December 31, 1997, were 8.96% and 2.62%, respectively. The
aggregate total returns for the same period for the Fixed Income and Global
Fixed Income Portfolios, calculated without the waiver of fees by a Portfolio's
service providers, were (.52%) and (1.47%), respectively.
Total return is calculated by finding the average annual
compounded rates of return for the one-, five-, and ten- (or such shorter period
as the Portfolio has been offered) year periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a hypothetical
investment of $1,000; "T" is average annual total return; "n" is number of
years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five- or ten-year periods (or fractional
portion thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000 investment over the period and assumes
that all dividends and distributions are reinvested during the period.
A Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. A Portfolio may advertise average annual
calendar-year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph, except that the
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the Portfolio's
total return in longer market cycles.
Yield is calculated by annualizing the net investment income
generated by a Portfolio over a specified thirty-day period according to the
following formula:
YIELD = 2[( a-b +1)(6)-1]
---
cd
For purposes of this formula: "a" is dividends and interest
earned during the period; "b" is expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Each Portfolio's 30-day annualized current yield as of
December 31, 1997 was as follows (figures calculated without the waiver of fees
by a Portfolio's service provider(s), if any, are noted in italics):
<TABLE>
<CAPTION>
With waivers Without waivers
------------ ---------------
<S> <C> <C>
Fixed Income: 5.76% 4.16%
Global Fixed Income: 7.12% 4.17%
</TABLE>
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<PAGE> 107
A Portfolio's performance will vary from time to time
depending upon market conditions, the composition of its portfolio and operating
expenses allocable to it. As described above, total return is based on
historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Portfolio's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Performance quotations for the Portfolios include the
effect of deducting each Portfolio's expenses, but may not include charges and
expenses attributable to any particular Variable Contract or Plan, which would
reduce the returns described in this section. See the Prospectus, "Performance."
INDEPENDENT ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for the Trust. The financial statements that are
incorporated by reference in this Statement of Additional Information have been
audited by Coopers & Lybrand, whose report thereon appears elsewhere herein and
have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
The Trust's annual report dated December 31, 1997, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference with respect to all
information regarding the Portfolios included therein. The Trust will furnish
without charge a copy of its Annual Report upon request by calling the Trust at
(800) 369-2728.
MISCELLANEOUS
As of March 31, 1998, Warburg owned of record 100% of each
Portfolio's outstanding shares.
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<PAGE> 108
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
<PAGE> 109
economic conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
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
A-2
<PAGE> 110
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B". The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
A-3
<PAGE> 111
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
Commercial Paper Ratings
The following summarizes the two highest ratings for
commercial paper used by S&P and Moody's, respectively:
Commercial paper rated A-1 by S&P's indicates that the degree
of safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
designation. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1 (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
A-4
<PAGE> 112
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
A-5
<PAGE> 113
The following summarizes the highest four municipal ratings
used by Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated as are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the AA, A, BAA, BA and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols AA1, A1, BAA1, BA1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
A-6
<PAGE> 114
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-7
<PAGE> 115
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Financial Statements included in Part A:
(a) Financial Highlights for the period March
31, 1997 (commencement of operations) to
December 31, 1997.
(2) Financial Statements included in Part B:
Audited Financial Information for the period March
31, 1997 (commencement of operations) to December
31, 1997, incorporated by reference to the Trust's
Annual Report dated December 31, 1997:
(i) Statement of Net Assets.
(ii) Statement of Operations.
(iii) Statement of Changes in Net Assets.
(iv) Notes to Financial Statements.
(v) Report of Coopers & Lybrand L.L.P.,
Independent Accountants.
(b) Exhibits:
Exhibit No. Description of Exhibit
- ----------- ----------------------
1 Agreement and Declaration of Trust.(1)
2(a) By-Laws.(1)
2(b) Amendment to By-Laws.(2)
3 Not applicable.
4 Form of Share Certificates.(3)
- ------------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on January 2, 1997 (Securities Act File No. 333-19175).
(2) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit to
Post-Effective Amendment No. 19 to the Registration Statement on Form
N-1A of Warburg, Pincus Capital Appreciation Fund filed on February 23,
1998 (Securities Act File No. 33-12344; Investment Company Act File No.
811-5041).
<PAGE> 116
5 Investment Advisory Agreements.(3)
6 Form of Distribution Agreement.(3)
7 Not applicable.
8(a) Form of Custodian Agreement between PNC Bank and
the Trust.(3)
(b) Form of Custodian Agreement between State Street
Bank and Trust Company and the Trust.(3)
9(a) Form of Transfer Agency Agreement.(3)
(b) Form of Co-Administration Agreement between
Counsellors Funds Service and the Trust.(3)
(c) Form of Co-Administration Agreement between PFPC
Inc. and the Trust.(3)
(d) Form of Participation Agreement.(3)
10 Opinion and Consent of Willkie Farr &
Gallagher, counsel to the Trust.
11 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants.
12 Not Applicable.
13 Form of Purchase Agreement.(3)
14 Not Applicable.
15 Not Applicable
16 Schedules of Computation of Performance Quotations.
17 Financial Data Schedules.
- -------------------
(3) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on March 17, 1997 (Securities Act File No. 333-19175).
<PAGE> 117
Item 25. Persons Controlled by or Under Common Control with Registrant
From time to time, Warburg Pincus Asset Management, Inc.
("Warburg"), may be deemed to control the Trust and other registered investment
companies it advises through its beneficial ownership of more than 25% of the
relevant fund's shares on behalf of discretionary advisory clients. Warburg has
five wholly-owned subsidiaries: Counsellors Securities Inc., a New York
corporation; Counsellors Funds Service, Inc., a Delaware corporation;
Counsellors Agency Inc., a New York corporation; Warburg, Pincus Investments
International (Bermuda), Ltd., a Bermuda corporation; and Warburg, Pincus Asset
Management, International, Inc., a Delaware corporation.
Item 26. Number of Holders of Securities
as of March 31, 1998
(shares of beneficial interest
par value $.001 per share)
Fixed Income 1
Global Fixed Income 1
Item 27. Indemnification
Registrant and officers and directors of Warburg, Counsellors
Securities Inc. ("Counsellors Securities") and Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Trust's initial Registration Statement on
Form N-1A filed on January 2, 1997.
Item 28. Business and Other Connections of Investment Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus Asset
Management Holdings, Inc., 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
<PAGE> 118
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; Warburg Pincus Institutional Fund;
Warburg Pincus Intermediate Maturity Government Fund; Warburg Pincus
International Equity Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus
Japan OTC Fund; Warburg Pincus Major Foreign Markets 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; 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)
(2) Warburg Pincus Asset Management, 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)
<PAGE> 119
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian,
shareholder servicing agent, 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 shareholder
servicing agent, transfer agent and
dividend disbursing agent)
(8) PNC Bank, National Association
1600 Market Street
Philadelphia, Pennsylvania 19103
(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 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.
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act and has duly caused this Amendment 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 7th day of April, 1998.
WARBURG, PINCUS TRUST II
By:/s/Eugene L. Podsiadlo
-------------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act, this Amendment has
been signed below by the following persons in the capacities and on the date
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/John L. Furth Chairman of the April 7, 1998
- ------------------------------- Board of Trustees
John L. Furth
/s/Eugene L. Podsiadlo President April 7, 1998
- -------------------------------
Eugene L. Podsiadlo
/s/Howard Conroy Vice President and April 7, 1998
- ------------------------------- Chief Financial
Howard Conroy Officer
/s/Daniel S. Madden Treasurer and April 7, 1998
- ------------------------------- Chief Accounting
Daniel S. Madden Officer
/s/Richard N. Cooper Trustee April 7, 1998
- -------------------------------
Richard N. Cooper
/s/Jack W. Fritz Trustee April 7, 1998
- -------------------------------
Jack W. Fritz
/s/Jeffrey E. Garten Trustee April 7, 1998
- -------------------------------
Jeffrey E. Garten
/s/Thomas A. Melfe Trustee April 7, 1998
- -------------------------------
Thomas A. Melfe
/s/Arnold M. Reichman Trustee April 7, 1998
- -------------------------------
Arnold M. Reichman
/s/Alexander B. Trowbridge Trustee April 7, 1998
- -------------------------------
</TABLE>
<PAGE> 121
Alexander B. Trowbridge
<PAGE> 122
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
10 Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Trust.
11 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
16 Schedules of Computation of Performance Quotations.
17 Financial Data Schedules.
<PAGE> 1
EXHIBIT 10
April 6, 1998
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
Re: Post-Effective Amendment No. 2 to Registration Statement
(Securities Act File No. 333-19175; Investment Company Act
File No. 811-07999) (the "Registration Statement")
Ladies and Gentlemen:
You have requested us, as counsel to Warburg, Pincus Trust II (the "Trust"), a
business trust organized under the laws of the Commonwealth of Massachusetts, to
furnish you with this opinion in connection with the Trust's filing of
Post-Effective Amendment No. 2 to its Registration Statement on Form N-1A (the
"Amendment").
We have examined copies of the Trust's Declaration of Trust, (the
"Declaration"), the Trust's By-Laws, as amended (the "By-Laws"), and the
Amendment. We have also examined such other records, documents, papers, statutes
and authorities as we have deemed necessary to form a basis for the opinion
hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us. As to various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Trust and
others.
Based upon the foregoing, we are of the opinion that the Shares, when duly sold,
issued and paid for in accordance with the terms of the Declaration, the Trust's
By-Laws and the Prospectuses and Statement of Additional Information ("SAI")
included as part of the Amendment, will be validly issued and will be fully paid
and non-assessable shares of beneficial interest of the Trust, except that, as
set forth in the Amendment, shareholders of the Trust may under certain
circumstances be held personally liable for its obligations.
We hereby consent to the filing of this opinion as an exhibit to the Amendment,
to the reference to our name under the heading "Independent Accountants and
Counsel" in the "SAI" included as part of the Amendment, and to the filing of
this opinion as an
<PAGE> 2
Warburg, Pincus Trust II
April 6, 1998
Page 2
exhibit to any application made by or on behalf of the Trust or any distributor
or dealer in connection with the registration or qualification of the Trust or
the Shares under the securities laws of any state or other jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions.
Very truly yours,
/s/Willkie Farr & Gallagher
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective
Amendment No. 2 to the Registration Statement under the Securities Act of 1933
on Form N-1A (File No. 333-19175) of our report dated February 9, 1998 of our
audit of the financial statements and financial highlights of Warburg, Pincus
Trust II (Fixed Income Portfolio and Global Fixed Income Portfolio), which
report is included in the Annual Report to Shareholders for the period ended
December 31, 1997. We also consent to the reference to our Firm under the
caption "Financial Highlights" in the Prospectuses and under the caption
"Independent Accountants and Counsel" in the Statement of Additional
Information.
/s/Coopers & Lybrand L.L.P.
- ---------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 1, 1998
<PAGE> 1
Exhibit 16
Schedule 16 Calculations for Warburg Pincus Trust II
Annualized Total Returns With Waivers as of 12/31/97
Warburg Pincus Trust II Fixed Income Fund
Common Shares
1/1
From inception (10,895.70/10,000) -1) = 8.96%
Warburg Pincus Trust II Global Fixed Income Fund
Common Shares
1/1
From Inception ((10,262.21/10,000) -1 = 2.62%
Annualized Total Returns Without Waivers as of 12/31/97
Warburg Pincus Trust II Fixed Income Fund
Common Shares
1/1
From Inception ((9,948.32/10,000) -1) = (.52)%
Warburg Pincus Trust II Global Fixed Income Fund
Common Shares
1/1
From Inception ((9,853.53/10,000) -1) = (1.47)%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001029879
<NAME> WARBURG PINCUS INCOME PORTFOLIO
<SERIES>
<NUMBER> 01
<NAME> FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 574652
<INVESTMENTS-AT-VALUE> 589847
<RECEIVABLES> 8962
<ASSETS-OTHER> 21668
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 620477
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21138
<TOTAL-LIABILITIES> 21138
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 600993
<SHARES-COMMON-STOCK> 5114
<SHARES-COMMON-PRIOR> 55000
<ACCUMULATED-NII-CURRENT> 22915
<OVERDISTRIBUTION-NII> 16849
<ACCUMULATED-NET-GAINS> 11157
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15195
<NET-ASSETS> 599339
<DIVIDEND-INCOME> 881
<INTEREST-INCOME> 26324
<OTHER-INCOME> 0
<EXPENSES-NET> 4289
<NET-INVESTMENT-INCOME> 22916
<REALIZED-GAINS-CURRENT> 11155
<APPREC-INCREASE-CURRENT> 15195
<NET-CHANGE-FROM-OPS> 49266
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 39765
<DISTRIBUTIONS-OF-GAINS> 11155
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 550075
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 50918
<NET-CHANGE-IN-ASSETS> 599339
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2166
<INTEREST-EXPENSE> 5
<GROSS-EXPENSE> 56514
<AVERAGE-NET-ASSETS> 575071
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> (.72)
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
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<NAME> WARBURG PINCUS TRUST II
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<NAME> GLOBAL FIXED INCOME PORTFOLIO
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