<PAGE>
Rule 497(c)
Securities Act File No. 2-94841
Investment Company Act File No. 811-4170
PROSPECTUS
July 1, 1996
WARBURG PINCUS
CASH RESERVE FUND
WARBURG PINCUS
NEW YORK TAX EXEMPT FUND
[Logo]
<PAGE>
<PAGE>
PROSPECTUS July 1, 1996
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 Gift 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, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Funds at (800) 927-2874. Information
regarding the status of shareholder accounts may also be obtained by calling
Warburg Pincus Funds at the same number. The Statements of Additional
Information bear the same date as this Prospectus and are incorporated by
reference in their entirety into this Prospectus.
- --------------------------------------------------------------------------------
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>
<PAGE>
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.................................................... .33% .23%
-- --
12b-1 Fees......................................................... 0 0
Other Expenses..................................................... .22 .32
Total Fund Operating Expenses...................................... .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>
- --------------------------------------------------------------------------------
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. Absent
the waiver of certain fees payable to the Funds' investment adviser and sub-
investment adviser and administrator, 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 .72% and .82%, respectively, of average
net assets with respect to each Fund. 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>
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The information regarding each Fund for the five fiscal years ended February
29, 1996 has been derived from information audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report dated April 8, 1996 appears in the
relevant Fund's Statement of Additional Information. Further information is
contained in the Funds' annual report, dated February 29, 1996, copies of which
may be obtained without charge by calling Warburg Pincus Funds at (800)
927-2874.
CASH RESERVE FUND
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------------------------
2/29/96 2/28/95 2/28/94 2/28/93 2/29/92
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment
Operations
Net Investment Income...... .0543 .0426 .0273 .0322 .0542
Net Gains (Losses) on
securities (both realized
and unrealized)........... 0 0 0 .0010 0
-------- -------- -------- -------- --------
Total from Investment
Operations................. .0543 .0426 .0273 .0322 .0552
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net
investment income)......... (.0543) (.0426) (.0273) (.0322) (.0542)
Distributions (from capital
gains)..................... 0 0 0 0 (.0010)
-------- -------- -------- -------- --------
Total Distributions.......... (.0543) (.0426) (.0273) (.0322) (.0552)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return.................. 5.57% 4.35% 2.76% 3.27% 5.66%
Ratios/Supplemental Data
Net Assets, End of Period
(000s)....................... $383,607 $403,211 $277,557 $287,723 $426,479
Ratios to Average Daily Net
Assets
Operating expenses........... .55% .55% .54% .50% .50%
Net investment income........ 5.43% 4.41% 2.73% 3.22% 5.45%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .16% .19% .13% .17% .16%
<CAPTION>
2/28/91 2/28/90 2/28/89 2/29/88 2/28/87
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment
Operations
Net Investment Income...... .0760 .0870 .0747 .0651 .0614
Net Gains (Losses) on
securities (both realized
and unrealized)........... 0 0 0 0 0
-------- -------- -------- -------- --------
Total from Investment
Operations................. .0760 .0870 .0747 .0651 .0614
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net
investment income)......... (.0760) (.0870) (.0747) (.0651) (.0614)
Distributions (from capital
gains)..................... 0 0 0 0 0
-------- -------- -------- -------- --------
Total Distributions.......... (.0760) (.0870) (.0747) (.0651) (.0614)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period.......................$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return.................. 7.87% 9.05% 7.73% 6.70% 6.39%
Ratios/Supplemental Data
Net Assets, End of Period
(000s).......................$361,428 $365,008 $209,538 $259,398 $193,669
Ratios to Average Daily Net
Assets
Operating expenses........... .50% .50% .50% .46% .45%
Net investment income........ 7.59% 8.59% 7.51% 6.54% 5.92%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .13% .12% .16% .19% .19%
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
<PAGE>
TAX EXEMPT FUND
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------------------
2/29/96 2/28/95 2/28/94 2/28/93 2/29/92
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Total Income from Investment
Operations
Net Investment Income........ .0326 .0246 .0175 .0224 .0329
------- ------- ------- ------- -------
Less Distributions
Dividends (from net
investment income)......... (.0326) (.0246) (.0175) (.0224) (.0329)
------- ------- ------- ------- -------
Net Asset Value, End of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total Return.................. 3.31% 2.48% 1.77% 2.26% 3.34%
Ratios/Supplemental Data
Net Assets, End of Period
(000s)....................... $96,584 $77,111 $65,984 $76,995 $65,438
Ratios to Average Daily Net
Assets
Operating expenses........... .55% .55% .54% .50% .50%
Net investment income........ 3.24% 2.46% 1.75% 2.23% 3.27%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .27% .27% .19% .28% .23%
<CAPTION>
2/28/91 2/28/90 2/28/89 2/29/88 2/28/87
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- --------
Total Income from Investment
Operations
Net Investment Income........ .0486 .0527 .0461 .0404 .0376
-------- ------- ------- ------- --------
Less Distributions
Dividends (from net
investment income)......... (.0486) (.0527) (.0461) (.0404) (.0376)
-------- ------- ------- ------- --------
Net Asset Value, End of
Period.......................$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
Total Return.................. 4.97% 5.40% 4.70% 4.10% 3.83%
Ratios/Supplemental Data
Net Assets, End of Period
(000s).......................$ 85,783 $87,283 $58,112 $87,721 $112,413
Ratios to Average Daily Net
Assets
Operating expenses........... .50% .50% .50% .46% .45%
Net investment income........ 4.84% 5.38% 4.57% 4.03% 3.72%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .21% .21% .25% .23% .20%
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
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 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 purposes
and exempt from New York State and New York City personal income taxes.
Dividends derived from interest on tax-exempt obligations of
5
<PAGE>
<PAGE>
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 Securities and Exchange Commission (the 'SEC'), are
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. For this purpose, variable rate master
6
<PAGE>
<PAGE>
demand notes (as described below), which are payable on demand, or, under
certain conditions, at specified periodic intervals not exceeding thirteen
months, in either case on not more than 30 days' notice, will be deemed to have
remaining maturities of thirteen months 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. If the Cash Reserve
Fund acquires securities that are unrated or that have been rated by a single
NRSRO, the acquisition must be approved or ratified by the Board. The Tax Exempt
Fund may purchase securities that are unrated at the time of purchase that the
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 Group ('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 each Fund's Statement of Additional Information.
Cash Reserve Fund. The Fund has adopted certain diversification requirements
under Rule 2a-7 under the Investment Company Act of 1940, as amended (the '1940
Act'), as operating policies. Under these policies the Cash Reserve Fund may not
invest more than 5% of its total assets in Eligible Securities that have not
received the highest rating from the Requisite NRSROs and comparable unrated
securities ('Second Tier Securities') and may not invest more than 1% of its
total assets in the Second Tier Securities of any one issuer. In addition, the
Cash Reserve Fund may invest up to 5% of the then-current value of the Fund's
total assets in the securities of a single issuer, provided that the Fund may
invest more than 5% in an issuer for a period of up to three business days,
provided that (i) the securities either are rated by the Requisite NRSROs in the
highest short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (ii) the Fund does not make more than one
such investment at any one time.
7
<PAGE>
<PAGE>
However, if Rule 2a-7 is amended to permit it, the Fund may invest, with respect
to 25% of its assets, more than 5% of its assets in any one issuer.
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 each Fund's 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 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
8
<PAGE>
<PAGE>
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 the investment adviser, present minimal credit risks. In evaluating the
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
9
<PAGE>
<PAGE>
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
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. In
10
<PAGE>
<PAGE>
recent years, 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. On the other hand, strong demand for New York Municipal
Securities has 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 its 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 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 each Fund's Statement of Additional Information.
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. Each Fund employs Warburg, Pincus Counsellors, Inc.
('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
11
<PAGE>
<PAGE>
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 1.00% of the value of each Fund's average daily net assets. The
advisory agreement between each Fund and Warburg provides that Warburg will
reimburse the Fund to the extent certain expenses that are described in the
Statement of Additional Information exceed applicable state expense limitations.
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. For the year ended February 29, 1996, the Cash Reserve Fund and the Tax
Exempt Fund paid Warburg a fee after waivers at the rate of .18% and .14%,
respectively, of each Fund's net assets.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of May 31, 1996,
Warburg managed approximately $16.3 billion of assets, including approximately
$9.7 billion of investment company assets. Incorporated in 1970, Warburg is a
wholly owned subsidiary of Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a
New York general partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls
Warburg through its ownership of a class of voting preferred stock of Warburg.
Warburg G.P. has no business other than being a holding company of Warburg and
its subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
SUB-INVESTMENT ADVISER AND ADMINISTRATOR. PNC Institutional Management
Corporation ('PIMC'), a wholly owned subsidiary of PNC Bank, National
Association ('PNC'), serves as each Fund's sub-investment adviser and
administrator. PIMC 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 May 31, 1996, PIMC served as investment
adviser to 34 mutual fund portfolios and as sub-investment adviser to 9 mutual
funds, having total assets exceeding $27.0 billion.
As sub-investment adviser and administrator, PIMC has agreed to implement
each Fund's investment program as determined by the Board and Warburg. PIMC 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. As
12
<PAGE>
<PAGE>
compensation therefor, each Fund has agreed to pay PIMC a fee computed daily and
payable monthly at an annual rate of .25 of 1.00% of the value of each Fund's
average daily net assets. For the year ended February 29, 1996, the Cash Reserve
Fund and the Tax Exempt Fund paid PIMC a fee after waivers at the rate of .15%
and .09%, respectively, of each Fund's 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 the Funds and their various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual, semiannual and quarterly reports, assisting in other regulatory filings
as necessary and monitoring and developing compliance procedures for the Funds.
As compensation, each Fund pays to Counsellors Service a fee calculated at an
annual rate of .10% of that 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 Broad and
Chestnut Streets, Philadelphia, Pennsylvania 19101.
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., a
50% owned subsidiary ('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.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to parties 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. In some instances,
these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to its Board. The Boards set broad
policies for each Fund and choose its officers. A list of the Directors and
Officers of each Fund and a brief statement of their present positions and
13
<PAGE>
<PAGE>
principal occupations during the past five years is set forth in the Statement
of Additional Information of each Fund.
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
Completed and signed account applications should be mailed to Warburg Pincus
Funds at the above address.
RETIREMENT PLANS AND UGMA ACCOUNTS. For information (i) about investing in
the Cash Reserve Fund through a tax-deferred retirement plan, such as an
Individual Retirement Account ('IRA') or a Simplified Employee Pension IRA
('SEP-IRA'), or (ii) about opening a Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act ('UGMA') 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 accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account, an
investor should telephone Warburg Pincus Funds at (800) 927-2874.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Shares of each Fund may be purchased either by mail or, with special advance
instructions, by wire.
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 Inc., 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 by the close of regular trading on
the New York Stock Exchange (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 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 after
payment has
14
<PAGE>
<PAGE>
been received. Checks or money orders in payment for shares of more than one
Warburg 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 to Counsellors
Securities Inc. using the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Insert Warburg Pincus fund name(s) here]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
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
4:00 p.m. 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.
The minimum initial investment in each Fund is $1,000 and the minimum
subsequent investment is $100. For retirement plans and UGMA 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 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 EMW or its affiliates or persons with whom Warburg has
entered into an investment advisory agreement. Existing investors will be
15
<PAGE>
<PAGE>
given 15 days' notice by mail of any increase in investment minimum
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.
PURCHASES THROUGH INTERMEDIARIES. The Funds understand that some
broker-dealers (other than Counsellors Securities), financial institutions,
securities dealers and other industry professionals may impose certain
conditions on their clients or customers that invest in the Funds, which are in
addition to or different than those described in this Prospectus, and may charge
their clients direct fees. Certain features of the Funds, such as the initial
and subsequent minimums, redemption fees and certain trading restrictions, may
be modified or waived in these programs, and administrative charges may be
imposed for the services rendered. Therefore, a client or customer should
contact the organization acting on his behalf concerning the fees (if any)
charged in connection with a purchase or redemption of Fund shares and should
read this Prospectus in light of the terms governing his accounts with the
organization. These organizations will be responsible for promptly transmitting
client or customer purchase and redemption orders to the Funds in accordance
with their agreements with clients or customers. Certain organizations that have
entered into agreements with a Fund or its agent may enter confirmed purchase
orders on behalf of customers, with payment to follow no later than the Fund's
pricing on the following business day. If payment is not received by such time,
the organization could be held liable for resulting fees or losses.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay certain financial
institutions, broker-dealers and recordkeeping organizations ('Service
Organizations') with whom it enters into agreements up to .15% (the
'Service Fee') of the average annual value of accounts maintained by such
Service Organizations with a Fund. A portion of the Service Fee may be
borne by a Fund as a transfer agency fee. In addition, a Service
Organization may directly or indirectly pay a portion of its Service Fee to
a Fund's custodian or transfer agent for costs related to accounts of the
Service Organizations' clients or customers. The Service Fee payable to any one
Service Organization is determined based upon a number of factors, including
the nature and quality of services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Service Organization.
16
<PAGE>
<PAGE>
AUTOMATIC MONTHLY INVESTING. Automatic monthly investing allows shareholders
to authorize a Fund 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. To establish the automatic monthly investing option, obtain a
separate application or complete the 'Automatic Investment Program' section of
the account application and include a voided, unsigned check from the bank
account to be debited. Only an account maintained at a domestic financial
institution which is an automated clearing house member may be used.
Shareholders using this service must satisfy the initial investment minimum for
the Fund prior to or concurrent with the start of any Automatic Investment
Program. Please refer to an account application for further information, or
contact Warburg Pincus Funds at (800) 927-2874 for information or to modify or
terminate the program. Investors should allow a period of up to 30 days in order
to implement an automatic investment program. The failure to provide complete
information could result in further delays.
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, you
may be giving up a measure of security that you may have if you were to redeem
or exchange your shares in writing. If an investor desires to redeem his shares
by mail, a written request for redemption should be sent to 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. In order to change the
bank account or address designated to receive the redemption proceeds, the
investor must send a written request (with signature guarantee of all investors
listed on the account when such a change is made in conjunction with a
redemption request) to Warburg Pincus Funds. 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 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any business day. 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. No
17
<PAGE>
<PAGE>
Fund currently imposes 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 or through the Automatic Investment Program
before the funds or check clear, payments of the redemption proceeds will be
delayed for five days (for funds received through the Automatic Investment
Program) or 10 days (for check purchases). Investors should consider purchasing
shares using a certified or bank check or money order 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 Warburg Pincus Funds. 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 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 UGMA 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.
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
18
<PAGE>
<PAGE>
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.
TELEPHONE TRANSACTIONS. In order to request redemptions by telephone,
investors must have completed and returned to Warburg Pincus Funds an account
application containing a telephone election. Unless contrary instructions are
elected, an investor will be entitled to make exchanges by telephone. 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 to confirm 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.
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 may be effected
without a sales charge but must satisfy the minimum dollar amount necessary for
new purchases. Due to the costs involved in effecting exchanges, each Fund
reserves the right to refuse to honor more than three exchange requests by a
shareholder in any 30-day period. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders. 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 TAX-FREE FUND -- a bond fund seeking maximum current income
exempt from federal income taxes, consistent with preservation of capital;
19
<PAGE>
<PAGE>
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 through diversified investments in equity and debt
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
medium-sized domestic 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 EMERGING GROWTH FUND -- an equity fund seeking maximum capital
appreciation by investing in emerging growth companies;
WARBURG PINCUS POST-VENTURE CAPITAL FUND -- an equity fund seeking long-term
growth of capital by investing principally in equity securities of issuers in
their post-venture capital stage of development;
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
20
<PAGE>
<PAGE>
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.
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 New York Stock Exchange (the
'NYSE') is not open will be computed as of the next business day. Distributions
of 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. Each 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
21
<PAGE>
<PAGE>
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. 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
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 the Funds, 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
22
<PAGE>
<PAGE>
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.
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, Washington's
Birthday, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when one of 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
23
<PAGE>
<PAGE>
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. Each Fund's 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.
In reports or other communications to investors or in advertising material, a
Fund may describe general economic and market conditions affecting the Fund. The
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
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 The Wall
Street Journal, Investor's Daily, Money, Inc., Institutional Investor, Barron's,
Fortune, Forbes, Morningstar, Inc. and Business Week. In addition, each 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.
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 one 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
24
<PAGE>
<PAGE>
Shares are outstanding for either of the Funds, references to 'shares' in this
prospectus 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 may be obtained by
calling Warburg Pincus Funds at (800) 927-2874.
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.
25
<PAGE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, EACH FUND'S
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
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Funds' Expenses..................................................... 2
Financial Highlights.................................................... 3
Investment Objectives and Policies...................................... 5
General................................................................. 6
Portfolio Investments................................................... 8
Investment Guidelines................................................... 11
Management of the Funds................................................. 11
How to Open an Account.................................................. 14
How to Purchase Shares.................................................. 14
How to Redeem and Exchange Shares....................................... 17
Dividends, Distributions and Taxes...................................... 21
Net Asset Value......................................................... 23
Performance............................................................. 23
General Information..................................................... 24
</TABLE>
[Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)
WPCRNY-1-0796
<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
July 1, 1996
------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information call: (800) WARBURG
------------------------------
Contents
Page
Investment Objective......................................................1
Municipal Securities......................................................1
Investment Policies.......................................................2
Special Considerations Relating to New York Municipal Securities..........9
Management of the Fund...................................................21
Additional Purchase and Redemption Information...........................27
Exchange Privilege.......................................................28
Additional Information Concerning Taxes..................................29
Determination of Yield...................................................32
Accountants And Counsel..................................................32
Miscellaneous............................................................33
Financial Statements.....................................................33
Appendix
Description of Municipal Securities Ratings........................A-1
Report of Coopers & Lybrand L.L.P., Independent Accountants.............A-3
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Warburg Pincus New York Tax Exempt Fund
(the "Fund") and Warburg Pincus Cash Reserve Fund dated July 1, 1996 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 the Fund should be made solely upon the information contained herein.
Copies of the Fund's Prospectus and information regarding the Fund's current
yield may be obtained by calling Warburg Pincus Funds at (800) 927-2874.
Information regarding the status of shareholder accounts may also be obtained by
calling Warburg Pincus Funds at the same number or by writing to Warburg Pincus
Funds, P.O. Box 9030, Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the 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 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 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 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 the
<PAGE>3
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 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 the
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 the 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, 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.
When-Issued Securities. As stated in the Prospectus, the Fund
may purchase Municipal Securities 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
certain liquid, high-grade debt obligations in a segregated account equal to the
amount of the commitment. Normally, the custodian will set aside
<PAGE>4
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 the 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.
Stand-By Commitment Agreements. 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 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 Counsellors,
Inc. ("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.
<PAGE>5
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. The 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). 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. 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
<PAGE>6
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.
Reverse Repurchase Agreements. The 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, United States government securities or other
high-grade debt obligations 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").
Other Investment Policies and Practices of the Fund
Non-Diversified Status. The 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
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
<PAGE>7
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 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 development programs, except that the Fund may invest in debt
obligations secured by real estate, mortgages or interests therein.
<PAGE>8
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.
Certain non-fundamental investment limitations are currently
required by one or more states in which shares of the Fund are sold. These may
be more restrictive than the limitations set forth above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, the Fund will revoke the commitment by terminating
the sale of Fund shares in the state involved.
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
The 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
<PAGE>9
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 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 the Fund's investment program to achieve its investment
objective. PNC Institutional Management Corporation ("PIMC") generally will
select specific portfolio investments and effect transactions for the 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. PIMC 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, PIMC may, in
its discretion, effect transactions in portfolio securities with dealers who
provide the Fund with research advice or other services.
Investment decisions for the Fund concerning specific
portfolio securities are made independently from those for other clients advised
by PIMC. 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 PIMC
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, PIMC may aggregate the securities to be sold or purchased for
the 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, PIMC, 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 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 PIMC, in their sole discretion, believe such practice to be
otherwise in the Fund's interest.
The Fund does not intend to seek profits through short-term
trading. The 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.
<PAGE>10
SPECIAL CONSIDERATIONS RELATING TO NEW YORK
MUNICIPAL SECURITIES
Some of the significant financial considerations relating to
the Fund's investment 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.
There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1996-97 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The unemployment rate in the State dipped below the national
rate in the second half of 1981 and remained lower until 1991. It stood at 6.9%
in 1994. The total employment growth rate in the State has been below the
national average since 1984 and is expected to slow to less than 0.5% in 1995.
State per capita personal income remains above the national average. State per
capita income for 1994 was estimated at $25,999, which was 19.2% above the 1994
estimated national average of $21,809. During the recent past, total personal
income in the State rose slightly faster than the national average only in 1986
through 1989.
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.
<PAGE>11
The State's budget for the 1995-96 fiscal year was enacted by
the Legislature on June 7, 1995, more than two 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 all necessary appropriations for debt service. The
State financial plan for the 1995-96 fiscal year was formulated on June 20, 1995
and was based upon the State's budget as enacted by the Legislature and signed
into law by the Governor (the "1995-96 State Financial Plan").
The 1995-96 State Financial Plan was the first to be enacted
in the administration of the Governor. It was the first budget in over half a
century which proposed and, as enacted, projected an absolute year-over-year
decline in disbursements in the General Fund, the State's principal operating
fund. Spending for State operations was projected to drop even more sharply, by
4.6%. Nominal spending from all State spending sources (i.e., excluding Federal
aid) was proposed to increase by only 2.5% from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged more than 6.0%
annually.
The Governor presented his 1996-97 Executive Budget to the
Legislature on December 15, 1995, and subsequently amended it. There can be no
assurance that the Legislature will enact the Executive Budget into law or that
the projections set forth in the Executive Budget will not differ materially and
adversely from actual results.
The Governor's Executive Budget projected balance on a cash
basis in the General Fund. It reflected a continuing strategy of substantially
reduced State spending, including program restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives. The 1996-1997
Executive Budget proposed $3.9 billion in actions to balance the 1996-97 State
Financial Plan. The Executive Budget proposed to close this gap primarily
through a series of spending reductions and cost containment measures. The
Executive Budget projected (i) over $1.8 billion in savings from cost
containment and other actions in social welfare programs, including Medicaid,
welfare and various health and mental health programs; (ii) $1.3 billion in
savings from a reduced State General Fund share of Medicaid made available from
anticipated changes in the Medicaid program, including an increase in the
Federal share of Medicaid; (iii) over $450 million in savings from reforms and
cost avoidance in educational services (including school aid and higher
education), while providing fiscal relief from certain State mandates that
increase local spending; and (iv) $350 million in savings from efficiencies and
reductions in other State programs. The State has noted that there is
considerable uncertainty as to the ultimate composition of the Federal budget,
including uncertainties regarding major Federal entitlement reforms.
The State Division of the Budget has noted that 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, can
vary from fiscal year to fiscal year, and are frequently the result of actions
taken not only by the State but also by entities, such as the Federal
government, that are outside the State's control. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the
<PAGE>12
assumptions underlying the State's projections. There can be no assurance that
the State economy will not experience results that are worse than predicted,
with corresponding material and adverse effects on the State's financial
projections.
To make progress toward addressing recurring budgetary
imbalances, the 1996-97 Executive Budget proposed significant actions to align
recurring receipts and disbursements in future fiscal years. However, there can
be no assurance that the Legislature will enact the Governor's proposals or that
the State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in future fiscal years. The 1996-97
Executive Budget included actions that will have an impact on receipts and
disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in the 1997-98 fiscal year of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming implementation
of the 1996-97 Executive Budget recommendations. It is expected that the
Governor will propose to close these budget gaps with future spending
reductions.
Uncertainties with regard to both the economy and potential
decisions at the Federal level add further pressure on future budget balance in
New York State. For example, various proposals relating to Federal tax and
spending policies could, if enacted, have a significant impact on the State's
financial condition in the current and future fiscal years. Specifically, the
assumption of $1.3 billion in savings in the State fiscal year 1996-97 from a
reduced State General Fund share of Medicaid is contingent upon anticipated
changes to Federal provisions, including an increase in the Federal share of
Medicaid from 50 to 60 percent. Other budget and tax proposals under
consideration at the Federal level but not included in the State's 1996-97
Executive Budget forecast could also have a disproportionately negative impact
on the longer-term outlook for the State's economy as compared to other states.
A significant risk to the State's projections arises from tax legislation under
consideration by Congress and the President. Congressionally adopted retroactive
changes to Federal tax treatment of capital gains would flow through
automatically to the State personal income tax. Such changes, if ultimately
enacted, could produce revenue losses in the 1996-1997 fiscal year. In addition,
changes in Federal aid programs, currently pending in Congress, could result in
prolonged interruptions in the receipt of Federal grants.
On March 15, 1996, the Governor announced that additional
projected resources had been identified for the State fiscal year 1996-97, which
could be used for additional program needs if the Federal government enacts
welfare and Medicaid reform in the near future, or which could be used as part
of a contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the State
assumed in the 1996-97 Executive Budget.
In the State's 1996 fiscal year and in certain recent fiscal
years, the State has failed to enact a budget prior to the beginning of the
State's fiscal year. The State budget for the 1997 fiscal year was not adopted
by the statutory deadline of April 1, 1996.
<PAGE>13
The projections and assumptions contained in the 1996-97
Executive Budget are subject to revision which may involve substantial change,
and no assurance can be given that these estimates and projections will be
realized.
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 reported a General Fund operating deficit of $1.426
billion for the 1994-95 fiscal year, as compared to an operating surplus of $914
million for the prior fiscal year. The 1994-95 fiscal year deficit was caused by
several factors, including the use of $1.026 billion of the 1993-94 cash-based
surplus to fund operating expenses in 1994-95 and the adoption of changes in
accounting methodologies by the State Comptroller. These factors were offset by
net proceeds of $315 million in bonds issued by the Local Government Assistance
Corporation.
On April 3, 1996, the State announced that the General Fund
for the State's 1996 fiscal year is expected to be balanced on a cash basis,
with an operating surplus of $445 million.
Total revenues for 1994-95 were $31.455 billion. Revenues
decreased by $173 million over the prior fiscal year, a decrease of less than
one percent. Total expenditures for 1994-95 totaled $33.079 billion, an increase
of $2.083 billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental funds of $1.666 billion, reflecting liabilities of
$14.778 billion and assets of $13.112 billion.
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
<PAGE>14
on New York State general obligation and New York State-guaranteed bonds and
notes are legally enforceable obligations of the State of New York.
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") in an effort to restructure the way the State
makes certain local aid payments.
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 not in
excess of $4.7 billion (exclusive of certain refunding bonds) plus certain other
amounts. Over a period of years, the issuance of these long-term obligations,
which are 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 is thus permitted in any fiscal year, it is
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. The impact of LGAC's borrowing
is that the State is able to meet its cash flow needs in the first quarter of
the fiscal year without relying on short-term seasonal borrowings.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed amendment
would (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects
<PAGE>15
included in a multi-year capital financing plan, and (iii) prohibit, after its
effective date, lease-purchase and contractual-obligation financing mechanisms
for State facilities.
Before the approved constitutional amendment could be
presented to the voters for their consideration, it had to be passed by a
separately elected legislature. The amendment was passed by the Senate and
Assembly in June 1995. The Amendment was thereafter submitted to voters in
November 1995, where it was defeated.
On January 13, 1992, Standard & Poor's Corporation ("Standard
& Poor's") 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. Standard & Poor's also
continued its negative rating outlook assessment on State general obligation
debt. On April 26, 1993, Standard & Poor's revised the rating outlook assessment
to stable. On February 14, 1994, Standard & Poor's raised its outlook to
positive and, on February 28, 1994, confirmed its A- rating. On January 6, 1992,
Moody's Investors Service, Inc. ("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.
The State anticipated that its capital programs would be
financed, in part, by State and public authorities borrowings in 1995-96. The
State expected to issue $248 million in general obligation bonds (including $170
million for purposes of redeeming outstanding bond anticipation notes) and $186
million in general obligation commercial paper. The Legislature had also
authorized the issuance of up to $33 million in certificates of participation
during the State's 1995-96 fiscal year for equipment purchases and $14 million
for capital purposes.
Principal and interest payments on general obligation bonds
and interest payments on bond anticipation notes and on tax and revenue
anticipation notes were $793.3 million for the 1994-95 fiscal year, and were
estimated to be $774.4 million for the 1995-96 fiscal year. These figures do not
include interest payable on State General Obligation Refunding Bonds issued in
July 1992 ("Refunding Bonds") to the extent that such interest was paid from an
escrow fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1994-95 fiscal year, and were estimated to be $328.2
million for 1995-96. State lease-purchase rental and contractual obligation
payments for 1994-95, including State installment payments relating to
certificates of participation, were $1.607 billion and were estimated to be
$1.641 billion in 1995-96.
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.
<PAGE>16
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 by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills; (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) a challenge to the
constitutionality of the treatment of certain moneys held in a Supplemental
Reserve Fund; and (10) a challenge to the constitutionality of a State lottery
game.
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 $30 million
in fiscal 1994-95, $63 million in fiscal 1995-96, $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 v. 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.
The legal proceedings noted above involve State finances,
State programs and miscellaneous tort, real property and contract claims in
which the State is a defendant and the monetary damages sought are substantial.
These proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1996-97 State
Financial Plan. An adverse decision in any of these proceedings could exceed the
amount of the 1996-97 State Financial Plan reserve for the payment of judgments
and, therefore, could affect the ability of the State to maintain a balanced
1996-97 State Financial Plan. In its audited financial statements for the fiscal
year ended March 31, 1995, the State reported its estimated liability for
awarded and anticipated unfavorable judgments to be $676 million.
<PAGE>17
Although other litigation is pending against New York State,
except as described above, 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 are
State-supported or State-related. As of September 30, 1994, date of the latest
data available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995, aggregate public
authority debt outstanding as State-supported debt was $27.9 billion and as
State-related debt was $36.1 billion.
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 18 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 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. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
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.
<PAGE>18
In 1975, Standard & Poor's 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 Standard & Poor's. On July
2, 1985, Standard & Poor's revised its rating of City bonds upward to BBB+ and
on November 19, 1987, to A-. On July 2, 1993, Standard & Poor's reconfirmed its
A- rating of City bonds, continued its negative rating outlook assessment and
stated that maintenance of such rating depended upon the City's making further
progress towards reducing budget gaps in the outlying years. 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 July 10, 1995, Standard & Poor's downgraded its rating
on the City's $23 billion of outstanding general obligation bonds to "BBB+" from
"A-", citing to the City's chronic structural budget problems and weak economic
outlook. Standard & Poor's stated that New York City's reliance on one-time
revenue measures to close annual budget gaps, a dependence on unrealized labor
savings, overly optimistic estimates of revenues and state and federal aid and
the City's continued high debt levels also contributed to its decision to lower
the rating. Moody's currently has the City's rating under review for a possible
downgrade.
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 December 31, 1995, MAC
had outstanding an aggregate of approximately $4.684 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 for the 1992 through 1997 fiscal years
in the event the City fails to provide such financing.
The City and MAC have reached an agreement in principle under
which MAC will develop and implement a debt restructuring program which will
provide the City with $125 million in budget relief in fiscal year 1996, in
addition to the $20 million of additional budget relief provided by MAC to the
City since January 1996. The City has agreed with MAC that it will reduce
certain expenditures by $125 million in each of the four fiscal years
<PAGE>19
starting in fiscal year 1997. The proposed refinancing, which must satisfy MAC
refinancing criteria, is subject to market conditions.
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.
From time to time, the Control Board staff, OSDC, the City
comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services.
On January 31, 1996, the City published the financial plan for
the 1996-1999 fiscal years (the "City Financial Plan"), which is a modification
to a financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the Financial
Plan reflected a strategy to substantially reduce spending for entitlements for
the 1996 and subsequent fiscal years, and to decrease the City's costs for
Medicaid in the 1997 fiscal year and thereafter by increasing the Federal share
of Medicaid costs otherwise paid by the City. This strategy has been the subject
of substantial debate, and implementation of this strategy will be significantly
affected by State and Federal budget proposals currently being considered. It is
likely that the City Financial Plan will be changed significantly in connection
with the preparation of the Executive Budget for the 1997 fiscal year as a
result of the status of State and Federal budget proposals and other factors.
The City Financial Plan also set forth projections for the
1997 through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion
<PAGE>20
for the 1998 and 1999 fiscal years, respectively, assuming successful
implementation of the gap-closing program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999
fiscal years included: (i) additional agency actions, totaling between $643
million and $691 million in each of the 1997 through 1999 fiscal years; (ii)
additional savings resulting from State and Federal aid and cost containment in
entitlement programs to reduce City expenditures and increase revenues by $650
million in the 1997 fiscal year and by $727 million in each of the 1998 and 1999
fiscal years; (iii) additional proposed Federal aid of $50 million in the 1997
fiscal year and State aid of $100 million in each of the 1997 through 1999
fiscal years; (iv) the receipt of $300 million in the 1997 fiscal year from
privatization or other initiatives, certain of which actions is expected to
require legislative action by the City Council; and (v) the assumed receipt of
revenues relating to rent payments for the City's airports, totaling $244
million, $226 million and $70 million in the 1997 through 1999 fiscal years,
respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The Federal and State budgets, when adopted, may result in
substantial reductions in revenues for the City, as well as a reduction in
projected expenditures in entitlement programs, including Medicare, Medicaid and
welfare programs. The nature and extent of the impact on the City of the Federal
and State budgets, when adopted, is uncertain, and no assurance can be given
that Federal or State actions included in the Federal and State adopted budgets
may not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years
reflected the costs of the proposed settlement with the teachers union and the
recent settlement with a coalition of municipal unions, and assumed that the
City will reach agreement with its remaining municipal unions under terms which
are generally consistent with such settlements.
The City's financial plans have been the subject of extensive
public comment and criticism. The City comptroller has issued reports
identifying risks ranging between $440 million and $560 million in the 1996
fiscal year before taking into account the availability of $160 million in the
general reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal
year after implementation of the City's proposed gap-closing actions. With
respect to the 1997 fiscal year, the report noted that the City Financial Plan
assumed the implementation of highly uncertain State and Federal actions, most
of which are unlikely to be implemented, that would provide between $1.2 billion
and $1.4 billion in relief to the City, and identified additional risks. The
report concluded that the magnitude of the budget risk for the 1997 fiscal year,
after two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would
<PAGE>21
require substantial revision in order to provide a credible program for
dealing with the large projected budget gap for the 1997 fiscal year.
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. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
Certain localities, in addition to the City, could have
financial problems leading to requests for additional New York State assistance.
The potential impact on the State of such requests by localities was not
included in the State's projections of its receipts and disbursements.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation 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 Governor or the Legislature to assist Yonkers could result in allocation of
New York State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1993, the total indebtedness
of all localities in New York State other than New York City was approximately
$17.7 billion. A small portion (approximately $105 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. Fifteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1993.
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.
<PAGE>22
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard N. Cooper (62) Director
Harvard University National Intelligence Counsel; Professor at Harvard
1737 Cambridge Street University; Director or Trustee of Circuit City Stores, Inc.
Cambridge, Massachusetts 02138 (retail electronics and appliances) and Phoenix Home Life
Insurance Co.
Donald J. Donahue (71) Director
99 Indian Field Road Chairman of Magma Copper Company since January 1987; Director
Greenwich, Connecticut 06830 or Trustee of Northeast Utilities, GEV Corporation and Signet
Star Reinsurance Company;
Chairman and Director of
NAC Holdings from
September 1990-June 1993.
Jack W. Fritz (69) 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).
John L. Furth* (65) Director
466 Lexington Avenue Vice Chairman and Director of E.M. Warburg, Pincus & Co.,
New York, New York 10017-3147 Inc. ("EMW"); Associated with EMW since 1970; Chief Executive
Officer of other
investment companies advised by Warburg.
Thomas A. Melfe (64) Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton & Irvine;
New York, New York 10112 Director of Municipal Fund for New York Investors, Inc.
</TABLE>
- ------------------------
* Indicates a Director who is an "interested person" of the Fund as
defined in the 1940 Act.
<PAGE>23
<TABLE>
<S> <C>
Arnold M. Reichman* (48) Director and Executive Vice President
466 Lexington Avenue Managing Director and Assistant Secretary of EMW; Associated
New York, New York 10017-3147 with EMW since 1984; Senior Vice President, Secretary and
Chief Operating Officer of
Counsellors Securities;
Officer of other
investment companies
advised by Warburg.
Alexander B. Trowbridge (66) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc. (business consulting)
Suite 700 from January 1990-January 1994; President of the National
Washington, D.C. 20036 Association of Manufacturers from 1980-1990; Director or
Trustee of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), P.H.H. Corporation (fleet
auto management, housing and plant relocation service), WMX
Technologies Inc. (solid and hazardous waste collection and
disposal), The Rouse Company (real estate development),
SunResorts International Ltd. (hotel real estate management),
Harris Corp. (electronics and communications equipment), The
Gillette Co. (personal care products) and Sun Company Inc.
(petroleum refining and marketing).
Dale C. Christensen (49) President
466 Lexington Avenue Co-Portfolio Manager of other Warburg Pincus Funds; Managing
New York 10017-3147 Director of EMW; Associated with EMW since 1989; Vice
President at Citibank,
N.A. from 1985-1989; Vice
President of Counsellors
Securities; President of
other investment companies
advised by Warburg.
Eugene L. Podsiadlo (39) Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated with EMW since 1991;
New York, New York 10017-3147 Vice President of Citibank, N.A. from 1987-1991; Senior Vice
President of Counsellors
Securities and officer 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.
<PAGE>24
<TABLE>
<S> <C>
Eugene P. Grace (43) Vice President and Secretary
466 Lexington Avenue Associated with EMW since April
New York, New York 10017-3147 1994; Attorney-at-law from
September 1989-April 1994; life
insurance agent, New York
Life Insurance Company
from 1993-1994; General
Counsel and Secretary,
Home Unity Savings Bank
from 1991-1992; Vice
President and Chief
Compliance Officer of
Counsellors Securities;
Vice President and
Secretary of other
investment companies
advised by Warburg.
Stephen Distler (42) Vice President and Chief Financial Officer
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of EMW;
New York, New York 10017-3147 Associated with EMW since 1984; Treasurer of Counsellors
Securities; Vice
President, Treasurer and
Chief Accounting Officer
or Vice President and
Chief Financial Officer of
other investment companies
advised by Warburg.
Howard Conroy (42) Vice President, Treasurer and
466 Lexington Avenue Chief Accounting Officer
New York, New York 10017-3147 Associated with EMW since
1992; Associated with
Martin Geller, C.P.A. from
1990-1992; Vice President,
Finance with
Gabelli/Rosenthal &
Partners, L.P. until 1990;
Vice President, Treasurer
and Chief Accounting
Officer of other
investment companies
advised by Warburg.
Janna Manes, Esq.(29) Assistant Secretary
466 Lexington Avenue Associated with EMW since 1996;
New York, New York 10017-3147 Associated with the law
firm of Willkie Farr & Gallagher
from 1993-1996; Assistant
Secretary of other investment companies
advised by Warburg.
</TABLE>
No employee of Warburg, PIMC, PNC or PFPC Inc. ("PFPC") or any
of their affiliates receives any compensation from the Fund for acting as an
officer or Director of the 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.
<PAGE>25
Directors' Compensation
(for the fiscal year ended February 29, 1996)
<TABLE>
<CAPTION>
Total Annual
Total Compensation from
Compensation from all Investment Companies
Name of Director* Fund Managed by Warburg
- ---------------- ---- ------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $4,000 $47,000
Donald J. Donahue $4,000 $47,000
Jack W. Fritz $4,000 $47,000
Thomas A. Melfe $4,000 $47,000
Arnold M. Reichman None** None**
Alexander B. Trowbridge $4,000 $47,000
</TABLE>
- --------------------
* Each Director also serves as a Director or Trustee of 19 other
investment companies advised by Warburg.
** Mr Furth and Mr. Reichman are considered to be interested persons of
the Fund and Warburg, as defined under Section 2(a)(19) of the 1940
Act, and, accordingly, receive no compensation from the Fund or any
other investment company managed by Warburg.
As of May 31, 1996, Directors and officers of the Fund as a
group did not own shares of the Fund's outstanding common stock.
Investment Adviser, Sub-Investment Adviser and Administrator
and Co-Administrator
Warburg serves as investment adviser to the Fund, PIMC 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 the fees payable
by the Fund to Warburg, PIMC 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").
Warburg and PIMC have agreed that if, in any fiscal year, the
expenses borne by the Fund exceed the applicable expense limitations imposed by
the securities regulations of any state in which shares of the Fund are
registered or qualified for sale to the public, they will each reimburse the
Fund for one-half of any excess to the extent required by such regulations.
Unless otherwise required by law, such reimbursement would be accrued and paid
on a monthly basis. At present, no state expense limitation is applicable to the
Fund.
<PAGE>26
During the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, the Fund incurred $194,823, $221,553 and $224,129,
respectively, in fees to each of Warburg and PIMC for services under the
Advisory Agreement and Sub-Advisory Agreement, respectively. For the same
periods, Warburg and PIMC voluntarily waived fees aggregating $148,167, $199,026
and $240,784, respectively, of which Warburg voluntarily waived $108,970,
$55,231 and $96,389, respectively, and PIMC voluntarily waived $39,197, $143,795
and $144,395, respectively. Under the Administrative Services Agreement or the
Co-Administration Agreement, as the case may be, $149,092, $88,871 and $89,652,
was payable to Counsellors Service during the fiscal years ended February 28,
1994, February 28, 1995 and February 29, 1996, respectively, of which $44,311
was waived by Counsellors Service in 1995.
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 PIMC are subject to such banking laws and regulations.
PIMC, PNC and the Fund have been advised by Messrs. Ballard,
Spahr, Andrews & Ingersoll that PIMC and PNC may perform the services for the
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 PIMC 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 the 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 serve as sub-custodian on behalf of the 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 Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19101.
<PAGE>27
State Street Bank and Trust Company ("State Street") has
agreed to serve as the 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., a 50% owned
subsidiary ("BFDS"), 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
The Fund is incorporated in Maryland. See the Prospectus,
"General Information." All shareholders of the 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
The Fund may in the future enter into agreements
("Agreements") with institutions ("Institutions") to perform certain
distribution, shareholder servicing, administrative and accounting services
would be provided to the holders ("Customers") who are beneficial owners of the
Fund's Series 2 class of shares (the "Advisor Shares"). See the Prospectus,
"Shareholder Servicing." The Fund's agreements with Institutions with respect to
Advisor Shares will be governed by a Distribution Plan. The Distribution Plan
would require the Board, at least quarterly, to receive and review written
reports of amounts expended under the Distribution Plan and the purposes for
which such expenditures were made.
An Institution with which the Fund has entered into an
Agreement with respect to either its Common Shares or Advisor Shares may charge
a Customer one or more of the following types of fees, as agreed upon by the
Institution and the Customer, with respect to the cash management or other
services provided by the Service Organization: (i) account fees (a fixed amount
per month or per year); (ii) transaction fees (a fixed amount per transaction
processed); (iii) compensation balance requirements (a minimum dollar amount a
Customer must maintain in order to obtain the services offered); or (iv) account
maintenance fees (a periodic charge based upon the percentage of assets in the
account or of the dividend paid on those assets). Services provided by an
Institution to Customers are in addition to, and not duplicative of, the
services to be provided under the Fund's co-administration and distribution and
shareholder servicing arrangements. A Customer of an Institution should read the
Prospectus and Statement of Additional Information in conjunction with the
Agreement and other literature describing the services and related fees that
would be provided by the an Institution to its Customers prior to any purchase
of Fund shares. Prospectuses are available
<PAGE>28
from the Fund's distributor upon request. No preference will be shown in the
selection of Fund portfolio investments for the instruments of Institutions.
The Distribution Plan and 12b-1 Plan will continue in effect
for so long as their continuance is specifically approved at least annually by
the Board, including a majority of the Directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Service Plans ("Independent Directors"). Any material amendment
of the Distribution Plan or the 12b-1 Plan would require the approval of the
Board in the manner described above. The Distribution Plan may be amended to
increase materially the amount to be spent under the Plan without shareholder
approval of the relevant class of shares. The Distribution Plan or the 12b-1
Plan may be terminated at any time, without penalty, by vote of a majority of
the Independent Directors or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of the Fund.
Until June 9, 1995, the 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 years ended February 29, 1994 and February 29, 1995,
Janney Montgomery received $36,410 and $41,225, respectively. 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.
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, the 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 (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.
(The 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 determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Fund
may make payment
<PAGE>29
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 the 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 the 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 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. Warburg reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange privilege
may be modified or terminated at any time upon 60 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the 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
<PAGE>30
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
As described above and in the Fund's Prospectus, the 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.
The Fund has qualified and intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Code. If it qualifies
as a regulated investment company, the 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, the Fund must, among other
things: (i) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains); (ii) derive at least 90% of its
gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and forward
contracts) derived with respect to the Fund's business of investing in
securities; (iii) derive less than 30% of its annual gross income from the sale
or other disposition of securities, options, futures or forward contracts held
for less than three months; and (iv) diversify its holdings so that, at the end
of each fiscal quarter of the Fund (a) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. government securities and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the 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. In meeting these
requirements, the Fund may be restricted in the selling of securities held by
the Fund for less than three months and in the utilization of certain of the
investment techniques described above and in the Prospectus. 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.
<PAGE>31
Although the 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 the 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.
Because the 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. 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 environmental tax, the federal "branch
profits" tax, or the federal "excess net passive income" tax.
While the 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 the 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 the 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.
<PAGE>32
Distributions by the Fund result in a reduction in the net
asset value of the Fund's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder to the extent it is derived from other than
tax-exempt interest as ordinary income or capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the distribution
which, to the extent it is derived from other than tax-exempt interest, will
nevertheless be taxable to them.
Each shareholder 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.
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.
DETERMINATION OF YIELD
From time to time, the Fund may quote its yield, effective
yield and tax equivalent yield in advertisements or in reports and other
communications to shareholders. The Fund's yield, effective yield and tax
equivalent yield on its Common Stock, par value $.001 per share (the "Shares"),
for the seven-day period ended on February 29, 1996 was 2.75%, 2.78% and 4.90%
(based on a 46.72% tax bracket), respectively. In the absence of waivers these
yields would have been 2.42%, 2.45% and 4.31%, respectively. The Fund's
<PAGE>33
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. The 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 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.
The Fund's yield will vary from time to time depending upon
market conditions, the composition of the 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 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 the Fund. The financial statements that appear in
this Statement of Additional Information have been audited by Coopers & Lybrand,
whose report thereon appears elsewhere herein, and have been included herein in
reliance upon the report of such firm of independent accountants given upon
their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Fund as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of May 31, 1996, the name, address and percentage of
ownership of other persons that control the 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: Fiduciary Trust Company
International, P.O. Box 3199, New York, NY 10008-3199 -- .62%; Neuberger &
Berman, 11 Broadway, New York, NY 10004-1303 -- .30% and Chemical Bank, 270 Park
Avenue, New York, NY 10017-2014. To the knowledge of the Fund, these
<PAGE>34
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 92.08% of Fund shares outstanding, including shares owned by clients for
which Warburg has investment discretion and by companies that EMW 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
The Fund's financial statements for the fiscal year ended
February 29, 1996 follow the Report of Independent Accountants.
<PAGE>A-1
APPENDIX
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
The following summarizes the highest two ratings used by
Standard & Poor's Ratings Group ("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.
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 Investors Service, Inc. ("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.
<PAGE>A-2
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.
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.
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS:
We have audited the accompanying statements of net assets of Warburg Pincus Cash
Reserve Fund and Warburg Pincus New York Tax Exempt Fund as of February 29,
1996, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 29, 1996. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Warburg Pincus Cash Reserve Fund and Warburg Pincus New York Tax Exempt Fund as
of February 29, 1996, and the results of their operations for the year then
ended, the changes in their net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 8, 1996
28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
- --------------------------------------------------------------------------------
April 18, 1996
Dear Shareholder:
Tax-exempt money fund yields continued to rise over the last six months,
peaking in January at 3.39%. The Donoghue's All Tax-Free 12-month total return
on February 29, 1996, was 3.36%, 11 basis points higher than in August. Because
of the high demand for New York-issued securities, New York state-specific
tax-exempt money fund yields tend to be 10 to 15 basis points lower than those
of national funds. According to Donoghue's, New York state-specific funds
averaged 3.21% for the year ended February 29, 1996. The current yield of
Warburg Pincus New York Tax Exempt Fund (the 'Fund') for the seven-day period
ended February 29, 1996, was 2.75%.*
Tax-exempt money funds experienced large cash inflows over the period due
to uncertainty in the stock and bond markets, the Washington budget impasse, and
the possibility of changes in the tax code. Total tax-exempt money fund assets
hit new all-time highs in virtually every month during the last year. At the end
of February, municipal money market assets reached a record level at $135.2
billion.
The economy of the state of New York remained sluggish over the past six
months, and as the state rolls into budget season, it faces another shortfall.
Governor Pataki continues to press hard for spending cuts, tax cuts, and job
cuts, aimed at revenue growth through a more favorable business climate and
leaner state government. Demand for short-term paper increased, causing
short-term tax-free rates to drop and the yield curve to remain flat.
The Fund had net assets of $96.6 million, up from $87.7 million on February
28, 1995. Its average weighted maturity was 24 days.
The Fund seeks to invest in high-quality issues, the income from which is
exempt from federal, New York state and New York City personal income taxes. The
Fund will continue to seek current income that is exempt from federal, New York
state and New York City personal income taxes, consistent with preservation of
capital and liquidity. We appreciate your continued support and investment in
the Fund.
- ------------
* From time to time, the Fund's investment adviser and co-administrators may
waive some fees and/or reimburse some expenses, without which performance
would be lower. Waivers and/or reimbursements are subject to change. All
figures listed here represent past performance and do not guarantee future
results. Although the Fund seeks to maintain a constant value of $1.00 per
share, investments in Warburg Pincus Funds are neither insured or guaranteed
by the U.S. government and there can be no assurance that the Fund will be
able to maintain a constant value of $1.00 per share.
2
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (100.4%)
$ 1,425,000 Chautauqua County Industrial
Development Agency Industrial
Development Revenue Bonds, Series
1995 (Belknap Business Forms, Inc.
Project) VRDN+ (NR, NR) 03/07/96 3.300 $ 1,425,000
700,000 Erie County New York Water Authority
Series B (AMBAC Insurance) VRDN+ (VMIG1, A-1+) 03/07/96 3.100 700,000
3,000,000 Massapequa New York Union Free School
District TANS (MIG1, NR) 06/28/96 4.250 3,004,696
200,000 Metropolitan Transportation Au-
thority Commuter Facility Series 1991
(Morgan Guaranty LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.150 200,000
1,000,000 Monroe County Industrial Development
Agency Electronic Navigational
Industries Facility Series 1984 MB (Aa1, AA) 07/01/96 3.800 1,000,000
1,900,000 New York City General Obligation
(Union Bank of Switzerland LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.350 1,900,000
500,000 New York City General Obligation
Series B10 (Union Bank of Switzerland
LOC) VRDN+ (VMIG1, A-1+) 03/07/96 3.150 500,000
4,400,000 New York City General Obligation
(Mitsubishi Bank LOC) VRDN+ (VMIG1, A-1+) 03/07/96 3.500 4,400,000
3,400,000 New York City General Obligation
(FGIC Insurance) VRDN+ (MIG1, A-1+) 03/01/96 3.350 3,400,000
1,800,000 New York City General Obligation
Bonds (Mitsubishi Bank LOC) VRDN+ (VMIG1, A-1+) 03/07/96 3.450 1,800,000
2,000,000 New York City General Obligation
Series H-6 (MBIA Insurance) TECP (VMIG1, A-1+) 05/21/96 3.250 2,000,000
1,500,000 New York City General Obligation
Series B-9 (Chemical Bank LOC) TECP (NR, NR) 08/19/96 3.250 1,500,000
</TABLE>
See Accompanying Notes to Financial Statements.
11
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (CONT'D)
$ 400,000 New York City General Obligation
1994B (Dai-Ichi Kangyo LOC) VRDN+ (MIG1, A-1) 03/01/96 3.400 $ 400,000
2,100,000 New York City Housing Development
Authority (York Ave.) (Chemical Bank
LOC) VRDN+ (NR, A-1) 03/07/96 3.250 2,100,000
2,675,000 New York City Housing Development
Corporation (Parkgate Tower)
(Citibank LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.100 2,675,000
1,000,000 New York City Housing Development
Corporation (Upper Fifth Avenue
Project) Series 1989A (Bankers Trust
LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.000 1,000,000
500,000 New York City Industrial Development
Agency (La Guardia Project) Series
1985 (Banque Indosuez LOC) VRDN+ (NR, A-1) 03/07/96 3.150 500,000
1,000,000 New York City Industrial Development
Agency Columbia Grammar and
Preparatory School Civic Facility
Revenue Bonds 1994 (Chemical Bank
LOC) VRDN+ (NR, A-1) 03/07/96 3.150 1,000,000
600,000 New York City Industrial Development
Agency Japan Airlines (Morgan
Guaranty LOC) VRDN+ (NR, A-1) 03/01/96 3.450 600,000
400,000 New York City Industrial Development
Revenue Bonds Nippon Cargo Airlines
Company (Industrial Bank of Japan
LOC) VRDN+ (NR, A-1+) 03/07/96 4.100 400,000
1,000,000 New York City Municipal Water Finance
Authority Series 3 (Toronto Dominion
LOC) TECP (P-1, A-1+) 05/21/96 3.250 1,000,000
3,300,000 New York City Series E (Morgan
Guaranty LOC) RANS (MIG1, SP-1) 06/28/96 4.750 3,314,183
3,000,000 New York City Series 1996-A RANS (NR, NR) 04/11/96 4.500 3,002,455
</TABLE>
See Accompanying Notes to Financial Statements.
12
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (CONT'D)
$ 1,447,000 New York City Trust For Cultural
Resources (Carnegie Hall) (Dai-Ichi
Kangyo LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.200 $ 1,447,000
1,000,000 New York City Trust For Cultural
Resources Adjustable Tender Revenue
Bonds (American Museum of Natural
History) Series 1991B (MBIA
Insurance) (Swiss Bank LOC) VRDN+ (VMIG1, A-1+) 03/07/96 2.900 1,000,000
1,900,000 New York City Trust For Cultural
Resources Museum of Broadcasting
Series 1989 (Sumitomo Bank LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.400 1,900,000
2,400,000 New York Local Government Assistance
Corp. (Multiple Credit Enhancements
LOC) VRDN+ (NR, A-1+) 03/07/96 3.100 2,400,000
700,000 New York Local Government Assistance
Corp. (Canadian Imperial Bank LOC)
VRDN+ (VMIG1, A-1+) 03/07/96 3.150 700,000
1,700,000 New York Local Government Assistance
Corp. (Society Generale LOC) VRDN+ (VMIG1, A-1+) 03/07/96 3.150 1,700,000
2,500,000 New York State Dormitory Authority
Revenue Bonds (Chemical Bank LOC)
TECP (VMIG1, A-1) 03/21/96 3.300 2,500,000
600,000 New York State Dormitory
Authority Revenues Bonds (Beverwyck
Inc.) (Banque Paribas LOC) VRDN+ (VMIG1, A-1) 03/07/96 3.050 600,000
4,600,000 New York State Energy Research &
Development Authority Pollution
Control Refunding Revenue Bonds (New
York State Electric & Gas Corp.)
(Union Bank of Switzerland LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.500 4,600,000
</TABLE>
See Accompanying Notes to Financial Statements.
13
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (CONT'D)
$ 1,400,000 New York State Energy Research &
Development Authority Pollution
Control Revenue Refunding Bonds
(Rochester Gas & Electric) Series
1984 (Bank of New York LOC) VRDN+ (P-1, NR) 03/01/96 3.250 $ 1,400,000
2,000,000 New York State Energy Research and
Development Authority (New York State
Electric & Gas) Series 1985A (Morgan
Guaranty LOC) MB (P-1, A-1+) 03/15/96 4.650 2,000,000
2,000,000 New York State Energy Research and
Development Authority Electric
Facilities Revenue Bonds 1995 Series
A (Long Island Lighting Company
Project) (Union Bank of Switzerland
LOC) VRDN+ (VMIG1, NR) 03/07/96 3.250 2,000,000
2,500,000 New York State Energy Research and
Development Authority Pollution
Control Revenue Bonds (Long Island
Lighting Company) (Deutsche Bank LOC)
MB (VMIG1, A-1+) 03/01/96 4.700 2,500,000
2,000,000 New York State Housing Finance Agency
East 84th Street Housing Revenue
Bonds 1995 Series A (Fleet Bank LOC)
VRDN+ (VMIG1, NR) 03/07/96 3.200 2,000,000
100,000 New York State Housing Finance Agency
Housing Revenue Bonds (Mt. Sinai
School of Medicine) Series 1984A
(Golden State Sanwa Bank LOC) VRDN+ (VMIG1, NR) 03/07/96 3.100 100,000
100,000 New York State Housing Finance Agency
Housing Revenue Bonds (Normandie
Court) Series 1991A (Society Generale
LOC) VRDN+ (VMIG1, NR) 03/07/96 3.100 100,000
1,100,000 New York State Housing Finance Agency
Housing Revenue Bonds (Sloan Memorial
Kettering Cancer Center) Series 1985A
VRDN+ (MIG1, A1+) 03/07/96 3.000 1,100,000
</TABLE>
See Accompanying Notes to Financial Statements.
14
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (CONT'D)
$ 1,200,000 New York State Housing Finance Agency
Multi-Family Housing (Pleasant Creek
Assoc.) 1988
Series A (AMBAC Insurance) VRDN+ (VMIG1, NR) 03/07/96 3.300 $ 1,200,000
230,000 New York State Job Development
Authority State Guaranteed Variable
Rate Special Purpose Bonds Series
1984C (Sumitomo Bank LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.650 230,000
110,000 New York State Job Development
Authority State Guaranteed Variable
Rate Special Purpose Bonds Series
1984F (Sumitomo Bank LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.650 110,000
640,000 New York State Job Development
Authority State Guaranteed Variable
Rate Special Purpose Bonds Series
1984G (Sumitomo Bank LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.650 640,000
810,000 New York State Job Development
Authority State Guaranteed Variable
Rate Special Purpose Bonds Series
1984H (Sumitomo Bank LOC) VRDN+ (VMIG1, A-1+) 03/01/96 3.650 810,000
1,200,000 New York State Local Government
Assistance Corporation Variable Rate
Revenue Bonds Series 1995F (Toronto
Dominion LOC) VRDN+ (VMIG1, A-1+) 03/07/96 3.150 1,200,000
500,000 New York State Medical Care
Facilities Finance Agency (Lenox Hill
Hospital Project) 1990
Series A (Chemical Bank LOC) VRDN+ (VMIG1, NR) 03/07/96 3.100 500,000
2,000,000 New York State Power Authority TECP (P-2, A-2) 03/26/96 3.350 2,000,000
2,120,000 New York State Power Authority TECP (P-1, A-1) 05/01/96 3.300 2,120,000
</TABLE>
See Accompanying Notes to Financial Statements.
15
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK (CONT'D)
$ 1,000,000 North Hempstead New York Solid Waste
Management Authority Series A 1993
VRDN+ (VMIG1, A-1+) 03/07/96 3.250 $ 1,000,000
2,000,000 New York City General Obligation (MIG1, NR) 06/28/96 4.750 2,004,742
2,100,000 State of New York General Obligation
BANS (P-1, A-1) 03/13/96 3.250 2,100,000
2,600,000 State of New York Power MB (MIG1, NR) 03/01/96 3.850 2,600,000
4,000,000 State of New York Series R TECP (P-1, A-1) 03/07/96 3.100 4,000,000
3,700,000 Suffolk County Industrial Devel-
opment Authority (Nissequogue Cogen)
Series 1993 (Toronto Dominion LOC)
VRDN+ (VMIG1, A-1+) 03/07/96 3.200 3,700,000
3,000,000 Suffolk County Water Authority BAN
1994 VRDN+ (VMIG1, NR) 03/07/96 3.100 3,000,000
1,000,000 Town of Babylon Industrial De-
velopment Agency (J. D'addario &
Company, Inc Project) Series 1994
(National Westminster LOC) VRDN+ (VMIG1, NR) 03/07/96 3.300 1,000,000
100,000 Town of Montgomery Industrial
Development Agency Authority (Service
Merchandise Co., Inc.) (Industrial
Bank of Japan LOC) VRDN+ (NR, A-1) 03/15/96 3.350 100,000
700,000 Triborough Bridge and Tunnel
Authority (FGIC Insurance) VRDN+ (VMIG1, A-1+) 03/07/96 3.250 700,000
2,100,000 Trust For Cultural Resources City of
New York (Solomon R. Guggenheim
Foundation) (Swiss Bank LOC) VRDN+ (MIG1, A1+) 03/01/96 3.400 2,100,000
------------
TOTAL NEW YORK (Cost $96,983,076) 96,983,076
------------
</TABLE>
See Accompanying Notes to Financial Statements.
16
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
STATEMENT OF NET ASSETS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS=
PAR SECURITY DESCRIPTION (MOODY'S/S&P) MATURITY RATE% VALUE
----------- ------------------------------------- --------------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
PUERTO RICO (4.5%)
$ 2,400,000 Government Development Bank For
Puerto Rico Adjustable Refunding
Bonds Series 1985 (Credit Suisse LOC)
VRDN+ (VMIG1, NR) 03/07/96 2.800 $ 2,400,000
2,000,000 Government Development Bank For
Puerto Rico TECP (NR, A-1+) 03/05/96 3.000 2,000,000
------------
TOTAL PUERTO RICO (Cost $4,400,000) 4,400,000
------------
TOTAL INVESTMENTS AT VALUE (104.9%) (Cost $101,383,076*) 101,383,076
LIABILITIES IN EXCESS OF OTHER ASSETS (4.9%) (4,799,327)
------------
NET ASSETS (100.0%) (applicable to 96,596,868 common shares) $ 96,583,749
------------
------------
NET ASSET VALUE, offering and redemption price per common
share ($96,583,749[div]96,596,868) $1.00
</TABLE>
INVESTMENT ABBREVIATIONS
<TABLE>
<S> <C>
BANS = Bond Anticipation Notes
FGIC = Financial Guaranty Insurance Company
LOC = Letter of Credit
MB = Municipal Bonds
MBIA = Municipal Bond Insurance Association
RANS = Revenue Anticipation Notes
TANS = Tax Anticipation Notes
TECP = Tax Exempt Commercial Paper
VRDN = Variable Rate Demand Notes
</TABLE>
= Credit ratings given by Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group are unaudited.
+ The interest rate shown is the rate as of February 29, 1996 and the maturity
date shown is the longer of the next interest readjustment date or the date
the principal amount owed can be recovered through demand.
* Also represents cost for Federal income tax purposes.
See Accompanying Notes to Financial Statements.
17
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
MATURITY SCHEDULE OF PORTFOLIO
February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENTAGE OF PORTFOLIO
MATURITY SCHEDULE -----------------------------
(DAYS) PAR AMOUNT (CUMULATIVE)
- ----------------- ------------
<S> <C> <C> <C>
1-7 $ 73,737,000 72.7% 72.7%
8-14 2,100,000 2.1 74.8
15-30 6,600,000 6.5 81.3
31-60 3,000,000 3.0 84.3
61-90 5,120,000 5.0 89.3
91-120 8,300,000 8.2 97.5
121-150 1,000,000 1.0 98.5
Over 150 1,500,000 1.5 100.0
------------
$101,357,000
------------
------------
</TABLE>
Average Weighted Maturity -- 24 days
See Accompanying Notes to Financial Statements.
18
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Cash Reserve New York Tax
Fund Exempt Fund
-------------- --------------
<S> <C> <C>
INTEREST INCOME $ 18,471,546 $3,402,663
-------------- --------------
EXPENSES:
Investment advisory 772,648 224,129
Sub-investment advisory and administration 772,648 224,129
Administrative services 309,059 89,652
Audit 32,135 31,210
Custodian 77,846 22,792
Directors' 19,500 19,500
Distribution 0 10,080
Insurance 14,987 5,480
Legal 51,866 55,571
Printing 16,489 (1,192)
Registration 9,338 15,529
Transfer agent 113,004 32,503
Miscellaneous 23,354 14,565
-------------- --------------
2,212,874 743,948
Less: fees waived (513,054) (240,784)
-------------- --------------
Total expenses 1,699,820 503,164
-------------- --------------
Net investment income 16,771,726 2,899,499
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized gain (loss) from security transactions (507) 645
-------------- --------------
Net increase in net assets resulting from operations $ 16,771,219 $2,900,144
-------------- --------------
-------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements.
19
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Cash Reserve New York Tax
Fund Exempt Fund
---------------------------------- ------------------------------
For the Year Ended February 28 For the Year Ended February 28
or 29, or 29,
1996 1995 1996 1995
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 16,771,726 $ 14,018,197 $ 2,899,499 $ 2,138,667
Net realized gain (loss) from
security transactions (507) 9,641 645 (189)
Net decrease in unrealized market
discount 0 0 0 (6)
--------------- --------------- ------------- -------------
Net increase in net
assets resulting from
operations 16,771,219 14,027,838 2,900,144 2,138,472
--------------- --------------- ------------- -------------
FROM DISTRIBUTIONS:
Dividends from net investment
income:
Common Shares (16,771,726) (14,018,197) (2,810,063) (1,892,371)
Series 2 Shares 0 0 (89,436) (246,296)
--------------- --------------- ------------- -------------
Net decrease from
distributions (16,771,726) (14,018,197) (2,899,499) (2,138,667)
--------------- --------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
(AT $1 PER SHARE):
Proceeds from sale of shares 1,883,249,803 1,886,500,990 314,824,220 246,396,767
Reinvested dividends 10,583,684 8,456,201 1,142,300 1,066,251
Net asset value of shares redeemed (1,913,436,052) (1,769,313,517) (307,102,780) (237,850,988)
--------------- --------------- ------------- -------------
Net increase (decrease)
in net assets from
capital share
transactions (19,602,565) 125,643,674 8,863,740 9,612,030
--------------- --------------- ------------- -------------
Net increase (decrease)
in net assets (19,603,072) 125,653,315 8,864,385 9,611,835
NET ASSETS:
Beginning of year 403,210,782 277,557,467 87,719,364 78,107,529
--------------- --------------- ------------- -------------
End of year $ 383,607,710 $ 403,210,782 $ 96,583,749 $ 87,719,364
--------------- --------------- ------------- -------------
--------------- --------------- ------------- -------------
</TABLE>
See Accompanying Notes to Financial Statements.
20
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS NEW YORK TAX EXEMPT FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON SHARES
------------------------------------------------------------
FOR THE YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net Investment Income .0326 .0246 .0175 .0224 .0329
Less Distributions:
Dividends from net investment
income (.0326) (.0246) (.0175) (.0224) (.0329)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return 3.31% 2.48% 1.77% 2.26% 3.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $ 96,584 $ 77,111 $ 65,984 $ 76,995 $ 65,438
Ratios to average daily net assets:
Operating expenses .55% .55% .54% .50% .50%
Net investment income 3.24% 2.46% 1.75% 2.23% 3.27%
Decrease reflected in above
operating expense ratios due
to waivers/reimbursements .27% .27% .19% .28% .23%
</TABLE>
(1) Series 2 Shares ceased being offered on June 9, 1995.
* Annualized
TAX STATUS OF 1996 DIVIDENDS (Unaudited)
Dividends paid by the Fund for the fiscal year will qualify as exempt interest
dividends.
22
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES 2 SHARES
----------------------------------------------------------------------------------------------
FOR THE PERIOD APRIL 30, 1990
MARCH 1, 1995 FOR THE YEAR ENDED FEBRUARY 28 OR 29, (INITIAL ISSUANCE)
THROUGH JUNE 8, ----------------------------------------------- THROUGH
1995(1) 1995 1994 1993 1992 FEBRUARY 28, 1991
------------------ -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- ----------
.0085 .0211 .0140 .0189 .0295 .0391
(.0085) (.0211) (.0140) (.0189) (.0295) (.0391)
------- -------- -------- -------- -------- ----------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- ----------
3.15% 2.13% 1.41% 1.90% 2.99% 4.78%
$ 0 $ 10,608 $ 12,123 $ 10,165 $ 9,307 $ 15,151
.90%* .90% .89% .85% .85% .65%*
3.10%* 2.11% 1.40% 1.87% 2.95% 4.63%*
.30%* .27% .19% .28% .23% .42%*
</TABLE>
See Accompanying Notes to Financial Statements.
23
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
NOTES TO FINANCIAL STATEMENTS
February 29, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Cash Reserve Fund (the 'Cash Reserve Fund') and the
Warburg Pincus New York Tax Exempt Fund (the 'New York Tax Exempt Fund') are
registered under the Investment Company Act of 1940, as amended (the '1940
Act'), as diversified and non-diversified, open-end management investment
companies, respectively.
Investment objectives for each Fund are as follows: the Cash Reserve Fund
is designed to provide investors with high current income consistent with
liquidity and stability of principal; the New York 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.
Issuers of New York tax-exempt securities (including issuers whose
obligations may be acquired by the New York Tax Exempt 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. During the
recent past, several different issuers of Municipal Securities of New York State
and its agencies and instrumentalities and of New York City have been downgraded
by Standard & Poor's Ratings Group and Moody's Investors Service, Inc. A
recurrence of the financial difficulties experienced by certain issuers of New
York tax-exempt securities could result in defaults or declines in the market
values of their existing obligations and, possibly, in the obligations of other
issuers of New York tax-exempt securities.
The net asset value of each Fund is determined as of noon and the close of
regular trading on the New York Stock Exchange on each day, except on days when
the Exchange is closed. Each Fund's investments are valued under the amortized
cost method which approximates current market value. Under this method,
investments are valued at cost when purchased and thereafter a constant
proportionate amortization of any discount or premium is recorded until maturity
of the investment.
Security transactions are accounted for on a trade date basis. Interest
income is recorded on the accrual basis. Income, expenses and
realized/unrealized gains/losses are allocated proportionately to each class of
shares based upon the relative net asset value of outstanding shares. The cost
of investments sold is determined by use of the specific identification method
for both financial reporting and income tax purposes.
Dividends from net investment income are declared daily and paid monthly.
Distributions of net capital gains, if any, are declared and paid annually,
although the Cash Reserve Fund may declare and pay short-term capital gains, if
any, periodically as the Board of Directors determines. To the extent that a net
realized capital gain can be reduced by a capital loss carryover, such gain will
not be distributed. Income and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
No provision is made for Federal taxes as it is each Fund's intention to
continue to qualify for and elect the tax treatment applicable to regulated
investment companies under the Internal Revenue Code and make the requisite
distributions to its shareholders which will be sufficient to relieve it from
Federal income and excise taxes.
24
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
Each Fund may enter into repurchase agreement transactions. Under the terms
of a typical repurchase agreement, a Fund acquires an underlying security
subject to an obligation of the seller to repurchase. The value of the
underlying security collateral will be maintained at an amount at least equal to
the total amount of the purchase obligation, including interest. The collateral
is in the Fund's possession. At February 29, 1996, no repurchase agreements were
held by either Fund.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. INVESTMENT ADVISER AND SUB-ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Warburg'), a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as each Fund's
investment adviser. For its investment advisory services, Warburg receives a fee
calculated at an annual rate of .25% of each Fund's average daily net assets.
For the year ended February 29, 1996, investment advisory fees and waivers were
as follows:
<TABLE>
<CAPTION>
GROSS NET
FUND ADVISORY FEE WAIVER ADVISORY FEE
- -------------------------------------------------- ------------------ --------- ------------------
<S> <C> <C> <C>
Cash Reserve $772,648 $(205,222) $567,426
New York Tax Exempt 224,129 (96,389) 127,740
</TABLE>
PNC Institutional Management Corporation ('PIMC'), a wholly owned
subsidiary of PNC Bank, N.A., serves as each Fund's sub-investment adviser and
administrator. For its sub-investment advisory and administrative services, PIMC
receives a fee calculated at an annual rate of .25% of each Fund's average daily
net assets. For the year ended February 29, 1996, sub-investment advisory and
administration fees and waivers were as follows:
<TABLE>
<CAPTION>
GROSS SUB-ADVISORY NET SUB-ADVISORY
AND AND
FUND ADMINISTRATION FEE WAIVER ADMINISTRATION FEE
- -------------------------------------------------- ------------------ --------- ------------------
<S> <C> <C> <C>
Cash Reserve $772,648 $(307,832) $464,816
New York Tax Exempt 224,129 (144,395) 79,734
</TABLE>
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Warburg, serves as each Fund's co-administrator. For its administrative
services, CFSI currently receives a fee calculated at an
25
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
annual rate of .10% of each Fund's average daily net assets. For the year ended
February 29, 1996, administrative services fees earned by CFSI were as follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------------------------- ---------------------
<S> <C>
Cash Reserve $ 309,059
New York Tax Exempt 89,652
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Warburg, serves as each Fund's distributor. No compensation is payable by the
Funds to CSI for distribution services.
3. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue three billion full and fractional shares
of capital stock, $.001 par value per share, of which one billion shares of New
York Tax Exempt Fund are designated as Series 2 Shares. Series 2 Shares are
identical to Common Shares in all respects except that Series 2 Shares are sold
to institutions ('Service Organizations') that perform certain distribution,
shareholder servicing, accounting and/or administrative services for their
customers who are beneficial owners of Series 2 Shares. Series 2 Shares bear the
fees paid pursuant to a distribution plan adopted by each Fund in an amount not
to exceed .75 of 1.00% (on an annualized basis) of the average daily net asset
value of the shares held by the institutions for the benefit of their customers
and enjoy certain exclusive voting rights on matters relating to those fees.
Series 2 Shares ceased being offered on June 9, 1995.
With respect to Series 2 Shares, Service Organizations earned the following
distribution fees for the period March 1, 1995 through June 8, 1995:
<TABLE>
<CAPTION>
FUND DISTRIBUTION FEE
- ------------------------------------------------------------------- ----------------
<S> <C>
New York Tax Exempt $ 10,080
</TABLE>
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
NEW YORK TAX NEW YORK TAX
CASH RESERVE FUND EXEMPT FUND EXEMPT FUND
------------------------------- --------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series 2 Shares
Common Shares Common Shares For the Period
For the Year Ended For the Year Ended March 1, 1995 For the Year
February 28 or 29, February 28 or 29, through June Ended February
1996 1995 1996 1995 8, 1995 28, 1995
-------------- -------------- ------------ ------------ -------------- ---------------
Shares sold 1,883,249,027 1,886,500,990 300,237,798 204,764,017 14,586,422 41,632,750
Shares issued to shareholders on
reinvestment of dividends 10,583,684 8,456,201 1,048,655 822,241 93,645 244,010
Shares redeemed (1,913,436,052) (1,769,313,517) (281,813,622) (194,459,365) (25,289,158) (43,391,623)
-------------- -------------- ------------ ------------ -------------- ---------------
Net increase (decrease) in shares (19,603,341) 125,643,674 19,472,831 11,126,893 (10,609,091) (1,514,863)
-------------- -------------- ------------ ------------ -------------- ---------------
-------------- -------------- ------------ ------------ -------------- ---------------
</TABLE>
26
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS CASH RESERVE AND NEW YORK TAX EXEMPT FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
February 29, 1996
- --------------------------------------------------------------------------------
4. NET ASSETS
Net Assets at February 29, 1996, consisted of the following:
<TABLE>
<CAPTION>
CASH RESERVE FUND NEW YORK TAX EXEMPT FUND
----------------- ------------------------
<S> <C> <C>
Capital contributed, net $ 383,608,146 $ 96,596,875
Accumulated net realized loss from security
transactions (436) (13,126)
----------------- ------------
Net assets $ 383,607,710 $ 96,583,749
----------------- ------------
----------------- ------------
</TABLE>
5. CAPITAL LOSS CARRYOVER
At February 29, 1996, the Cash Reserve Fund and the New York Tax Exempt
Fund have capital loss carryovers of $507 and $13,126, respectively, to offset
possible future capital gains of each Fund. These carryovers expire as follows:
<TABLE>
<CAPTION>
FUND YEAR AMOUNT
- -------------------------------------------- ---- ------
<S> <C> <C>
Cash Reserve 2004 $ 507
New York Tax Exempt 1997 4,822
1998 4,026
2000 4,089
2002 189
</TABLE>
27
- --------------------------------------------------------------------------------
<PAGE>
