<PAGE> 1
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS FUNDS
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to these Warburg Pincus funds. Under
the terms of the arrangement, no immediate changes are planned to Warburg Pincus
investment portfolio managers and investment professionals.
The funds' governing Board and fund shareholders will be asked to vote on
the "assignment" of the funds' current investment advisory agreements with
Warburg Pincus Asset Management. Shareholders will receive more information
about the advisory agreement arrangements, but until then shareholders do not
need to take any action relating to their Warburg Pincus fund shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: February 22, 1999
<PAGE> 2
PROSPECTUS April 27, 1998
Warburg Pincus Funds are a family of open-end mutual funds that offer investors
a variety of investment opportunities. Two money market funds are described in
this Prospectus:
WARBURG PINCUS CASH RESERVE FUND (the "Cash Reserve Fund") is designed to
provide investors with high current income consistent with liquidity and
stability of principal.
WARBURG PINCUS NEW YORK TAX EXEMPT FUND (the "Tax Exempt Fund") is designed to
provide investors with as high a level of current income that is exempt from
federal, New York State and New York City personal income taxes as is consistent
with preservation of capital and liquidity.
Because of its focus on investments that distribute income that is exempt from
New York State and New York City personal income tax, the Tax Exempt Fund will
have a more limited number of investment options available to it than a fund
that does not focus on investments that distribute income that is exempt from
taxation in a particular state. Consequently, the Fund may find it necessary to
invest a significant percentage of its assets in a single issuer. Changes in the
financial condition or market assessment of such an issuer could have a
significant adverse impact on the Fund. Therefore an investment in the Tax
Exempt Fund may be riskier than an investment in a money market fund that does
not focus on investments that distribute income which is exempt from taxation in
a particular state.
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. ALTHOUGH EACH FUND SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF
$1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT IT CAN DO SO ON A CONTINUING
BASIS.
NO LOAD SHARES
- --------------------------------------------------------------------------------
Fund shares are sold and redeemed at net asset value without the imposition of a
sales or redemption charge by the Fund. Fund shares are "no-load," which means
that there are no sales charges, commissions, 12b-1 plan or other deferred sales
charges applicable to the Fund.
LOW MINIMUM INVESTMENT
- --------------------------------------------------------------------------------
The minimum initial investment in each Fund is $1,000 ($500 for an IRA or
Uniform Transfers/Gifts to Minors Act account in the case of the Cash Reserve
Fund) and the minimum subsequent investment is $100. Through the Automatic
Monthly Investment Plan, subsequent investment minimums may be as low as $50.
See "How to Purchase Shares."
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about each
Fund has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Funds. The Statement of Additional Information is also available
upon request and without charge by calling Warburg Pincus Funds at (800)
927-2874. Information regarding the status of shareholder accounts may also be
obtained by calling the Funds at the same number. Warburg Pincus Funds maintains
a Web site at www.warburg.com. The Statement of Additional Information bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF A FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 3
THE FUNDS' EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cash Tax
Reserve Exempt
Fund Fund
---- ----
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................... 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets) (after fee
waivers)
Management Fees......................................... .38% .38%
12b-1 Fees.............................................. 0 0
Other Expenses.......................................... .17 .17
---- ----
Total Fund Operating Expenses (after fee waivers)+...... .55% .55%
==== ====
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 Year................................................... $ 6 $ 6
3 Years.................................................. $18 $18
5 Years.................................................. $31 $31
10 Years.................................................. $69 $69
</TABLE>
- --------------------------------------------------------------------------------
+ Annual Fund Operating Expenses for the Funds are based on actual expenses for
the ten-month period ended December 31, 1997, net of any applicable fee
waivers or expense reimbursements. Absent such waivers and/or reimbursements,
the Management Fees for the Cash Reserve Fund and the Tax Exempt Fund would
have equalled .50% and the Total Fund Operating Expenses would have equalled
.67% and .67%, respectively, of average net assets with respect to each Fund.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an investor in each Fund. Certain broker-dealers and
financial institutions also may charge their clients fees in connection with
investments in Fund shares, which fees are not reflected in the table. The
Example should not be considered a representation of past or future expenses;
actual Fund expenses may be greater or less than those shown. Moreover, while
the Example assumes a 5% annual return, each Fund's actual performance will vary
and may result in a return greater or less than 5%.
2
<PAGE> 4
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The information regarding each Fund for the ten-month period ended December
31, 1997 and the five fiscal years ended February 28, 1997 has been derived from
information audited by Coopers & Lybrand L.L.P., independent accountants, whose
report dated February 9, 1998 is incorporated by reference in the Funds'
Statement of Additional Information. Further information is contained in the
Funds' annual report, dated December 31, 1997, copies of which may be obtained
without charge by calling Warburg Pincus Funds at (800) 927-2874.
CASH RESERVE FUND
<TABLE>
<CAPTION>
For the Ten
Months Ended For the Year Ended February 28 or 29,
December 31, ----------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- --------
Income from Investment
Operations:
Net Investment Income.......... 0.0428 0.0492 0.0543 0.0426 0.0273 0.0322
Net Gains (Losses) on
securities (both realized and
unrealized)................... 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Total from Investment
Operations.................... 0.0428 0.0492 0.0543 0.0426 0.0273 0.0322
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income)....................... (0.0428) (0.0492) (0.0543) (0.0426) (0.0273) (0.0322)
Distributions (from capital
gains)........................ 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Total Distributions............ (0.0428) (0.0492) (0.0543) (0.0426) (0.0273) (0.0322)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ========
Total Return.................... 4.28%+ 5.03% 5.57% 4.35% 2.76% 3.27%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(000s)........................ $472,675 $416,735 $383,607 $403,211 $277,557 $287,723
Ratios to Average Daily Net
Assets:
Operating expenses............. .55%@* .55%@ .56%@ .55% .54% .50%
Net investment income.......... 5.11%* 4.93% 5.43% 4.41% 2.73% 3.22%
Decrease reflected in above
expense ratios due to
waivers/reimbursements........ .12%* .14% .16% .19% .13% .17%
<CAPTION>
For the Year Ended February 28 or 29,
-----------------------------------------
1992 1991 1990 1989
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $1.00 $1.00 $1.00 $1.00
-------- -------- -------- --------
Income from Investment
Operations:
Net Investment Income.......... 0.0542 0.0760 0.0870 0.0747
Net Gains (Losses) on
securities (both realized and
unrealized)................... 0.0010 0 0 0
-------- -------- -------- --------
Total from Investment
Operations.................... 0.0552 0.0760 0.0870 0.0747
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment
income)....................... (0.0542) (0.0760) (0.0870) (0.0747)
Distributions (from capital
gains)........................ (0.0010) 0 0 0
-------- -------- -------- --------
Total Distributions............ (0.0542) (0.0760) (0.0870) (0.0747)
-------- -------- -------- --------
NET ASSET VALUE, END OF YEAR.... $1.00 $1.00 $1.00 $1.00
======== ======== ======== ========
Total Return.................... 5.66% 7.87% 9.05% 7.73%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(000s)........................ $426,479 $361,428 $365,008 $209,538
Ratios to Average Daily Net
Assets:
Operating expenses............. .50% .50% .50% .50%
Net investment income.......... 5.45% 7.59% 8.59% 7.51%
Decrease reflected in above
expense ratios due to
waivers/reimbursements........ .16% .13% .12% .16%
</TABLE>
TAX EXEMPT FUND
<TABLE>
<CAPTION>
For the Ten
Months Ended For the Year Ended February 28 or 29,
December 31, ----------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- --------
Total Income from Investment
Operations:
Net Investment Income.......... 0.0261 0.0288 0.0326 0.0246 0.0175 0.0224
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends (from net
investment income)............ (0.0261) (0.0288) (0.0326) (0.0246) (0.0175) (0.0224)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ========
Total Return.................... 2.64%+ 2.92% 3.31% 2.48% 1.77% 2.26%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(000s)........................ $151,173 $124,191 $96,584 $77,111 $65,984 $76,995
Ratios to Average Daily Net
Assets:
Operating expenses............. .55%@* .55%@ .56%@ .55% .54% .50%
Net investment income.......... 3.12%* 2.88% 3.24% 2.46% 1.75% 2.23%
Decrease reflected in above
expense ratios due to
waivers/reimbursements........ .12%* .17% .27% .27% .19% .28%
<CAPTION>
For the Year Ended February 28 or 29,
-----------------------------------------
1992 1991 1990 1989
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR........................... $1.00 $1.00 $1.00 $1.00
-------- -------- -------- --------
Total Income from Investment
Operations:
Net Investment Income.......... 0.0329 0.0486 0.0527 0.0461
-------- -------- -------- --------
Less Distributions:
Dividends (from net
investment income)............ (0.0329) (0.0486) (0.0527) (0.0461)
-------- -------- -------- --------
NET ASSET VALUE, END OF YEAR.... $1.00 $1.00 $1.00 $1.00
======== ======== ======== ========
Total Return.................... 3.34% 4.97% 5.40% 4.70%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(000s)........................ $65,438 $85,783 $87,283 $58,112
Ratios to Average Daily Net
Assets:
Operating expenses............. .50% .50% .50% .50%
Net investment income.......... 3.27% 4.84% 5.38% 4.57%
Decrease reflected in above
expense ratios due to
waivers/reimbursements........ .23% .21% .21% .25%
</TABLE>
- --------------------------------------------------------------------------------
@ Interest earned on uninvested cash balances is used to offset portions of the
transfer agent expense. These arrangements resulted in a reduction to the
Fund's expenses by .00%, .00% and .01% for the period ended December 31, 1997
and the years ended February 28 or 29, 1997 and 1996, respectively. The
operating expense ratio after reflecting these arrangements was .55%, .55% and
.55% for the period ended December 31, 1997 and the years ended February 28 or
29, 1997 and 1996, respectively.
* Annualized.
+ Non-annualized.
3
<PAGE> 5
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Warburg Pincus Cash Reserve Fund (the "Cash Reserve Fund") is a
diversified money market mutual fund whose investment objective is high current
income consistent with liquidity and stability of principal. The Warburg Pincus
New York Tax Exempt Fund (the "Tax Exempt Fund") is a non-diversified money
market mutual fund whose objective is to provide investors with as high a level
of current interest income that is exempt from federal, New York State and New
York City personal income taxes as is consistent with preservation of capital
and liquidity. Each objective may be changed only with the approval of the
investors in that Fund. There can be, of course, no assurance that a Fund will
achieve its investment objective. Investors should be aware that the market
value of the obligations in each Fund's portfolio can be expected to vary
inversely to changes in prevailing interest rates. See "Certain Investment
Strategies" for descriptions of certain types of investments the Funds may make.
CASH RESERVE FUND
The Cash Reserve Fund will attempt to achieve its investment objective by
investing in a portfolio of "money market" instruments consisting of United
States Treasury Bills, other obligations issued or guaranteed by the United
States government, its agencies or instrumentalities ("Government Securities");
bank and bank holding company obligations such as certificates of deposit,
bankers' acceptances, time deposits, commercial paper and debt obligations;
commercial paper and notes of other corporate issuers, including those with
floating or variable rates of interest (including variable rate master demand
notes) and repurchase agreements with respect to the foregoing.
The Cash Reserve Fund will concentrate its investments in the banking industry
except during temporary defensive periods. Up to 25% of the assets of the Cash
Reserve Fund may be invested at any time in the debt obligations of issuers
conducting their principal business activities in any industry other than
banking. In addition, the Cash Reserve Fund may invest up to 25% of its assets
in the debt obligations of a single issuer for a period of up to three business
days. Securities issued by the United States or its agencies or
instrumentalities may be purchased without regard to these limits.
TAX EXEMPT FUND
At least 80% of the Tax Exempt Fund's assets will be invested in short-term
tax-exempt debt obligations issued by or on behalf of the State of New York and
other states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions ("Municipal Securities"). Dividends paid by the Tax
Exempt Fund which are derived from interest attributable to tax-exempt
obligations of the State of New York and its political subdivisions, as well as
of certain other governmental issuers such as Puerto Rico ("New York Municipal
Securities"), will be excluded from gross income for federal income tax
4
<PAGE> 6
purposes and exempt from New York State and New York City personal income taxes.
Dividends derived from interest on tax-exempt obligations of other governmental
issuers will be excluded from gross income for federal income tax purposes, but
will be subject to New York State and New York City personal income taxes. The
Tax Exempt Fund expects that, except during temporary defensive periods or when
acceptable securities are unavailable for investment by the Fund, at least 65%
of the Tax Exempt Fund's assets will be invested in New York Municipal
Securities.
The Tax Exempt Fund is concentrated in New York Municipal Securities. Changes
in the financial condition or market assessment of the financial condition of
the State of New York and its political subdivisions or entities located within
the State of New York could have a significant adverse impact on the Fund.
Consequently, an investment in the Tax Exempt Fund may be riskier than an
investment in a money market fund that does not concentrate in securities issued
by, or within, a single state.
Municipal Securities in which the Tax Exempt Fund may invest include
commercial paper, notes and bonds. Interest on certain bonds issued after August
7, 1986 to finance certain non-governmental activities ("Alternative Minimum Tax
Securities") is a preference item for purposes of the federal individual and
corporate alternative minimum taxes, but is exempt from regular federal income
tax. The Fund is authorized to invest up to 20% of its assets in Alternative
Minimum Tax Securities. The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments or tax
preference items. Available returns on Alternative Minimum Tax Securities
acquired by the Fund may be lower than those from newly issued Municipal
Securities acquired by the Fund due to the possibility of federal, state and
local alternative minimum or minimum income tax liability on interest from
Alternative Minimum Tax Securities.
The Tax Exempt Fund may for defensive or other purposes invest in certain
short-term taxable securities when the Fund's investment adviser believes that
it would be in the best interests of the Fund's investors. Taxable securities in
which the Fund may invest on a short-term basis are Government Securities,
including repurchase agreements with banks or securities dealers involving such
securities, time deposits maturing in not more than seven days, other debt
securities, commercial paper and certificates of deposit issued by United States
branches of United States banks with assets of $1 billion or more. At no time
will more than 20% of the Fund's total assets be invested in taxable short-term
securities unless the Fund's investment adviser has determined to temporarily
adopt a defensive investment policy in the face of an anticipated softening in
the market for Municipal Securities in general.
GENERAL
- --------------------------------------------------------------------------------
PRICE AND PORTFOLIO MATURITY. Each Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, are deemed to have) remaining maturities
5
<PAGE> 7
of 397 calendar days or less at the date of purchase by the Fund. For this
purpose, variable rate master demand notes (as described below), which are
payable on demand, or, under certain conditions, at specified periodic intervals
not exceeding 397 calendar days, in either case on not more than 30 days'
notice, will be deemed to have remaining maturities of 397 calendar days or
less. Each Fund maintains a dollar-weighted average portfolio maturity of 90
days or less. Each Fund follows these policies to maintain a constant net asset
value of $1.00 per share, although there is no assurance that it can do so on a
continuing basis.
PORTFOLIO QUALITY AND DIVERSIFICATION. Each Fund will limit its portfolio
investments to securities that its Board determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the "Requisite NRSROs" in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (i) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a rating
with respect to a security or class of debt obligations of an issuer, or (ii)
one NRSRO, if only one NRSRO has issued a rating with respect to such security
or issuer at the time that the Fund acquires the security. The Funds may
purchase securities that are unrated at the time of purchase that a Fund's
investment adviser and sub-investment adviser deem to be of comparable quality
to rated securities that the Fund may purchase. The NRSROs currently designated
as such by the SEC are Standard & Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Services, Inc., Duff and
Phelps, Inc. and IBCA Limited and its affiliate, IBCA, Inc. A discussion of the
ratings categories of the NRSROs is contained in the Appendix to the Fund's
Statement of Additional Information.
The Funds have adopted certain credit quality, maturity and diversification
requirements under Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "1940 Act"), as operating policies. Under these policies, there are
two tiers of Eligible Securities, first and second tier, based on their ratings
by NRSROs or, if the securities are unrated, on determinations by a Fund's
investment adviser and sub-investment adviser. These policies generally restrict
a Fund from investing more than 5% of its assets in second tier securities and
limit to 5% of assets the portion that may be invested in any one issuer. The
Tax Exempt Fund may invest up to 25% of its assets without regard to this per
issuer limit. In addition, the credit quality and diversification policies vary
to some extent between the Cash Reserve and Tax Exempt Funds because the Tax
Exempt Fund is a single-state tax exempt fund.
YEAR 2000 COMPLIANCE. Many services provided to a Fund and their shareholders
by Warburg Pincus Asset Management, Inc., the Funds' investment adviser
("Warburg"), and certain of its affiliates (collectively, the "Warburg Service
Providers") and the Funds' other service providers rely on the functioning of
their respective computer systems. Many computer systems
6
<PAGE> 8
cannot distinguish the year 2000 from the year 1900, with resulting potential
difficulty in performing various calculations (the "Year 2000 Issue"). The Year
2000 Issue could potentially have an adverse impact on the handling of security
trades, the payment of interest and dividends, pricing, account services and
other Fund operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Funds nor can there be any assurance that the
Year 2000 Issue will not have an adverse effect on the Funds' investments or on
global markets or economies, generally.
The Warburg Service Providers anticipate that their systems and those of the
Funds' other service providers will be adapted in time for the year 2000. To
further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Funds' other major service
providers. The Warburg Service Providers will be monitoring the Year 2000 Issue
in an effort to ensure appropriate preparation.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
Set forth below are descriptions of investments the Funds may make. More
detailed information concerning these investments and their related risks is
contained in the Funds' Statement of Additional Information.
BANK OBLIGATIONS. The Cash Reserve Fund may purchase bank obligations,
including United States dollar-denominated instruments issued or supported by
the credit of the United States or foreign banks or savings institutions having
total assets at the time of purchase in excess of $1 billion. While the Cash
Reserve Fund will invest in obligations of foreign banks or foreign branches of
United States banks only if the Fund's investment adviser and sub-investment
adviser deem the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of United States banks due to differences in political,
regulatory and economic systems and conditions. Such risks include future
political and economic developments, the possible imposition of withholding
taxes on interest income, possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on such obligations. The Cash Reserve Fund
may also make interest-bearing savings deposits in commercial and savings banks
in amounts not in excess of 5% of its assets.
VARIABLE RATE MASTER DEMAND NOTES. Each Fund may also purchase variable rate
master demand notes, which are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Although the notes are not normally traded and there may be no
secondary market in the notes, the Fund may demand
7
<PAGE> 9
payment of principal and accrued interest at any time and may resell the note at
any time to a third party. In the event an issuer of a variable rate master
demand note defaulted on its payment obligation, the Fund might be unable to
dispose of the note because of the absence of a secondary market and might, for
this or other reasons, suffer a loss to the extent of the default.
GOVERNMENT SECURITIES. Government Securities in which the Funds may invest
include Treasury Bills, Treasury Notes and Treasury Bonds; other obligations
that are supported by the full faith and credit of the United States Treasury,
such as Government National Mortgage Association pass-through certificates;
obligations that are supported by the right of the issuer to borrow from the
Treasury, such as securities of Federal Home Loan Banks; and obligations that
are supported only by the credit of the instrumentality, such as Federal
National Mortgage Association bonds.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase money market
instruments from financial institutions such as banks and broker-dealers subject
to the seller's agreement to repurchase them at an agreed-upon date and price
("repurchase agreements"). The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the securities underlying the
repurchase agreement). Default by a seller, if the Fund is delayed or prevented
from exercising its rights to dispose of the collateral securities, could expose
the Fund to possible loss, including the risk of a possible decline in the value
of the underlying securities during the period while the Fund seeks to assert
its rights thereto. Repurchase agreements are considered to be loans by the Fund
under the 1940 Act.
WHEN-ISSUED SECURITIES. Each Fund may purchase portfolio securities on a
"when-issued" basis. When-issued securities are securities purchased for
delivery beyond the normal settlement date at a stated price and yield. A Fund
will generally not pay for such securities or start earning interest on them
until they are received. Securities purchased on a when-issued basis are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Each Fund expects that commitments to
purchase when-issued securities will not exceed 25% of the value of its total
assets absent unusual market conditions, and that a commitment by the Fund to
purchase when-issued securities will generally not exceed 45 days. The Funds do
not intend to purchase when-issued securities for speculative purposes but only
in furtherance of their investment objectives.
STAND-BY COMMITMENTS. The Tax Exempt Fund may acquire "stand-by commitments"
with respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The principal risk of a stand-by
commitment is that the writer of a commitment may default on its obligation to
repurchase the securities acquired by it. The Fund intends to enter into
stand-by commitments only with brokers, dealers and banks that, in the opinion
of its advisers, present minimal credit risks. In evaluating the
8
<PAGE> 10
creditworthiness of the issuer of a stand-by commitment, the investment adviser
and sub-investment adviser will review periodically relevant financial
information concerning the issuer's assets, liabilities and contingent claims.
The Fund will acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes.
THIRD PARTY PUTS. The Tax Exempt Fund may purchase long-term fixed rate bonds
that have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or "put") the
bonds to the institution and receive the face value thereof (plus accrued
interest). The Fund receives a short-term rate of interest (which is
periodically reset), and the interest rate differential between that rate and
the fixed rate on the bond is retained by the financial institution. The
financial institution does not provide credit enhancement, and in the event that
there is a default in the payment of principal or interest, or downgrading of a
bond to below investment grade, or a loss of the bond's tax-exempt status, the
put option will terminate automatically, the risk to the Fund will be that of
holding such a long-term bond and the dollar-weighted average maturity of the
Fund's portfolio would be adversely affected. See the Fund's Statement of
Additional Information, "Investment Policies -- Additional Information and
Policies."
SPECIAL CONSIDERATIONS AND RISK FACTORS RELATING TO THE TAX EXEMPT FUND. In
seeking to achieve its investment objective the Tax Exempt Fund may invest all
or any part of its assets in Municipal Securities which are industrial
development bonds. Moreover, although the Tax Exempt Fund does not currently
intend to do so on a regular basis, it may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues of
economically related projects, if such investment is deemed necessary or
appropriate by the Fund's investment adviser and sub-investment adviser. To the
extent that the Fund's assets are concentrated in Municipal Securities payable
from revenues on economically related projects and facilities, the Fund will be
subject to the peculiar risks presented by such projects to a greater extent
than it would be if the Fund's assets were not so concentrated.
The Tax Exempt Fund also invests in securities backed by guarantees from banks
and other financial institutions. The Fund's ability to maintain a stable share
price is largely dependent upon such guarantees, which are not supported by
federal deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
As a non-diversified mutual fund, the Tax Exempt Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, will be subject to greater credit risk with respect to its
portfolio securities. In the opinion of the Fund's adviser, any risk to the Fund
9
<PAGE> 11
should be limited by its intention to continue to conduct its operations so as
to qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), and by its policies restricting
investments to obligations with short-term maturities and high quality credit
ratings.
The Tax Exempt Fund's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York Municipal Securities to meet their
continuing obligations for the payment of principal and interest. New York State
and New York City face long-term economic problems that could seriously affect
their ability and that of other issuers of New York Municipal Securities to meet
their financial obligations.
Certain substantial issuers of New York Municipal Securities (including
issuers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by S&P
and Moody's in recent years, the most recent actions of S&P and Moody's have
been to place the debt obligations of New York State on CreditWatch with
positive implications and to upgrade the debt obligations of New York City,
respectively. Strong demand for New York Municipal Securities has also at times
had the effect of permitting New York Municipal Securities to be issued with
yields relatively lower, and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal obligations issued by other
jurisdictions. A recurrence of the financial difficulties previously experienced
by certain issuers of New York Municipal Securities could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Securities.
Although as of the date of this Prospectus, no issuers of New York Municipal
Securities are in default with respect to the payment of their municipal
securities, the occurrence of any such default could affect adversely the market
values and marketability of all New York Municipal Securities and, consequently,
the net asset value of the Fund's portfolio.
Other considerations affecting the Tax Exempt Fund's investments in New York
Municipal Securities are summarized in the Statement of Additional Information.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Each Fund may invest up to an aggregate of 10% of its total assets in illiquid
securities with contractual or other restrictions on resale and other
instruments which are not readily marketable. Each Fund is also authorized to
borrow and to enter into reverse repurchase agreements in an amount of up to
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<PAGE> 12
10% of its total assets for temporary or emergency purposes, but not for
leverage, and to pledge its assets to the same extent in connection with such
borrowings. Whenever borrowings exceed 5% of the value of a Fund's total assets,
the Fund will not make any additional investments (including roll-overs). A more
detailed description of these policies, together with an enumeration of
additional investment restrictions that each Fund has adopted and that cannot be
changed without the approval of the holders of a majority of the Fund's
outstanding shares, is contained in the Funds' Statement of Additional
Information.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. Each Fund employs Warburg as investment adviser to the
Fund. In its Advisory Agreement with each Fund, Warburg has agreed to be
responsible, subject to the supervision and direction of the Board, for the
Fund's investment program, including decisions concerning: (i) the specific
types of securities to be held by the Fund and the proportion of the Fund's
assets that should be allocated to such investments during particular market
cycles, (ii) the specific issuers whose securities will be purchased or sold by
the Fund, (iii) the maximum maturity (under one year) of its portfolio
investments, (iv) the appropriate average weighted maturity of its portfolio in
light of current market conditions and, with respect to the Tax Exempt Fund, (v)
the extent to which taxable securities will be purchased for and held by the Tax
Exempt Fund and (vi) the extent to which securities other than New York
Municipal Securities will be purchased for and held by the Tax Exempt Fund. In
addition, Warburg has agreed to supervise the performance by the sub-investment
adviser of the functions described below.
For the services provided pursuant to the Advisory Agreement, Warburg is
entitled to receive a fee, computed daily and payable monthly, at the annual
rate of .25% of the value of each Fund's average daily net assets. Warburg and
each Fund's administrators may voluntarily waive a portion of their fees from
time to time and temporarily limit the expenses to be paid by the Fund.
Warburg is a professional investment advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of March 31, 1998,
Warburg managed approximately $21.2 billion of assets, including approximately
$12.4 billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."), which has no business
other than being a holding company of Warburg and its affiliates. Lionel I.
Pincus, the managing partner of WP&Co., may be deemed to control both WP&Co. and
Warburg. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
SUB-INVESTMENT ADVISER AND ADMINISTRATOR. Blackrock Institutional Manage-
ment Corporation ("BIMC"), formerly PNC Institutional Management Corporation, a
wholly owned indirect subsidiary of PNC Bank, National Association ("PNC"),
serves as each Fund's sub-investment adviser and
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<PAGE> 13
administrator. BIMC was organized in 1977 by PNC to perform advisory services
for investment companies and has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809. As of March 31, 1998, BIMC served as investment
adviser to 20 mutual fund portfolios and as sub-investment adviser to 15 mutual
funds, having total assets exceeding $42 billion.
As sub-investment adviser and administrator, BIMC has agreed to implement each
Fund's investment program as determined by the Board and Warburg. BIMC will
supervise the day-to-day operations of the Fund and perform the following
services: (i) providing investment research and credit analysis concerning the
Fund's investments, (ii) placing orders for all purchases and sales of the
Fund's portfolio investments and (iii) maintaining the books and records
required to support the Fund's operations. BIMC also calculates the Fund's net
asset value, provides accounting services for the Funds and assists in related
aspects of the Funds' operations. As compensation therefor, each Fund has agreed
to pay BIMC a fee computed daily and payable monthly at an annual rate of .25%
of the value of each Fund's average daily net assets.
CO-ADMINISTRATOR. The Funds employ Counsellors Funds Service, Inc.
("Counsellors Service"), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Funds including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between a Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual and semiannual reports, assisting in the preparation of tax returns and
monitoring and developing compliance procedures for the Fund. As compensation,
each Fund pays to Counsellors Service a fee calculated at an annual rate of .10%
of the Fund's average daily net assets.
CUSTODIAN. PNC serves as the custodian of each Fund's assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103.
TRANSFER AGENT. State Street Bank and Trust Company ("State Street") serves as
shareholder servicing agent, transfer agent and dividend disbursing agent for
the Funds. State Street has delegated to Boston Financial Data Services, Inc.,
an affiliated company ("BFDS"), responsibility for most shareholder servicing
functions. State Street's principal business address is 225 Franklin Street,
Boston, Massachusetts 02110. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities Inc. ("Counsellors Securities") serves as
distributor of the shares of the Funds. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147. No compensation is payable by each Fund to Counsellors Securities
for its distribution services.
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<PAGE> 14
Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of the Funds,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. In some instances, these
incentives may be offered only to certain institutions whose representatives
provide services in connection with the sale or expected sale of Fund shares.
DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to its Board. The Board of a Fund sets
broad policies for each Fund and chooses the Fund's officers. A list of the
Directors and officers of each Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth in
the Statement of Additional Information.
HOW TO OPEN AN ACCOUNT
- --------------------------------------------------------------------------------
In order to invest in a Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone Warburg
Pincus Funds at (800) 927-2874. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
OR
Overnight to:
BFDS
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, Massachusetts 02171
Completed and signed account applications should be sent to the above.
RETIREMENT PLANS AND UTMA/UGMA ACCOUNTS. For information (i) about investing
in the Cash Reserve Fund through a tax-advantaged retirement plan, such as an
Individual Retirement Account ("IRA") or (ii) about opening a Uniform Gifts to
Minors Act ("UGMA") or Uniform Transfers to Minors Act ("UTMA") account in the
Cash Reserve Fund, an investor should telephone Warburg Pincus Funds at (800)
927-2874 or write to Warburg Pincus Funds at the address set forth above.
Investors should consult their own tax advisers about the establishment of
retirement plans and UGMA or UTMA accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account,
including changes to account registration, address and/or privileges,
13
<PAGE> 15
an investor should telephone Warburg Pincus Funds at (800) 927-2874.
Shareholders are responsible for maintaining current account registrations and
addresses with a Fund. No interest will be paid on amounts represented by
uncashed distribution or redemption checks.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Shares of each Fund may be purchased either by mail or, with special advance
instructions, by wire and automated clearing house transactions ("ACH on
Demand"). The minimum initial investment in each Fund is $1,000 and the minimum
subsequent investment is $100. For retirement plans and UTMA accounts in the
Cash Reserve Fund, the minimum initial investment is $500. Subsequent minimum
investments can be as low as $50 under the Automatic Monthly Investing Plan or
by ACH on Demand, as described below. The Fund reserves the right to change the
initial and subsequent investment minimum requirements at any time. In addition,
the Fund may, in its sole discretion, waive the initial and subsequent
investment minimum requirements with respect to investors who are employees of
Warburg or its affiliates or persons with whom Warburg has entered into an
investment advisory agreement. Existing investors will be given 15 days' notice
by mail of any increase in minimum investment requirements.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. In the interest of
economy and convenience, physical certificates representing shares in the Funds
are not normally issued.
BY MAIL. If the investor desires to purchase shares by mail, a check or money
order made payable to the Fund or Warburg Pincus Funds (in U.S. currency) should
be sent along with the completed account application to Warburg Pincus Funds
through its distributor, Counsellors Securities, at the address set forth above.
Checks payable to the investor and endorsed to the order of the Fund or Warburg
Pincus Funds will not be accepted as payment and will be returned to the sender.
If payment is received in proper form prior to the close of regular trading on
The New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m., Eastern
time) on a day that the Fund calculates its net asset value (a "business day"),
the purchase will be made at the Fund's net asset value calculated at the end of
that day. If payment is received at or after the close of regular trading on the
NYSE, the purchase will be effected at the Fund's net asset value next
determined after payment has been received. Checks or money orders that are not
in proper form or that are not accompanied or preceded by a complete account
application will be returned to the sender. Shares purchased by check or money
order are entitled to receive dividends and distributions beginning on the day
payment is received. Checks or money orders in payment for shares of more than
one Warburg
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<PAGE> 16
Pincus Fund should be made payable to Warburg Pincus Funds and should be
accompanied by a breakdown of amounts to be invested in each fund. If a check
used for purchase does not clear, the Fund will cancel the purchase and the
investor may be liable for losses or fees incurred. For a description of the
manner of calculating the Fund's net asset value, see "Net Asset Value" below.
BY WIRE. Investors may also purchase shares in a Fund by wiring funds from
their banks. Telephone orders by wire will not be accepted until a completed
account application in proper form has been received and an account number has
been established. Investors should place an order with the Fund prior to wiring
funds by telephoning (800) 927-2874. Federal funds may be wired using the
following wire
address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
[Insert Warburg Pincus Fund name(s) here]
DDA# 9904-649-2
F/F/C: [Account; Number and Account Registration]
If a telephone order is received before 12:00 p.m. (Eastern time) and payment
by wire is received on the same day in proper form in accordance with
instructions set forth above, the purchase will be executed at noon and shares
are entitled to dividends and distributions beginning on that day. If payment by
wire is received in proper form before 12:00 p.m. without a prior telephone
order, that purchase and any telephone orders placed after 12:00 p.m. for which
payment by wire is received on the same day in proper form, will be priced at
the net asset value of the Fund as of the close of regular trading on the NYSE
on that day and is entitled to dividends and distributions beginning the next
business day. Payment for orders that are not accepted will be returned to the
prospective investor after prompt inquiry. If a telephone order is placed and
payment by wire is not received on the same day, the Fund will cancel the
purchase and the investor may be liable for losses or fees incurred.
AUTOMATIC MONTHLY INVESTMENT PLAN AND ACH ON DEMAND. The Automatic Monthly
Investment Plan allows shareholders to authorize a Fund or its agent to debit
their bank account monthly ($50 minimum) for the purchase of Fund shares on or
about either the tenth or twentieth calendar day of each month. Shareholders may
also purchase shares by calling (800) 927-2874 on any business day to request
direct debit or credit (for redemptions) of their bank account through an ACH on
Demand transaction.
To establish the Automatic Monthly Investment Plan and/or ACH on Demand
option, obtain a separate application or complete the relevant section of the
account application. Only an account maintained at a financial institution which
is an automated clearing house member may be used, and one common name must
appear on both the shareholder's Fund registration and bank account
registration. Shareholders using this service must satisfy the initial
investment minimum for the Fund prior to or concurrent with the start
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<PAGE> 17
of any Automatic Monthly Investment Plan or ACH on Demand transaction. Please
contact Warburg Pincus Funds at (800) 927-2874 for additional information.
Investors should allow a period of up to 30 days in order to implement an
Automatic Monthly Investment Plan or ACH on Demand transaction. The failure to
provide complete information could result in further delays.
If an ACH on Demand transaction request is received prior to the close of
regular trading on the NYSE, the shares will be priced according to the net
asset value of Fund shares on that day and are entitled to dividends and
distributions as described above for wire purchases. If a request is received at
or after the close of regular trading on the NYSE, the shares will be priced at
the relevant Fund's net asset value on the following business day.
TELEPHONE TRANSACTIONS. Unless otherwise indicated on the account application
or if the ACH on Demand option is elected an investor may request transactions
by telephone. Investors should realize that in conducting transactions by
telephone they may be giving up a measure of security that they might have if
they were to conduct these transactions in writing. Neither a Fund nor its
agents will be liable for following instructions communicated by telephone that
it reasonably believes to be genuine. Reasonable procedures will be employed on
behalf of each Fund designed to give reasonable assurance that instructions
communicated by telephone are genuine. Such procedures include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific personal information prior to acting upon telephone
instructions.
GENERAL. Each Fund reserves the right to reject any specific purchase order,
including certain purchases made by exchange (see "How to Redeem and Exchange
Shares -- Exchange of Shares" below). Purchase orders may be refused if, in
Warburg's opinion, a Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. A Fund may discontinue sales of its shares if
management believes that a substantial further increase in assets may adversely
affect the Fund's ability to achieve its investment objective. In such event,
however, it is anticipated that existing shareholders would be permitted to
continue to authorize investment in the Fund and to reinvest any dividends or
capital gains distributions.
HOW TO REDEEM AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES. An investor in a Fund may redeem (sell) his shares on
any day that the Fund's net asset value is calculated (see "Net Asset Value"
below).
Shares of the Funds may either be redeemed by mail or by telephone. Investors
should realize that in using the telephone redemption and exchange option, they
may be giving up a measure of security that they may have if they were to redeem
or exchange their shares in writing. If an investor desires to redeem his shares
by mail, a written request for redemption should be sent to
16
<PAGE> 18
Warburg Pincus Funds at the address indicated above under "How to Open an
Account." An investor should be sure that the redemption request identifies the
Fund, the number of shares to be redeemed and the investor's account number.
Payment of redemption proceeds may be delayed in connection with account
changes. Each mail redemption request must be signed by the registered owner(s)
(or his legal representative(s)) exactly as the shares are registered. If an
investor has applied for the telephone redemption feature on his account
application, he may redeem his shares by calling Warburg Pincus Funds at (800)
927-2874. An investor making a telephone withdrawal should state (i) the name of
the Fund, (ii) the account number of the Fund, (iii) the name of the investor(s)
appearing on the Fund's records, (iv) the amount to be withdrawn and (v) the
name of the person requesting the redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. The Funds
currently do not impose a service charge for effecting wire transfers but each
Fund reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
the address shown above under "How to Open an Account." Although each Fund will
redeem shares purchased by check, through the Automatic Monthly Investment Plan
or by ACH on Demand before the funds or check clear, payments of the redemption
proceeds will be delayed for up to five days (for funds received through the
Automatic Monthly Investment Plan or by ACH on Demand) or up to 10 days (for
check purchases) from the date of purchase. Investors should consider purchasing
shares using a certified or bank check, money order or federal funds wire if
they anticipate an immediate need for redemption proceeds.
Shares are redeemed at the net asset value per share next determined after
receipt of a redemption order by a Fund or its agent. Except as noted above,
redemption proceeds will normally be mailed or wired to an investor on the next
business day following the date a redemption order is effected. If, however, in
the judgment of Warburg, immediate payment would adversely affect a Fund, each
Fund reserves the right to pay the redemption proceeds within seven days after
the redemption order is effected. Furthermore, each Fund may suspend the right
of redemption or postpone the date of payment upon redemption (as well as
suspend or postpone the recordation of an exchange of shares) for such periods
as are permitted under the 1940 Act.
Although each Fund intends to use its best efforts to maintain its net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount invested depending upon a share's net asset value at the time of
redemption. If an investor redeems all the shares in his account, all
17
<PAGE> 19
dividends and distributions declared up to and including the date of redemption
are paid along with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account drops to less than
$750 ($250 in the case of an IRA or UTMA account), each Fund reserves the right
to redeem the shares in that account at net asset value. Prior to any
redemption, the Fund will notify an investor in writing that this account has a
value of less than the minimum. The investor will then have 60 days to make an
additional investment before a redemption will be processed by the Fund.
Redemption By Check. An individual investor who is the record owner of Fund
shares may request a supply of checks by making the appropriate election on his
account application. Checks may be made payable to the order of any person in
any amount not less than $500. When a check is presented to State Street for
payment, State Street, as agent for the investor, causes the relevant Fund to
redeem a sufficient number of shares in the investor's account to cover the
amount of the check. A Fund may, in its discretion, waive the checkwriting
minimum requirements with respect to investors who are employees of Warburg or
its affiliates or persons with whom Warburg has entered into an investment
advisory agreement.
Investors are entitled to receive dividends on the shares to be redeemed
through the day the check is presented to State Street for payment. If an
investor owns insufficient shares to cover a check, the check will be returned
to the investor marked "insufficient funds." Cancelled checks will be returned
to the investor. Each Fund reserves the right to terminate or modify the check
redemption procedure at any time, to impose a service charge or to charge for
checks. Each Fund may also charge an investor's account for returned checks and
for effecting stop orders.
AUTOMATIC CASH WITHDRAWAL PLAN. Each Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the "Automatic Withdrawal Plan" section of the account application and
attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the Plan, investors should contact Warburg Pincus Funds at (800)
927-2874.
EXCHANGE OF SHARES. An investor may exchange shares of a Fund for shares of
the other Fund or for Common Shares of another Warburg Pincus Fund at their
respective net asset values. Exchanges may be effected by mail or by telephone
in the manner described under "Redemption of Shares" above. If an exchange
request is received by Warburg Pincus Funds or their agent prior to the close of
regular trading on the NYSE, the exchange will be made at each Fund's net asset
value determined at the end of that business day. Exchanges will be effected
without a sales charge but must satisfy the minimum dollar amount necessary for
new purchases. The Fund may refuse exchange
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<PAGE> 20
purchases at any time without prior notice. Currently, exchanges may be made
between the Funds and with the following other funds:
- - WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND -- an intermediate-term
municipal bond fund designed for New York investors seeking income exempt from
federal, New York State and New York City income tax;
- - WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND -- an intermediate-term
bond fund investing in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
- - WARBURG PINCUS FIXED INCOME FUND -- a bond fund seeking current income and,
secondarily, capital appreciation by investing in a diversified portfolio of
fixed-income securities;
- - WARBURG PINCUS GLOBAL FIXED INCOME FUND -- a bond fund investing in a
portfolio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
- - WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return through a
combination of long-term growth of capital and current income consistent with
preservation of capital by investing in equity and fixed income securities;
- - WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term growth
of capital and income and a reasonable current return;
- - WARBURG PINCUS CAPITAL APPRECIATION FUND -- an equity fund seeking long-term
capital appreciation by investing principally in equity securities of domestic
companies;
- - WARBURG PINCUS STRATEGIC VALUE FUND -- an equity fund seeking capital
appreciation by investing in undervalued companies and market sectors;
- - WARBURG PINCUS EMERGING GROWTH FUND -- an equity fund seeking maximum capital
appreciation by investing in emerging growth companies;
- - WARBURG PINCUS SMALL COMPANY VALUE FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of small
companies;
- - WARBURG PINCUS SMALL COMPANY GROWTH FUND* -- an equity fund seeking capital
growth by investing in equity securities of small sized domestic companies;
- - WARBURG PINCUS HEALTH SCIENCES FUND -- an equity fund seeking capital
appreciation by investing primarily in equity and debt securities of health
sciences companies;
- - WARBURG PINCUS POST-VENTURE CAPITAL FUND -- an equity fund seeking long-term
growth of capital by investing primarily in equity securities of issuers in
their post-venture capital stage of development;
- ---------------
* Warburg Pincus Small Company Growth Fund is currently closed to certain new
investors; the Small Company Growth Fund's prospectus describes the types of
investors that may purchase shares.
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<PAGE> 21
- - WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND -- an equity fund seeking
long-term growth of capital by investing primarily in equity securities of
U.S. and foreign issuers in their post-venture capital stage of development;
- - WARBURG PINCUS MAJOR FOREIGN MARKETS FUND -- an equity fund seeking long-term
capital appreciation by investing in equity securities of issuers consisting
of companies in major foreign securities markets;
- - WARBURG PINCUS INTERNATIONAL EQUITY FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of non-
United States issuers;
- - WARBURG PINCUS EMERGING MARKETS FUND -- an equity fund seeking growth of
capital by investing primarily in securities of non-United States issuers
consisting of companies in emerging securities markets;
- - WARBURG PINCUS JAPAN GROWTH FUND -- an equity fund seeking long-term growth of
capital by investing primarily in equity securities of Japanese issuers; and
- - WARBURG PINCUS JAPAN OTC FUND -- an equity fund seeking long-term capital
appreciation by investing in a portfolio of securities traded in the Japanese
over-the-counter market.
The exchange privilege is available to shareholders residing in any state in
which the shares being acquired may legally be sold. When an investor effects an
exchange of shares, the exchange is treated for federal income tax purposes as a
redemption. Therefore, the investor may realize a taxable gain or loss in
connection with the exchange. Investors wishing to exchange shares of a Fund for
shares in another Warburg Pincus Fund should review the prospectus of the other
fund prior to making an exchange. For further information regarding the exchange
privilege or to obtain a current prospectus for another Warburg Pincus Fund, an
investor should contact Warburg Pincus Funds at (800) 927-2874.
The Funds reserve the right to refuse exchange purchases by any person or
group if, in an adviser's judgment, a Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. Each Fund reserves the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Fund calculates its dividends from net
investment income. Net investment income is declared daily and paid monthly. Net
investment income earned on weekends and when the NYSE is not open will be
computed on the previous business day. Distributions of
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long-term capital gains, if any, generally are declared and paid annually at the
end of the Fund's fiscal year in which they are earned. Distributions of short-
term capital gains, if any, are declared and paid annually, at the end of the
fiscal year in the case of the Tax Exempt Fund, and periodically, as the Board
determines, in the case of the Cash Reserve Fund. Unless an investor instructs a
Fund to pay dividends or capital gains distributions in cash, dividends and
distributions will automatically be reinvested in additional shares of the
relevant Fund at net asset value. The election to receive dividends in cash may
be made on the account application or, subsequently, by writing to Warburg
Pincus Funds at the address set forth under "How to Open an Account" or by
calling Warburg Pincus Funds at (800) 927-2874.
A Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. Each Fund intends to qualify each year as a "regulated investment
company" within the meaning of the Code. A Fund, if it qualifies as a regulated
investment company, will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain. Each Fund expects to pay such additional dividends and to make such
additional distributions as are necessary to avoid the application of this tax.
As long as the Tax Exempt Fund qualifies as a regulated investment company and
meets certain other Code requirements (including the requirement that at least
50% of its assets are invested in tax-exempt obligations at the close of each
quarter of its taxable year), distributions of tax-exempt interest income will
be excluded from an investor's income for federal income tax purposes.
Such exempt interest dividends paid by the Tax Exempt Fund may be excluded by
investors from their gross incomes for federal income tax purposes, although (i)
such exempt interest dividends will be a tax preference item for purposes of the
federal individual and corporate alternative minimum taxes to the extent they
are derived from Alternative Minimum Tax Securities and (ii) all exempt interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum tax. In addition,
corporate investors may incur a greater federal environmental tax liability
through the receipt of Fund dividends and distributions if the tax is reinstated
as proposed by President Clinton. Investors who are "substantial users" (or
"related persons" of substantial users) within the meaning of the Code of
facilities financed by Alternative Minimum Tax Securities should consult their
tax advisers as to whether the Tax Exempt Fund is a desirable investment.
Dividends paid by a Fund from its taxable net investment income (if any, in
the case of the Tax Exempt Fund) and distributions of any net short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
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investors as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. As a general rule, an investor's gain or loss on
a sale or redemption of his Fund shares will be a long-term capital gain or loss
if he has held his shares for more than one year and will be short-term capital
gain or loss if he has held his shares for one year or less. Each Fund does not
expect to realize long-term capital gains and, therefore, it is unlikely that
any portion of the dividends or distributions paid by a Fund will be taxable to
investors as long-term capital gains. An investor in the Tax Exempt Fund who
redeems his shares prior to the declaration of a dividend may lose tax exempt
status on accrued income attributable to tax exempt Municipal Securities.
Investors may be proportionately liable for taxes on income and gains of a Fund,
but investors not subject to tax on their income will not be required to pay tax
on amounts distributed to them. Each Fund's dividends and distributions will not
qualify for the dividends-received deduction allowed to corporations. The Funds'
investment activities should not result in unrelated business taxable income to
a tax exempt investor.
Exempt interest dividends derived from interest on qualifying New York
Municipal Securities will also be exempt from New York State and New York City
personal (but not corporate franchise) income taxes. The exclusion or exemption
of interest income for federal income tax purposes, or New York State or New
York City personal income tax purposes, in most cases does not result in an
exemption under the tax laws of any other state or local authority. Investors
who are subject to tax in other states or localities should consult their own
tax advisers about the taxation of dividends and distributions from the Tax
Exempt Fund by such states and localities.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. In the case of the Tax Exempt Fund, these
statements set forth the dollar amount of income excluded or exempt from federal
income taxes and exempt from New York State and New York City personal income
taxes, and the dollar amount, if any, subject to taxation. These statements also
designate the amount of exempt-interest dividends that is a specific preference
item for purposes of the federal individual and corporate alternative minimum
taxes. Each investor in the Cash Reserve Fund will also receive, if applicable,
various written notices after the close of the Fund's prior taxable year with
respect to certain dividends and distributions which were received from the Fund
during the Fund's prior taxable year. Investors should consult their own tax
advisers with specific reference to their own tax situations, including their
state and local taxes that may apply to dividends and distributions received
from the Cash Reserve Fund. In this regard, investors should be aware that if a
portion of any dividend is derived from interest on United States government
obligations, that portion may be subject to tax by certain states, even though
such interest, if received directly by an investor, would be exempt from state
income tax.
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NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Fund's net asset value per share is calculated at noon and as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each
business day, Monday through Friday, except on days when the NYSE is closed. The
NYSE is currently scheduled to be closed on New Year's Day, Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or Sunday,
respectively.
The net asset value per share of each Fund is computed by adding the value of
the Fund's assets, deducting liabilities and dividing the result by the number
of outstanding shares. Portfolio securities are valued on the basis of amortized
cost, which involves valuing a portfolio instrument at its cost initially and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.
PERFORMANCE
- --------------------------------------------------------------------------------
From time to time, a Fund may advertise its yield and effective yield and, in
the case of the Tax Exempt Fund, its tax equivalent yield. The yield of the Fund
refers to the income generated by an investment in the shares over a seven-day
period, which is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, assumes that income earned by an
investment in the Fund is reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. The tax equivalent yield shows the taxable yield an investor in
the highest applicable tax bracket would have to earn to equal the Tax Exempt
Fund's tax-free yield after the imposition of federal, New York State and New
York City personal income taxes. The Tax Exempt Fund's tax equivalent yield is
calculated by dividing the Fund's tax-exempt yield by one minus the highest
level of the combined federal, New York State and New York City tax rates.
Yield, effective yield and tax equivalent yield may be shown by means of
schedules, charts or graphs.
Investors should note that yield, effective yield and tax equivalent yield
figures are based on historical earnings and are not intended to indicate future
performance. The Funds' Statement of Additional Information describes the method
used to determine the Fund's yield. Current yield figures may be obtained by
calling Warburg Pincus Funds at (800) 927-2874.
A Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or (ii) in the
case of the Tax Exempt Fund, an average of the yields of similar New York
23
<PAGE> 25
tax-exempt money market funds based on information contained in Donoghue's Money
Market Fund Report, which is published weekly by the Donoghue Organization or
(iii) in the case of the Cash Reserve Fund, the Donoghue's Money Market Fund
Average, which is an average of all major taxable money market fund yields
published weekly by the Donoghue Organization or (iv) in each case, other
appropriate indexes of investment securities. Each Fund may also include
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney,
The Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various time periods. In addition,
the Fund may from time to time compare its expense ratio to that of investment
companies with similar objectives and policies, based on data generated by
Lipper Analytical Services, Inc. or similar investment services that monitor
mutual funds.
In reports or other communications to investors or in advertising, a Fund may
discuss relevant economic and market conditions affecting the Fund. In addition,
the Fund may render periodic updates of Fund investment activity, which may
include, among other things, discussion or quantitative statistical or
comparative analysis of portfolio composition and significant portfolio
holdings. The Fund may also describe the Fund's investment objective, approaches
taken in managing the Fund's investments or the methodology underlined in the
Fund's portfolios. The Fund may also discuss measures of risk and the continuum
of risk and return relating to different investments.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. Each Fund was incorporated on November 15, 1984 under the laws
of the State of Maryland as "Counsellors Cash Reserve Fund, Inc." and as
"Counsellors New York Tax Exempt Fund, Inc." On October 27, 1995, the Cash
Reserve Fund and the Tax Exempt Fund each filed an amendment to its charter in
order to change its name to "Warburg, Pincus Cash Reserve Fund, Inc." and
"Warburg, Pincus New York Tax Exempt Fund, Inc.", respectively. Each Fund's
charter authorizes the Board to issue three billion full and fractional shares
of capital stock, $.001 par value per share, of which two billion shares are
designated Advisor Shares. Under each Fund's charter documents, the Board has
the power to classify or reclassify any unissued shares of the Fund into one or
more additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of shares into one or more series and, without
shareholder approval, may increase the number of authorized shares of the Fund.
Since no Advisor Shares are outstanding for either of the Funds, references to
"shares" in this prospectus
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refer solely to the common shares of a Fund unless the context otherwise
requires.
MULTI-CLASS STRUCTURE. Although neither Fund currently does so, each Fund is
authorized to offer a separate class of shares, the Advisor Shares, pursuant to
a separate prospectus. Individual investors could only purchase Advisor Shares
through institutional shareholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and other financial
intermediaries. Shares of each class would represent equal pro rata interests in
the Fund and accrue dividends and calculate net asset value and performance
quotations in the same manner. Because of the higher fees paid by the Advisor
Shares, the total return on such shares can be expected to be lower than the
total return on common shares.
VOTING RIGHTS. Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of a Fund may be removed from office
upon the vote of shareholders holding at least a majority of the relevant Fund's
outstanding shares at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of a Fund. Lionel I. Pincus
may be deemed to be a controlling person of each Fund because he may be deemed
to possess or share investment power over shares owned by clients of Warburg and
certain other entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions or investment made through the Automatic Investment
Program). Each Fund will also send to its investors a semiannual report and an
audited annual report, each of which includes a list of the investment
securities held by the Fund and a statement of the performance of the Fund.
Periodic listings of the investment securities held by a Fund, as well as
certain statistical characteristics of the Fund, may be obtained by calling
Warburg Pincus Funds at (800) 927-2874 or on the Warburg Pincus Funds Web site
at www.warburg.com.
The prospectuses of the Funds are combined in this Prospectus. Each Fund
offers only its own shares, yet it is possible that a Fund might become liable
for a misstatement, inaccuracy or omission in this Prospectus with regard to the
other Fund.
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------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUNDS'
STATEMENT OF ADDITIONAL INFORMATION OR THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUNDS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EACH FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
26
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TABLE OF CONTENTS
<TABLE>
<S> <C>
The Funds' Expenses...................................... 2
Financial Highlights..................................... 3
Investment Objectives and Policies....................... 4
General.................................................. 5
Portfolio Investments.................................... 7
Investment Guidelines.................................... 10
Management of the Funds.................................. 11
How to Open an Account................................... 13
How to Purchase Shares................................... 14
How to Redeem and Exchange Shares........................ 16
Dividends, Distributions and Taxes....................... 20
Net Asset Value.......................................... 23
Performance.............................................. 23
General Information...................................... 24
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)
www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPMMF-1-0498B
<PAGE> 32
STATEMENT OF ADDITIONAL INFORMATION
April 27, 1998
------------------------------
WARBURG PINCUS CASH RESERVE FUND
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information call: (800) WARBURG
------------------------------
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives............................................................................................ 2
Municipal Securities............................................................................................. 2
Investment Policies.............................................................................................. 3
Special Considerations Relating to New York Municipal Securities................................................. 12
Management of the Funds.......................................................................................... 25
Additional Purchase and Redemption Information................................................................... 32
Exchange Privilege............................................................................................... 32
Additional Information Concerning Taxes.......................................................................... 33
Determination of Yield........................................................................................... 36
Independent Accountants and Counsel.............................................................................. 37
Miscellaneous.................................................................................................... 37
Financial Statements............................................................................................. 38
Appendix
Description of Commercial Paper and Municipal Securities Ratings....................................... A-1
</TABLE>
This Statement of Additional Information is meant to be read
in conjunction with the combined Prospectus of Warburg Pincus Cash Reserve Fund
(the "Cash Reserve Fund") and Warburg Pincus New York Tax Exempt Fund (the "New
York Tax Exempt Fund") (collectively, the "Funds"), dated April 27, 1998 and is
incorporated by reference in its entirety into that Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no investment in
shares of a Fund should be made solely upon the information contained herein.
Copies of the Funds' Prospectus and information regarding each Fund's current
yield may be obtained by calling the Fund at (800) 927-2874. Information
regarding the status of shareholder accounts may also be obtained by calling the
Fund at the same number or by writing to the Fund, P.O. Box 9030, Boston,
Massachusetts 02205-9030.
<PAGE> 33
INVESTMENT OBJECTIVES
The investment objective of the Cash Reserve Fund is to
provide investors with high current income consistent with liquidity and
stability of principal.
The investment objective of the New York Tax Exempt Fund is to
provide investors with as high a level of current income that is excluded from
gross income for federal income tax purposes and exempt from New York State and
New York City personal income taxes as is consistent with preservation of
capital and liquidity.
MUNICIPAL SECURITIES
Under normal circumstances, substantially all of the New York
Tax Exempt Fund's assets will be invested in Municipal Securities. Municipal
Securities include short-term debt obligations issued by governmental entities
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity securities that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Securities if the interest paid thereon
is exempt from federal income tax.
The two principal types of Municipal Securities consist of
"general obligation" and "revenue" issues, and the New York Tax Exempt Fund's
portfolio may include "moral obligation" issues, which are normally issued by
special purpose authorities. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity securities held by the
Fund are in most cases revenue bonds and are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of such private
activity securities is usually directly related to the credit standing of the
corporate user of the facility involved.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of rating agencies represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that ratings are general
and are not absolute standards of quality, and Municipal Securities with the
same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by the New York Tax
Exempt Fund, an issue of Municipal Securities may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. The Fund's investment adviser and sub-investment adviser will consider
such an event in determining whether the Fund should continue to hold
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<PAGE> 34
the obligation. See the Appendix attached hereto for further information
concerning ratings and their significance.
An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the possibility that as a result of litigation or
other conditions, the power or ability of any one or more issuers to pay, when
due, principal of and interest on its, or their, Municipal Securities may be
materially adversely affected.
Among other instruments, the New York Tax Exempt Fund may
purchase short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes and other forms of short-term loans. Such notes are issued
with a short-term maturity in anticipation of the receipt of tax funds, the
proceeds of bond placements or other revenues.
INVESTMENT POLICIES
The following policies supplement the descriptions of each
Fund's investment objective and policies in the Prospectus.
Additional Information on Investment Practices
Variable Rate Master Demand Notes. Variable rate master demand
notes held by a Fund may have maturities of more than thirteen months, provided:
(i) the Fund is entitled to payment of principal and accrued interest upon not
more than seven days' notice and (ii) the rate of interest on such notes is
adjusted automatically at periodic intervals which may extend up to thirteen
months. In determining the Fund's average weighted portfolio maturity and
whether a variable rate master demand note has a remaining maturity of thirteen
months or less, each note will be deemed by the Fund to have a maturity equal to
the longer of the period remaining until its next interest rate adjustment or
the period remaining until the principal amount owed can be recovered through
demand. In determining whether an unrated variable rate master demand note is of
comparable quality at the time of purchase to instruments rated "high quality"
by any major rating service or when purchasing variable rate master demand
notes, the Fund's investment adviser and sub-investment adviser will consider
the earning power, cash flow and other liquidity ratios of the issuer of the
note and will continuously monitor its financial condition. In addition, when
necessary to ensure that a note is of "high quality," the Fund will require that
the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter of line of credit, guarantee or commitment to lend.
In the event an issuer of a variable rate master demand note
defaults on its payment obligation, a Fund might be unable to dispose of the
note because of the absence of a secondary market and might, for this or other
reasons, suffer a loss to the extent of the default. However, the Fund will
invest in such instruments only where its investment adviser and sub-
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<PAGE> 35
investment adviser believe that the risk of such loss is minimal. In determining
average weighted portfolio maturity, a variable rate master demand note will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand note period.
When-Issued Securities. As stated in the Prospectus, a Fund
may purchase Municipal Securities or portfolio securities, as the case may be,
on a "when-issued" basis (i.e., for delivery beyond the normal settlement date
at a stated price and yield). When the Fund agrees to purchase when-issued
securities, its custodian will set aside cash or liquid securities in a
segregated account equal to the amount of the commitment. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the segregated account in order to ensure that the value of the
account remains equal to the amount of the Fund's commitment. It may be expected
that the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because the Fund will set aside cash and liquid assets to satisfy its
purchase commitments in the manner described, the Fund's liquidity and ability
to manage its portfolio might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its assets.
When a Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so may result in
the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Reverse Repurchase Agreements and Borrowings. A Fund may
borrow funds for temporary purposes and not for leverage by agreeing to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed-upon date and price. At the time the
Fund enters into such an arrangement (a "reverse repurchase agreement"), it will
place in a segregated custodial account cash or liquid securities having a value
equal to the repurchase price (including accrued interest) and will subsequently
monitor the account to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the repurchase price of those securities.
Reverse repurchase agreements are considered to be borrowings by the Fund under
the Investment Company Act of 1940, as amended (the "1940 Act").
Repurchase Agreements (Cash Reserve Fund only). The seller
under a repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the repurchase price
(including accrued interest). Securities subject to repurchase agreements will
be held by the Fund's custodian or in the Federal Reserve/Treasury book-entry
system or another authorized securities depository.
Stand-By Commitment Agreements (New York Tax Exempt Fund
only). The Fund may acquire "stand-by commitments" with respect to Municipal
Securities held in its portfolio. Under a stand-by commitment, a dealer agrees
to purchase at the Fund's option
4
<PAGE> 36
specified Municipal Securities at a specified price. Stand-by commitments
acquired by the Fund may also be referred to as "put" options. The Fund's right
to exercise stand-by commitments is unconditional and unqualified. A stand-by
commitment is not transferable by the Fund, although the Fund can sell the
underlying securities to a third party at any time.
The principal risk of a stand-by commitment is that the writer
of a commitment may default on its obligation to repurchase the securities
acquired with it. The Fund intends to enter into stand-by commitments only with
brokers, dealers and banks that, in the opinion of Warburg Pincus Asset
Management, Inc., each Fund's investment adviser ("Warburg"), present minimal
credit risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, Warburg will periodically review relevant financial information
concerning the issuer's assets, liabilities and contingent claims.
The amount payable to the Fund upon its exercise of a stand-by
commitment is normally (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
The Fund would acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a stand-by commitment would
not affect the valuation or assumed maturity of the underlying Municipal
Securities which, as noted, would continue to be valued in accordance with the
amortized cost method. Stand-by commitments acquired by the Fund would be valued
at zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a stand-by commitment, its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Fund. Stand-by commitments would not affect the average weighted maturity of
the Fund's portfolio.
The Internal Revenue Service has issued a revenue ruling to
the effect that a registered investment company will be treated for federal
income tax purposes as the owner of the Municipal Securities acquired subject to
a stand-by commitment and the interest on the Municipal Securities will be
tax-exempt to the Fund.
Third Party Puts (New York Tax Exempt Fund only). The Fund may
purchase long-term fixed rate bonds that have been coupled with an option
granted by a third party
5
<PAGE> 37
financial institution allowing the Fund at specified intervals to tender (or
"put") the bonds to the institution and receive the face value thereof (plus
accrued interest). These third party puts are available in several different
forms, may be represented by custodial receipts or trust certificates and may be
combined with other features such as interest rate swaps. The Fund receives a
short-term rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement, and in the event that there is a default in the
payment of principal or interest, or downgrading of a bond to below investment
grade, or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and the dollar-weighted average maturity of the Fund's portfolio would be
adversely affected.
These bonds coupled with puts may present the same tax issues
as are associated with stand-by commitments. As with any stand-by commitment,
the Fund intends to take the position that it is the owner of any municipal
obligation acquired subject to a third party put, and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Internal Revenue Service will agree with
such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, Warburg, intends to manage the
Fund's portfolio in a manner designed to minimize any adverse impact from these
investments.
Taxable Investments (New York Tax Exempt fund only). Because
the Fund's purpose is to provide income excluded from gross income for federal
income tax purposes and exempt from New York State and New York City taxes, the
Fund generally will invest in taxable obligations only if and when the
investment adviser believes it would be in the best interests of the Fund's
investors to do so. Situations in which the Fund may invest up to 20% of its
total assets in taxable securities include: (i) pending investment of proceeds
of sales of Fund shares or the sale of its portfolio securities or (ii) when the
Fund requires highly liquid securities in order to meet anticipated redemptions.
The Fund may temporarily invest more than 20% of its total assets in taxable
securities to maintain a "defensive" posture when the Fund's investment adviser
determines that it is advisable to do so because of adverse market conditions
affecting the market for Municipal Securities generally.
Among the taxable investments in which the Fund may invest are
repurchase agreements and time deposits maturing in not more than seven days.
The Fund may agree to purchase money market instruments from financial
institutions such as banks and broker-dealers subject to the seller's agreement
to repurchase them at an agreed-upon date and price ("repurchase agreements").
The seller under a repurchase agreement will be required to maintain the value
of the securities subject to the agreement at not less than the repurchase price
(including accrued interest). Securities subject to repurchase agreements will
be held by the Fund's custodian or in the Federal Reserve/Treasury book-entry
system or another authorized securities depository.
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Other Investment Policies and Practices of the New York Tax Exempt Fund
Non-Diversified Status. The New York Tax Exempt Fund is
classified as non-diversified within the meaning of the 1940 Act, which means
that it is not limited by such Act in the proportion of its assets that it may
invest in securities of a single issuer. The Fund's investments will be limited,
however, in order to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). See "Additional
Information Concerning Taxes." To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (a) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (b) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
Other Investment Limitations
Cash Reserve Fund. The investment limitations numbered 1
through 10 may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares. Such majority is defined as the
lesser of (i) 67% or more of the shares present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (ii) more than 50% of the outstanding shares. Investment
limitations 11 and 12 may be changed by a vote of the Fund's Board of Directors
(the "Board") at any time.
The Cash Reserve Fund may not:
1. Invest in common stocks, preferred stocks, warrants, other
equity securities, corporate bonds or indentures, state bonds, municipal bonds
or industrial revenue bonds.
2. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's assets would be invested in the securities of
such issuer, except that this 5% limitation does not apply to securities issued
or guaranteed by the United States government, its agencies or
instrumentalities, and except that up to 25% of the value of the Fund's assets
may be invested without regard to this 5% limitation.
3. Borrow money, issue senior securities or enter into reverse
repurchase agreements except for temporary or emergency purposes and not for
leveraging, and then in amounts not in excess of 10% of the value of the Fund's
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of the value of the Fund's
assets at the time of such borrowing. The Fund does not currently intend to
enter into reverse repurchase agreements in amounts in excess of 5% of its
assets at the time the agreement is entered into. Whenever borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments.
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4. Purchase any securities which would cause more than 25% of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of
obligations issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political sub-divisions or
certificates of deposit, time deposits, savings deposits and bankers'
acceptances.
5. Make loans except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations and enter into repurchase agreements.
6. Underwrite any issue of securities except to the extent
that the purchase of debt obligations directly from the issuer thereof in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
7. Purchase securities on margin, make short sales of
securities or maintain a short position.
8. Write or sell puts, calls, straddles, spreads or
combinations thereof.
9. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may purchase
commercial paper issued by companies that invest in real estate or interests
therein.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition or reorganization.
11. Invest more than 10% of the value of the Fund's total
assets in securities which may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days after notice by the Fund, variable rate
master demand notes providing for settlement upon maturities longer than seven
days and savings accounts which require more than seven days' notice prior to
withdrawal shall be considered illiquid securities.
12. Invest in oil, gas or mineral leases.
If a percentage restriction (other than the percentage
limitation set forth in No. 3 above) is adhered to at the time of an investment,
a later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of the Fund's assets will
not constitute a violation of such restriction.
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New York Tax Exempt Fund. The investment limitations numbered
1 through 9 may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares. Such majority is defined as the
lesser of (i) 67% or more of the shares present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (ii) more than 50% of the outstanding shares. Investment
limitations 10 and 11 may be changed by a vote of the Fund's Board of Directors
(the "Board") at any time.
The New York Tax Exempt Fund may not:
1. Invest less than 80% of its assets in securities the
interest on which is exempt from federal income tax, except during temporary
defensive periods or under unusual market conditions, as determined by the
Fund's investment adviser.
2. Borrow money, issue senior securities or enter into reverse
repurchase agreements except for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of the Fund's
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in excess
of the lesser of the dollar amounts borrowed or 10% of the value of the Fund's
assets at the time of such borrowing. The Fund does not currently intend to
enter into reverse repurchase agreements in amounts in excess of 5% of its
assets at the time the agreement is entered into. Whenever borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments.
3. Purchase any securities which would cause more than 25% of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of (i)
obligations issued by the United States, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political sub-divisions, (ii) certificates of
deposit issued by United States branches of United States banks or (iii)
Municipal Securities the interest on which is paid solely from revenues of
economically related projects. For purposes of this restriction, private
activity securities ultimately payable by companies within the same industry are
treated as if they were issued by issuers in the same industry.
4. Make loans except that the Fund may purchase or hold debt
obligations and enter into repurchase agreements in accordance with its
investment objective, policies and limitations.
5. Underwrite any issue of securities except to the extent
that the purchase of debt obligations directly from the issuer thereof in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
6. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or mineral
exploration or
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development programs, except that the Fund may invest in debt obligations
secured by real estate, mortgages or interests therein.
7. Purchase securities on margin, make short sales of
securities or maintain short positions.
8. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may acquire stand-by commitments.
9. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization.
10. Invest more than 10% of the value of the Fund's total
assets in securities which may be illiquid because of legal or contractual
restrictions on resale or securities for which there are not readily available
market quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days and variable rate master demand notes
providing for settlement upon more than seven days notice by the Fund and time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
11. Invest in oil, gas or mineral leases.
If a percentage restriction (other than the percentage
limitation set forth in No. 2 above) is adhered to at the time of an investment,
a later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of the Fund's assets will
not constitute a violation of such restriction.
Portfolio Valuation
Each Fund's portfolio securities are valued on the basis of
amortized cost. Under this method, the Fund values a portfolio security at cost
on the date of purchase and thereafter assumes a constant value of the security
for purposes of determining net asset value, which normally does not change in
response to fluctuating interest rates. Although the amortized cost method seems
to provide certainty in portfolio valuation, it may result in periods during
which values, as determined by amortized cost, are higher or lower than the
amount the Fund would receive if it sold the securities. In connection with
amortized cost valuation, the Board has established procedures that are intended
to stabilize the Fund's net asset value per share for purposes of sales and
redemptions at $1.00. These procedures include review by the Board, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
Fund's net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1%,
the Board will promptly consider what action, if any, should be initiated. If
the Board believes that the amount of any deviations from the Fund's $1.00
amortized cost price per share may result in material dilution or other unfair
results to investors or existing shareholders, it will take such steps as it
considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity; shortening the Fund's average portfolio
maturity; withholding or
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reducing dividends; redeeming shares in kind; reducing the number of the Fund's
outstanding shares without monetary consideration; or utilizing a net asset
value per share determined by using available market quotations.
Portfolio Transactions
Warburg is responsible for establishing, reviewing, and, where
necessary, modifying a Fund's investment program to achieve its investment
objective. Blackrock Institutional Management Corporation ("BIMC") generally
will select specific portfolio investments and effect transactions for each
Fund. Purchases and sales of portfolio securities are usually principal
transactions without brokerage commissions effected directly with the issuer or
with dealers who specialize in money market instruments. BIMC seeks to obtain
the best net price and the most favorable execution of orders. To the extent
that the execution and price offered by more than one dealer are comparable,
BIMC may, in its discretion, effect transactions in portfolio securities with
dealers who provide the Fund with research advice or other services.
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by BIMC.
Such other investment clients may invest in the same securities as the Fund.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other clients, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which BIMC believes to
be equitable to each client, including the Fund. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained or sold for the Fund. To the extent
permitted by law, BIMC may aggregate the securities to be sold or purchased for
each Fund with those to be sold or purchased for such other investment clients
in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to Warburg, BIMC, PNC Bank, National Association ("PNC") or Counsellors
Securities Inc. ("Counsellors Securities") or any affiliated person of such
companies, except pursuant to an exemption received from the Securities and
Exchange Commission (the "SEC").
The New York Tax Exempt Fund may participate, if and when
practicable, in bidding for the purchase of Municipal Securities directly from
an issuer for the Fund's portfolio in order to take advantage of the lower
purchase price available to members of such a group. The Fund will engage in
this practice, however, only when Warburg and BIMC, in their sole discretion,
believe such practice to be otherwise in the Fund's interest.
Each Fund does not intend to seek profits through short-term
trading. A Fund's annual portfolio turnover will be relatively high but the
Fund's portfolio turnover is not expected to have a material effect on its net
income. The Fund's portfolio turnover is expected to be zero for regulatory
reporting purposes.
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SPECIAL CONSIDERATIONS RELATING TO NEW YORK
MUNICIPAL SECURITIES
Some of the significant financial considerations relating to
the New York Tax Exempt Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from official statements relating to
issues of New York Municipal Securities that were available prior to the date of
this Statement of Additional Information. The accuracy and completeness of the
information contained in those official statements have not been independently
verified.
State Economy. New York is the third most populous state in
the nation and has a relatively high level of personal wealth. The State's
economy is diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. New York City (the "City"),
which is the most populous city in the State and nation and is the center of the
nation's largest metropolitan area, accounts for a large portion of the State's
population and personal income.
The State has historically been one of the wealthiest states
in the nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic position. State per
capita personal income has historically been significantly higher than the
national average, although the ratio has varied substantially.
Moderate growth is projected to continue in 1998 and 1999 for
employment, wages, and personal income, although the growth rates will lessen
gradually during the course of the two years. Overall employment growth is
expected to continue at a modest rate, reflecting the slowing growth in the
national economy, continued spending restraint in government, and restructuring
in the health care, social service, and banking sectors.
There can be no assurance that the State economy will not
experience worse-than-predicted results, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor
(the "Governor") to submit to the State legislature (the "Legislature") a
balanced executive budget which contains a complete plan of expenditures for the
ensuing fiscal year and all moneys and revenues estimated to be available
therefor, accompanied by bills containing all proposed appropriations or
reappropriations and any new or modified revenue measures to be enacted in
connection with the executive budget. The entire plan constitutes the proposed
State financial plan for that fiscal year. The Governor is required to submit to
the Legislature quarterly budget updates which include a revised cash-basis
state financial plan, and an explanation of any changes from the previous state
financial plan.
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The State's budget for the 1997-98 fiscal year was adopted by
the Legislature on August 4, 1997, more than four months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for State-supported debt
service. The State Financial Plan for the 1997-98 fiscal year was formulated on
August 11, 1997 and was based on the State's budget as enacted by the
Legislature, as well as actual results for the first quarter of the current
fiscal year (the "1997-98 State Financial Plan"). In recent years, the State has
failed to adopt a budget prior to the beginning of its fiscal year. There can be
no assurance that State budgets in future fiscal years will be adopted by the
April 1 statutory deadline.
The Governor is required by law to propose a balanced budget
each year. In order to address any potential remaining budget gap, the Governor
is expected to make additional proposals to bring receipts in line with
disbursements. The State has closed projected budget gaps of $5.0 billion, $3.9
billion and $2.3 billion in its 1995-96, 1996-97 and 1997-98 fiscal years,
respectively.
The 1997-98 General Fund Financial Plan is projected to be
balanced on a cash basis, with a projected cash surplus of $1.83 billion. As
compared to the Governor's Executive Budget as amended in February 1997, the
State's adopted budget for 1997-98 increased General Fund spending by $1.7
billion, primarily from increases for local assistance ($1.3 billion). Resources
used to fund these additional expenditures include increased revenues projected
for the 1997-98 fiscal year, increased resources produced in the 1996-97 fiscal
year that will be utilized in 1997-98, re-estimates of social service, fringe
benefit and other spending, and certain non-recurring resources.
The 1997-98 adopted budget includes multi-year reductions,
including a State funded property and local income tax reduction program, estate
tax relief, utility gross receipts tax reductions, permanent reductions in the
State sales tax on clothing, and elimination of assessments on medical
providers. These reductions are intended to reduce the overall level of State
and local taxes in New York and to improve the State's competitive position
vis-a-vis other states. The various elements of the State and local tax and
assessments reductions have little or no impact on the 1997-98 State Financial
Plan, and do not begin to materially affect the outyear projections until the
State's 1999-2000 fiscal year.
Other actions taken in the 1997-98 adopted budget add further
pressure to future budget balance in New York State. For example, the fiscal
effects of tax reductions adopted in the 1997-98 budget are projected to grow
more substantially beyond the 1998-99 fiscal year, with incremental costs
averaging in excess of $1.3 billion annually over the last three years of the
tax reduction program. These incremental costs reflect the phase-in of
State-funded school property tax and local income tax relief, the phase-out of
the assessments on medical providers, and reductions in estate and gift levies,
utility gross receipts taxes, and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when
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fully effective in State fiscal year 2001-02. In addition, the 1997-98 budget
included multi-year commitments for school aid and pre-kindergarten early
learning programs which could add as much as $1.4 billion in costs when fully
annualized in fiscal year 2001-02. These spending commitments are subject to
annual appropriation.
On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps could become
a significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The Governor presented his 1998-99 Executive Budget to the
Legislature on January 20, 1998. The Executive Budget contains financial
projections for the State's 1997-98 through 2000-01 fiscal years, detailed
estimates of receipts and a proposed Capital Program and Financing Plan for the
1997-98 through 2002-03 fiscal years. It is expected that the Governor will
prepare amendments to his Executive Budget as permitted under law and that these
amendments will be reflected in a revised Financial Plan. There can be no
assurance that the Legislature will enact into law the Executive Budget as
proposed by the Governor, or that the State's adopted budget projections will
not differ materially and adversely from the projections set forth therein.
The 1998-99 Financial Plan is projected to be balanced on a
cash basis in the General Fund. Total General Fund receipts, including transfers
from other funds, are projected to be $36.22 billion, an increase of $1.02
billion over projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the projected expenditures (including
pre-payments), for the current fiscal year. As compared to the 1997-98 State
Financial Plan, the Executive Budget proposes year-to-year growth in General
Fund spending of 2.89 percent. State Funds spending (i.e., General Fund plus
other dedicated funds, with the exception of federal aid) is projected to grow
by 8.5 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 7.6 percent from the prior fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates
several Executive Budget tax proposals that, if enacted, would further reduce
receipts otherwise available to the General Fund by approximately $700 million
during 1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut
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initiatives and other funding changes that are projected to further reduce
receipts available to the General Fund by over $200 million. These initiatives
include reducing the fee to register passenger motor vehicles and earmarking a
larger portion of such fees to dedicated funds and other purposes; extending the
number of weeks in which certain clothing purchases are exempt from sales taxes;
more fully conforming State law to reflect recent Federal changes in estate
taxes; continuing lower pari-mutuel tax rates; and accelerating scheduled
property tax relief for farmers from 1999 to 1998. In addition to the specific
tax and fee reductions discussed above, the Executive Budget also proposes
establishing a reserve of $100 million to permit the acceleration into 1998-99
of other tax reductions that are otherwise scheduled in law for implementation
in future fiscal years.
The Division of the Budget estimates that the 1998-99
Financial Plan includes approximately $62 million in non-recurring resources,
comprising less than two-tenths of one percent of General Fund disbursements.
The non-recurring resources projected for use in 1998-99 consist of $27 million
in retroactive federal welfare reimbursements for family assistance recipients
with HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are
estimated at $4.82 billion, or $1.07 billion higher than 1997-98. The proposed
spending plan includes: $2.51 billion in disbursements for transportation
purposes, including the State and local highway and bridge program; $815 million
for environmental activities; $379 million for correctional services; $228
million for the State University of New York ("SUNY") and the City University of
New York ("CUNY"); $290 million for mental hygiene projects; and $375 million
for CEFAP. Approximately 28 percent of capital projects are proposed to be
financed by "pay-as-you-go" resources. State-supported bond issuances finance 46
percent of capital projects, with federal grants financing the remaining 26
percent.
The economic and financial condition of the State may be
affected by various financial, social, economic and political factors. Those
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities, but also by entities, such as the federal government,
that are not under the control of the State. In addition, the financial plan is
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. Actual results, however, could differ
materially and adversely from the projections set forth in a financial plan, and
those projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made
use of internal sources to address potential State financial plan shortfalls,
and the Division of Budget believes it could take similar actions should
variances occur in its projections for the current fiscal year.
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Recent Financial Results. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives almost all State taxes and other resources
not dedicated to particular purposes.
The State ended the first six months of its 1997-98 fiscal
year with an unaudited General Fund cash balance of $3.2 billion, or $254
million above the August Financial Plan estimate. Total unaudited receipts,
including transfers from other funds, totaled $18.8 billion, or $340 million
higher than expected. The additional receipts reflected higher-than-anticipated
tax revenues of $244 million and miscellaneous receipts of $93 million.
Unaudited General Fund spending for the same period equaled $16.0 billion, or
$86 million above the cashflow projections published in the August Financial
Plan. For fiscal year 1997-98, total General Fund receipts were projected at
$35.09 billion, an increase of $2.05 billion from 1996-97 results. Total
disbursements, including transfers to capital projects, debt service and other
funds, were projected at $34.60 billion, or 5.2 percent higher than
disbursements in 1996-97.
The mid-year update projected a closing balance in the General
Fund of $927 million, which was composed of a $530 million reserve for future
needs, a $332 million balance in the Tax Stabilization Reserve Fund ("TSRF"),
and a $65 million balance in the Contingency Reserve Fund ("CRF").
As part of the 1997-98 Adopted Budget Report, the State also
issued its update to the GAAP-basis Financial Plan for the State's 1997-98
fiscal year, based on the cash-basis 1997-98 State Financial Plan completed in
August. The GAAP-basis update projected a General Fund operating deficit of $959
million, primarily reflecting the use of a portion of the 1996-97 cash surplus
to fund 1997-98 liabilities, offset by the $530 million reserve for future
needs.
Debt Limits and Outstanding Debt. There are a number of
methods by which the State of New York may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the Legislature and approved by the voters. There is no
limitation on the amount of long-term general obligation debt that may be so
authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter
approval (i) in anticipation of the receipt of taxes and revenues, by issuing
tax and revenue anticipation notes, and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
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The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
In 1990, as part of a State fiscal reform program, legislation
was enacted creating LGAC, a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments
traditionally funded through New York State's annual seasonal borrowing. The
legislation empowered LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which were to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap was thus permitted in any fiscal year, it was
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. As of June 1995, LGAC had issued bonds to provide net
proceeds of $4.7 billion, completing the program.
17
<PAGE> 49
On January 13, 1992, Standard & Poor's Ratings Services
("S&P") reduced its ratings on the State's general obligation bonds from A to A-
and, in addition, reduced its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On August 28, 1997, S&P
revised its ratings on the State's general obligation bonds from A- to A and
revised its ratings on the State's moral obligation, lease purchase, guaranteed
and contractual obligation debt. On March 2, 1998, S&P affirmed its A rating on
the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State
and stated that the outlook for the State's general obligations is stable.
The State anticipates that its capital programs will be
financed, in part, by State and public authorities borrowings in the 1997-98
fiscal year. The State expects to issue $605 million in general obligation bonds
(including $140 million for purposes of redeeming outstanding bond anticipation
notes) and $140 million in general obligation commercial paper. The Legislature
has also authorized the issuance of $311 million in certificates of
participation (including costs of issuance, reserve funds and other costs)
during the State's 1997-98 fiscal year for equipment purchases. The projection
of State borrowings for the 1997-98 fiscal year is subject to change as market
conditions, interest rates and other factors vary throughout the fiscal year.
The proposed 1997-98 through 2002-03 Capital Program and
Financing Plan was released with the 1998-99 Executive Budget on January 20,
1998. As a part of that Plan, changes were proposed to the State's 1997-98
borrowing plan, including: the delay in the issuance of COPs to finance welfare
information systems until 1998-99 to permit a thorough assessment of needs; and
the elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing
plan now reflects: $501 million in general obligation bonds (including $140
million for purposes of redeeming outstanding BANs) and $140 million in general
obligation commercial paper; the issuance of $83 million in COPs for equipment
purchases; and approximately $1.8 billion in borrowings by public authorities
pursuant to lease-purchase and contractual-obligation financings for capital
programs of the State, including costs of issuance, reserve funds, and other
costs, net of anticipated refundings and other adjustments for 1997-98 capital
projects. The projection of State borrowings for the 1997-98 fiscal year is
subject to change as market conditions, interest rates and other factors vary
through the end of the fiscal year.
18
<PAGE> 50
New York State has never defaulted on any of its general
obligation indebtedness or its obligations under lease-purchase or
contractual-obligation financing arrangements and has never been called upon to
make any direct payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State
or its officers or employees could have a substantial or long-term adverse
effect on New York State finances. Among the more significant of these cases are
those that involve (1) the validity of agreements and treaties by which various
Indian tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (7) challenges to certain aspects of
petroleum business taxes; (8) action alleging damages resulting from the failure
by the State's Department of Environmental Conservation to timely provide
certain data; (9) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(10) an action seeking reimbursement from the State for certain costs arising
out of the provision of pre-school services and programs for children with
handicapped conditions; (11) action seeking enforcement of certain sales and
excise taxes and tobacco products and motor fuel sold to non-Indian consumers on
Indian reservations; and (12) a challenge to the constitutionality of Clean
Water/Clean Air Bond Act.
Several actions challenging the constitutionality of
legislation enacted during the 1990 legislative session which changed actuarial
funding methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware vs. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
19
<PAGE> 51
The legal proceedings noted above involve State finances,
State programs and miscellaneous cure rights, tort, real property and contract
claims in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1997-98 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan. In its audited financial statements for
the 1996-97 fiscal year, the State reported its estimated liability for awarded
and anticipated unfavorable judgments to be $364 million, of which $134 million
is expected to be paid during the 1997-98 fiscal year.
Although other litigation is pending against New York State,
except as described herein, no current litigation involves New York State's
authority, as a matter of law, to contract indebtedness, issue its obligations,
or pay such indebtedness when it matures, or affects New York State's power or
ability, as a matter of law, to impose or collect significant amounts of taxes
and revenues.
Authorities. The fiscal stability of New York State is
related, in part, to the fiscal stability of its Authorities, which generally
have responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the
State of New York may also be impacted by the fiscal health of its localities,
particularly the City of New
20
<PAGE> 52
York, which has required and continues to require significant financial
assistance from New York State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired
the borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward
to BBB+ and on November 19, 1987, to A-. On February 3, 1998, S&P placed a BBB+
rating on the City's general obligation debt on CreditWatch with positive
implications. Moody's ratings of City bonds were revised in November 1981 from B
(in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to
Baa1, in May 1988 to A and again in February 1991 to Baa1. On February 25, 1998,
Moody's upgraded nearly $28 billion of the City's debt from Baa1 to A3.
New York City is heavily dependent on New York State and
federal assistance to cover insufficiencies in its revenues. There can be no
assurance that in the future federal and State assistance will enable the City
to make up its budget deficits. To help alleviate the City's financial
difficulties, the Legislature created the Municipal Assistance Corporation
("MAC") in 1975. Since its creation, MAC has provided, among other things,
financing assistance to the City by refunding maturing City short-term debt and
transferring to the City funds received from sales of MAC bonds and notes. MAC
is authorized to issue bonds and notes payable from certain stock transfer tax
revenues, from the City's portion of the State sales tax derived in the City
and, subject to certain prior claims, from State per capita aid otherwise
payable by the State to the City. Failure by the State to continue the
imposition of such taxes, the reduction of the rate of such taxes to rates less
than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City. As of June 30, 1997, MAC had
outstanding an aggregate of approximately $4.267 billion of its bonds. MAC is
authorized to issue bonds and notes to refunds its outstanding bonds and notes
and to fund certain reserves, without limitation as to principal amount, and to
finance certain capital commitments to the Transit Authority and the New York
City School Construction Authority through the 1997 fiscal year in the event the
City fails to provide such financing.
21
<PAGE> 53
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-987 level. Recurring growth in the State General Fund tax base is projected
to be approximately six percent during 1998-99, after adjusting for tax law and
administrative changes. This growth rate is lower than the rates for 1996-97 or
currently estimated for 1997-98, but roughly equivalent to the rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the
impact of scheduled tax reductions that will lower receipts by $38 million, as
well as the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax
receipts are projected to decline slightly in 1998-99, falling from $4.98
million to $4.96 billion. The decline in this category is largely attributable
to scheduled tax reductions. In total, collections for corporation and utility
taxes and the petroleum business tax are projected to fall by $107 million from
1997-98. The decline in receipts in these categories is partially offset by
growth in the corporation franchise, insurance and bank taxes, which are
projected to grow by $88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus
of $131 million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99
in the General Fund, primarily as a result of the use of the 1997-98 cash
surplus. In 1998-99, the
22
<PAGE> 54
General Fund GAAP Financial Plan shows total revenues of $34.68 billion, total
expenditures of $35.94 billion, and net other financing sources and uses of $42
million.
Since the preparation of the 1998-2001 Financial Plan, the
State has adopted its budget for the 1997-1998 fiscal year. The State budget
enacted a smaller sales tax reduction than the tax reduction program assumed by
the City in the financial plan, which will increase projected City sales tax
revenues; provided for State aid to the City which was less than assumed in the
financial plan; and enacted a State funded tax relief program which begins a
year later than reflected in the financial plan. In addition, the net effect of
tax law changes made in the Federal Balanced Budget Act of 1997 are expected to
increase tax revenues in the 1998 fiscal year.
Although the City has maintained balanced budgets in each of
its last sixteen fiscal years and is projected to achieve balanced operating
results for the 1997 fiscal year, there can be no assurance that the gap-closing
actions proposed in the 1998-2001 Financial Plan can be successfully implemented
or that the City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could adversely affect
the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in the 1998-2001 Financial Plan, employment
growth, the ability to implement proposed reductions in City personnel and other
cost reduction initiatives, the ability of the Health and Hospitals Corporation
and the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also
dependent upon the City's ability to market its securities successfully. The
City's financing program for fiscal years 1998 through 2001 contemplates the
issuance of $5.7 billion of general obligation bonds and $5.7 billion of bonds
to be issued by the proposed New York City Transitional Finance Authority (the
"Finance Authority") to finance City capital projects. The Finance Authority,
was created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds.
23
<PAGE> 55
On June 2, 1997, an action was commenced seeking a declaratory judgment
declaring the legislation establishing the Transitional Finance Authority to be
unconstitutional. If such legislation were voided, projected contracts for the
City capital projects would exceed the City's debt limit during fiscal year
1997-98. Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well as
prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities and may
also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials
have issued reports and made public statements which, among other things, state
that projected revenues and expenditures may be different from those forecast in
the City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing
needs in the public credit markets, repaying all short-term obligations within
their fiscal year of issuance. Although the City's current financial plan
projects $2.4 billion of seasonal financing for the 1998 fiscal year, the City
expects to undertake only approximately $1.4 billion of seasonal financing. The
City issued $2.4 billion of short-term obligations in fiscal year 1997. Seasonal
financing requirements for the 1996 fiscal year increased to $2.4 billion from
$2.2 billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the re-establishment of the Financial Control Board for
the City of Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers
Board is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the State to assist Yonkers could result in increased State
expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
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<PAGE> 56
Eighteen municipalities received extraordinary assistance
during the 1996 legislative session through $50 million in special
appropriations targeted for distressed cities, and that was largely continued in
1997. Twenty-eight municipalities are scheduled to share in more than $32
million in targeted unrestricted aid allocated in the 1997-98 budget. An
additional $21 million will be dispersed among all cities, towns and villages, a
3.97% increase in General Purpose State Aid.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1995, the total indebtedness
of all localities in New York State other than New York City was approximately
$19 billion. A small portion (approximately $102.3 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, federal expenditure reductions could
reduce, or in some cases eliminate, federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If New York State, New York City or any of the Authorities
were to suffer serious financial difficulties jeopardizing their respective
access to the public credit markets, the marketability of notes and bonds issued
by localities within New York State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Long-range
potential problems of declining urban population, increasing expenditures and
other economic trends could adversely affect localities and require increasing
New York State assistance in the future.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
25
<PAGE> 57
<TABLE>
<S> <C>
Richard N. Cooper* (63) ........................... Director
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (retail electronics and
appliances) and Phoenix Home Life Insurance Company;
Director/Trustee of other investment companies advised by
Warburg.
Jack W. Fritz (70)................................. Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc. (direct
mail advertising); Director/Trustee of other investment
companies advised by Warburg.
John L. Furth* (67)................................ Director
466 Lexington Avenue Vice Chairman and Director of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1970; Chairman of the Board of other investment
companies advised by Warburg.
Jeffrey E. Garten (51)............................. Director
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and Finance;
Undersecretary of Commerce for International Trade from
November 1993 to October 1995; Professor at Columbia University
from September 1992 to November 1993; Director/Trustee of
other investment companies advised by Warburg.
</TABLE>
- ------------------------
* Indicates a Director who is an "interested person" of the Fund as
defined in the 1940 Act.
26
<PAGE> 58
<TABLE>
<S> <C>
Thomas A. Melfe (66)............................... Director
1251 Avenue of the Americas Partner in the law firm of Piper & Marbury L.L.P.; Partner in
New York, New York 10020-1104 the law firm of Donovan Leisure Newton & Irvine from April
1984 to April 1998; Director of Municipal Fund for New York
Investors, Inc.; Director/Trustee of other investment companies
advised by Warburg.
Arnold M. Reichman* (49)........................... Director
466 Lexington Avenue Managing Director and Assistant Secretary of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1984; Senior Vice President,
Secretary and Chief Operating Officer of Counsellors Securities;
Director/Trustee of other investment companies advised by Warburg.
Alexander B. Trowbridge (68)....................... Director
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business consulting)
Washington, DC 20004 from January 1990 to November 1996; Director or Trustee of
New England Mutual Life Insurance Co., ICOS Corporation
(biopharmaceuticals), Waste Management, Inc. (solid and
hazardous waste collection and disposal), IRI International
(energy services), The Rouse Company (real estate
development), Harris Corp. (electronics and communications
equipment), The Gillette Co. (personal care products) and Sun
Company Inc. (petroleum refining and marketing);
Director/Trustee of other investment companies advised by
Warburg.
Eugene L. Podsiadlo (41)........................... President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York 10017-3147 1991; Vice President of Citibank, N.A. from 1987-1991;
Officer of Counsellors Securities and other investment companies
advised by Warburg.
</TABLE>
27
<PAGE> 59
<TABLE>
<S> <C>
Eugene P. Grace (46)............................... Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since April 1994; Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life Insurance Company from
1993-1994; Officer of Counsellors Securities and other investment
companies advised by Warburg.
Stephen Distler (44)............................... Vice President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York, New York 10017-3147 1984; Treasurer of Counsellors Securities; Officer of other
investment companies advised by Warburg.
Howard Conroy, CPA (44)............................ Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1992; Officer of other investment companies advised by
Warburg.
Daniel S. Madden, CPA (32)......................... Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc.
from September 1994 to October 1995; Associated with BEA Associates
from April 1993 to September 1994; Associated with Ernst & Young LLP
from 1990 to 1993; Officer of other investment companies advised by
Warburg.
Janna Manes, Esq. (30)............................. Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993-1996; Officer of other investment companies
advised by Warburg.
</TABLE>
28
<PAGE> 60
No employee of Warburg, BIMC, PNC or PFPC Inc. ("PFPC") or any
of their affiliates receives any compensation from a Fund for acting as an
officer or Director of a Fund. Each Director who is not a director, officer or
employee of Warburg, PFPC or any of their affiliates receives an annual fee of
$2,000, and $500 for each meeting of the Board attended by him for his services
as Director and is reimbursed for expenses incurred in connection with his
attendance at Board meetings.
Directors' Compensation
(for the ten-month period ended December 31, 1997)
<TABLE>
<CAPTION>
Total Compensation from
Compensation from all Investment Companies
Name of Director* each Fund Managed by Warburg
- ---------------- --------- ------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $2,000 $44,500
Donald J. Donahue*** $2,000 $44,500
Jack W. Fritz $2,000 $44,500
Jeffrey E. Garten**** N/A N/A
Thomas A. Melfe $2,000 $44,500
Arnold M. Reichman None** None**
Alexander B. Trowbridge $2,000 $44,500
</TABLE>
- --------------------
* Each Director also serves as a Director or Trustee of 25 other
investment companies advised by Warburg.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg, and, accordingly, receive no compensation from a Fund or any
other investment company managed by Warburg.
*** Mr. Donahue resigned as a Director of each Fund effective February 6,
1998.
**** Mr. Garten became a Director of each Fund effective February 6, 1998
and, accordingly, received no compensation from the Funds for the
10-month period ended December 31, 1997.
As of April 1, 1998, Directors and officers of a Fund as a
group owned of record less than 1% of the relevant Fund's outstanding common
stock.
Investment Adviser, Sub-Investment Adviser and Administrator
and Co-Administrator
Warburg serves as investment adviser to the Fund, BIMC serves
as sub-investment adviser and administrator to the Fund and Counsellors Funds
Service, Inc. ("Counsellors Service") serves as co-administrator to the Fund
pursuant to written agreements (the "Advisory Agreement," the "Sub-Advisory
Agreement" and the "Co-Administration Agreement," respectively, and
collectively, the "Agreements"). The services provided by and
29
<PAGE> 61
the fees payable by the Fund to Warburg, BIMC and Counsellors Service under the
respective Agreements are described in the Prospectus. Prior to June 29, 1994,
Counsellors Service served as administrative services agent to the Fund pursuant
to a written agreement (the "Administrative Services Agreement").
CASH RESERVE FUND
Advisory and Sub-Advisory Fees paid to each of Warburg and BIMC
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended 10-month period ended
February 29, 1996 February 28, 1997 December 31, 1997
<S> <C> <C>
$772,648 $1,092,344 $1,004,894
</TABLE>
Regarding the aggregate amounts waived and for the same periods, Warburg
voluntarily waived $205,222, $229,970 and $192,234, respectively, and BIMC
voluntarily waived $307,832, $344,956 and $288,351, respectively.
Administrative Services/Co-Administration Fees paid to Counsellors Service
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended 10-month period ended
February 29, 1996 February 28, 1997 December 31, 1997
<S> <C> <C>
$309,059 $436,938 $401,957
</TABLE>
NEW YORK TAX EXEMPT FUND
Advisory and Sub-Advisory Fees paid to each of Warburg and BIMC
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended 10-month period ended
February 29, 1996 February 28, 1997 December 31, 1997
<S> <C> <C>
$224,129 $287,156 $294,367
</TABLE>
30
<PAGE> 62
Regarding the aggregate amounts waived and for the same periods, Warburg
voluntarily waived $96,389, $74,362 and $58,818, respectively, and BIMC
voluntarily waived $144,395, $111,543 and $88,227, respectively.
Administrative Services/Co-Administration Fees paid to Counsellors Service
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended 10-month period ended
February 29, 1996 February 28, 1997 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C>
$89,652 $114,862 $117,747
</TABLE>
Banking Laws
Banking laws and regulations presently (i) prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any bank or non-bank affiliate thereof from
sponsoring, organizing, controlling, or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
but (ii) do not prohibit such a holding company or affiliate from acting as
investment adviser, transfer agent or custodian to such an investment company.
PNC and BIMC are subject to such banking laws and regulations.
BIMC, PNC and each Fund have been advised by Messrs. Ballard,
Spahr, Andrews & Ingersoll that BIMC and PNC may perform the services for a Fund
contemplated by their respective agreements with the Fund and the Prospectus
without violation of applicable banking laws or regulations. Such counsel have
pointed out, however, that future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent one or more of them from
continuing to perform services for the Fund. If BIMC or PNC were prohibited from
providing services to the Fund, the Board would select another qualified firm.
Any new sub-investment advisory agreement would be subject to shareholder
approval.
Custodian and Transfer Agent
PNC is custodian of each Fund's assets pursuant to a custodian
agreement (the "Custodian Agreement"). Under the Custodian Agreement, PNC (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds and
transfers portfolio securities on account of the Fund, (iii) makes receipts and
disbursements of money on behalf of the Fund, (iv) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities and (v) makes periodic reports to the Board concerning the Fund's
custodial arrangements. PNC is authorized to select one or more banks or trust
companies to
31
<PAGE> 63
serve as sub-custodian on behalf of a Fund, provided that PNC remains
responsible for the performance of all its duties under the Custodian Agreement
and holds the Fund harmless from the acts and omissions of any sub-custodian.
PNC is an indirect wholly owned subsidiary of PNC Bank Corp., and its principal
business address is 1600 Market Street, Philadelphia, Pennsylvania 19103.
State Street Bank and Trust Company ("State Street") has
agreed to serve as each Fund's shareholder servicing, transfer and dividend
disbursing agent pursuant to a Transfer Agency and Service Agreement, under
which State Street (i) issues and redeems shares of the Fund, (ii) addresses and
mails all communications by the Fund to record owners of the Fund shares,
including reports to shareholders, dividend and distribution notices and proxy
material for its meetings of shareholders, (iii) maintains shareholder accounts
and, if requested, sub-accounts, and (iv) makes periodic reports to the Board
concerning the transfer agent's operations with respect to the Fund. State
Street has delegated to Boston Financial Data Services, Inc. ("BFDS"), a 50%
owned subsidiary, responsibility for most shareholder servicing functions. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
Boston, Massachusetts 02171.
Organization of the Fund
Each Fund is incorporated in Maryland. See the Prospectus,
"General Information." All shareholders of a Fund, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
Until June 9, 1995, the New York Tax Exempt Fund was under an
agreement (the "Selected Dealer Agreement") with Janney Montgomery Scott Inc.
("Janney Montgomery") whereby Janney Montgomery agreed to provide distribution,
administrative and shareholder services for their Customers who owned Advisor
Shares. Under the Selected Dealer Agreement, Counsellors Securities, out of
moneys received from the Fund, paid Janney Montgomery a fee, accrued daily and
paid quarterly, calculated at the annual rate of .10% of the Fund's average
daily net assets with respect to distribution and administrative services and
.25% of the Fund's average daily net assets with respect to shareholder
services. During the fiscal year ended February 28, 1995, Janney Montgomery
received $41,225. During the period March 1, 1995 through June 8, 1995
(elimination of series), Janney Montgomery received fees of $10,080. The amounts
retained were used primarily to defray a portion of the costs incurred in
rendering services to Janney Montgomery's customers under the Selected Dealer
Agreement, principally compensation to its sales representatives.
32
<PAGE> 64
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares and how
such shares are priced is included in the Prospectus.
Under the 1940 Act, each Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which The New York Stock Exchange, Inc. (the "NYSE") is closed, other than
customary weekend and holiday closings, or during which trading on the NYSE is
restricted, or during which (as determined by the SEC by rule or regulation) an
emergency exists as a result of which disposal or fair valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit. (A Fund may also suspend or postpone the recordation of an exchange
of its shares upon the occurrence of any of the foregoing conditions.)
If the Board of a Fund determines that conditions exist which
make payment of redemption proceeds wholly in cash unwise or undesirable, the
Fund may make payment wholly or partly in securities or other investment
instruments which may not constitute securities as such term is defined in the
applicable securities laws. If a redemption is paid wholly or partly in
securities or other property, a shareholder would incur transaction costs in
disposing of the redemption proceeds. The Fund intends to comply with Rule 18f-1
promulgated under the 1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of a Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All dividends and distributions on shares in the Plan
are automatically reinvested at net asset value in additional shares of the
Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Warburg is available to investors in each Fund. The funds into which exchanges
of Common Shares currently can be made are listed in the Common Share
Prospectus. Exchanges may also be made between certain Warburg Pincus Advisor
Funds.
The exchange privilege enables shareholders to acquire shares
in a fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which the Common Shares or Advisor
Shares being acquired, as relevant, may legally be sold. Prior to any exchange,
the investor should obtain and review a copy of the current prospectus of the
relevant class of each fund into which an exchange is being considered.
Shareholders may
33
<PAGE> 65
obtain a prospectus of the relevant class of the fund into which they are
contemplating an exchange from Counsellors Securities.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed at the
then-current net asset value of the relevant class and the proceeds are invested
on the same day, at a price as described above, in shares of the relevant class
of the fund being acquired. The exchange privilege may be modified or terminated
at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting a Fund and its shareholders is intended to be only a summary and is
not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
As described above and in the Funds' Prospectus, the New York
Tax Exempt Fund is designed to provide investors with current income which is
excluded from gross income for federal income tax purposes and exempt from New
York State and New York City personal income taxes. The Fund is not intended to
constitute a balanced investment program and is not designed for investors
seeking capital gains or maximum tax-exempt income irrespective of fluctuations
in principal. Investment in the Fund would not be suitable for tax-exempt
institutions, individual retirement plans, employee benefit plans and individual
retirement accounts since such investors would not gain any additional tax
benefit from the receipt of tax-exempt income.
Each Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If it qualifies as a regulated investment company, a Fund
will pay no federal income taxes on its taxable net investment income (that is,
taxable income other than net realized capital gains) and its net realized
capital gains that are distributed to shareholders. To qualify under Subchapter
M, each Fund must, among other things: (i) distribute to its shareholders at
least the sum of 90% of its taxable net investment income (for this purpose
consisting of taxable net investment income and net realized short-term capital
gains) plus 90% of its net tax-exempt interest income; (ii) derive at least 90%
of its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and forward
contracts) derived with respect to the Fund's business of investing in
securities; and (iii) diversify its holdings so that, at the end of each fiscal
quarter of the Fund (a) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. government
34
<PAGE> 66
securities and other securities, with those other securities limited, with
respect to any one issuer, to an amount no greater in value than 5% of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer, and (b) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one issuer (other than U.S.
government securities or securities of other regulated investment companies) or
of two or more issuers that the Fund controls and that are determined to be in
the same or similar trades or businesses or related trades or businesses. As a
regulated investment company, the Fund will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year, together with any undistributed, untaxed amounts of ordinary income and
capital gains from the previous calendar year. The Fund expects to pay the
dividends and make the distributions necessary to avoid the application of this
excise tax.
Although each Fund expects to be relieved of all or
substantially all federal income taxes, depending upon the extent of its
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, that portion of a Fund's income
which is treated as earned in any such state or locality could be subject to
state and local tax. Any taxes paid by the Fund would reduce the amount of
income and gains available for distribution to shareholders.
Investors in the Cash Reserve Fund should be aware that it is
possible that some portion of the Fund's income from investments in obligations
of foreign banks could become subject to foreign taxes.
Because the New York Tax Exempt Fund will distribute exempt
interest dividends, interest on indebtedness incurred by a shareholder to
purchase or carry Fund shares is not deductible for federal income tax purposes
and New York State and New York City personal income tax purposes. In addition,
the Code may require a shareholder, if he or she receives exempt interest
dividends, to treat as taxable income a portion of certain otherwise non-taxable
social security and railroad retirement benefit payments. Furthermore, that
portion of any dividend paid by the Fund which represents income derived from
private activity securities held by the Fund may not retain its tax-exempt
status in the hands of a shareholder who is a "substantial user" of a facility
financed by such bonds, or a "related person" thereof. Moreover, as noted in the
Fund's prospectus, (i) some of the Fund's dividends may be a tax preference
item, or a component of an adjustment item, for purposes of the federal
individual and corporate alternative minimum taxes and (ii) the receipt of Fund
dividends and distributions may affect a corporate shareholder's federal
"environmental" tax liability if that tax is reinstated as proposed by President
Clinton. In addition, the receipt of Fund dividends and distributions may affect
a foreign corporate shareholder's federal "branch profits" tax liability and a
Subchapter S corporation shareholder's federal "excess net passive income" tax
liability. Shareholders should consult their own tax advisers as to whether they
(i) may be "substantial users" with respect to a facility or "related" to such
users within the meaning of the Code and (ii) are subject to a federal
alternative minimum tax, the federal
35
<PAGE> 67
environmental tax, the federal "branch profits" tax, or the federal "excess net
passive income" tax.
While each Fund does not expect to realize net long-term
capital gains, any such realized gains will be distributed as described in the
Prospectus. Such distributions ("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held Fund shares, and will be designated as capital gain dividends in a
written notice mailed by a Fund to shareholders after the close of the Fund's
taxable year. Gain or loss, if any, recognized on the sale or other disposition
of shares of the Fund will be taxed as capital gain or loss if the shares are
capital assets in the shareholder's hands. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the shares have been held for more than
one year. If a shareholder sells or otherwise disposes of a share of the Fund
before holding it for more than six months, any loss on the sale or other
disposition of such share shall be treated as a long-term capital loss to the
extent of any capital gain dividends received by the shareholder with respect to
such share.
A shareholder of a Fund receiving dividends or distributions
in additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should have
a cost basis in the shares received equal to that amount.
Each shareholder of the Cash Reserve Fund will receive an
annual statement as to the federal income tax status of his dividends and
distributions from the Fund for the prior calendar year. Furthermore,
shareholders will also receive, if appropriate, various written notices after
the close of the Fund's taxable year regarding the federal income tax status of
certain dividends and distributions that were paid (or that are treated as
having been paid) by the Fund to its shareholders during the preceding year.
Each shareholder of the New York Tax Exempt Fund will receive
an annual statement as to the federal and New York State and New York City
personal income tax status of his dividends and distributions from the Fund for
the prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable year
regarding the federal income tax status of certain dividends and distributions
that were paid (or that are treated as having been paid) by the Fund to its
shareholders during the preceding year. Shareholders should consult their tax
advisers as to any other state and local taxes that may apply to the Fund's
dividends and distributions. The dollar amount of dividends excluded from
federal income taxation and exempt from New York State and New York City
personal income taxation and the dollar amounts subject to federal income and
New York State and New York City personal income taxation, if any, will vary for
each shareholder depending upon the size and duration of each shareholder's
investment in the Fund. In the event that the Fund derives taxable net
investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend as its actual taxable net investment income
bears to its total net investment income earned on that day. Therefore, the
percentage of each day's dividend designated as taxable, if any, may vary from
day to day.
36
<PAGE> 68
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he has provided a correct taxpayer identification number
and that he is not subject to withholding, then the shareholder may be subject
to a 31% "backup withholding" tax with respect to (a) taxable dividends and
distributions and (b) the proceeds of any redemptions of Fund shares. An
individual's taxpayer identification number is his social security number.
Corporate shareholders and other shareholders specified in the Code are or may
be exempt from backup withholding. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's federal income tax
liability.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING A FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUND.
DETERMINATION OF YIELD
From time to time, each Fund may quote its yield, effective
yield and tax equivalent yield, as applicable, in advertisements or in reports
and other communications to shareholders. The Cash Reserve Fund's yield and
effective yield for the seven-day period ended on December 31, 1997 were 5.26%
and 5.40%, respectively. In the absence of waivers, these yields would have been
5.05% and 5.18%, respectively. The New York Tax Exempt Fund's yield, effective
yield and tax equivalent yield for the seven-day period ended on December 31,
1997, was 3.37%, 3.43% and 6.24% (based on a 50.14% total of 3 tax rates),
respectively. In the absence of waivers these yields would have been 3.30%,
3.35% and 6.11%, respectively. Each Fund's seven-day yield is calculated by (i)
determining the net change in the value of a hypothetical pre-existing account
in the Fund having a balance of one share at the beginning of a seven calendar
day period for which yield is to be quoted, (ii) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return and (iii) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared on the original share and
any such additional shares, but does not include realized gains and losses or
unrealized appreciation and depreciation. Each Fund's seven-day compound
effective annualized yield is calculated by adding 1 to the base period return
(calculated as described above), raising the sum to a power equal to 365/7 and
subtracting 1. The New York Tax Exempt Fund's tax equivalent yield is calculated
by dividing that portion of the base period return which is exempt from federal,
New York State and New York City personal income taxes by 1 minus the highest
marginal federal, New York State and New York City individual income tax rates
and adding the quotient to that portion, if any, of the yield which is not
exempt from those taxes.
Each Fund's yield will vary from time to time depending upon
market conditions, the composition of a Fund's portfolio and operating expenses
allocable to it. Yield information may be useful in reviewing the Fund's
performance and for providing a basis for comparison with other investment
alternatives. However, the Fund's yield will fluctuate, unlike certain bank
deposits or other investments which pay a fixed yield for a stated period of
37
<PAGE> 69
time. In comparing the Fund's yield with that of other money market funds,
investors should give consideration to the quality and maturity of the portfolio
securities of the respective funds.
INDEPENDENT ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for each Fund. The Funds' financial statements for the
10-month period ended December 31, 1997, that is incorporated by reference in
this Statement of Additional Information have been audited by Coopers & Lybrand,
and have been included herein by reference in reliance upon the report of such
firm of independent accountants given upon their authority as experts in
accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of March 31, 1998, the name, address and percentage of
ownership of other persons that control a Fund (within the meaning of the rules
and regulations under the 1940 Act) or own of record 5% or more of the Fund's
outstanding shares were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------- -------------------------------
CASH RESERVE FUND COMMON STOCK
- ------------------------------------------------------- -------------------------------
<S> <C>
Fiduciary Trust Company International* 20.86%
Securities Services Group
Church Street Station
P.O. Box 3199
New York, NY 10008-3199
- ------------------------------------------------------- -------------------------------
Neuberger and Berman* 29.47%
Attn.: Operations Control Dept.
55 Water Street, FL 272
New York, NY 10041-0001
- ------------------------------------------------------- -------------------------------
The Bank of New York* 7.67%
Special Processing Dept.
2nd Floor
One Wall Street
New York, NY 10005-2501
- ------------------------------------------------------- -------------------------------
Zilog Inc. Corporate Acct.* 10.96%
c/o M. Tangirala
Zilog Inc.
210 Hacienda Avenue
Campbell, CA 95008-6617
- ------------------------------------------------------- -------------------------------
</TABLE>
38
<PAGE> 70
<TABLE>
<CAPTION>
- ------------------------------------------------------- -------------------------------
CASH RESERVE FUND COMMON STOCK
- ------------------------------------------------------- -------------------------------
<S> <C>
Warburg Pincus & Co. 5.41%
466 Lexington Avenue-10th Floor
New York, NY 10017-3147
- ------------------------------------------------------- -------------------------------
- ------------------------------------------------------- -------------------------------
NEW YORK TAX EXEMPT FUND COMMON STOCK
- ------------------------------------------------------- -------------------------------
Fiduciary Trust Company International* 47.20%
Securities Services Group
Church Street Station
P.O. Box 3199
New York, NY 10008-3199
- ------------------------------------------------------- -------------------------------
Neuberger & Berman* 42.35%
Attn.: Operations Control Dept.
55 Water Street, FL 272
New York, NY 10041-0001
- ------------------------------------------------------- -------------------------------
</TABLE>
* To the knowledge of each Fund, these entities are not the beneficial
owners of a majority of the shares held by them of record.
Mr. Lionel I. Pincus may be deemed to have beneficially owned
46.5% and 30.1% of the Cash Reserve and New York Tax Exempt Fund's shares
outstanding, respectively, including shares owned by clients for which Warburg
has investment discretion and by companies that he may be deemed to control. Mr.
Pincus disclaims ownership of these shares and does not intend to exercise
voting rights with respect to these shares.
FINANCIAL STATEMENTS
Each Fund's audited annual report, dated December 31, 1997,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference. A Fund will
furnish without charge a copy of its annual report upon request by calling
Warburg Pincus Funds at (800) 927-2874.
39
<PAGE> 71
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's Ratings
Services ("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investor Services, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Short term obligations, including commercial paper, rated A1 +
by IBCA are obligations supported by the highest capacity for timely repayment.
Obligations rated A1 have a very strong capacity for timely repayment.
Obligations rated A2 have a strong capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business, economic or
financial conditions.
Fitch Investors Services, Inc. employs the rating F-1+ to
indicate issues regarded as having the strongest degree of assurance for timely
payment. The rating F-1 reflects an assurance of timely payment only slightly
less in degree than issues rated F-1+, while the rating F-2 indicates a
satisfactory degree of assurance for timely payment, although the margin of
safety is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps, Inc. employs the designation of Duff 1 with
respect to top grade commercial paper and bank money instruments. Duff 1+
indicates the highest certainty of timely payment: short-term liquidity is
clearly outstanding and safety is just below risk-free U.S. Treasury short-term
obligations. Duff 1- indicates high certainty of timely payment. Duff 2
indicates good certainty of timely payment: liquidity factors and company
fundamentals are sound.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
The following summarizes the highest two ratings used by S&P
for Municipal Securities:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
<PAGE> 72
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
To provide more detailed indications of credit quality, the
"AA" rating may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the highest two ratings used by
Moody's for bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated As are judged to be of high quality
by all standards. Together with the Aaa group they are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
Moody's applies numerical modifiers (1,2 and 3) with respect
to the bonds rated Aa. The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a (+) designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
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Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
designation. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Services, Inc. Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Short term obligations, including commercial paper, rated A1 +
by IBCA are obligations supported by the highest capacity for timely repayment.
Obligations rated A1 have a very strong capacity for timely repayment.
Obligations rated A2 have a strong capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business, economic or
financial conditions.
Fitch Investors Services, Inc. employs the rating F-1+ to
indicate issues regarded as having the strongest degree of assurance for timely
payment. The rating F-1 reflects an assurance of timely payment only slightly
less in degree than issues rated F-1+, while the rating F-2 indicates a
satisfactory degree of assurance for timely payment, although the margin of
safety is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps, Inc. employs the designation of Duff 1 with
respect to top grade commercial paper and bank money instruments. Duff 1+
indicates the highest certainty of timely payment: short-term liquidity is
clearly outstanding and safety is just below risk-free U.S. Treasury short-term
obligations. Duff 1- indicates high certainty of timely payment. Duff 2
indicates good certainty of timely payment: liquidity factors and company
fundamentals are sound.
A-3
