ANNUAL
REPORT
December 31, 1998
WARBURG PINCUS TRUST II
o FIXED INCOME PORTFOLIO
o 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 Trust, 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 document and which should be read carefully before investing. You
may obtain additional copies by calling 800-222-8977 or by writing to Warburg
Pincus, P.O. Box 9030, Boston, MA 02205-9030.
[LOGO]
<PAGE>
From time to time, the portfolios' investment adviser and co-administrators 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
portfolio holdings described in this document are as of December 31, 1998; these
views and portfolio holdings may have changed subsequent to these dates. Nothing
in this document is a recommendation to purchase or sell securities.
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
February 9, 1999
Dear Shareholder:
The objective of Warburg Pincus Trust II -- Fixed Income 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; preferred stocks; government
securities; municipal securities; mortgage-backed securities; and repurchase
agreements involving portfolio securities.
Effective December 24, 1998, Dale C. Christensen no longer serves as Co-
Portfolio Manager. M. Anthony E. van Daalen, previously Co-Portfolio manager,
serves as Portfolio Manager.
MANAGER COMMENTARY
For the 12 months ended December 31, 1998, the portfolio had a return of
8.08%, vs. a return of 8.44% for the Lehman Intermediate Government/Corporate
Bond Index.
The period was a favorable one for the domestic bond market as a whole,
supported by continued benign inflation and declining interest rates. Treasuries
paced the market's advance, reflecting a very favorable supply/demand backdrop
for these securities. Demand for Treasuries was especially strong during the
year's third quarter, when turmoil in global financial markets caused investors
to place a hefty premium on safety and liquidity. Treasury supply, meanwhile,
declined, due to the government's improving fiscal profile and reduced borrowing
needs. As a result of these forces, the yield on the 30-year Treasury declined
83 basis points during the period to stand at 5.09% on December 31.
The portfolio's performance reflected both its interest-rate exposure and its
sector allocation. In terms of the former, we maintained a longer-than-neutral
duration throughout the 12 months, since we continued to have a favorable view
on inflation and interest rates. This helped the portfolio's return, given the
rally in bonds.
With respect to sector allocation, we held a mix of Treasuries, corporate
securities and mortgage-backed securities throughout the 12 months. That said,
we held overweightings in those last two areas during much of the period
(emphasizing investment-grade bonds in both). These issues lagged Treasuries, in
part due to an increase in supply of corporate and mortgage-backed bonds during
the period. While our weighting in non-Treasuries cost
1
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
the portfolio somewhat in terms of total return, it reflected our attempt to
provide attractive levels of risk-adjusted yield via a diverse mix of high-
quality bonds.
Going forward, we will continue to make sector and duration adjustments to the
portfolio based on risk-vs.-reward considerations. Our specific emphasis will
remain on high-quality, intermediate-term bonds we deem to have attractive
yields and prospects for capital appreciation.
M. Anthony E. van Daalen
Portfolio Manager
2
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
SINCE INCEPTION AS OF DECEMBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in Warburg
Pincus Trust II -- Fixed Income Portfolio from March 31, 1997 (inception) to
December 31, 1998, compared to the Lehman Intermediate Government/Corporate Bond
Index ("LIGC")* for the same time period.
Average Annual
Total Returns
for periods ended
12/31/98
- -----------------
1 year
8.08%
- -----------------
Since Inception
(3/31/97)
9.76%
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points.
Lehman Brothers
Trust II Fixed Income Intermediate Gov. Corp.
--------------------- -----------------------
Mar-97 10000.00 10000.00
Apr-97 10110.00 10117.50
May-97 10199.98 10201.48
Jun-97 10329.52 10294.61
Jul-97 10629.07 10504.11
Aug-97 10529.16 10451.38
Sep-97 10649.19 10572.93
Oct-97 10769.53 10690.08
Nov-97 10789.99 10713.60
Dec-97 10895.73 10799.30
Jan-98 11070.07 10940.77
Feb-98 11026.89 10932.57
Mar-98 11048.95 10967.66
Apr-98 11093.14 11022.61
May-98 11169.68 11103.08
Jun-98 11256.81 11174.36
Jul-98 11256.81 11213.80
Aug-98 11475.19 11390.08
Sep-98 11770.10 11676.20
Oct-98 11747.74 11664.76
Nov-98 11737.17 11663.83
Dec-98 11775.90 11710.72
- ------------------
* 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.
3
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
February 5, 1999
Dear Shareholder:
The objective of Warburg Pincus Trust -- Global Fixed Income Portfolio is
total return, consisting of a combination of interest income, currency gains and
capital appreciation, consistent with prudent management. The portfolio pursues
its objective by investing in fixed-income securities of U.S. and foreign
issuers, such as foreign governments and companies (including those in emerging
markets); multinational organizations such as the World Bank; and the U.S.
government, its agencies and instrumentalities.
Effective December 24, 1998, Dale C. Christensen no longer serves as Co-
Portfolio Manager. Charles C. Van Vleet, formerly Co-Portfolio Manager, serves
as Portfolio Manager.
MANAGER COMMENTARY
For the 12 months ended December 31, 1998, the portfolio had a return of
12.09%, vs. returns of 11.02% for the Salomon Brothers World Government Bond
Index (Currency-Hedged), 8.69% for the Lehman Aggregate Bond Index and 8.84% for
a Composite Benchmark composed of: 50% Lehman Aggregate Bond Index, 35% Salomon
Brothers World Government Bond Index Excluding the U.S. (Currency-Hedged) and
15% Merrill Lynch High Yield Master II Index.
In broad terms, the period was positive for developed bond markets and
difficult for emerging bond markets. The best performances belonged to Europe,
where bonds benefited from continued low inflation and from converging interest
rates ahead of the launch of European Monetary Union on January 1. The U.S. bond
market also rallied, reflecting a favorable domestic inflation and interest-rate
backdrop. Other developed bond markets enjoying good performances were
Australia, Canada, and, to a lesser extent, Japan. Most emerging bond markets,
by contrast, struggled, hurt by continued weakness in emerging market economies.
These markets ended the period on a positive note, however, aided by a global
easing of monetary policy and investors' renewed embrace of risk.
Against this backdrop, the portfolio had solid performance, both in absolute
terms and compared to its benchmarks, buoyed by its sizable positions in the
U.S. and Europe. Also contributing positively to the portfolio's return was its
modestly longer-than-neutral duration. Our decision to stay long vs. our
benchmarks reflected our generally positive view on global inflation and
interest rates.
4
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
We made few noteworthy changes to the portfolio during the 12 months in
terms of regional allocation. We remained biased toward Europe and the U.S.
throughout, viewing these markets as the most attractive from a risk/reward
perspective. We did, however, make some intra-regional adjustments worthy of
mention. Most notably, we shifted our emphasis within the U.S. away from
Treasuries and toward corporate and mortgage-backed securities. Yield spreads
between these last two groups and Treasuries widened significantly over the
latter part of the period, prompting us to add several high-quality corporate
and mortgage-backed bonds we believed to represent good value. Within Europe,
our changes included paring our weighting in Germany and establishing positions
in government bonds from the U.K. and Greece.
Elsewhere, we maintained some exposure to emerging markets through the period.
Our holdings here at the end of the 12 months consisted of a small position in
Latin American Brady bonds and a modest weighting in dollar-denominated South
Korean sovereign debt.
In terms of currency management, we continued to hedge the bulk of the
portfolio's foreign currency exposure (as of December 31, 1998, 92% of the
portfolio's assets were dollar-denominated or hedged into U.S. dollars). All
told, our hedging strategies had a positive impact on the Portfolio's
performance.
Looking out over 1999, we will continue to attempt to identify attractive
buying opportunities in global bond markets. Areas we are currently monitoring
include high-yield debt, both within the U.S. and abroad.
Charles C. Van Vleet
Portfolio Manager
5
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
ANNUAL INVESTMENT ADVISER'S REPORT -- DECEMBER 31, 1998 (CONT'D)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
SINCE INCEPTION AS OF DECEMBER 31, 1998
The graph below illustrates the hypothetical investment of $10,000 in Warburg
Pincus Trust II -- Global Fixed Income Portfolio from March 31, 1997 (inception)
to December 31, 1998, compared to the Salomon Brothers World Government Bond
Index (Currency-Hedged) ("Salomon"),* the Lehman Aggregate Bond Index
("Lehman"),** and a Composite Benchmark ("Composite")*** for the same time
period.
Average Annual
Total Returns
for periods ended
12/31/98
- -----------------
1 year
12.09%
- -----------------
Since Inception
(3/31/97)
8.54%
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points.
Trust II Composite
Global Fixed SBWGBI LB-Aggregate Benchmark
------------ ------ ------------ ---------
10000.00 10000.00 10000.00 10000.00
Apr-97 10100.00 10110.00 10149.70 10127.70
May-97 10159.59 10171.27 10245.61 10223.71
Jun-97 10289.63 10322.41 10367.23 10368.07
Jul-97 10509.83 10526.38 10646.83 10604.15
Aug-97 10479.35 10503.65 10556.12 10565.02
Sep-97 10589.39 10673.59 10711.83 10732.90
Oct-97 10418.90 10785.35 10867.25 10845.06
Nov-97 10388.68 10853.62 10917.24 10911.54
Dec-97 10260.90 10979.85 11027.18 11027.96
Jan-98 10380.95 11126.54 11168.77 11172.76
Feb-98 10500.33 11179.05 11160.50 11210.30
Mar-98 10554.94 11257.08 11198.90 11280.59
Apr-98 10630.93 11312.92 11257.36 11339.02
May-98 10641.56 11455.57 11364.30 11457.06
Jun-98 10685.19 11529.92 11460.56 11530.04
Jul-98 10739.69 11604.64 11484.97 11589.54
Aug-98 10946.96 11857.38 11671.83 11674.26
Sep-98 11338.86 12149.79 11945.18 11909.73
Oct-98 11350.20 12132.29 11881.99 11837.79
Nov-98 11447.82 12212.36 11949.72 12002.34
Dec-98 11550.85 12190.14 11985.57 12002.34
- ------------------
* 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 Lehman Aggregate Bond Index is composed of the Lehman
Government/Corporate Bond Index and the Lehman Mortgage-Backed Securities
Index. The Aggregate Index includes U.S. Treasury and agency issues,
corporate bond issues and mortgage-backed securities rated investment-grade
or higher by Moody's Investors Service, Standard & Poor's Ratings Services
or Fitch Investors' Service.
*** The Composite Benchmark measures the weighted performance of three component
indexes. The weights of the component indexes -- 50% Lehman Aggregate Bond
Index, 35% Salomon Brothers World Government Bond Index excluding the U.S.
(Currency-Hedged), and 15% Merrill Lynch High Yield Master II Index --
correspond to the investment strategy of the portfolio's manager. The
Merrill Lynch High Yield Master II Index provides a broad-based measure of
the performance of the non-investment-grade U.S. domestic bond market.
6
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS+
PAR (MOODY'S/S&P) MATURITY RATE% VALUE
--- ------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (13.7%)
$ 15,000 ABN-AMRO Bank N.V. New York Branch,
Subordinate Deposit Notes (Callable
08/01/04 @ $100.00) (Aa2, AA-) 08/01/09 8.250 $ 16,387
10,000 Aetna Services, Inc. (A3, A) 08/15/06 7.125 10,675
50,000 AT&T Capital Corp. (Baa3, BBB) 11/15/00 7.500 50,812
10,000 CBS Corp. (Callable @ Make Whole +25BP) (Ba1, BB+) 05/20/05 7.150 10,387
10,000 Conagra, Inc. Senior Notes (Putable
08/01/09 @ $100.00) (Baa1, BBB+) 08/01/27 6.700 10,537
10,000 Countrywide Home Loan, Inc. Medium Term
Note (A3, A) 10/08/02 6.380 10,112
10,000 First Industrial LP (Putable 05/15/02 @
$100.00) (Baa2, BBB) 05/15/27 7.150 10,325
15,000 First Union Corp. Subordinate Debentures
(Putable 10/15/05 @ $100.00) (A2, A-) 10/15/35 6.550 15,712
60,000 General Motors Acceptance Corp. (A2, A) 11/10/03 5.750 60,375
5,000 Glenborough Realty Trust (Ba1, NR) 03/15/05 7.625 4,994
20,000 GS Escrow (NR, NR) 08/01/03 7.000 20,025
50,000 Household Finance Corp. (A2, A) 11/15/08 6.500 52,125
15,000 Ingersoll-Rand Co. Medium Term Note
(Putable 11/19/03 @ $100.00) (A3, A-) 11/19/27 6.230 15,431
10,000 Lowe's Companies Medium Term Note
(Putable 05/15/07 @ $100.00) (A2, A) 05/15/37 7.110 10,888
15,000 MBNA Master Credit Card Trust,
Series 1996-K Class A (NR, NR) 03/15/06 5.665 14,901
5,000 National Semiconductor Subordinate
Debenture (Convertible) (Callable 10/01/99
@ $102.79) (Ba2, BB) 10/01/02 6.500 4,375
10,000 Nationwide Health Properties
(Putable 07/07/03 @ $100.00) (Baa2, BBB) 07/07/38 6.590 10,163
5,000 Niagara Mohawk Power Corp. Series D
(Callable 4/1/99 to 12/31/00 @ make whole
+50 BP) (Ba3, BB-) 10/01/02 7.250 5,094
10,000 Philip Morris Cos., Inc.
(Putable 06/01/01 @ $100.00) (A2, A) 06/01/06 6.950 10,263
10,000 Philips Electronics NV Notes
(Putable 06/01/06 @ $100.00) (A3, BBB+) 06/01/26 7.200 10,400
5,000 Potomac Electric Power Co.
(Callable 05/15/02 @ $103.21) (A1, A) 05/15/27 8.500 5,531
5,000 Riggs Capital Trust II Series C
(Callable 03/15/07 @ $104.44) (Baa3, BB-) 03/15/27 8.875 5,381
10,000 Times Mirror Co. Note
(Putable 09/15/04 @ $100.00) (A2, A+) 09/15/27 6.610 10,538
10,000 Unova, Inc. (Baa2, BBB-) 03/15/05 6.875 10,525
----------
TOTAL CORPORATE BONDS (Cost $376,068) 385,956
----------
</TABLE>
See Accompanying Notes to Financial Statements.
7
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS+
PAR (MOODY'S/S&P) MATURITY RATE% VALUE
--- ------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (59.5%)
$ 25,000 Asset Securitization Corp. (Nomura Asset
Securities Corp.) Series 1996-D2, Class A2 (NR, AA) 02/14/29 7.360 $ 26,939
100,000 California Infrastructure PG & E Series
97-1, Class A7 (Aaa, AAA) 09/25/08 6.420 103,042
170,000 California Infrastructure SCE-1
(Callable 12/02/07 @ $100.00) (Aaa, AAA) 12/26/09 6.420 176,797
80,000 Capital One Master Trust Series 1998-4 (Aaa, AAA) 01/15/07 5.430 79,680
60,000 Case Equipment Loan Trust (NR, NR) 11/15/03 5.610 60,619
70,000 Commonwealth Edison Transitional Funding
Trust Series 1998-1 Class A6 (Aaa, AAA) 06/25/09 5.630 70,490
60,000 Fannie Mae (Aaa, AAA) 12/01/08 5.690 59,831
85,000 Fannie Mae (Aaa, AAA) 01/01/09 5.700 85,000
250,000 Fannie Mae Discount Notes (Aaa, AAA) 10/04/99 4.646## 241,223
100,000 Fannie Mae, Series 1993-50 (Aaa, AAA) 09/25/20 5.000 94,959
20,000 Fannie Mae, Series 1997-51,
Class KB Guaranteed REMIC Trust (Aaa, AAA) 03/20/08 7.000 20,433
25,000 Fannie Mae, Series 1998-M4, Class B (Aaa, AAA) 12/25/23 6.424 25,525
30,000 Federal Home Loan Bank (Aaa, NR) 07/14/00 5.500 30,266
80,000 Federal Home Loan Bank (Aaa, NR) 09/15/03 5.125 80,143
140,000 Federal Home Loan Mortgage Corp. (Aaa, AAA) 12/14/01 4.750 139,730
15,000 First USA Credit Card Master Trust,
Series 1998-4, Class A (Aaa, AAA) 03/18/08 5.671# 14,858
110,000 Federal Home Loan Mortgage Corp., Series
2072, Class PK (Aaa, AAA) 07/15/24 6.000 110,215
90,000 MBNA Master Credit Card Trust, Series
1998-J, Class A (NR, NR) 02/15/06 5.250 89,739
30,000 Mortgage Capital Funding, Inc.
Series 1998-MC1, Class E (NR, BBB+) 01/18/08 7.060 30,163
16,240 Nomura Asset Securities Corp.
Series 1994-4B, Class 4A (Aaa, AAA) 09/25/24 8.300 16,591
120,000 Standard Credit Card Master Trust Series
1995-9, Class A (Aaa, AAA) 10/07/07 6.550 125,214
----------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $1,682,783) 1,681,457
----------
UNITED STATES TREASURY OBLIGATIONS (23.2%)
180,000 U.S. Treasury Note (Aaa, AAA) 08/15/02 6.375 190,087
480,000 U.S. Treasury Principal Strip (Aaa, AAA) 08/15/99 4.628# 466,723
----------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $654,071) 656,810
----------
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES RATE% VALUE
- --------- ----- -----
<S> <C> <C> <C>
PREFERRED STOCK (0.5%)
Financial (0.3%)
100 Natexis AMBS Co. Series A (Callable 06/30/08 at $100,000) 8.440 $ 9,441
----------
Real Estate (0.2%)
200 Equity Residential Properties Trust, Series D REIT 8.600 5,225
----------
TOTAL PREFERRED STOCKS (Cost $15,000) 14,666
----------
<CAPTION>
PAR
- --------
<S> <C> <C> <C>
SHORT TERM INVESTMENT (1.3%)
$ 38,000 Repurchase agreement with Merrill Lynch & Co., dated
12/31/98 at 4.950% to be repurchased at $38,021 on
01/04/99. (Collateralized by a pro rata amount of U.S.
Treasury Notes ranging in par value from
$6,025,000-$50,000,000, 6.250%-8.750%, 3/25/99-2/15/27.
Market value of collateral is $38,760.) (Cost $38,000) 38,000
----------
TOTAL INVESTMENTS AT VALUE (98.2%) (Cost $2,765,922*) 2,776,889
OTHER ASSETS IN EXCESS OF LIABILITIES (1.8%) 50,307
----------
NET ASSETS (100.0%) (applicable to 273,876 shares
outstanding) $2,827,196
==========
NET ASSET VALUE, offering and redemption price per share
($2,827,196 divided by 273,876) $10.32
======
</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 Services are unaudited.
# On instruments with variable rates, the interest rate shown reflects the
current rate as of December 31, 1998.
## Rate shown reflects yield to maturity on date of purchase.
* Also cost for federal income tax purposes.
See Accompanying Notes to Financial Statements.
9
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS+
PAR+ (MOODY'S/S&P) MATURITY RATE% VALUE
---- ------------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
BONDS (90.9%)
Argentina (1.7%)
30,000(A) Republic of Argentina, Series XW (Aaa, NR) 12/04/05 11.000 $ 29,775
----------
Brazil (0.7%)
19,200(A) Republic of Brazil, Series EI-L (B2, B+) 04/15/06 6.125# 12,421
----------
Cayman Islands (2.4%)
50,000(A) Ayala Corp. International Finance
(Convertible) (BBB, BBB) 12/08/00 8.280# 42,125
----------
Denmark (1.5%)
145,000 Kingdom of Denmark (Aaa, AAA) 11/15/07 7.000 27,356
----------
France (5.7%)
508,000 French Government (Aaa, AAA) 04/25/29 5.500 101,827
----------
Germany (12.0%)
144,000 Bundesrepublic Deutschland (Aaa, AAA) 10/14/05 6.500 100,682
191,000 Bundesrepublic Deutschland (Aaa, AAA) 07/04/28 4.750 113,968
----------
214,650
----------
Greece (3.8%)
18,000,000 Hellenic Republic (A2, NR) 03/21/04 8.900 68,686
----------
Japan (3.1%)
6,000,000 International Bank for Reconstruction
and Development (Aaa, NR) 06/20/00 4.500 56,285
----------
Korea (2.8%)
50,000(A) Korean Development Bank (Ba2, BBB-) 12/01/00 9.600 49,312
----------
Mexico (0.9%)
15,000(A) United Mexican States (Ba2, BB) 05/15/26 11.500 16,275
----------
United Kingdom (7.8%)
74,000 United Kingdom Treasury (Aaa, NR) 06/10/03 8.000 140,445
----------
United States (48.5%)
50,000 California Infrastructure SCE-1, Series
1997-1, Class A7 (Aaa, AAA) 12/26/09 6.420 51,999
30,000 Commonwealth Edison Transitional
Funding Trust Series (Aaa, AAA) 06/25/09 5.630 30,210
64,011 Fannie Mae 15 Year Collateral (Aaa, AAA) 09/01/13 6.000 64,231
108,242 Ginnie Mae Pool (NR, NR) 05/15/28 6.500 109,494
30,000 General Motors Acceptance Corp. (A2, A) 11/10/03 5.750 30,187
20,000 Golden State Escrow Corp. (Ba1,BB+) 08/01/03 7.000 20,025
40,000 Household Finance Corp. (A2, A) 11/15/08 6.500 41,700
35,000 Illinois Power Transitional Funding
Trust (Aaa, AAA) 06/25/09 5.540 35,044
30,000 MBNA Master Credit Card Trust, Series
1995-C, Class A (NR, NR) 02/15/08 6.450 31,597
20,000 Newcourt Credit Group (Baa3, BBB) 12/17/03 7.250 19,825
63,000 U.S. Treasury Bond (Aaa, AAA) 11/15/28 5.250 64,535
183,000 U.S. Treasury Note (Aaa, AAA) 11/30/02 5.750 189,970
182,000 U.S. Treasury Note (Aaa, AAA) 11/15/03 4.250 179,712
----------
868,529
----------
TOTAL BONDS (Cost $1,579,636) 1,627,686
----------
</TABLE>
See Accompanying Notes to Financial Statements.
10
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES RATE% VALUE
- --------- ----- -----
<S> <C> <C> <C>
PREFERRED STOCK (0.5%)
United States (0.5%)
100 Natexis AMBS Co. Series A (Callable 06/30/08 at $100.00)
(Cost $10,000) 8.440 $ 9,441
----------
WARRANTS (0.0%)
Argentina (0.0%)
30 Republic of Argentina, Expires 12/03/99 (Cost $0) 132
----------
<CAPTION>
PAR
- --------
<S> <C> <C>
SHORT TERM INVESTMENT (7.2%)
$129,000 Repurchase agreement with Merrill Lynch & Co., dated
12/31/98 at 4.950% to be repurchased at $129,071 on
01/04/99. (Collateralized by a pro rata amount of U.S.
Treasury Notes ranging in par value from
$6,025,000-$50,000,000, 6.250%-8.750%, 3/25/99-2/15/27.
Market value of collateral is $131,580.) (Cost $129,000) 129,000
----------
TOTAL INVESTMENTS AT VALUE (98.6%) (Cost $1,718,636*) 1,766,259
OTHER ASSETS IN EXCESS OF LIABILITIES (1.4%) 24,183
----------
NET ASSETS (100.0%) (applicable to 181,167 shares
outstanding) $1,790,442
==========
NET ASSET VALUE, offering and redemption price per share
($1,790,442 divided by 181,167) $9.88
=====
</TABLE>
INVESTMENT ABBREVIATIONS
NR = Not Rated
- --------------------------------------------------------------------------------
+ Unless otherwise indicated below, all securities are
denominated in the currency of the issuers' country of
origin.
(A) Denominated in U.S. Dollars.
Credit ratings given by Moody's Investors Service, Inc. and
+ Standard and Poor's Ratings Services are unaudited.
On instruments with variable rates, the interest rate shown
# reflects the current rate as of December 31, 1998.
## Rate shown reflects yield to maturity on date of purchase.
* Also cost for federal income tax purposes.
See Accompanying Notes to Financial Statements.
11
<PAGE>
WARBURG PINCUS TRUST II PORTFOLIOS
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME GLOBAL FIXED INCOME
PORTFOLIO PORTFOLIO
------------ -------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,237 $ 422
Interest 73,904 97,381
-------- --------
Total investment income 75,141 97,803
-------- --------
EXPENSES:
Investment advisory 6,619 16,787
Administrative services 5,986 4,590
Professional fees 15,528 20,082
Custodian/Sub-custodian 14,337 1,080
Trustees 4,617 4,618
Insurance 18 25
Interest 45 90
Offering/Organizational costs 8,386 8,521
Printing 13,973 10,640
Registration 598 95
Transfer agent 36 60
Miscellaneous 354 440
-------- --------
70,497 67,028
Less: fees waived, expenses reimbursed and transfer agent
fee offsets (57,391) (50,409)
-------- --------
Total expenses 13,106 16,619
-------- --------
Net investment income 62,035 81,184
-------- --------
NET REALIZED AND UNREALIZED GAIN FROM INVESTMENTS AND
FOREIGN CURRENCY RELATED ITEMS:
Net realized gain (loss) from security transactions 46,770 (5,603)
Net realized gain from foreign currency related items 0 34,315
Net change in unrealized appreciation (depreciation) from
investments and foreign currency related items (4,228) 84,140
-------- --------
Net realized and unrealized gain from investments and
foreign currency related items 45,542 112,852
-------- --------
Net increase in net assets resulting from operations $104,577 $194,036
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
12
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
WARBURG PINCUS TRUST II PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO
----------------------------------------
FOR THE PERIOD
MARCH 31, 1997
FOR THE YEAR (COMMENCEMENT OF
ENDED OPERATIONS) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 62,035 $ 22,916
Net realized gain (loss) from security transactions 46,770 11,155
Net realized gain from foreign currency related items 0 0
Net change in unrealized appreciation (depreciation)
from investments and foreign currency related items (4,228) 15,195
---------- --------
Net increase in net assets resulting from operations 104,577 49,266
---------- --------
FROM DISTRIBUTIONS:
Dividends from net investment income (62,035) (22,916)
Distributions in excess of net investment income (9,850) (16,849)
Distributions from realized gains (46,781) (11,155)
Distributions in excess of realized gain 0 0
---------- --------
Net decrease in net assets from distributions (118,666) (50,920)
---------- --------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 3,910,106 500,075
Reinvested dividends 118,666 50,918
Net asset value of shares redeemed (1,786,826) 0
---------- --------
Net increase in net assets from capital share
transactions 2,241,946 550,993
---------- --------
Net increase in net assets 2,227,857 549,339
NET ASSETS:
Beginning of period 599,339 50,000
---------- --------
End of period $2,827,196 $599,339
========== ========
Undistributed (or distribution in excess of) net
investment income $ 423 $ 0
========== ========
</TABLE>
See Accompanying Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME PORTFOLIO
-----------------------------------------
FOR THE PERIOD
MARCH 31, 1997
FOR THE YEAR (COMMENCEMENT OF
ENDED OPERATIONS) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 81,184 $ 68,277
Net realized gain (loss) from security transactions (5,603) 24,275
Net realized gain from foreign currency related items 34,315 (13,304)
Net change in unrealized appreciation (depreciation)
from investments and foreign currency related items 84,140 (32,913)
----------- -----------
Net increase in net assets resulting from operations 194,036 46,335
----------- -----------
FROM DISTRIBUTIONS:
Dividends from net investment income (81,184) (68,277)
Distributions in excess of net investment income (10,205) (16,847)
Distributions from realized gains (1,413) (10,971)
Distributions in excess of realized gain (31,073) (32,902)
----------- -----------
Net decrease in net assets from distributions (123,875) (128,997)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares
Reinvested dividends 0 1,500,075
Net asset value of shares redeemed 123,873 128,995
----------- -----------
Net increase in net assets from capital share
transactions 123,873 1,629,070
----------- -----------
Net increase in net assets 194,034 1,546,408
NET ASSETS:
Beginning of period 1,596,408 50,000
----------- -----------
End of period $ 1,790,442 $ 1,596,408
=========== ===========
Undistributed (or distribution in excess of) net
investment income $ (31,073) $ 0
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
15
<PAGE>
WARBURG PINCUS TRUST II -- FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997(1)
PERIOD ENDED: ------ ------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 9.97 $10.00
------ ------
INVESTMENT ACTIVITIES:
Net investment income 0.24 0.44
Net gain or losses on investments and foreign currency
related items (both realized and unrealized) 0.57 0.45
------ ------
Total from investment activities 0.81 0.89
------ ------
DISTRIBUTIONS:
From net investment income (0.24) (0.41)
In excess of net investment income (0.04) (0.31)
From realized capital gains (0.18) (0.20)
------ ------
Total distributions (0.46) (0.92)
------ ------
NET ASSET VALUE, END OF PERIOD $10.32 $ 9.97
====== ======
Total return 8.08% 8.96%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $2,827 $ 599
Ratios of expenses to average net assets .99%(3) .99%(3,4)
Ratio of net income to average net assets 4.69% 5.29%(4)
Decrease reflected in above operating expense ratios due
to waivers/reimbursements 4.33% 12.05%(4)
Portfolio turnover rate 318.95% 138.28%(2)
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period March 31, 1997 (commencement of operations)
through December 31, 1997.
(2) Non annualized.
(3) 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.
(4) Annualized.
See Accompanying Notes to Financial Statements.
16
<PAGE>
WARBURG PINCUS TRUST II -- GLOBAL FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a Share of the Portfolio Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997(1)
PERIOD ENDED: ------ ------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $ 9.47 $10.00
------ ------
INVESTMENT ACTIVITIES:
Net investment income 0.48 0.45
Net gain or losses on investments and foreign currency
related items (both realized and unrealized) 0.66 (0.15)
------ ------
Total from investment activities 1.14 0.30
------ ------
DISTRIBUTIONS:
From net investment income (0.48) (0.44)
In excess of net investment income (0.06) (0.11)
From realized capital gains (0.01) (0.07)
In excess of realized capital gains (0.18) (0.21)
------ ------
Total distributions (0.73) (0.83)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.88 $ 9.47
====== ======
Total return 12.09% 2.62%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000s omitted) $1,790 $1,596
Ratios to expenses to average net assets .99%(3) .99%(3,4)
Ratio of net income to average net assets 4.84% 5.67%(4)
Decrease reflected in above operating expense ratios due
to waivers/reimbursements 3.00% 4.59%(4)
Portfolio turnover rate 232.58% 139.81%(2)
</TABLE>
- --------------------------------------------------------------------------------
(1) For the period March 31, 1997 (commencement of operations)
through December 31, 1997.
(2) Non annualized.
(3) 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.
(4) Annualized.
See Accompanying Notes to Financial Statements.
17
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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: 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. If market quotations are not
readily available, securities and other assets are valued by another method that
the Board of Trustees believes accurately reflects fair value. Debt that will
mature in 60 days or less is valued on the basis of amortized cost, which
approximates market value, unless the Board determine that using this method
would not reflect an investment's 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.
18
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONT'D)
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 others, currency risk
(fluctuations in currency exchange rates), information risk (key information may
be inaccurate or unavailable, and political risk (expropriation, nationalization
or the imposition of capital or currency controls or punitive taxes). Other
risks of investing in foreign securities include liquidity and valuation risks.
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.
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 were deferred and are being amortized over a
one year period from the date each portfolio commenced its operations.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, each portfolio, along with other funds advised by Warburg Pincus
Asset Management, Inc., the portfolio's investment adviser ("Warburg")
(collectively the "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
19
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONT'D)
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 counterparty to the agreement,
retention of the collateral may be subject to legal proceedings.
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.
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 fiscal year ended December 31, 1998, the Fixed
Income Portfolio and the Global Fixed Income Portfolio received credits or
reimbursements of $36 and $54, 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 the relevant portfolio's average daily net assets. For the fiscal year ended
December 31, 1998, investment advisory fees earned and voluntarily waived and
reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
PORTFOLIO ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- --------- ------------ -------- ------------ --------------
<S> <C> <C> <C> <C>
Fixed Income $ 6,619 $ (6,619) $0 $(50,074)
Global Fixed Income 16,787 (16,787) 0 (32,729)
</TABLE>
As of December 31, 1998, net amounts of $11,734 and $3,775 were due from
Warburg for the Fixed Income and Global Fixed Income Portfolios, respectively.
Counsellors Fund Services, Inc. ("CFSI"), a wholly owned subsidiary of
Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC
Bank Corp., 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 fiscal year
20
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR -- (CONT'D)
period ended December 31, 1998, administrative services fees earned by CFSI were
as follows:
PORTFOLIO CO-ADMINISTRATION FEE
- --------- ---------------------
Fixed Income $1,324
Global Fixed Income 1,679
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 fiscal year
ended December 31, 1998, administrative services fees earned and voluntarily
waived by PFPC were as follows:
<TABLE>
<CAPTION>
NET
PORTFOLIO CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE
- --------- --------------------- ------ ---------------------
<S> <C> <C> <C>
Fixed Income $4,662 $(662) $4,000
Global Fixed Income 2,911 (839) 2,072
</TABLE>
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.
3. LINE OF CREDIT
Each portfolio, together with other Warburg Funds, has established committed
and uncommitted lines of credit facilities with PNC Bank, National Association
("PNC") and an uncommitted line of credit facility with Deutsche Bank, AG
("Deutsche Bank") for temporary or emergency purposes primarily relating to
unanticipated fund share redemptions. Under the terms of the committed line of
credit, the Warburg Funds with access to the facility pay a commitment fee at a
rate of .07% per annum on the average daily balance of the line of credit, which
is undisbursed and uncanceled during the preceding quarter. In addition, the
Warburg Funds will pay interest on borrowings at the bank's base rate plus .45%.
Under the terms of the uncommitted lines of credit, the Warburg Funds will pay
interest on borrowings at the bank's base rate plus .55%. Aggregate borrowings
for each fund under the committed and uncommitted lines of credit with PNC may
not exceed the lowest of (a) thirty-three and one-third percent (33 1/3%) of the
assets of such fund, for any fund that does not invest at least sixty-five
percent (65%) of its assets in international equity or fixed income securities
(an "international fund") and twenty five percent (25%) of the assets of any
fund that is an international fund or (b) the maximum amount permitted by such
fund's investment
21
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
3. LINE OF CREDIT -- (CONT'D)
policies and restrictions. Aggregate borrowings for each fund under the
uncommitted line of credit facility with Deutsche Bank may not exceed thirty-
three and one-third percent (33 1/3%) of the net assets of such fund. At
December 31, 1998 and during the year ended December 31, 1998, none of these
portfolios had borrowings under these lines of credit facilities .
4. INVESTMENTS IN SECURITIES
For the fiscal period ended December 31, 1998, 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 $6,242,189 $4,147,448 $4,750,452 $3,858,063
Global Fixed Income 128,581 385,500 632,599 350,214
</TABLE>
At December 31, 1998, 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:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION)
- --------- ------------ ------------ --------------
<S> <C> <C> <C>
Fixed Income $19,487 $(8,520) $10,967
Global Fixed Income 55,824 (8,201) 47,623
</TABLE>
5. 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.
22
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
5. FORWARD FOREIGN CURRENCY CONTRACTS -- (CONT'D)
At December 31, 1998, the Global Fixed Income Portfolio had the following open
forward currency contracts:
<TABLE>
<CAPTION>
FOREIGN UNREALIZED
EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
PURCHASED FORWARD CURRENCY CONTRACTS DATE AMOUNT AMOUNT VALUE GAIN/(LOSS)
- ------------------------------------ ---------- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Japanese Yen 01/13/99 3,921,000 $ 33,680 $ 34,822 $1,142
Australian Dollar 01/13/99 59,000 36,186 36,193 7
-------- -------- ------
$ 69,866 $ 71,015 $1,149
======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
FOREIGN UNREALIZED
EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE
SOLD FORWARD CURRENCY CONTRACTS DATE AMOUNT AMOUNT VALUE GAIN/(LOSS)
- ------------------------------- ---------- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
European Economic Unit 01/13/99 290,765 $341,839 $341,664 $ 175
British Pounds 01/13/99 85,200 143,136 141,705 1,431
Danish Krone 01/13/99 180,800 28,828 28,419 409
Swiss Franc 01/13/99 49,000 36,017 35,722 295
-------- -------- ------
$549,820 $547,510 $2,310
======== ======== ======
</TABLE>
6. 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. As of December 31, 1998,
Warburg, Pincus & Co., owned all of the shares outstanding for the Global Fixed
Income Portfolio. Transactions in shares of each portfolio were as follows:
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO GLOBAL FIXED INCOME PORTFOLIO
-------------------------------------- --------------------------------------
FOR THE PERIOD FOR THE PERIOD
MARCH 31, 1997 MARCH 31, 1997
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) OPERATIONS)
FOR THE YEAR ENDED THROUGH FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Shares sold 370,058 50,007 0 150,007
Shares issued to shareholders
on reinvestment of dividends 11,498 5,107 12,538 13,622
Shares Redeemed (167,794) 0 0 0
-------- ------ ------ -------
Net increase in shares
outstanding 213,762 55,114 12,538 163,629
======== ====== ====== =======
</TABLE>
7. NET ASSETS
At December 31, 1998, 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 $10,202 and $10,205 respectively from undistributed net
investment income to capital contributions. The Fixed Income Portfolio also
reclassified certain disallowed expenses of $71 from
23
<PAGE>
WARBURG PINCUS TRUST II
NOTES TO FINANCIAL STATEMENTS (CONT'D)
December 31, 1998
- --------------------------------------------------------------------------------
7. NET ASSETS -- (CONT'D)
undistributed net investment income to capital contributions. The Global Fixed
Income Portfolio reclassified net foreign currency gains of $34,315 and
distributions of $65,388 from accumulated (or distributions in excess of) net
realized gain (loss) from security transactions to undistributed net investment
income.
Net assets at December 31, 1998, consisted of the following:
<TABLE>
<CAPTION>
FIXED INCOME GLOBAL FIXED INCOME
PORTFOLIO PORTFOLIO
------------ -------------------
<S> <C> <C>
Capital contributed, net $2,815,817 $1,775,891
Undistributed (or distributions in excess of) net
investment income 423 (31,073)
Accumulated (or distributions in excess of) net
realized gain (loss) from security transactions (11) (5,603)
Net unrealized appreciation from investments and
foreign currency related items 10,967 51,227
---------- ----------
Net Assets $2,827,196 $1,790,442
========== ==========
</TABLE>
8. CAPITAL LOSS CARRYOVER
At December 31, 1998, capital loss carryover available to offset possible
future capital gains of the Global Fixed Income Portfolio was as follows:
CAPITAL LOSS CARRYOVER EXPIRES IN AMOUNT
- --------------------------------- ------
2006 $5,603
24
<PAGE>
WARBURG PINCUS TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
WARBURG, PINCUS TRUST II:
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Warburg, Pincus Trust II -- Fixed Income Portfolio and Global Fixed Income
Portfolio, (all portfolios collectively referred to as the "Trust") at December
31, 1998, the results of their operations for the year then ended, and changes
in their net assets and their financial highlights for each of the two years (or
periods) in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 5, 1999
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P.O. BOX 9030, BOSTON, MA 02205-9030
800-222-8977 n www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRBDF-2-1298
