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ANNUAL
REPORT
December 31, 1997
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
The Warburg Pincus Trust II (the "Trust") Shares are not available directly to
individual investors but may be offered only through certain insurance products
and pension and retirement plans.
More complete information about the Fund, including charges and expenses and,
where applicable, the special considerations and risks associated with
international investing is provided in the Prospectus, which must precede or
accompany this report and which should be read carefully before investing. You
may obtain additional copies by calling 800-369-2728 or by writing to Warburg
Pincus Funds, P.O. Box 9030, Boston, MA 02205-9030.
WARBURG PINCUS
ASSET MANAGEMENT
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From time to time, the Portfolios' investment adviser and co-administrator
may waive some fees and/or reimburse some expenses, without which performance
would be lower. Waivers and /or reimbursements are subject to change.
Returns are historical and include changes in share price and reinvestment of
dividends and capital gains. Past performance cannot guarantee future results.
Returns and share price will fluctuate, and redemption value may be more or
less than original cost.
The views of the Portfolios' management are as of the date of the letters and
Portfolios' holdings described in this annual report are as of December 31,
1997; these views and Portfolio holdings may have changed subsequent to these
dates. Nothing in this annual report is a recommendation to purchase or sell
securities.
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WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT--DECEMBER 31, 1997
February 9, 1998
Dear Shareholder:
The objective of Warburg Pincus Trust II--Fixed Income Portfolio (the
"Portfolio") is total return consistent with prudent investment management. The
Portfolio pursues its objective by investing 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 and repurchase agreements with respect to portfolio
securities.
For the nine months ended December 31, 1997 (the Portfolio's inception date was
March 31, 1997), the Portfolio had a total return of 8.96%, vs. a 7.99% gain for
the Lehman Intermediate Government/Corporate Bond Index.
The April-through-December period was a positive one for the domestic bond
market. Despite a continued healthy economy--as measured, for example, by the
unemployment rate, which fell to a 25-year low during the period--inflation
remained under control. Also helping bonds was a "flight to safety" sparked by a
worsening financial crisis in Asia. Many investors, concerned that the crisis
could hamper corporate earnings, took refuge in fixed-income securities, in
particular high-quality bonds such as U.S. Treasuries. These trends, along with
projections of a federal budget surplus and the Federal Reserve's continued
reluctance to raise interest rates, caused bonds to rally over the period.
Our strategy throughout was to attempt to optimally position the Portfolio on
the yield curve, given our outlook on the markets from a risk-vs.-reward
perspective. Our efforts in this regard contributed positively to the
Portfolio's performance for the nine months. We maintained a modestly
longer-than-average duration (compared to that of the Portfolio's benchmark)
over the period, which proved beneficial, given the bond market's rally.
We also aimed to enhance the Portfolio's return through sector allocation. U.S.
Treasuries accounted for the bulk of the Portfolio's assets during the period,
as we continued to find them most attractive on a risk-reward basis. We also
held a position in corporate bonds, a weighting we increased late in the period
when their widening yield spreads over U.S. Treasuries created a number of
buying opportunities (we saw particularly good values
1
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among A-rated bonds). The Portfolio's corporate issues had a positive impact on
its performance, thanks in large part to the economy's continued growth.
Elsewhere, we maintained a significant weighting in mortgage-backed securities,
where we saw the best value in the commercial mortgage-backed area. These issues
helped the Portfolio's return over the 12 months, as did the Portfolio's smaller
position in preferred securities.
Dale C. Christensen M. Anthony E. van Daalen
Co-Portfolio Manager Co-Portfolio Manager
2
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WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO
SINCE INCEPTION AS OF DECEMBER 31, 1997
The graph below illustrates the hypothetical investment of $10,000 in Warburg
Pincus Trust II - Fixed Income Portfolio (the "Portfolio") from March 31, 1997
(inception) to December 31, 1997, compared to the Lehman Intermediate
Government/Corporate Bond Index ("LIGC") * for the same time period.
[PERFORMANCE GRAPH]
Aggregate Total Returns Since Inception (3/31/97-12/13/97).............8.96%+
DATE Portfolio LIGC
Mar-97 $10,000 $10,000
Apr-97 $10,110 $10,118
May-97 $10,200 $10,201
Jun-97 $10,330 $10,295
Jul-97 $10,629 $10,504
Aug-97 $10,529 $10,451
Sep-97 $10,649 $10,573
Oct-97 $10,770 $10,690
Nov-97 $10,790 $10,714
Dec-97 $10,896 $10,799
* The Lehman Intermediate Government/Corporate Bond Index is an unmanaged index
(with no defined investment objective) of intermediate-term government and
corporate bonds, and is calculated by Lehman Brothers Inc.
+ Non annualized.
3
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WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT--DECEMBER 31, 1997
February 9, 1998
Dear Shareholder:
The objective of Warburg Pincus Trust II--Global Fixed Income Portfolio (the
"Portfolio") is total return, consisting of a combination of interest income,
currency gains and capital appreciation, consistent with prudent management.
For the nine months ended December 31, 1997 (the Portfolio's inception date was
March 31,1997), the Portfolio gained 2.62% vs. gains of 9.80% for the Salomon
Brothers World Government Bond Index (Currency-Hedged) and 5.44% for the Lipper
World Income Funds Average.
Supported by continued low inflation and declining interest rates, most foreign
bond markets saw gains for the nine months in local-currency terms (in dollar
terms, these returns were less impressive, as the dollar strengthened vs. most
currencies over the period). Many markets were volatile, however, and thus we
maintained a cautious approach throughout. In general, we found the most
attractive inflation-adjusted yields (and risk-adjusted total-return potential)
among intermediate-term bonds.
In terms of geographic allocation, European and dollar-bloc countries accounted
for the bulk of the Portfolio during the period. In Europe, we focused on
high-quality bonds from the continent's "core" economies, most specifically
Germany. The Portfolio's European holdings contributed positively to its
performance for the period, buoyed by modest economic growth and lower budget
deficits across the region.
Within dollar-bloc markets, we emphasized the U.S., where we favored
intermediate-maturity U.S. Treasuries for their historically high
inflation-adjusted yields. These securities had a positive impact on the
Portfolio's return, thanks to continued subdued inflation and declining domestic
interest rates over the period. We also found value in Canadian issues, which
likewise helped the Portfolio's performance.
In other areas, we maintained a weighting in Asia, one that contributed
negatively to the Fund's performance for the period. Asia's worsening currency
crisis had a dramatic and negative impact on bond markets throughout the region.
Our holdings, though denominated in dollars, and thus not as vulnerable to the
crisis as bonds denominated in Asian currencies, nonetheless suffered due to
growing credit-related concerns in the area.
4
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We hedged the majority of the Portfolio's foreign currency exposure during the
period (as of December 31, approximately 94% of the Portfolio was
dollar-denominated or hedged into dollars). This proved beneficial to the
Portfolio's return, given the dollar's continued rise vs. most currencies.
Laxmi C. Bhandari Dale C. Christensen
Co-Portfolio Manager Co-Portfolio Manager
5
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WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME
PORTFOLIO SINCE INCEPTION AS OF DECEMBER 31, 1997
The graph below illustrates the hypothetical investment of $10,000 in Warburg
Pincus Trust 11 - Global Fixed Income Portfolio (the "Portfolio") from March 31,
1997 (inception) to December 31, 1997, compared to the Salomon Brothers World
Government Bond Index (Currency-Hedged) ("Salomon")* and the Lipper World Income
Funds Average ("Lipper")** for the same time period.
[PERFORMANCE GRAPH]
Aggregate Total Return Since Inception (3/31/97-12/31/97)...2.62%+
DATE Portfolio Salomon Lipper
Mar-97 $10,000 $10,000 $10,000
Apr-97 $10,100 $10,110 $10,024
May-97 $10,160 $10,171 $10,212
Jun-97 $10,290 $10,322 $10,343
Jul-97 $10,510 $10,526 $10,401
Aug-97 $10,479 $10,504 $10,366
Sep-97 $10,589 $10,674 $10,594
Oct-97 $10,419 $10,785 $10,472
Nov-97 $10,389 $10,854 $10,490
Dec-97 $10,262 $10,980 $10,544
* The Salomon Brothers World Government Bond Index (Currency-Hedged) is a market
capitalization-weighted index designed to track major government debt markets
and is currency-hedged into U.S. dollars.
**The Lipper World Income Funds Average is an arithmetic average of all world
income funds, tracked by Lipper Analytical Services, that invest in non-U.S.
dollar and U.S. dollar debt instruments with unspecified maturities and
durations, or other income-producing securities.
+Non annualized.
6
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Warburg Pincus Trust II -- Fixed Income Portfolio
Statement of Net Assets
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratings!
Par (Moody's/S&P) Maturity Rate % Value
--- ------------- -------- ------ -----
<S> <C> <C> <C> <C>
CORPORATE BONDS/NOTES (31.2%)
$ 15,000 ABN-AMRO Bank NV New York Branch Subordinate
Deposit Notes (Callable 08/01/04 @ $100.00) (Aa2, NR) 08/01/09 8.250 $ 16,275
10,000 Conagra, Inc. Senior Notes (Putable 08/01/09 @ $100.00) (Baa1, BBB+) 08/01/27 6.700 10,237
10,000 Countrywide Home Loan Inc. Medium Term Notes (A3, A) 10/08/02 6.380 10,025
10,000 First Industrial LP (Putable 05/15/02 @ $100.00) (Baa2, BBB)) 05/15/27 7.150 10,287
15,000 First Union Corp. Subordinate Debentures
(Putable 10/15/05 @ $100.00) (A2,A-) 10/15/35 6.550 15,319
15,000 Ingersoll-Rand Co. (Putable 11/19/03 @ $100.00) (A3, A-) 11/19/27 6.230 15,056
15,000 J.C. Penney & Co., Inc. Debentures
(Putable 08/15/26 @ $100.00) (A2, A) 08/15/26 6.900 15,656
10,000 Lowe's Companies Medium Term Notes
(Putable 05/15/07 @ $100.00) (A2, A) 05/15/37 7.110 10,600
10,000 Merck and Company, Inc. Medium Term Notes
(Putable 05/03/99 @ $100.00) (Aaa, AAA) 05/03/37 5.760 10,225
10,000 Midland Bank PLC Yankee Subordinate Notes
(Putable 05/01/07 @ $100.00) (A1, A) 05/01/25 7.650 11,050
10,000 Norfolk Southern Corp. (Putable 05/01/04 @ $100.00) (Baa1, BBB+) 05/01/37 7.050 10,612
10,000 Philip Morris Companies, Inc. Notes (A2, A) 07/15/05 7.000 10,225
10,000 Philips Electronics NV Notes
(Putable 06/01/06 @ $100.00) (A3, BBB+) 06/01/26 7.200 10,512
10,000 Rohr Industries Subordinated Debenture
(Pre-refunded 03/01/98 @ $104.16) (B2, B) 03/01/98 9.250 10,363
10,000 Salomon Smith Barney Holdings, Inc. Notes (A2, A) 10/01/04 6.375 10,013
10,000 Times Mirror Co. Notes (Putable 09/15/04 @ $100.00) (A2, A+) 09/15/27 6.610 10,263
-------
TOTAL BONDS (Cost $181,203) 186,718
-------
MORTGAGED-BACKED SECURITIES (7.4%)
20,000 Federal National Mortgage Association, Guaranteed
REMIC Trust Series 1997-51, Class KB (Aaa, AAA) 03/20/08 7.000 20,278
23,981 Nomura Asset Securities Corp. Series 1994-4B, Class 4A (Aaa, AAA) 09/25/24 8.300 24,588
-------
TOTAL MORTGAGED-BACKED SECURITIES (Cost $44,777) 44,866
-------
UNITED STATES TREASURY OBLIGATIONS (58.0%)
110,000 U.S. Treasury Note (Aaa, AAA) 08/15/02 6.375 112,880
90,000 U.S. Treasury Note (Aaa, AAA) 02/15/05 7.500 98,977
50,000 U.S. Treasury Principal Strip (Aaa, AAA) 08/15/99 5.705# 45,657
30,000 U.S. Treasury Interest Strip (Aaa, AAA) 05/15/02 5.840# 23,458
100,000 U.S. Treasury Interest Strip (Aaa, AAA) 02/15/05 5.800# 66,653
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TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost $338,297) 347,625
-------
<CAPTION>
Number of
Shares Rate Value
- --------- ---- -----
<S> <C> <C> <C>
PREFERRED STOCK (1.8%)
Real Estate (1.8%)
200 Equity Residential Properties Trust Series D REIT 8.600 5,213
200 Loewen Group Capital Series A REIT (Callable 08/31/04 @ $25.00) 9.450 5,425
----------
TOTAL PREFERRED STOCK (Cost $10,375) 10,638
----------
TOTAL INVESTMENTS AT VALUE (98.4%) (Cost $574,652*) 589,847
OTHER ASSETS IN EXCESS OF LIABILITIES (1.6%) 9,492
----------
NET ASSETS (100.0%) (applicable to 60,114 Shares outstanding) $ 599,339
==========
NET ASSET VALUE, offering and redemption price per Share ($599,339 / 60,114) $ 9.97
==========
</TABLE>
INVESTMENT ABBREVIATIONS
NR = Not Rated
REMIC = Real Estate Mortgage Investment Conduit
REIT = Real Estate Investment Trust
- -------------------------------------------------------------------------------
! Credit ratings given by Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group are unaudited."
# Rate shown reflects yield to maturity on date of purchase.
* Also cost for federal income tax purposes.
See Accompanying Notes to Financial Statements
7
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Warburg Pincus Trust II -- Global Fixed Income Portfolio
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratings!
Par++ (Moody's/S&P) Maturity Rate % Value
- ----- ------------- -------- ------ -----
<S> <C> <C> <C> <C>
BONDS (53.3%)
Canada (9.8%)
200,000 Canadian Government (Aa1, AAA) 08/01/99 6.500 $ 142,771
---------
Cayman Islands (7.1%)
50,000(A) Ayala Corp. International Finance (Convertible) (BBB, BBB) 12/08/00 8.280# 37,562
100,000(A) APP Global Finance FRN III (B3, NR) 04/17/02 10.094< 66,400
---------
103,962
---------
Germany (21.3%)
324,000 Bundesrepublic Deutschland (Aaa, NR) 10/14/05 6.500 194,936
200,000 Bundesrepublic Deutschland (Aaa, NR) 06/20/16 6.000 115,448
---------
310,384
---------
Indonesia (5.8%)
50,000(A) Bank Negara (Baa3, BBB) 02/15/07 7.625 36,438
50,000(A) Indah Kiat International Finance Co.
(Callable 06/15/01 @ $106.25) (Ba2, BB) 06/15/06 12.500 48,000
---------
84,438
---------
Moldova (6.2%)
100,000(A) Republic of Moldova (Ba2, NR) 06/13/02 9.875 90,500
---------
South Korea (3.1%)
50,000(A) Korea Development Bank (A1, A+) 12/01/00 9.600 44,875
---------
TOTAL BONDS (Cost $832,265) 776,930
---------
UNITED STATES TREASURY OBLIGATIONS (46.7%)
510,000 U.S. Treasury Note (Aaa, AAA) 11/30/02 5.750 510,612
100,000 U.S. Treasury Note (Aaa, AAA) 05/31/01 6.500 102,412
67,000 U.S. Treasury Note (Aaa, AAA) 06/30/99 6.000 67,360
---------
TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost $679,882) 680,384
---------
TOTAL INVESTMENTS AT VALUE (100.0%)(Cost $1,512,147*) 1,457,314
=========
</TABLE>
INVESTMENT ABBREVIATIONS
NR = Not Rated
- --------------------------------------------------------------------------------
++ Unless otherwise indicated below, all securities are denominated in the
currency of the issuers' country of origin.
! Credit ratings given by Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group are unaudited.
(A) Denominated in U.S. Dollars
# Rate shown reflects yield to maturity on date of purchase.
* Also cost for federal income tax purposes.
< Interest rate shown reflects current rate on instrument with
variable rate or step coupon rate.
See Accompanying Notes to Financial Statements
8
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Warburg Pincus Trust II -- Global Fixed Income Portfolio
Statement of Assets and Liabilities
December 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value (Cost $1,512,147) $1,457,314
Cash 3,787
Receivable for investment securities sold 100,000
Receivable for unrealized gains on forward contracts 22,084
Interest receivable (Cost $20,888) 20,724
Other assets 14,533
----------
Total Assets 1,618,442
----------
Liabilities:
Accrued expenses payable 15,990
Payable to affiliate 6,044
----------
Total Liabilities 22,034
----------
NET ASSETS, applicable to 168,629 Shares outstanding $1,596,408
==========
NET ASSET VALUE, offering and redemption price per Share
($1,596,408/168,629) $ 9.47
==========
See Accompanying Notes to Financial Statements.
9
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Warburg Pincus Trust II Portfolios
Statements of Operations
For the Period Ended December 31, 1997
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<TABLE>
<CAPTION>
Fixed Income Global Fixed Income
Portfolio(1) Portfolio(1)
------------ -------------------
<S> <C> <C>
Investment Income:
Dividends $ 881 $ 0
Interest 26,324 80,203
-------- --------
Total investment income 27,205 80,203
-------- --------
Expenses:
Investment advisory 2,166 12,047
Administrative services 649 1,807
Professional fees 16,327 24,170
Custodian/Sub-custodian 9,203 1,400
Trustees 3,125 3,125
Interest 5 8
Offering/Organizational costs 21,634 21,774
Printing 1,625 1,625
Registration 200 400
Transfer agent 338 231
Miscellaneous 1,242 655
-------- -------
56,514 67,242
Less fees waived, expenses reimbursed and transfer agent offsets (52,225) (55,316)
-------- -------
Total expenses 4,289 11,926
-------- -------
Net investment income 22,916 68,277
-------- -------
Net Realized and Unrealized Gain (Loss)from
Investments and Foreign Currency Related
Items:
Net realized gain from security transactions 11,155 24,275
Net realized loss from foreign currency related items 0 (13,304)
Net unrealized appreciation (depreciation) from
investments and foreign currency related items 15,195 (32,913)
-------- --------
Net realized and unrealized gain (loss) from investments
and foreign currency related items 26,350 (21,942)
-------- --------
Net increase in net assets resulting from
operations $ 49,266 $ 46,335
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) For the Period March 31, 1997 (Commencement of Operations) through
December 31, 1997.
See Accompanying Notes to Financial Statements.
10
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Warburg Pincus Trust II Portfolios
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fixed Income Global Fixed Income
Portfolio Portfolio
--------------- -------------------
For the Period For the Period
March 31, 1997 March 31, 1997
(Commencement of (Commencement of
Operations) through Operations) through
December 31, 1997 December 31, 1997
------------------ -------------------
<S> <C> <C>
From Operations:
Net investment income $ 22,916 $ 68,277
Net realized gain from security transactions 11,155 24,275
Net realized loss from foreign currency related items 0 (13,304)
Net unrealized appreciation (depreciation) from
investments and foreign currency related items 15,195 (32,913)
----------- -----------
Net increase in net assets resulting
from operations 49,266 46,335
----------- -----------
From Distributions:
Dividends from net investment income (22,916) (68,277)
Distributions in excess of net investment income (16,849) (16,847)
Distributions from realized gains (11,155) (10,971)
Distributions in excess of realized gains 0 (32,902)
----------- -----------
Net decrease in net assets from
distributions (50,920) (128,997)
----------- -----------
From Capital Share Transactions:
Proceeds from sale of shares 500,075 1,500,075
Reinvested Dividends 50,918 128,995
----------- -----------
Net increase in net assets from capital
share transactions 550,993 1,629,070
----------- -----------
Net increase in net assets 549,339 1,546,408
Net Assets:
Beginning of period 50,000 50,000
----------- -----------
End of period $ 599,339 $ 1,596,408
=========== ===========
Undistributed net investment income $ 0 $ 0
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
11
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Warburg Pincus Trust II -- Fixed Income Portfolio
Financial Highlights
(For a Share of the Portfolio Outstanding Throughout the Period)
- --------------------------------------------------------------------------------
<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.
See Accompanying Notes to Financial Statements.
12
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Warburg Pincus Trust II -- Global Fixed Income Portfolio
Financial Highlights
(For a Share of the Portfolio Outstanding Throughout the Year)
- -------------------------------------------------------------------------------
<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 ratios due to
waivers/reimbursements 4.59 %*
Portfolio Turnover Rate 139.81 %+
</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.
See Accompanying Notes to Financial Statements.
13
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<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Warburg Pincus Trust II (the "Trust") is an open-end management investment
company registered under the Investment Company Act of 1940, as amended, and
currently offers two investment funds (the "Portfolios"): Fixed Income Portfolio
is a non-diversified investment fund that seeks total return consistent with
prudent investment management; Global Fixed Income Portfolio is a
non-diversified investment fund that 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 (a) life insurance
companies for allocation to certain of their separate accounts established for
the purpose of funding variable annuity contracts and variable life insurance
contracts and (b) tax-qualified pension and retirement plans ("Plans"),
including participant-directed Plans which elect to make a Portfolio an
investment option for Plan participants.
The net asset value of each Portfolio is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Portfolio's investments are
valued at market value, which is currently determined using the last reported
sales price. If no sales are reported, investments are generally valued at the
mean between the last reported bid and ask prices. In the absence of market
quotations, investments are generally valued at fair value as determined by or
under the direction of the Trust's Board of Trustees. Short-term investments
that mature in 60 days or less are valued on the basis of amortized cost, which
approximates market value.
The books and records of the Portfolios are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate
at the end of the period. Translation gains or losses resulting from changes in
the exchange rate during the reporting period and realized gains and losses on
the settlement of foreign currency transactions are reported in the results of
operations for the current period. The Portfolios do not isolate that portion of
gains and losses on investments in equity securities which are due to changes in
the foreign exchange rate from that which are due to changes in market prices of
equity securities. The Global Fixed Income portfolio isolates that portion of
gains and losses on investments in debt securities which are due to changes in
the foreign exchange rate from that which are due to changes in market prices of
debt securities.
The Portfolios may invest in securities of foreign countries and governments
which involve certain risks in addition to those inherent in domestic
investments. Such risks generally include, among other things fluctuations in
currency exchange rates, revaluation of currencies, future adverse political and
economic developments and the imposition of foreign laws and restrictions.
Securities of foreign issuers are often subject to less rigorous regulatory
practices and requirements than those applied in the United States and may also
be less liquid (and their prices more volatile) than securities of comparable
U.S companies. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S economy in many respects.
Security transactions are accounted for on a trade date basis. Interest
income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date. The cost of investments sold is determined by use of the
specific identification method for both financial reporting and income tax
purposes.
14
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<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Dividends from net investment income and distributions of net realized
capital gains, if any, are declared and paid annually. However, to the extent
that a net realized capital gain can be reduced by a capital loss carryover,
such gain will not be distributed. Income and capital gain distributions are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles.
No provision is made for federal income taxes as it is the Trust's intention
to have each Portfolio continue to qualify for and elect the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
make the requisite distributions to its shareholders which will be sufficient to
relieve it from federal income and excise taxes.
Costs incurred by the Trust in connection with its organization have been
deferred and are being amortized over a period of five years from the date the
Trust commenced its operations. Costs incurred by the Portfolios in connection
with the offering of their shares have been deferred and are being amortized
over a one year period from the date each Portfolio commenced its operations.
The Trust, together with other funds advised by Warburg Pincus Asset
Management, Inc., the Portfolio's investment adviser ("Warburg"), has
established committed and uncommitted lines of credit facilities with certain
banks for temporary or emergency purposes primarily relating to fund share
redemption's and funding payments of dividend or capital gain distributions.
Under the terms of the committed line of credit, the Warburg Funds with access
to the facility pay a commitment fee at the rate of .10% per annum on the amount
of the line of credit. In addition, under the terms of both the committed and
uncommitted facilities, the Warburg Funds will pay interest on borrowings at the
bank's base rate plus .55%. Aggregate borrowings for each fund under these
credit facilities may not exceed the lower of (a) the maximum amount permitted
by such fund's investment policies and restrictions or (b) thirty-three and
one-third percent (33 1/3%) of such fund's total assets. At December 31, 1997
there were no outstanding balances under these lines of credit facilities for
any of the Portfolios.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statement and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, each Portfolio, along with other Warburg Funds, transfers uninvested
cash balances to a Pooled Cash Account, which is invested in repurchase
agreements secured by U.S. government securities. Securities pledged as
collateral for repurchase agreements are held by the Portfolios' custodian bank
until the agreements mature. Each agreement requires that the market value of
the collateral be sufficient to cover payments of interest and principal;
however, in the event of default or bankruptcy by the other party to the
agreement, retention of the collateral may be subject to legal proceedings.
15
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<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1997
- --------------------------------------------------------------------------------
The Portfolios have an arrangement with their transfer agent whereby
interest earned on uninvested cash balances was used to offset a portion of
their transfer agent expense. For the period ended December 31, 1997, the Fixed
Income Portfolio and the Global Fixed Income Portfolio received credits or
reimbursements of $16 and $37, respectively under this arrangement.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, which is indirectly controlled by Warburg, Pincus & Co., serves as
each Portfolio's investment adviser. For its investment advisory services,
Warburg receives a fee from the Fixed Income Portfolio and the Global Fixed
Income Portfolio calculated at an annual rate of .50% and 1.00%, respectively,
of each Portfolio's average daily net assets. For the period ended December 31,
1997, investment advisory fees earned and voluntarily waived, and reimbursements
were as follows:
GROSS NET EXPENSE
PORTFOLIO ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
--------- ------------- --------- ------------ --------------
Fixed Income $ 2,166 $ (2,166) $ 0 $ (49,827)
Global Fixed Income 12,047 (12,047) 0 (42,630)
As of December 31, 1997, a net amount of $2,253 was due from Warburg for
the Fixed Income Portfolio.
Counsellors Fund Services, Inc. ("CFSI"), a wholly owned subsidiary of
Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC
Bank Corp. ("PNC"), serve as each Portfolio's co-administrators. For its
administrative services, CFSI currently receives a fee calculated at an annual
rate of .10% of each Portfolio's average daily net assets. For the period ended
December 31, 1997, administrative services fees earned by CFSI were as follows:
PORTFOLIO CO-ADMINISTRATION FEE
--------- ---------------------
Fixed Income $ 433
Global Fixed Income 1,205
For its administrative services, PFPC currently receives a fee from the
Fixed Income Portfolio and the Global Fixed Income Portfolio calculated at an
annual rate of .05% of the Portfolio's average daily net assets. For the period
ended December 31, 1997, administrative services fees earned and voluntarily
waived by PFPC were as follows:
NET
PORTFOLIO CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
--------- --------------------- ------ ---------------------
Fixed Income $ 216 $ (216) $ 0
Global Fixed Income 602 (602) 0
Counsellors Securities Inc. ("CSI"), a wholly owned subsidiary of Warburg,
serves as each Portfolio's distributor. No compensation is paid by the
Portfolios to CSI for its distribution services.
16
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<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENTS IN SECURITIES
For the period ended December 31, 1997, purchases and sales of investment
securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND
INVESTMENT SECURITIES AGENCY OBLIGATIONS
PORTFOLIO PURCHASES SALES PURCHASES SALES
--------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Fixed Income $ 239,541 $ 27,490 $1,010,946 $ 658,237
Global Fixed Income 1,641,684 794,276 1,816,713 1,152,941
</TABLE>
At December 31, 1997, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
depreciation from investments for those securities having an excess of cost over
value (based on cost for federal income tax purposes) was as follows:
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION)
--------- ------------ ------------ ---------------
Fixed Income $ 15,250 $ (55) $ 15,195
Global Fixed Income 7,874 (62,707) (54,833)
4. FORWARD FOREIGN CURRENCY CONTRACTS
The Portfolios may enter into forward currency contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date. Risks
may arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. The
Portfolios will enter into forward contracts primarily for hedging purposes. The
forward currency contracts are adjusted daily by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
At December 31, 1997, the Global Fixed Income Portfolio had the following
open forward currency contracts:
<TABLE>
<CAPTION>
FORWARD FOREIGN UNREALIZED
CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
CONTACTS DATE TO BE SOLD AMOUNT VALUE GAIN
-------- ---- ---------- ------ ----- ----
<S> <C> <C> <C> <C> <C>
German Marks 02/23/98 520,000 $305,882 $290,098 $15,784
Canadian Dollars 02/02/98 200,000 146,199 139,899 6,300
-------- -------- -------
$452,081 $429,997 $22,084
======== ======== =======
</TABLE>
17
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<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1997
- --------------------------------------------------------------------------------
5. CAPITAL SHARE TRANSACTIONS
The Fixed Income Portfolio and the Global Fixed Income Portfolio are each
authorized to issue an unlimited number of full and fractional shares of
beneficial interest, par value of $.001 per share. Warburg, Pincus & Co., owned
all of the shares outstanding as of December 31, 1997, for both the Portfolio's.
Transactions in shares of each Portfolio were as follows:
<TABLE>
<CAPTION>
GLOBAL FIXED
FIXED INCOME PORTFOLIO INCOME PORTFOLIO
---------------------- ----------------
FOR THE PERIOD FOR THE PERIOD
MARCH 31, 1997 MARCH 31, 1997
COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) THROUGH OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Shares sold 50,007 150,007
Shares issued to shareholders
on reinvestment of dividends 5,107 13,622
------ -------
Net increase in shares outstanding 55,114 163,629
====== =======
</TABLE>
6. NET ASSETS
At December 31, 1997, capital contributions, and undistributed net investment
income have been adjusted for current period permanent book/tax differences. The
Fixed Income Portfolio and the Global Fixed Income Portfolio reclassified
offering costs of $16,849 and $16,847 respectively from undistributed net
investment income to capital contributions.
Net assets at December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
FIXED INCOME GLOBAL FIXED INCOME
PORTFOLIO PORTFOLIO
------------ -------------------
<S> <C> <C>
Capital contributed, net $584,144 $1,662,223
Accumulated (or Distributions in excess of)
net realized gain (loss) from security
transactions 0 (32,902)
Net unrealized appreciation (depreciation) from
investments and foreign currency related items 15,195 (32,913)
--------- -----------
Net Assets $599,339 $1,596,408
========= ===========
</TABLE>
18
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
WARBURG PINCUS TRUST II:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments of Warburg Pincus Trust II - Global Fixed Income
Portfolio and the statement of net assets of Warburg Pincus Trust II - Fixed
Income Portfolio (all portfolios collectively referred to as the "Warburg Pincus
Trust II") as of December 31, 1997, and the related statements of operations,
the statements of changes in net assets, and the financial highlights for the
period then ended. These financial statements and financial highlights are the
responsibility of the Warburg Pincus Trust II's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
each portfolio of the Warburg Pincus Trust II as of December 31, 1997, the
results of their operations, the changes in their net assets, and their
financial highlights for the period then ended, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 9, 1998
19
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<PAGE>
WARBURG PINCUS
ASSET MANAGEMENT
P.O. Box 9030, Boston, MA 02205-9030
800-Warburg (800-927-2874)
WWW.WARBURG.COM
COUNSELLORS SECURITIES INC., DISTRIBUTOR.
