<PAGE> 1
PROSPECTUS
Common Class
February 22, 1999
WARBURG PINCUS
INTERMEDIATE MATURITY GOVERNMENT FUND
-
WARBURG PINCUS
NEW YORK INTERMEDIATE MUNICIPAL FUND
-
WARBURG PINCUS
FIXED INCOME FUND
-
WARBURG PINCUS
GLOBAL FIXED INCOME FUND
As with all mutual funds, the Securities and Exchange
Commission has not approved these funds, nor has it passed
upon the adequacy or accuracy of this Prospectus. It is a
criminal offense to state otherwise.
[Warburg Pincus Funds Logo]
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CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................... .................... 4
Goals and Principal Strategies.................. 4
Investor Profile................................ 5
A Word About Risk............................... 6
PERFORMANCE SUMMARY............... ................ 8
Year-by-Year Total Returns...................... 8
Average Annual Total Returns.................... 9
INVESTOR EXPENSES................ ................. 12
Fees and Fund Expenses.......................... 12
Example......................................... 13
THE FUNDS IN DETAIL............... ................ 14
The Management Firm............................. 14
Multi-Class Structure........................... 14
Fund Information Key............................ 15
INTERMEDIATE MATURITY GOVERNMENT FUND...... ....... 16
NEW YORK INTERMEDIATE MUNICIPAL FUND....... ....... 18
FIXED INCOME FUND................ ................. 20
GLOBAL FIXED INCOME FUND............. ............. 22
MORE ABOUT RISK................. .................. 24
Introduction.................................... 24
Types of Investment Risk........................ 24
Certain Investment Practices.................... 27
MEET THE MANAGERS................ ................. 30
ABOUT YOUR ACCOUNT................ ................ 32
Share Valuation................................. 32
Buying and Selling Shares....................... 32
Account Statements.............................. 33
Distributions................................... 33
Taxes........................................... 33
OTHER INFORMATION................ ................. 35
About the Distributor........................... 35
FOR MORE INFORMATION.................................back cover
</TABLE>
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KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
INTERMEDIATE MATURITY As high a level of - Invests in securities of the
GOVERNMENT FUND current income as is U.S. government and its agencies
Risk factors: consistent with the and instrumentalities
Market risk preservation of capital - Normally maintains a weighted-
Interest-rate risk average portfolio maturity of
between three and 10 years
NEW YORK INTERMEDIATE To maximize current - Invests in New York municipal
MUNICIPAL FUND interest income exempt securities
Risk factors: from federal income tax - Normally maintains a weighted-
Market risk and New York state and average portfolio maturity of
Interest-rate risk New York City personal between three and 10 years
Credit risk income taxes, to the - Emphasizes investment-grade
Non-diversified extent consistent with securities
status prudent investment and
New York municipal the preservation of
securities capital
FIXED INCOME FUND To generate high current - Invests in fixed-income
Risk factors: income consistent with securities denominated primarily
Market risk reasonable risk and, in U.S. dollars
Interest-rate risk secondarily, capital - Normally maintains a weighted-
Credit risk appreciation average portfolio maturity of 10
years or less
- Favors investment-grade
securities, but may diversify
credit quality in pursuit of its
goal
GLOBAL FIXED INCOME To maximize total - Invests in U.S. and foreign
FUND investment return fixed- income securities
Risk factors: consistent with prudent denominated in various
Market risk investment management, currencies
Interest-rate risk consisting of a - Favors investment-grade
Credit risk combination of interest securities, but may diversify
Foreign securities income, currency gains credit quality in pursuit of its
Non-diversified and capital appreciation goal
status - Investment decisions are based
on fundamental market factors,
currency trends and credit
quality.
</TABLE>
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INVESTOR PROFILE
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- are looking for higher potential returns than money-market funds and are
willing to accept moderate risk and volatility
- want to diversify their portfolios with fixed-income funds
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
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A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to your fund. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
All funds
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
All funds
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
CREDIT RISK
New York Intermediate Municipal Fund, Fixed Income Fund, Global Fixed
Income Fund
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
NON-DIVERSIFIED STATUS
New York Intermediate Municipal Fund, Global Fixed Income Fund
The funds are considered non-diversified investment companies under the
Investment Company Act of 1940 and are permitted to invest a greater proportion
of their assets in the securities of a smaller number of issuers. As a result,
the funds may be subject to greater volatility with respect to their respective
portfolio securities than a fund that is more broadly diversified.
NEW YORK MUNICIPAL SECURITIES
New York Intermediate Municipal Fund
New York state and New York City face long-term economic problems that could
seriously affect New York municipal issuers. The default or credit-rating
downgrade of one of these issuers could affect the market values and
6
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marketability of all New York municipal securities and hurt the fund's
performance.
FOREIGN SECURITIES
Global Fixed Income Fund
A fund that invests outside the U.S. carries additional risks that include:
- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-
currency-denominated investments and may widen any losses. The fund may, but
is not required to, seek to reduce currency risk by hedging part or all of its
exposure to various foreign currencies.
- INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
- POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security prices
and impair a fund's ability to bring its capital or income back to the U.S.
Other political risks include economic policy changes, social and political
instability, military action and war.
7
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PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these funds. The bar chart shows you how each fund's
performance has varied from year to year for up to 10 years. The table compares
each fund's performance over time to that of a broadly based securities market
index and other indexes, if applicable. As with all mutual funds, past
performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
.
.
.
.
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTERMEDIATE MATURITY GOVERNMENT FUND 11.50% 8.92% 15.02% 6.66% 7.87% -1.78% 16.26% 2.27% 7.55% 8.15%
Best quarters: 5.61% (Q2 89 & Q4 91)
Worst quarter: -2.20% (Q1 92)
Inception date: 8/22/88
- ---------------------------------------------------------------------------------------------------------------------------------
NEW YORK INTERMEDIATE MUNICIPAL FUND 6.81% 5.97% 9.50% 7.52% 9.89% -0.55% 9.64% 4.32% 5.88% 5.48%
Best quarter: 3.70% (Q2 89)
Worst quarter: -2.87% (Q1 94)
Inception date: 4/1/87
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUND 9.20% 2.95% 16.85% 6.70% 11.32% -0.67% 15.13% 6.15% 8.80% 6.51%
Best quarter: 5.81% (Q2 95)
Worst quarter: -1.32% (Q2 94)
Inception date: 8/17/87
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND 14.73% 2.10% 19.62% -5.48% 16.01% 9.97% 2.17% 8.42%
Best quarter: 10.19% (Q3 91)
Worst quarter: -4.06% (Q1 92)
Inception date: 11/1/90
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
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AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
INTERMEDIATE MATURITY GOVERNMENT
FUND 8.15% 6.32% 8.12% 8.16% 8/22/88
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT BOND INDEX(1) 8.49% 6.45% 8.33% 8.30%(2)
NEW YORK INTERMEDIATE
MUNICIPAL FUND 5.48% 4.90% 6.41% 5.96% 4/1/87
LEHMAN BROTHERS FIVE-YEAR
MUNICIPAL BOND INDEX(3) 5.84% 5.30% 7.07% N/A
FIXED INCOME FUND 6.51% 7.06% 8.17% 8.06% 8/17/87
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT/CORPORATE
BOND INDEX(4) 8.44% 6.60% 8.51% 8.31%(5)
GLOBAL FIXED INCOME FUND 8.42% 5.96% N/A 8.09% 11/1/90
SALOMON BROTHERS WORLD
GOVERNMENT BOND INDEX
(CURRENCY-HEDGED)(6) 11.02% 8.68% N/A 9.80%(7)
LEHMAN BROTHERS AGGREGATE BOND
INDEX(8) 8.69% 7.28% N/A 8.96%(7)
COMPOSITE BENCHMARK(9) 8.84% 8.32% N/A 10.20%(7)
</TABLE>
(1) The Lehman Brothers Intermediate Government Bond Index is an unmanaged
index (with no defined investment objective) of intermediate-term
government bonds, and is calculated by Lehman Brothers Inc.
(2) Performance since August 31, 1988.
(3) The Lehman Brothers Five-Year Municipal Bond Index is an unmanaged index
(with no defined investment objective) of municipal bonds, and is compiled
by Lehman Brothers Inc.
(4) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index (with no defined investment objective) of intermediate-term
government and corporate bonds, and is calculated by Lehman Brothers Inc.
(5) Performance since July 31, 1987.
(6) The Salomon Brothers World Government Bond Index (Currency-Hedged) is a
market-capitalization-weighted index designed to track major government
debt markets and is currency-hedged into U.S. dollars.
(7) Performance since October 31, 1990.
(8) The Lehman Brothers Aggregate Bond Index is composed of the Lehman Brothers
Government/Corporate Bond Index and the Lehman Brothers Mortgage-Backed
Securities Index. The Aggregate Bond Index includes U.S. Treasury and
agency issues, corporate bond issues and mortgage-backed securities rated
investment-grade or higher by Moody's Investors Service, Standard & Poor's
Corporation or Fitch Investors' Service.
(9) The Composite Benchmark measures the weighted performance of three
component indexes. The weights of the component indexes -- 50% Lehman
Brothers Aggregate Bond Index, 35% Salomon Brothers World Government Bond
Index Excluding the U.S. (Currency-Hedged), and 15% Merrill Lynch High
Yield Master II Index -- correspond to the investment strategy of the
fund's managers. The Merrill Lynch High Yield Master II Index provides a
broad-based measure of the performance of the non-investment-grade U.S.
domestic bond market. 9
<PAGE> 9
UNDERSTANDING PERFORMANCE
*TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and capital
gains (if any) were reinvested in additional shares. The change in value
can be stated either as a cumulative return or as an average annual rate
of return.
*A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
*An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
*Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
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11
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INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INTERMEDIATE NEW YORK GLOBAL
MATURITY INTERMEDIATE FIXED FIXED
GOVERNMENT MUNICIPAL INCOME INCOME
FUND FUND FUND FUND
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE NONE NONE NONE
Deferred sales charge "load" NONE NONE NONE NONE
Sales charge "load" on reinvested
distributions NONE NONE NONE NONE
Redemption fees NONE NONE NONE NONE
Exchange fees NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(deducted from fund assets)
Management fee .50% .40% .50% 1.00%
Distribution and service (12b-1) fee NONE NONE NONE NONE
Other expenses .44% .27% .29% .41%
TOTAL ANNUAL FUND OPERATING EXPENSES* .94% .67% .79% 1.41%
</TABLE>
* Actual fees and expenses for the fiscal year ended October 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses for
some funds during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
INTERMEDIATE NEW YORK GLOBAL
MATURITY INTERMEDIATE FIXED FIXED
EXPENSES AFTER WAIVERS AND GOVERNMENT MUNICIPAL INCOME INCOME
REIMBURSEMENTS FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management fee .20% .33% .46% .55%
Distribution and service (12b-1)
fee NONE NONE NONE NONE
Other expenses .40% .27% .29% .40%
----- ----- ----- -----
TOTAL ANNUAL FUND OPERATING
EXPENSES .60% .60% .75% .95%
</TABLE>
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EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table on the opposite page (before fee waivers and
expense reimbursements or credits), and you close your account at the end of
each of the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
INTERMEDIATE MATURITY GOVERNMENT FUND $96 $300 $520 $1,155
NEW YORK INTERMEDIATE MUNICIPAL FUND $68 $214 $373 $835
FIXED INCOME FUND $81 $252 $439 $978
GLOBAL FIXED INCOME FUND $144 $446 $771 $1,691
</TABLE>
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THE FUNDS IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
- Investment adviser for the funds
- Responsible for managing each fund's assets according to its goal and
strategies
- A professional investment-advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
- Currently manages approximately $22 billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this Prospectus.
MULTI-CLASS STRUCTURE
This Prospectus offers Common Class shares of the funds. Common Class shares
are no-load.
Three of the funds -- the Intermediate Maturity Government, Fixed Income and
Global Fixed Income funds -- offer Advisor Class shares described in a separate
prospectus. Advisor Class shares are available through financial-services firms.
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOAL AND STRATEGIES
The fund's particular investment goal and the strategies it intends to use in
pursuing that goal. Percentages of fund assets are based on total assets unless
indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the fund's
day-to-day management.
INVESTOR EXPENSES
Actual fund expenses for the 1998 fiscal year. Future expenses may be higher
or lower.
- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the fund. Expressed as a percentage of average net
assets after waivers.
- OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal registration fees and miscellaneous
expenses. Expressed as a percentage of average net assets after waivers,
credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
- PORTFOLIO TURNOVER An indication of trading frequency. The funds may sell
securities without regard to the length of time they have been held. A high
turnover rate may increase the fund's transaction costs and negatively affect
its performance. Portfolio turnover may also result in capital-gain
distributions that could raise your income-tax liability.
The Annual Report includes the auditor's report, along with the fund's
financial statements. It is available free upon request.
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INTERMEDIATE MATURITY
GOVERNMENT FUND
GOAL AND STRATEGIES
The Intermediate Maturity Government Fund seeks as high a level of current
income as is consistent with the preservation of capital. To pursue this goal,
it invests in securities of the U.S. government and its agencies and
instrumentalities.
The fund's weighted-average maturity will typically be between three and
10 years.
PORTFOLIO INVESTMENTS
Under normal market conditions, the fund will invest at least 65% of assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These may include:
- U.S. Treasury obligations
- mortgage-backed securities such as Ginnie Maes and Fannie Maes
- government-agency obligations such as those of the Small Business
Administration
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- interest-rate risk
As with most income funds, share price, yield and total return will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including U.S. government and
mortgage-backed securities). To the extent that the fund invests in mortgage-
backed securities, it may also be subject to extension and prepayment risks.
These risks are defined in "More About Risk."
Other factors may affect the market price and yield of the fund's securities,
including investor demand and domestic and world-wide economic conditions.
The credit risk of the fund's securities will depend primarily on whether or
not the securities are guaranteed by the U.S. government. To the extent the fund
invests in securities guaranteed by the U.S. government, credit risk for this
fund is expected to be low. However, the U.S. government does not guarantee the
market value or the current yield of government securities, nor does any
government guarantee extend to the fund itself.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the fund's investment portfolio. You can
find out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .20%
All other expenses .40%
-----------
Total expenses .60%
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FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $10.05 $10.07 $10.22 $9.66 $11.03
Investment activities:
Net investment income 0.56 0.58 0.58 0.59 0.54
Net gains or losses on investments (both
realized and unrealized) 0.32 0.10 (0.06) 0.56 (0.73)
Total from investment activities 0.88 0.68 0.52 1.15 (0.19)
Distributions:
From net investment income (0.56) (0.58) (0.58) (0.59) (0.55)
From realized capital gains 0.00 (0.08) (0.09) 0.00 (0.63)
In excess realized gains 0.00 (0.04) 0.00 0.00 0.00
Total distributions (0.56) (0.70) (0.67) (0.59) (1.18)
Net asset value, end of period $10.37 $10.05 $10.07 $10.22 $9.66
Total return 9.35% 6.99% 5.16% 12.32% (1.78%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $78,200 $48,421 $47,690 $55,898 $46,734
Ratio of expenses to average net assets 0.60%(*) 0.61%(*) 0.61%(*) 0.60% 0.60%
Ratio of net income to average net assets 5.54% 5.81% 5.68% 6.00% 5.43%
Decrease reflected in above expense ratios
due to waivers/reimbursements 0.34% 0.33% 0.46% 0.49% 0.42%
Portfolio turnover rate 133.98% 104.34% 163.59% 105.79% 115.37%
</TABLE>
* Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' net expense ratio by .00%, .01% and .01% for the years ended
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were .60%, .60% and .60% for
the years ended October 31, 1998, 1997 and 1996, respectively.
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NEW YORK INTERMEDIATE
MUNICIPAL FUND
GOAL AND STRATEGIES
The New York Intermediate Municipal Fund seeks to maximize current interest
income exempt from federal income tax and New York state and New York City
personal income taxes, to the extent consistent with prudent investment and the
preservation of capital. To pursue this goal, the fund invests in New York
municipal securities.
New York municipal securities are debt obligations (other than short-term
securities) whose interest is exempt from federal and New York state and City
income taxes.
Under normal market conditions, the fund will:
- invest at least 65% of assets in investment-grade New York municipal
securities
- maintain a weighted-average maturity of between three and 10 years
PORTFOLIO INVESTMENTS
This fund invests at least 80% of assets in municipal securities. The fund
may invest up to 20% of assets in other types of debt securities. To a limited
extent, it may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- New York municipal securities
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities. There is also the risk
that an issuer of a debt security will fail to make timely payments of principal
or interest to the fund.
The fund's ability to achieve its goal depends upon the ability of the
issuers of New York municipal securities to repay their debt. New York state and
New York City face long-term economic problems that could seriously affect New
York municipal issuers. The default or credit-rating downgrade of one of these
issuers could affect the market values and marketability of all New York
municipal securities and hurt the fund's performance. As a result, this fund may
be more volatile than a more geographically diversified municipal fund.
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because the
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
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PORTFOLIO MANAGEMENT
Sharon B. Parente and Patrick A. Bittner manage the fund's investment
portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES
Management fee .33%
All other expenses .27%
-----------
Total expenses .60%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of
period $10.35 $10.34 $10.42 $10.07 $10.65
Investment activities:
Net investment income 0.44 0.45 0.45 0.47 0.46
Net gains or losses on investments
(both realized and unrealized) 0.19 0.13 0.04 0.36 (0.45)
Total from investment activities 0.63 0.58 0.49 0.83 0.01
Distributions:
From net investment income (0.44) (0.45) (0.45) (0.47) (0.46)
From realized capital gains 0.00 (0.12) (0.12) (0.01) (0.13)
Total distributions (0.44) (0.57) (0.57) (0.48) (0.59)
Net asset value, end of period $10.54 $10.35 $10.34 $10.42 $10.07
Total return 6.24% 5.83% 4.87% 8.31% 0.04%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000s omitted) $106,922 $88,944 $77,559 $73,361 $75,716
Ratio of expenses to average net
assets 0.60%* 0.60%* 0.61%* 0.60% 0.60%
Ratio of net income to average
net assets 4.24% 4.40% 4.41% 4.50% 4.41%
Decreased reflected in above
expense ratios due to
waivers/reimbursements 0.07% 0.08% 0.17% 0.26% 0.20%
Portfolio turnover rate 37.25% 69.84% 69.23% 105.17% 167.09%
</TABLE>
* Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' net expense ratio by .00%, .00% and .01% for the years ended
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were .60%, .60% and .60% for
the years ended October 31, 1998, 1997 and 1996, respectively.
19
<PAGE> 19
FIXED INCOME FUND
GOAL AND STRATEGIES
The Fixed Income Fund seeks to generate high current income consistent with
reasonable risk and, secondarily, capital appreciation. To pursue these goals,
it invests in fixed-income securities.
Under normal market conditions:
- at least 65% of the fund's fixed-income securities will be investment grade
- the fund will maintain a weighted-average maturity of 10 years or less
PORTFOLIO INVESTMENTS
Under normal market conditions, this fund invests at least 65% of assets in
fixed-income securities such as:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The fund may invest:
- without limit in U.S. dollar-denominated, investment-grade foreign securities
- up to 35% of assets in non-dollar-denominated foreign securities
- up to 35% of assets in fixed-income securities rated below investment grade
(junk bonds)
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
To the extent that it invests in certain securities, the fund may be affected
by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
- start-up and other small companies: information and liquidity risks
These risks are defined in "More About Risk." That section also details
certain other investment practices the fund may use. Please read "More About
Risk" carefully before you invest.
20
<PAGE> 20
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the fund's investment portfolio. You can
find out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .46%
All other expenses .29%
-----------
Total expenses .75%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $10.43 $10.10 $10.07 $9.61 $10.42
Investment activities:
Net investment income 0.59 0.62 0.63 0.70 0.63
Net gains or losses on investments and
foreign currency-related items (both
realized and unrealized) 0.07 0.33 0.03 0.46 (0.70)
Total from investment activities 0.66 0.95 0.66 1.16 (0.07)
Distributions:
From net investment income (0.59) (0.62) (0.63) (0.70) (0.65)
From realized capital gains (0.09) 0.00 0.00 0.00 (0.09)
Total distributions (0.68) (0.62) (0.63) (0.70) (0.74)
Net asset value, end of period $10.41 $10.43 $10.10 $10.07 $9.61
Total return 6.48% 9.78% 6.80% 12.59% (.60%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s
omitted) $423,536 $265,453 $151,184 $116,983 $102,246
Ratio of expenses to average net
assets 0.75%* 0.75%* 0.76%* 0.75% 0.75%
Ratio of net income to average net
assets 5.64% 6.05% 6.30% 7.25% 6.53%
Decrease reflected in above operating
expense ratios due to
waivers/reimbursements 0.04% 0.08% 0.15% 0.18% 0.18%
Portfolio turnover rate 124.04% 129.06% 194.23% 182.93% 179.44%
</TABLE>
* Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' net expense ratio by .00%, .00% and .01% for the years ended
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were .75%, .75% and .75% for
the years ended October 31, 1998, 1997 and 1996, respectively.
21
<PAGE> 21
GLOBAL FIXED INCOME FUND
GOAL AND STRATEGIES
The Global Fixed Income Fund seeks to maximize total investment return
consistent with prudent investment management, consisting of a combination of
interest income, currency gains and capital appreciation. To pursue this goal,
the fund invests in fixed-income securities of U.S. and foreign issuers.
- foreign governments and companies, including those in emerging markets
- multinational organizations such as the World Bank
- the U.S. government, its agencies and instrumentalities
Under normal market conditions, the fund invests at least 65% of assets in
fixed-income securities of issuers located in at least three countries,
including the U.S.
The portfolio managers base their investment decisions on fundamental market
factors, currency trends and credit quality. The fund generally invests in
countries where the combination of fixed-income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
managers believe the currency risk can be reduced through hedging.
PORTFOLIO INVESTMENTS
This fund may invest in all types of fixed-income securities, including:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The fund may purchase securities denominated in foreign currencies or in U.S.
dollars.
The fund may invest up to:
- 40% of assets in securities of issuers located in any single foreign country
- 35% of net assets in fixed-income securities rated below investment grade
(junk bonds)
- 25% of assets in the securities of any one foreign government, its agencies,
instrumentalities and political subdivisions
- 20% of assets in equity securities, including common stocks, warrants and
rights
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- foreign securities
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
either principal or interest to the fund.
International investing, particularly in emerging markets, carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because the
22
<PAGE> 22
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
To the extent that the fund invests in junk bonds and securities of start-up
and other small companies, it takes on further risks that could hurt its
performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
PORTFOLIO MANAGEMENT
Charles C. Van Vleet manages the fund's investment portfolio. You can find
out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .55%
All other expenses .40%
-----------
Total expenses .95%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96 10/95 10/94
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.91 $11.17 $11.04 $10.45 $11.38
- --------------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.58 0.54 0.62 0.99 0.34
Net gains or losses on investments
and foreign currency-related items
(both realized and unrealized) (0.16) 0.08 0.57 0.09 (0.64)
- --------------------------------------------------------------------------------------------
Total from investment activities 0.42 0.62 1.19 1.08 (0.30)
- --------------------------------------------------------------------------------------------
Distributions:
From net investment income (0.71) (0.34) (1.06) (0.49) (0.45)
From realized capital gains 0.00 (0.54) 0.00 0.00 (0.14)
Return of capital 0.00 0.00 0.00 0.00 (0.04)
- --------------------------------------------------------------------------------------------
Total distributions (0.71) (0.88) (1.06) (0.49) (0.63)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $10.62 $10.91 $11.17 $11.04 $10.45
- --------------------------------------------------------------------------------------------
Total return 4.10% 5.76% 11.35% 10.65% (2.79%)
- --------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000s
omitted) $154,131 $194,731 $131,072 $63,641 $90,394
Ratio of expenses to average net
assets 0.95%* 0.96%* 0.95%* 0.95% 0.95%
Ratio of net income to average net
assets 5.21% 5.40% 6.78% 8.18% 6.96%
Decrease reflected in above expense
ratios due to
waivers/reimbursements 0.46% 0.39% 0.56% 0.63% 0.65%
Portfolio turnover rate 233.73% 202.92% 123.90% 128.70% 178.11%
- --------------------------------------------------------------------------------------------
</TABLE>
* Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
Common Shares' net expense ratio by .00%, .01% and .00% for the years ended
October 31, 1998, 1997 and 1996, respectively. The Common Shares' operating
expense ratio after reflecting these arrangements were .95%, .95% and .95% for
the years ended October 31, 1998, 1997 and 1996, respectively.
23
<PAGE> 23
MORE ABOUT RISK
INTRODUCTION
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this prospectus.
ACCESS RISK Some countries may restrict a fund's access to investments or
offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to a fund.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses.
EURO CONVERSION The introduction of a new single European currency, the euro,
may result in uncertainties for securities of European companies, European
markets and the operation of the funds. The euro was introduced on January 1,
1999, by 11 European Union member countries who are participating in European
Monetary Union (EMU).
The introduction of the euro results in the redenomination of certain
European debt and equity securities over a period of time, which may bring
differences in various accounting, tax and/or legal treatments that would not
otherwise occur. Any market disruptions relating to the introduction of the euro
could adversely affect the value of European securities and currencies held by
the funds. Other risks relate to the ability of financial institutions' systems
to process euro transactions. Additional economic and operational issues are
raised by the fact that certain European Union member countries, including the
United Kingdom, did not participate in EMU on January 1, 1999, and therefore did
not implement the euro on that date.
At this early stage no one knows what the degree of impact of the
introduction of the euro will be. To the extent that the market impact or effect
on a fund holding is negative or that fund service provider systems cannot
process the euro
24
<PAGE> 24
conversion, the fund's performance could be hurt.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
*HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
*SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the fund is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell
at the time and the price that the fund would like. A fund may have to lower the
price, sell other securities instead or forego an investment opportunity. Any of
these could have a negative effect on fund management or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
25
<PAGE> 25
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair a
fund's ability to bring its capital or income back to the U.S. Other political
risks include economic policy changes, social and political instability,
military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, a fund would
generally have to reinvest the proceeds at lower rates.
REGULATORY RISK Governments, agencies or other regulatory bodies may adopt or
change laws or regulations that could adversely affect the issuer, the market
value of the security, or a fund's performance.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK The funds' investment adviser is working to address
the Year 2000 issue relating to the change from "99" to "00" on January 1, 2000,
and has obtained assurances from service providers that they are taking similar
steps. The adviser is working on the Year 2000 issue pursuant to a plan designed
to address potential problems, and progress is proceeding according to the plan.
The adviser anticipates the completion of testing of internal systems in the
first part of 1999, and is developing contingency plans intended to address any
unexpected service problems.
The fund's operations are dependent upon interactions among many participants
in the financial-services and other related industries. There is no assurance
that preparations by the adviser and other industry participants will be
sufficient, and any noncompliant computer systems could hurt key fund
operations, such as shareholder servicing, pricing and trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world -- including companies
or governmental entities in which the funds invest and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a fund holding or on markets or
economies is negative, it could seriously affect a fund's performance.
26
<PAGE> 26
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[X] Permitted without limitation; does not
indicate actual use
20% Italic type (e.g., 20%) represents an
investment limitation as a percentage of
NET fund assets; does not indicate actual
use
20% Roman type (e.g., 20%) represents an
investment limitation as a percentage of
TOTAL fund assets; does not indicate
actual use
[ ] Permitted, but not expected to be used to
a significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE NEW YORK FIXED
MATURITY INTERMEDIATE INCOME GLOBAL FIXED
GOV'T FUND MUNICIPAL FUND FUND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30% 30% 30%
- --------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGING Instruments, such as options, futures,
forwards or swaps, intended to manage fund exposure to
currency risk. Options, futures or forwards involve the
right or obligation to buy or sell a given amount of foreign
currency at a specified price and future date. Swaps involve
the right or obligation to receive or make payments based on
two different currency rates. Correlation, credit, currency,
hedged exposure, liquidity, political, valuation risks.(1) -- -- [X] [X]
- --------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject a
fund to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose a fund to risks beyond those generally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. -- -- [ ] [X]
- --------------------------------------------------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable a fund to hedge against or speculate on future
changes in currency values, interest rates, securities or
stock indexes. Futures obligate the fund (or give it the
right, in the case of options) to receive or make payment at
a specific future time based on those future changes.(1)
Correlation, currency, hedged exposure, interest-rate,
market, speculative exposure risks.(2) [ ] [ ] [ ] [ ]
- --------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, euro conversion,
information, liquidity, market, political, valuation risks. -- -- [X] [X]
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 27
<TABLE>
<CAPTION>
INTERMEDIATE NEW YORK FIXED
MATURITY INTERMEDIATE INCOME GLOBAL FIXED
GOV'T FUND MUNICIPAL FUND FUND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Debt securities
backed by pools of mortgages, including passthrough
certificates and other senior classes of collateralized
mortgage obligations (CMOs), or other receivables. Credit,
extension, interest-rate, liquidity, prepayment risks. [X] [X] [X] [X]
- --------------------------------------------------------------------------------------------------------------------
MUNICIPAL SECURITIES Debt obligations issued by or on behalf
of states, territories and possessions of the U.S. and the
District of Columbia and their political subdivisions,
agencies and instrumentalities. Municipal securities may be
affected by uncertainties regarding their tax status,
legislative changes or rights of municipal-securities
holders. Credit, interest-rate, market, regulatory risks. -- [X] [X] [X]
- --------------------------------------------------------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated
below the fourth-highest grade (BBB/Baa) by Standard &
Poor's or Moody's rating service, and unrated securities of
comparable quality. Commonly referred to as junk bonds.
Credit, information, interest-rate, liquidity, market,
valuation risks. -- -- 35% 35%
- --------------------------------------------------------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security, currency or index of
securities at a fixed price within a certain time period. A
fund may purchase or sell (write) both put and call options
for hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure
risks. [ ] [ ] 25% 25%
- --------------------------------------------------------------------------------------------------------------------
REAL-ESTATE INVESTMENT TRUSTS (REITS) Pooled investment
vehicles that invest primarily in income-producing real
estate or real-estate-related loans or interests. Credit,
interest-rate, market risks. -- -- [ ] [ ]
- --------------------------------------------------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15% 15% 15% 15%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 28
<TABLE>
<CAPTION>
INTERMEDIATE NEW YORK FIXED
MATURITY INTERMEDIATE INCOME GLOBAL FIXED
GOV'T FUND MUNICIPAL FUND FUND INCOME FUND
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES LENDING Lending portfolio securities to financial
institutions; a fund receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3% 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------------------------------------------
START-UP AND OTHER SMALL COMPANIES Companies with small
relative market capitalizations, including those with
continuous operations of less than three years. Information,
liquidity, market, valuation risks. [X] [X] [X] [X]
- --------------------------------------------------------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and
other instruments that allow a fund to gain access to the
performance of a benchmark asset (such as an index or
selected stocks) that may be more attractive or accessible
than the fund's direct investment. Credit, currency,
information, interest-rate, liquidity, market, political,
speculative exposure, valuation risks. [ ] [ ] [ ] [ ]
- --------------------------------------------------------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's
assets in investments such as money-market obligations and
investment-grade debt securities for defensive purposes.
Although intended to avoid losses in adverse market,
economic, political or other conditions, defensive tactics
might be inconsistent with a fund's principal investment
strategies and might prevent a fund from achieving its goal. [ ] [ ] [ ] [ ]
- --------------------------------------------------------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. -- -- 10% 10%
- --------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. [X] [X] 20% 20%
- --------------------------------------------------------------------------------------------------------------------
ZERO-COUPON BONDS Debt securities that pay no cash income to
holders until maturity and are issued at a discount from
maturity value. At maturity, the entire return comes from
the difference between purchase price and maturity value.
Interest-rate, market risks. [X] [X] [X] [X]
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The funds are not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) Each fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
29
<PAGE> 29
MEET THE MANAGERS
[Parente Photo]
SHARON B. PARENTE
Managing Director
- Co-Portfolio Manager, New York Intermediate Municipal Fund since 1992
- With Warburg Pincus since 1992
[VAN DAALEN PHOTO]
M. ANTHONY E. VAN DAALEN, CFA
Senior Vice President
- Portfolio Manager, Intermediate Maturity Government Fund since 1992
- Portfolio Manager, Fixed Income Fund since 1992
- With Warburg Pincus since 1992
[VAN VLEET PHOTO]
CHARLES C. VAN VLEET
Vice President
- Portfolio Manager, Global Fixed Income Fund since May 1998
- Senior vice president and senior global strategist with Putnam Investment
Management, 1994 to 1998
- Previously vice president and senior portfolio manager at Alliance Capital in
New York and Alliance Limited in London, 1989 to 1994
[BITTNER PHOTO]
PATRICK A. BITTNER, CFA
Assistant Vice President
- Co-Portfolio Manager, New York Intermediate Municipal Fund since 1998
- With Warburg Pincus since 1994
30
Job titles indicate position with the investment adviser.
<PAGE> 30
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31
<PAGE> 31
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the Common Class's total assets, less its
liabilities, by the number of Common Class shares outstanding.
Each fund values its securities based on market quotations when it calculates
its NAV. If market quotations are not readily available, securities and other
assets are valued by another method that the Board of Directors/Trustees
believes accurately reflects fair value. Debt obligations that will mature in 60
days or less are valued on the basis of amortized cost, unless the Board of
Directors/Trustees determines that using this method would not reflect an
investment's value.
Some fund securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the funds do not compute their prices. This could
cause the value of a fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
BUYING AND SELLING SHARES
The accompanying Shareholder Guide explains how to invest directly with the
funds. You will find information about purchases, redemptions, exchanges and
services.
Each fund is open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. ET), your transaction will be priced at that day's NAV. If
we receive it after that time, it will be priced at the next business day's NAV.
FINANCIAL-SERVICES FIRMS
You can also buy and sell fund shares through a variety of financial-services
firms such as banks, brokers and financial advisors. The funds have authorized
these firms (and other intermediaries that the firms may designate) to accept
orders. When an authorized firm or its designee has received your order, it is
considered received by the fund and will be priced at the next-computed NAV.
Financial-services firms may charge transaction fees or other fees that you
could avoid by investing directly with the fund. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain features of the fund, such as the minimum
initial or subsequent investment amounts, may be modified.
Some of the firms through which the funds are available include:
- Charles Schwab & Co., Inc. Mutual Fund OneSource(R) service
- Fidelity Brokerage Services, Inc. FundsNetwork(TM) Program
- Waterhouse Securities, Inc.
32
<PAGE> 32
ACCOUNT STATEMENTS
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports.
DISTRIBUTIONS
As a fund investor, you are entitled to your share of the fund's net income
and gains on its investments. The fund passes these earnings along to its
shareholders as distributions.
Each fund earns interest from its investments. These are passed along as
dividend distributions. A fund realizes capital gains whenever it sells
securities for a higher price than it paid for them. These are passed along as
capital-gain distributions.
The Intermediate Maturity Government, New York Intermediate Municipal, and
Fixed Income funds declare dividend distributions daily and pay them monthly.
The Global Fixed Income Fund declares dividend distributions quarterly. The
funds typically distribute capital gains annually, usually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
TAXES
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable. However, any interest that the New York
Intermediate Municipal Fund receives that is federally tax-free remains tax-free
when it is distributed to you. Gain on the sale of tax-free securities results
in taxable distributions.
Distributions from a fund's long-term capital gains are taxed as capital
gains; distributions from short-term capital gains and other sources are
generally taxed as ordinary income. The funds will mostly make dividend
distributions.
33
<PAGE> 33
If you buy shares shortly before or on the "record date"--the date that
establishes you as the person to receive the upcoming distribution--you may
receive a portion of the money you just invested in the form of a taxable
distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category.
Intermediate Maturity Government Fund--Special Tax Matters
Depending on provisions in your state's tax law, the portion of a fund's
income derived from U.S. government and agency obligations may be exempt from
state and local taxes.
New York Intermediate Municipal Fund--Special Tax Matters
The New York Intermediate Municipal Fund intends to pay federally tax-exempt
distributions derived from qualifying municipal securities. To the extent that
the fund's dividend distributions are derived from state tax-free investments,
they will be free from New York state and City personal income taxes. Corporate
taxpayers should note that the fund's distributions are not exempt from New York
state and City franchise or corporate income taxes.
Some income from the fund that is exempt from federal tax may be subject to
state and local income taxes. In addition, the fund may invest a portion of its
assets in securities that generate income that is not exempt from federal or
state income tax.
34
<PAGE> 34
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
Counsellors Securities Inc., a wholly owned subsidiary of Warburg Pincus, is
responsible for:
- making the funds available to you
- account servicing and maintenance
- other administrative services related to sale of the Common Class
35
<PAGE> 35
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36
<PAGE> 36
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37
<PAGE> 37
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38
<PAGE> 38
FOR MORE INFORMATION
More information about these funds is available free upon request, including
the following:
SHAREHOLDER GUIDE
Explains how to buy and sell shares. The Shareholder Guide is incorporated by
reference into (is legally part of) this Prospectus.
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the fund's manager discussing
market conditions and investment strategies that significantly affected fund
performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the funds, is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
Please contact Warburg Pincus Funds to obtain, without charge, the SAI and
Annual and Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-WARBURG
(800-927-2874)
BY MAIL:
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBERS:
Warburg Pincus Intermediate
Maturity Government Fund 811-05600
Warburg Pincus New York
Intermediate Municipal Fund 811-04964
Warburg Pincus Fixed
Income Fund 811-05039
Warburg Pincus Global Fixed
Income Fund 811-07715
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) - www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPBDF-1-0299
<PAGE> 39
PROSPECTUS
Advisor Class
February 22, 1999
WARBURG PINCUS
INTERMEDIATE MATURITY GOVERNMENT FUND
--
WARBURG PINCUS
FIXED INCOME FUND
--
WARBURG PINCUS
GLOBAL FIXED INCOME FUND
As with all mutual funds, the Securities and Exchange
Commission has not approved these funds, nor has it passed
upon the adequacy or accuracy of this Prospectus. It is a
criminal offense to state otherwise.
[Warburg Pincus Funds Logo]
<PAGE> 40
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................... .................... 4
Goals and Principal Strategies.................. 4
Investor Profile................................ 4
A Word About Risk............................... 5
PERFORMANCE SUMMARY............... ................ 8
Year-by-Year Total Returns...................... 8
Average Annual Total Returns.................... 9
INVESTOR EXPENSES................ ................. 12
Fees and Fund Expenses.......................... 12
Example......................................... 13
THE FUNDS IN DETAIL............... ................ 14
The Management Firm............................. 14
Multi-Class Structure........................... 14
Fund Information Key............................ 15
INTERMEDIATE MATURITY GOVERNMENT FUND...... ....... 16
FIXED INCOME FUND................ ................. 18
GLOBAL FIXED INCOME FUND............. ............. 20
MORE ABOUT RISK................. .................. 22
Introduction.................................... 22
Types of Investment Risk........................ 22
Certain Investment Practices.................... 25
MEET THE MANAGERS................ ................. 28
ABOUT YOUR ACCOUNT................ ................ 29
Share Valuation................................. 29
Account Statements.............................. 29
Distributions................................... 29
Taxes........................................... 30
OTHER INFORMATION................ ................. 31
About the Distributor........................... 31
BUYING SHARES.................. ................... 32
SELLING SHARES.................. .................. 34
SHAREHOLDER SERVICES............... ............... 36
OTHER POLICIES.................. .................. 37
FOR MORE INFORMATION............... ............... back cover
</TABLE>
3
<PAGE> 41
KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
INTERMEDIATE MATURITY As high a level of -- Invests in securities of the
GOVERNMENT FUND current income as is U.S. government and its agencies
Risk factors: consistent with the and instrumentalities
Market risk preservation of capital -- Normally maintains a weighted-
Interest-rate risk average portfolio maturity of
between three and 10 years
FIXED INCOME FUND To generate high current -- Invests in fixed-income
Risk factors: income consistent with securities denominated primarily
Market risk reasonable risk and, in U.S. dollars
Interest-rate risk secondarily, capital -- Normally maintains a weighted-
Credit risk appreciation average portfolio maturity of
10 years or less
-- Favors investment-grade
securities, but may diversify
credit quality in pursuit of
its goal
GLOBAL FIXED INCOME To maximize total -- Invests in U.S. and foreign
FUND investment return fixed-income securities
Risk factors: consistent with prudent denominated in various
Market risk investment management, currencies
Interest-rate risk consisting of a -- Favors investment-grade
Credit risk combination of interest securities, but may diversify
Foreign securities income, currency gains credit quality in pursuit of
Non-diversified and capital appreciation its goal
status -- Investment decisions are based
on fundamental market factors,
currency trends and credit
quality.
</TABLE>
INVESTOR PROFILE
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
-- are seeking investment income
-- are looking for higher potential returns than money-market funds and are
willing to accept moderate risk and volatility
-- want to diversify their portfolios with fixed-income funds
THEY MAY NOT BE APPROPRIATE IF YOU:
-- are investing for maximum return over a long time horizon
-- require stability of your principal
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
4
<PAGE> 42
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to your fund. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
All funds
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
All funds
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
CREDIT RISK
Fixed Income Fund, Global Fixed
Income Fund
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
NON-DIVERSIFIED STATUS
Global Fixed Income Fund
The fund is considered a non-diversified investment company under the
Investment Company Act of 1940 and is permitted to invest a greater proportion
of its assets in the securities of a smaller number of issuers. As a result, the
fund may be subject to greater volatility with respect to its portfolio
securities than a fund that is more broadly diversified.
FOREIGN SECURITIES
Global Fixed Income Fund
A fund that invests outside the U.S. carries additional risks that include:
-- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
5
<PAGE> 43
denominated investments and may widen any losses. The fund may, but is not
required to, seek to reduce currency risk by hedging part or all of its
exposure to various foreign currencies.
-- INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
-- POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security prices
and impair a fund's ability to bring its capital or income back to the U.S.
Other political risks include economic policy changes, social and political
instability, military action and war.
6
<PAGE> 44
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7
<PAGE> 45
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these funds. The bar chart shows you how each fund's
performance has varied from year to year for up to 10 years. The table compares
each fund's performance over time to that of a broadly based securities market
index and other indexes, if applicable. As with all mutual funds, past
performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
INTERMEDIATE
MATURITY
GOVERNMENT
YEAR ENDED 12/31: FUND
<S> <C> <C>
1996 BEST QUARTERS:4.62%(Q398)
1997 WORST QUARTER:-0.01%(Q498)
1998 7.87 INCEPTION DATE:8/15/97
</TABLE>
<TABLE>
<CAPTION>
FIXED
INCOME FUND
<S> <C> <C>
1996 BEST QUARTER:3.05%(Q297)
1997 8.53 WORST QUARTER:0.06%(Q498)
1998 6.14 INCEPTION DATE:7/3/96
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
FIXED
INCOME FUND
<S> <C> <C>
1996 BEST QUARTER:3.31%(Q398)
1997 1.77 WORST QUARTER:-2.70%(Q497)
1998 7.83 INCEPTION DATE:8/12/96
</TABLE>
8
<PAGE> 46
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
INTERMEDIATE MATURITY GOVERNMENT
FUND 7.87% N/A N/A 8.13% 8/15/97
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT BOND INDEX(1) 8.49% N/A N/A 4.53%(2)
FIXED INCOME FUND 6.14% N/A N/A 8.18% 7/3/96
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT/CORPORATE
BOND INDEX(3) 8.44% N/A N/A 8.25%(4)
GLOBAL FIXED INCOME FUND 7.83% N/A N/A 6.21% 8/12/96
SALOMON BROTHERS WORLD
GOVERNMENT BOND INDEX
(CURRENCY-HEDGED)(5) 11.02% N/A N/A 11.64%(6)
LEHMAN BROTHERS AGGREGATE BOND
INDEX(7) 8.69% N/A N/A 9.55%(6)
COMPOSITE BENCHMARK(8) 8.84% N/A N/A 10.63%(6)
</TABLE>
(1) The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
(with no defined investment objective) of intermediate-term government
bonds, and is calculated by Lehman Brothers Inc.
(2) Performance since July 31, 1997.
(3) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index (with no defined investment objective) of intermediate-term
government and corporate bonds, and is calculated by Lehman Brothers Inc.
(4) Performance since June 30, 1996.
(5) The Salomon Brothers World Government Bond Index (Currency-Hedged) is a
market capitalization-weighted index designed to track major government debt
markets and is currency-hedged into U.S. dollars.
(6) Performance since July 31, 1996.
(7) The Lehman Brothers Aggregate Bond Index is composed of the Lehman
Government/Corporate Bond Index and the Lehman Mortgage-Backed Securities
Index. The Aggregate Index includes U.S. Treasury and agency issues,
corporate bond issues and mortgage-backed securities rated investment-grade
or higher by Moody's Investors Service, Standard & Poor's Corporation or
Fitch Investors' Service.
(8) The Composite Benchmark measures the weighted performance of three component
indexes. The weights of the component indexes -- 50% Lehman Aggregate Bond
Index, 35% Salomon Brothers World Government Bond Index excluding the U.S.
(Currency-Hedged), and 15% Merrill Lynch High Yield Master II
Index -- correspond to the investment strategy of the fund's managers. The
Merrill Lynch High Yield Master II Index provides a broad-based measure of
the performance of the non-investment-grade U.S. domestic bond market.
9
<PAGE> 47
UNDERSTANDING PERFORMANCE
-- TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and
capital gains (if any) were reinvested in additional shares. The change
in value can be stated either as a cumulative return or as an average
annual rate of return.
-- A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
-- An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
-- Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
10
<PAGE> 48
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11
<PAGE> 49
INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
INTERMEDIATE GLOBAL
MATURITY FIXED FIXED
GOVERNMENT INCOME INCOME
FUND FUND FUND
<S> <C> <C> <C>
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE NONE NONE
Deferred sales charge "load" NONE NONE NONE
Sales charge "load" on reinvested distributions NONE NONE NONE
Redemption fees NONE NONE NONE
Exchange fees NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(deducted from fund assets)
Management fee .50% .50% 1.00%
Distribution and service (12b-1) fee .25% .25% .50%
Other expenses 3.40% .29% .32%
TOTAL ANNUAL FUND OPERATING EXPENSES* 4.15% 1.04% 1.82%
</TABLE>
* Actual fees and expenses for the fiscal year ended October 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses for
some funds during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
INTERMEDIATE GLOBAL
MATURITY FIXED FIXED
EXPENSES AFTER WAIVERS GOVERNMENT INCOME INCOME
AND REIMBURSEMENTS FUND FUND FUND
<S> <C> <C> <C>
Management fee .20% .46% .55%
Distribution and service (12b-1) fee .25% .25% .50%
Other expenses .40% .29% .40%
---- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES .85% 1.00% 1.45%
</TABLE>
12
<PAGE> 50
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table on the opposite page (before fee waivers and
expense reimbursements or credits) and you close your account at the end of each
of the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
INTERMEDIATE MATURITY GOVERNMENT FUND $417 $1,261 $2,120 $4,331
FIXED INCOME FUND $106 $331 $574 $1,271
GLOBAL FIXED INCOME FUND $185 $573 $985 $2,137
</TABLE>
13
<PAGE> 51
THE FUNDS IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET
MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
-- Investment adviser for the funds
-- Responsible for managing each fund's assets according to its goal and
strategies
-- A professional investment-advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
-- Currently manages approximately $22 billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this Prospectus.
MULTI-CLASS STRUCTURE
Each fund offers two classes of shares, Common and Advisor. This Prospectus
offers the Advisor Class of shares, which are sold through financial-services
firms.
The Common Class of each fund is described in a separate prospectus.
14
<PAGE> 52
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOAL AND STRATEGIES
The fund's particular investment goal and the strategies it intends to use in
pursuing that goal. Percentages of fund
assets are based on total assets unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the fund's
day-to-day management.
INVESTOR EXPENSES
Actual fund expenses for the 1998 fiscal year. Future expenses may be higher
or lower.
-- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the fund. Expressed as a percentage of average net
assets after waivers.
-- DISTRIBUTION AND SERVICE (12B-1) FEES Fees paid by the fund to the
distributor for making shares of the fund available to you. Expressed as a
percentage of average net assets.
-- OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets after
waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
-- TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested
all dividend and capital-gain distributions.
-- PORTFOLIO TURNOVER An indication of trading frequency. The funds may sell
securities without regard to the length of time they have been held. A high
turnover rate may increase the fund's transaction costs and negatively affect
its performance. Portfolio turnover may also result in capital-gain
distributions that could raise your income-tax liability.
The Annual Report includes the auditor's report, along with the fund's
financial statements. It is available free upon request.
15
<PAGE> 53
INTERMEDIATE MATURITY
GOVERNMENT FUND
GOAL AND STRATEGIES
The Intermediate Maturity Government Fund seeks as high a level of current
income as is consistent with the preservation of capital. To pursue this goal,
it invests in securities of the U.S. government and its agencies and
instrumentalities.
The fund's weighted-average maturity will typically be between three and
10 years.
PORTFOLIO INVESTMENTS
Under normal market conditions, the fund will invest at least 65% of assets
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These may include:
-- U.S. Treasury obligations
-- mortgage-backed securities such as Ginnie Maes and Fannie Maes
-- government-agency obligations such as those of the Small Business
Administration
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
-- market risk
-- interest-rate risk
As with most income funds, share price, yield and total return will fluctuate
with changes in interest rates. Typically, a rise in interest rates causes a
decline in the market value of debt securities (including U.S. government and
mortgage-backed securities). To the extent that the fund invests in
mortgage-backed securities, it may also be subject to extension and prepayment
risks. These risks are defined in "More About Risk."
Other factors may affect the market price and yield of the fund's securities,
including investor demand and domestic and world-wide economic conditions.
The credit risk of the fund's securities will depend primarily on whether or
not the securities are guaranteed by the U.S. government. To the extent the fund
invests in securities guaranteed by the U.S. government, credit risk for this
fund is expected to be low. However, the U.S. government does not guarantee the
market value or the current yield of government securities, nor does any
government guarantee extend to the fund itself.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the fund's investment portfolio. You can
find out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .20%
Distribution and service
(12b-1) fee .25%
All other expenses .40%
Total expenses .85%
16
<PAGE> 54
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97(1)
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $10.06 $9.95
Investment activities:
Net investment income 0.53 0.11
Net gains or losses on investments
(both realized and unrealized) 0.32 0.11
Total from investment activities 0.85 0.22
Distributions:
From net investment income (0.53) (0.11)
Total distributions (0.53) (0.11)
Net asset value, end of period $10.38 $10.06
Total return 8.99% 2.22%(2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000s omitted) $12 $2
Ratio of expenses to average net assets(3) 0.85% 0.85%(4)
Ratio of net income to average net assets 5.28% 5.62%(4)
Decrease reflected in above operating expense ratio due to
waivers/reimbursements 3.30% 0.00%(4)
Portfolio turnover rate 133.98% 104.34%(2)
</TABLE>
(1) For the Period August 15, 1997 (Commencement of Operations) through October
31, 1997.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the Advisor
Shares' net expense ratio.
(4) Annualized.
17
<PAGE> 55
FIXED INCOME FUND
GOAL AND STRATEGIES
The Fixed Income Fund seeks to generate high current income consistent with
reasonable risk and, secondarily, capital appreciation. To pursue these goals,
it invests in fixed-income securities.
Under normal market conditions:
-- at least 65% of the fund's fixed-income securities will be investment grade
-- the fund will maintain a weighted-average maturity of 10 years or less
PORTFOLIO INVESTMENTS
Under normal market conditions, this fund invests at least 65% of assets in
fixed-income securities such as:
-- corporate bonds, debentures and notes
-- convertible debt securities
-- preferred stocks
-- government securities
-- municipal securities
-- mortgage-backed securities
-- repurchase agreements involving portfolio securities
The fund may invest:
-- without limit in U.S. dollar-denominated, investment-grade foreign
securities
-- up to 35% of assets in non-dollar-denominated foreign securities
-- up to 35% of assets in fixed-income securities rated below investment grade
(junk bonds)
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
-- market risk
-- interest-rate risk
-- credit risk
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
To the extent that it invests in certain securities, the fund may be affected
by additional risks:
-- mortgage-backed securities: extension and prepayment risks
-- junk bonds: above-average credit, information, market and other risks
-- foreign securities: currency, information and political risks
-- start-up and other small companies: information and liquidity risks
These risks are defined in "More About Risk." That section also details
certain other investment practices the fund may use. Please read "More About
Risk" carefully before you invest.
18
<PAGE> 56
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the fund's investment portfolio. You can
find out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .46%
Distribution and service (12b-1) fee .25%
All other expenses .29%
------------
Total expenses 1.00%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96(1)
<S> <C> <C> <C>
PER-SHARE DATA
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.43 $10.10 $9.90
- ----------------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.56 0.60 0.19
Net gains or losses on investments and foreign
currency related items (both realized and
unrealized) 0.07 0.33 0.20
- ----------------------------------------------------------------------------------------------
Total from investment activities 0.63 0.93 0.39
- ----------------------------------------------------------------------------------------------
Distributions:
From net investment income (0.56) (0.60) (0.19)
From realized capital gains (0.09) 0.00 0.00
- ----------------------------------------------------------------------------------------------
Total distributions (0.65) (0.60) (0.19)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $10.41 $10.43 $10.10
- ----------------------------------------------------------------------------------------------
Total return 6.21% 9.51% 3.93%(2)
- ----------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $3,058 $3,963 $911
Ratio of expenses to average net assets(3) 1.00% 1.00% 1.00%(4)
Ratio of net income to average net assets 5.40% 5.62% 5.85%(4)
Decrease reflected in above operating expense
ratio due to waivers/reimbursements 0.04% 0.08% 0.11%(4)
Portfolio turnover rate 124.04% 129.06% 194.23%(2)
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) For the Period July 3, 1996 (Commencement of Operations) through October 31,
1996.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the Advisor
Shares' net expense ratio.
(4) Annualized.
19
<PAGE> 57
GLOBAL FIXED INCOME FUND
GOAL AND STRATEGIES
The Global Fixed Income Fund seeks to maximize total investment return
consistent with prudent investment management, consisting of a combination of
interest income, currency gains and capital appreciation. To pursue this goal,
the fund invests in fixed-income securities of U.S. and foreign issuers.
-- foreign governments and companies, including those in emerging markets
-- multinational organizations such as the World Bank
-- the U.S. government, its agencies and instrumentalities
Under normal market conditions, the fund invests at least 65% of assets in
fixed-income securities of issuers located in at least three countries,
including the U.S.
The portfolio managers base their investment decisions on fundamental market
factors, currency trends and credit quality. The fund generally invests in
countries where the combination of fixed-income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
managers believe the currency risk can be reduced through hedging.
PORTFOLIO INVESTMENTS
This fund may invest in all types of fixed-income securities, including:
-- corporate bonds, debentures and notes
-- convertible debt securities
-- preferred stocks
-- government securities
-- municipal securities
-- mortgage-backed securities
-- repurchase agreements involving portfolio securities
The fund may purchase securities denominated in foreign currencies or in U.S.
dollars.
The fund may invest up to:
-- 40% of assets in securities of issuers located in any single foreign country
-- 35% of net assets in fixed-income securities rated below investment grade
(junk bonds)
-- 25% of assets in the securities of any one foreign government, its agencies,
instrumentalities and political subdivisions
-- 20% of assets in equity securities, including common stocks, warrants and
rights
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
-- market risk
-- interest-rate risk
-- credit risk
-- foreign securities
-- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
either principal or interest to the fund.
International investing, particularly in emerging markets, carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because the
20
<PAGE> 58
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
To the extent that the fund invests in junk bonds and securities of start-up
and other small companies, it takes on further risks that could hurt its
performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
PORTFOLIO MANAGEMENT
Charles C. Van Vleet manages the fund's investment portfolio. You can find
out more about him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .55%
Distribution and service
(12b-1) fee .50%
All other expenses .40%
------------
Total expenses 1.45%
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 10/98 10/97 10/96(1)
<S> <C> <C> <C>
PER-SHARE DATA
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.90 $11.17 $10.90
- --------------------------------------------------------------------------------------------
Investment activities:
Net investment income 0.37 0.41 0.10
Net gains or losses on investments and foreign currency
related items (both realized and unrealized) (0.02) 0.15 0.27
- --------------------------------------------------------------------------------------------
Total from investment activities 0.35 0.56 0.37
- --------------------------------------------------------------------------------------------
Distributions:
From net investment income (0.68) (0.29) (0.10)
From realized capital gains 0.00 (0.54) 0.00
- --------------------------------------------------------------------------------------------
Total distributions (0.68) (0.83) (0.10)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $10.57 $10.90 $11.17
- --------------------------------------------------------------------------------------------
Total return 3.51% 5.18% 3.41%(2)
- --------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $6,518 $8,935 $39
Ratio of expenses to average net assets(3) 1.45% 1.45% 1.45%(4)
Ratio of net income to average net assets 4.75% 4.76% 5.69%(4)
Decrease reflected in above operations expense ratios due
to waivers/reimbursements 0.37% 0.33% 0.21%(4)
Portfolio turnover rate 233.73% 202.92% 123.90%(2)
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For the Period August 12, 1996 (Commencement of Operations) through October
31, 1996.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements had no effect on the Advisor
Shares' net expense ratio.
(4) Annualized.
21
<PAGE> 59
MORE ABOUT RISK
INTRODUCTION
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this prospectus.
ACCESS RISK Some countries may restrict a fund's access to investments or
offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to a fund.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses.
EURO CONVERSION RISK The introduction of a new single European currency, the
euro, may result in uncertainties for securities of European companies, European
markets and the operation of the funds. The euro was introduced on January 1,
1999, by 11 European Union member countries who are participating in European
Monetary Union (EMU).
The introduction of the euro results in the redenomination of certain
European debt and equity securities over a period of time, which may bring
differences in various accounting, tax and/or legal treatments that would not
otherwise occur. Any market disruptions relating to the introduction of the euro
could adversely affect the value of European securities and currencies held by
the funds. Other risks relate to the ability of financial institutions' systems
to process euro transactions. Additional economic and operational issues are
raised by the fact that certain European Union member countries, including the
United Kingdom, did not participate in EMU on January 1, 1999, and therefore did
not implement the euro on that date.
At this early stage no one knows what the degree of impact of the
introduction of the euro will be. To the extent that the market impact or effect
on a fund holding
22
<PAGE> 60
is negative or that fund service provider systems cannot process the euro
conversion, the fund's performance could be hurt.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
-- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can
reduce or eliminate losses, it can also reduce or eliminate gains.
-- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the fund is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses
from writing uncovered call options and from speculative short sales
are unlimited.
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell
at the time and the price that the fund would like. A fund may have to lower the
price, sell other securities instead or forego an investment opportunity. Any of
these could have a negative effect on fund management or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
23
<PAGE> 61
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair a
fund's ability to bring its capital or income back to the U.S. Other political
risks include economic policy changes, social and political instability,
military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, a fund would
generally have to reinvest the proceeds at lower rates.
REGULATORY RISK Governments, agencies or other regulatory bodies may adopt or
change laws or regulations that could adversely affect the issuer, the market
value of the security, or a fund's performance.
VALUATION RISK The lack of an
active trading market may make it difficult to obtain an accurate price for a
fund security.
YEAR 2000 PROCESSING RISK The funds' investment adviser is working to address
the Year 2000 issue relating to the change from "99" to "00" on January 1, 2000,
and has obtained assurances from service providers that they are taking similar
steps. The adviser is working on the Year 2000 issue pursuant to a plan designed
to address potential problems, and progress is proceeding according to the plan.
The adviser anticipates the completion of testing of internal systems in the
first part of 1999, and is developing contingency plans intended to address any
unexpected service problems.
The fund's operations are dependent upon interactions among many participants
in the financial-services and other related industries. There is no assurance
that preparations by the adviser and other industry participants will be
sufficient, and any noncompliant computer systems could hurt key fund
operations, such as shareholder servicing, pricing and trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world -- including companies
or governmental entities in which the funds invest and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a fund holding or on markets or
economies is negative, it could seriously affect a fund's performance.
24
<PAGE> 62
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[X] Permitted without limitation; does not
indicate actual use
20% Italic type (e.g., 20%) represents an
investment limitation as a percentage of
NET fund assets; does not indicate actual
use
20% Roman type (e.g., 20%) represents an
investment limitation as a percentage of
TOTAL fund assets; does not indicate
actual use
[ ] Permitted, but not expected to be used to
a significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
Global
Intermediate Fixed Fixed
Maturity Income Income
Gov't Fund Fund Fund
------------- ------- ------
INVESTMENT PRACTICE LIMIT
<S> <C> <C> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30% 30%
- ---------------------------------------------------------------------------------------------
CURRENCY HEDGING Instruments, such as options, futures,
forwards or swaps, intended to manage fund exposure to
currency risk. Options, futures or forwards involve the
right or obligation to buy or sell a given amount of foreign
currency at a specified price and future date. Swaps involve
the right or obligation to receive or make payments based on
two different currency rates. Correlation, credit, currency,
hedged exposure, liquidity, political, valuation risks.(1) -- [X] [X]
- ---------------------------------------------------------------------------------------------
EMERGING MARKETS Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject a
fund to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose a fund to risks beyond those generally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. -- [ ] [X]
- ---------------------------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable a fund to hedge against or speculate on future
changes in currency values, interest rates, securities or
stock indexes. Futures obligate the fund (or give it the
right, in the case of options) to receive or make payment at
a specific future time based on those future changes.(1
)Correlation, currency, hedged exposure, interest-rate,
market, speculative exposure risks.(2) [ ] [ ] [ ]
- ---------------------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, euro conversion,
information, liquidity, market, political, valuation risks. -- [X] [X]
- ---------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 63
<TABLE>
<CAPTION>
Global
Intermediate Fixed Fixed
Maturity Income Income
Gov't Fund Fund Fund
------------- ------- ------
INVESTMENT PRACTICE LIMIT
<S> <C> <C> <C>
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Debt securities
backed by pools of mortgages, including passthrough
certificates and other senior classes of collateralized
mortgage obligations (CMOs), and other receivables. Credit,
extension, interest-rate, liquidity, prepayment risks. [X] [X] [X]
- ----------------------------------------------------------------------------------------------
MUNICIPAL SECURITIES Debt obligations issued by or on behalf
of states, territories and possessions of the U.S. and the
District of Columbia and their political subdivisions,
agencies and instrumentalities. Municipal securities may be
affected by uncertainties regarding their tax status,
legislative changes or rights of municipal-securities
holders. Credit, interest-rate, market, regulatory risks. -- [X] [X]
- ----------------------------------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated
below the fourth-highest grade (BBB/Baa) by Standard &
Poor's or Moody's rating service, and unrated securities of
comparable quality. Commonly referred to as junk bonds.
Credit, information, interest-rate, liquidity, market,
valuation risks. -- 35% 35%
- ----------------------------------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security, currency or index of
securities at a fixed price within a certain time period. A
fund may purchase or sell (write) both put and call options
for hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure
risks. [ ] 25% 25%
- ----------------------------------------------------------------------------------------------
REAL-ESTATE INVESTMENT TRUSTS (REITS) Pooled investment
vehicles that invest primarily in income-producing real
estate or real-estate-related loans or interests. Credit,
interest-rate, market risks. -- [ ] [ ]
- ----------------------------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15% 15% 15%
- ----------------------------------------------------------------------------------------------
SECURITIES LENDING Lending portfolio securities to financial
institutions; a fund receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3% 33 1/3% 33 1/3%
- ----------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 64
<TABLE>
<CAPTION>
GLOBAL
INTERMEDIATE FIXED FIXED
MATURITY GOV'T INCOME INCOME
FUND FUND FUND
<S> <C> <C> <C>
INVESTMENT PRACTICE LIMIT
START-UP AND OTHER SMALL COMPANIES Companies with small
relative market capitalizations, including those with
continuous operations of less than three years. Information,
liquidity, market, valuation risks. [X] [X] [X]
- --------------------------------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and
other instruments that allow a fund to gain access to the
performance of a benchmark asset (such as an index or
selected stocks) that may be more attractive or accessible
than the fund's direct investment. Credit, currency,
information, interest-rate, liquidity, market, political,
speculative exposure, valuation risks. [ ] [ ] [ ]
- -------------------------------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of a fund's
assets in investments such as money-market obligations and
investment-grade debt securities for defensive purposes.
Although intended to avoid losses in adverse market,
economic, political or other conditions, defensive tactics
might be inconsistent with a fund's principal investment
strategies and might prevent a fund from achieving its goal. [ ] [ ] [ ]
- --------------------------------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. -- 10% 10%
- --------------------------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. [X] 20% 20%
- --------------------------------------------------------------------------------------------
ZERO-COUPON BONDS Debt securities that pay no cash income to
holders until maturity and are issued at a discount from
maturity value. At maturity, the entire return comes from
the difference between purchase price and maturity value.
Interest-rate, market risks. [X] [X] [X]
- --------------------------------------------------------------------------------------------
</TABLE>
(1) The funds are not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) Each fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
27
LOGO
<PAGE> 65
MEET THE MANAGERS
[VAN DAALEN PHOTO]
M. ANTHONY E. VAN DAALEN, CFA
Senior Vice President
-- Portfolio Manager, Intermediate Maturity Government Fund since 1992
-- Portfolio Manager, Fixed Income Fund since 1992
-- With Warburg Pincus since 1992
[VAN VLEET PHOTO]
CHARLES C. VAN VLEET
Vice President
-- Portfolio Manager, Global Fixed Income Fund since May 1998
-- With Warburg Pincus since 1998
-- Senior vice president and senior global strategist with Putnam Investment
Management,
1994 to 1998
-- Previously vice president and senior portfolio manager at Alliance Capital
in New York and Alliance Limited in London, 1989 to 1994
28
Job titles indicate position with the investment adviser.
<PAGE> 66
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the Advisor Class's total assets, less
its liabilities, by the number of Advisor Class shares outstanding.
Each fund values its securities based on market quotations when it calculates
its NAV. If market quotations are not readily available, securities and other
assets are valued by another method that the Board of Directors/Trustees
believes accurately reflects fair value. Debt obligations that will mature in 60
days or less are valued on the basis of amortized cost, unless the Board of
Directors/ Trustees determines that using this method would not reflect an
investment's value.
Some fund securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the funds do not compute their prices. This could
cause the value of a fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
ACCOUNT STATEMENTS
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports.
DISTRIBUTIONS
As a fund investor, you are entitled to your share of the fund's net income
and gains on its investments. The fund passes these earnings along to its
shareholders as distributions.
Each fund earns dividends from stocks and interest from bond, money market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital-gain distributions.
The Intermediate Maturity Government and Fixed Income funds declare dividend
distributions daily and pay them monthly. The Global Fixed Income Fund declares
dividend distributions quarterly. The funds typically distribute capital gains
annually, usually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
29
<PAGE> 67
TAXES
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable.
Distributions from a fund's long-term capital gains are taxed as capital
gains; distributions from short-term capital gains and other sources are
generally taxed as ordinary income. The funds will mostly make dividend
distributions.
If you buy shares shortly before or on the "record date"--the date that
establishes you as the person to receive the upcoming distribution--you may
receive a portion of the money you just invested in the form of a taxable
distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category.
Intermediate Maturity Government Fund--Special Tax Matters
Depending on provisions in your state's tax law, the portion of a fund's
income derived from U.S. government and agency obligations may be exempt from
state and local taxes.
TAXES ON TRANSACTIONS
Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
30
<PAGE> 68
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
Counsellors Securities Inc., a wholly owned subsidiary of Warburg Pincus, is
each fund's distributor. Counsellors Securities is responsible for:
-- making the fund available to you
-- account servicing and maintenance
-- other administrative services related to sale of the Advisor Class
Certain institutions and financial-services firms may offer Advisor Class
shares to their clients and customers (or participants in the case of retirement
plans). These firms provide distribution, administrative and shareholder
services for fund shareholders. The funds have adopted Rule 12b-1
shareholder-servicing and distribution plans to compensate these firms for their
services. The current 12b-1 fee is .50% per annum of each fund's average daily
net assets, although under the 12b-1 plan the fund is authorized to pay up to
.75%.
31
<PAGE> 69
BUYING SHARES
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Institutional Shareholder Service Center
to receive one by mail or fax.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
BUYING AND SELLING SHARES
The fund is open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. ET), your transaction will be priced at that day's NAV. If
we receive it after that time, it will be priced at the next business day's NAV.
FINANCIAL-SERVICES FIRMS
You can buy and sell fund shares through a variety of financial-services
firms such as banks, brokers and financial advisors. The funds have authorized
these firms (and other intermediaries that the firms may designate) to accept
orders. When an authorized firm or its designee has received your order, it is
considered received by the fund and will be priced at the next-computed NAV.
Financial-services firms may charge transaction fees or other fees that you
could avoid by investing directly with the fund. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain features of the fund, such as the minimum
initial or subsequent investment amounts, may be modified.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Advisor Funds. Unfortunately, we cannot accept "starter" checks that do
not have your name pre-printed on them. We also cannot accept checks payable to
you or to another party and endorsed to the order of Warburg Pincus Advisor
Funds. These types of checks may be returned to you and your purchase order may
not be processed. Limited exceptions include properly endorsed government
checks.
32
<PAGE> 70
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- -- Complete the Warburg Pincus Advisor -- Make your check payable to Warburg
Funds New Account Application. Pincus Advisor Funds.
- -- Make your check payable to Warburg -- Write the account number and the fund
Pincus Advisor Funds. name on your check.
- -- Write the fund name on the check. -- Mail to Warburg Pincus Advisor Funds.
- -- Mail to Warburg Pincus Advisor Funds.
BY EXCHANGE
- -- Call our Institutional Shareholder -- Call our Institutional Shareholder
Service Center to request an exchange Service Center to request an exchange
from another Warburg Pincus fund or from another Warburg Pincus fund or
portfolio. Be sure to read the current portfolio.
Prospectus for the new fund or If you do not have telephone privileges,
portfolio. mail or fax a letter of instruction.
If you do not have telephone privileges,
mail or fax a letter of instruction.
BY WIRE
- -- Complete and sign the New Account -- Call our Institutional Shareholder
Application. Service Center by 4 p.m. ET to inform us
- -- Call our Institutional Shareholder of the incoming wire. Please be sure
Service Center and fax the signed New to specify the account registration,
Account Application by 4 p.m. ET. account number and the fund name on
- -- Institutional Services will telephone your wire advice.
you with your account number. Please -- Wire the money for receipt that day.
be sure to specify the account
registration, account number and the
fund name on your wire advice.
- -- Wire your initial investment for
receipt that day.
- -- Mail the original, signed application
to Warburg Pincus Advisor Funds.
BY ACH TRANSFER
- -- Cannot be used to open an account. -- Call our Institutional Shareholder
Service Center to request an ACH transfer
from your bank.
-- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
Requires ACH on Demand privileges.
</TABLE>
INSTITUTIONAL SHAREHOLDER SERVICE CENTER
800-222-8977
MONDAY - FRIDAY, 8 A.M. - 5 P.M. ET
33
<PAGE> 71
SELLING SHARES
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that -- Sales of any amount.
includes:
- -- your name(s) and signature(s) or, if
redeeming on an investor's behalf, the
name(s) of the registered owner(s) and
the signature(s) of their legal
representative(s)
- -- the fund name and account number
- -- the dollar amount you want to sell
- -- how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Advisor Funds.
If only a letter of instruction is
required, you can fax it to the
Institutional Shareholder Service Center
(unless a signature guarantee is
required).
BY EXCHANGE
- -- Call our Institutional Shareholder -- Accounts with telephone privileges.
Service Center to request an exchange If you do not have telephone privileges,
into another Warburg Pincus fund or mail or fax a letter of instruction to
portfolio. Be sure to read the current exchange shares.
Prospectus for the new fund or portfolio.
BY PHONE
Call our Institutional Shareholder -- Accounts with telephone privileges.
Service Center to request a redemption.
You can receive the proceeds as:
- -- a check mailed to the address of
record
- -- an ACH transfer to your bank
- -- a wire to your bank
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- -- Complete the "Wire Instructions" or -- Requests by phone or mail.
"ACH on Demand" section of your New
Account Application.
- -- For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
34
<PAGE> 72
HOW TO REACH US
Institutional Shareholder Service Center
Toll free: 800-222-8977
Fax: 212-370-9833
Mail
Warburg Pincus Advisor Funds
P.O. Box 9030
Boston, MA 02205-9030
Overnight/Courier Service
Boston Financial
Attn: Warburg Pincus Advisor Funds
2 Heritage Drive
North Quincy, MA 02171
Internet Web Site
www.warburg.com
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Advisor Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Account Registration]
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
-- accounts whose address of record has been changed within the past 30 days
-- redemptions in certain large accounts (other than by exchange)
-- requests to send the proceeds to a different payee or address
-- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
INSTITUTIONAL SHAREHOLDER SERVICE CENTER
800-222-8977
MONDAY - FRIDAY, 8 A.M. - 5 P.M. ET
35
<PAGE> 73
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Institutional Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments from a designated bank account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Institutional Shareholder Service Center to update your account
records whenever you change your address. Institutional Shareholder Services
Center can also help you change your account information or privileges.
36
<PAGE> 74
OTHER POLICIES
TRANSACTION DETAILS
You are entitled to capital-gain and earned-dividend distributions as soon as
your purchase order is executed.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
-- your investment check or ACH transfer does not clear
-- you place a telephone order by 4 p.m. ET and we do not receive your wire
that day
If you wire money without first calling our Institutional Shareholder Service
Center to place an order, and your wire arrives after the close of regular
trading on the NYSE, then your order will not be executed until the end of the
next business day. In the meantime, your payment will be held uninvested. Your
bank or other financial-services firm may charge a fee to send or receive wire
transfers.
While we monitor telephone-servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
The fund reserves the right to:
-- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
-- change or discontinue its exchange privilege after 30 days' notice to
current investors, or temporarily suspend this privilege during unusual
market conditions
-- impose minimum investment amounts after 15 days' notice to current investors
of any increases
-- charge a wire-redemption fee
-- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
-- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
-- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
INSTITUTIONAL SHAREHOLDER SERVICE CENTER
800-222-8977
MONDAY - FRIDAY, 8 A.M. - 5 P.M. ET
37
<PAGE> 75
This page intentionally left blank
38
<PAGE> 76
More information about these funds is available free upon request, including
the following:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the fund's manager discussing
market conditions and investment strategies that significantly affected fund
performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the funds, is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference, and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
Please contact Warburg Pincus Advisor Funds to obtain information, without
charge, the SAI and Annual and Semiannual Reports and to make shareholder
inquiries:
BY TELEPHONE:
800-222-8977
BY MAIL:
Warburg Pincus Advisor Funds
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Advisor Funds
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBERS:
Warburg Pincus Intermediate
Maturity Government Fund 811-05600
Warburg Pincus Fixed
Income Fund 811-05039
Warburg Pincus Global Fixed
Income Fund 811-07715
FOR MORE INFORMATION
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-222-8977 -- www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. ADBDF-1-0299
<PAGE> 77
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS FUNDS
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to these Warburg Pincus funds. Under
the terms of the arrangement, no immediate changes are planned to Warburg Pincus
investment portfolio managers and investment professionals.
The funds' governing Board and fund shareholders will be asked to vote on
the "assignment" of the funds' current investment advisory agreements with
Warburg Pincus Asset Management. Shareholders will receive more information
about the advisory agreement arrangements, but until then shareholders do not
need to take any action relating to their Warburg Pincus fund shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: February 22, 1999
<PAGE> 78
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
December 3, 1998
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE> 79
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed IRA Rollover and government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt
Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Funds $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to
Minors: $ 500*
* $25,000 minimum for Long-Short
Funds.
</TABLE>
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
SHAREHOLDER SERVICE CENTER
Toll free: 800 -WARBURG
(800 -927-2874)
Fax: 212-370-9833
MAIL
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
OVERNIGHT/COURIER SERVICE
Boston Financial
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, MA 02171
INTERNET WEB SITE
www.warburg.com
2
BUYING SHARES
<PAGE> 80
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- - Complete the New Account Application. - Make your check payable to Warburg
For IRAs use the Universal IRA Pincus Funds.
Application. - Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds. - Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds. - Minimum amount is $100.
BY EXCHANGE
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new - Minimum amount is $250.
fund. Also please observe the minimum If you do not have telephone privileges,
initial investment. mail or fax a signed letter of
If you do not have telephone privileges, instruction.
mail or fax a signed letter of
instruction.
BY WIRE
- - Complete and sign the New Account - Call our Shareholder Service Center by
Application. 4 p.m. ET to inform us of the incoming
- - Call our Shareholder Service Center and wire. Please be sure to specify your
fax the signed New Account Application name, the account number and the fund
by 4 p.m. ET. name on your wire advice.
- - Shareholder Services will telephone you - Wire the money for receipt that day.
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand privileges.
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
3
<PAGE> 81
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that - Accounts of any type.
includes: - Sales of any amount.
- - your name(s) and signature(s) For IRAs please use the IRA Distribution
- - the fund name and account number Request Form.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
BY EXCHANGE
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read If you do not have telephone privileges,
the current prospectus for the new fund. mail or fax a letter of instruction to
Also please observe the minimum initial exchange shares.
investment.
BY PHONE
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your New or ACH on Demand privileges.
Account Application. - Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
()* For the Central & Eastern Europe Fund only: A short-term trading fee of 1.0%
of the amount redeemed will be deducted from the redemption proceeds if you sell
shares of the fund after holding them less than six months. This fee, which is
currently being waived, does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without charging the fees, followed by the shares held longest.
4
SELLING SHARES(*)
<PAGE> 82
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
<S> <C>
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to
Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
5
<PAGE> 83
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct Rollover
Form. If you are opening a new IRA, you will also need to complete the Universal
IRA Application. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
SHAREHOLDER SERVICES
<PAGE> 84
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for employees and clients
of its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
7
OTHER POLICIES
<PAGE> 85
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPCOM-31-1298A
<PAGE> 86
STATEMENT OF ADDITIONAL INFORMATION
February 22, 1999
WARBURG PINCUS FIXED INCOME FUND
WARBURG PINCUS GLOBAL FIXED INCOME FUND
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Fixed Income Fund (the "Fixed Income Fund"), Warburg Pincus
Intermediate Maturity Government Fund (the "Intermediate Government Fund"),
Warburg Pincus New York Intermediate Municipal Fund (the "New York Municipal
Fund") and Warburg Pincus Global Fixed Income Fund (the "Global Fixed Income
Fund") (each a "Fund" and collectively, the "Funds") that supplements
information contained in the combined Prospectus for the Common Shares and the
combined Prospectus for the Advisor Shares of the Funds, each dated February 22,
1999.
Each Fund's audited annual report dated October 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses. Copies of the Prospectuses and the annual
report can be obtained by writing or telephoning:
Common Shares: Advisor Shares:
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, MA 02205-9030 Boston, MA 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
<PAGE> 87
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.......................................... 1
Options on Securities and Securities Indices and Currency Exchange
Transactions.............................................. 1
Securities Options.............................................. 1
Securities Index Options........................................ 4
OTC Options..................................................... 5
Currency Exchange Transactions.................................. 6
Hedging Generally............................................... 7
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures........................................ 9
Futures Activities....................................................
Money Market Obligations.............................................. 9
Convertible Securities................................................ 10
Structured Securities................................................. 10
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate
Caps, Floors and Collars......................................... 13
Foreign Investments................................................... 14
U.S. Government Securities............................................ 16
Loan Participations and Assignments...................................
Municipal Obligations................................................. 17
Securities of Other Investment Companies.............................. 19
Below Investment Grade Securities..................................... 19
Lending Portfolio Securities.......................................... 20
Repurchase Agreements................................................. 21
Reverse Repurchase Agreements and Dollar Rolls........................ 22
Zero Coupon Securities................................................ 22
Government Zero Coupon Securities..................................... 23
Short Sales........................................................... 23
Unseasoned Issuers....................................................
Variable Rate and Master Demand Notes................................. 24
When-Issued Securities and Delayed-Delivery Transactions.............. 24
Stand-By Commitment Agreements........................................ 25
Depositary Receipts...................................................
REITs................................................................. 26
Warrants.............................................................. 27
Non-Publicly Traded and Illiquid Securities........................... 27
Borrowing............................................................. 29
Non-Diversified Status................................................ 29
Taxable Investments................................................... 29
INVESTMENT RESTRICTIONS..................................................... 30
Fixed Income Fund..................................................... 30
Global Fixed Income Fund.............................................. 32
Intermediate Government Fund.......................................... 34
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
Page
----
<S> <C>
New York Municipal Fund............................................... 35
PORTFOLIO VALUATION......................................................... 37
PORTFOLIO TRANSACTIONS...................................................... 38
PORTFOLIO TURNOVER.......................................................... 41
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS........... 42
State Economy.......................................................... 43
State Budget.......................................................... 43
Recent Financial Results.............................................. 46
Debt Limits and Outstanding Debt...................................... 47
Litigation............................................................ 49
Authorities........................................................... 51
New York City and Other Localities.................................... 51
MANAGEMENT OF THE FUNDS..................................................... 56
Officers and Boards of Directors/Trustees............................. 56
Directors'/Trustees' Compensation..................................... 60
Portfolio Managers of the Funds....................................... 60
Investment Adviser and Co-Administrators.............................. 61
Custodian and Transfer Agent.......................................... 62
Organization of the Funds............................................. 63
Distribution and Shareholder Servicing................................ 65
General......................................................... 65
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 66
Automatic Cash Withdrawal Plan........................................ 66
EXCHANGE PRIVILEGE.......................................................... 66
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 67
The Funds and Their Investments....................................... 67
Special Tax Matters Regarding the Fixed Income Fund, Global Fixed
Income Fund and Intermediate Government Fund.......................... 69
Special Tax Considerations Regarding the Intermediate Government
Fund.................................................................. 70
Special Tax Considerations Regarding the New York Municipal Fund...... 70
Passive Foreign Investment Companies.................................. 72
Dividends and Distributions........................................... 73
Sales of Shares....................................................... 74
Foreign Taxes......................................................... 74
Backup Withholding.................................................... 75
Notices............................................................... 75
Other Taxation........................................................ 75
DETERMINATION OF PERFORMANCE................................................ 75
INDEPENDENT ACCOUNTANTS AND COUNSEL......................................... 79
MISCELLANEOUS............................................................... 80
FINANCIAL STATEMENTS........................................................ 82
APPENDIX - DESCRIPTION OF RATINGS........................................... A-1
</TABLE>
ii
<PAGE> 89
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objective and policies in the Prospectuses. There are no assurances
that the Funds will achieve their investment objectives.
The investment objectives of the Fixed Income Fund are to generate
high current income consistent with reasonable risk and, secondarily, capital
appreciation.
The investment objective of the Global Fixed Income Fund is to
maximize total investment return consistent with prudent investment management,
consisting of a combination of interest income, currency gains and capital
appreciation.
The investment objective of the Intermediate Government Fund is to
achieve as high a level of current income as is consistent with the preservation
of capital.
The investment objective of the New York Municipal Fund is to
maximize current interest income exempt from federal income tax and New York
State and New York City personal income taxes to the extent consistent with
prudent investment management and the preservation of capital.
Unless otherwise indicated, all of the Funds are permitted to engage
in the following investment strategies, subject to any percentage limitations
set forth below. Any percentage limitation on a Fund's ability to invest in
debt securities will not be applicable during periods when the Fund pursues a
temporary defensive strategy as discussed below.
The Funds are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
Options on Securities and Securities Indices and Currency Exchange
Transactions
The Funds may purchase and write (sell) options on securities,
securities indices and currencies for hedging purposes or to increase total
return. Up to 25% of the Fund's total assets may be at risk in connection with
investing in options on securities, securities indices and, if applicable,
currencies. The amount of assets considered to be "at risk" in these
transactions is, in the case of purchasing options, the amount of the premium
paid, and, in the case of writing options, the value of the underlying
obligation.
Securities Options. Each Fund may write covered put and call
options on stock and debt securities and each Fund may purchase such options
that are traded on foreign and U.S. exchanges, as well as over-the-counter
("OTC") options. A Fund realizes fees (referred to as "premiums") for granting
the rights evidenced by the options it has written. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price for a specified time
period or at a specified time. In contrast, a call option embodies the right of
its purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price for a specified time period or at a
specified time.
The potential loss associated with purchasing an option is limited
to the premium paid, and the premium would partially offset any gains achieved
from its use. However, for an option writer the exposure to adverse price
movements in the underlying security or index is potentially unlimited during
the exercise period. Writing securities
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options may result in substantial losses to a Fund, force the sale or purchase
of portfolio securities at inopportune times or at less advantageous prices,
limit the amount of appreciation the Fund could realize on its investments or
require the Fund to hold securities it would otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of a decline in the price of the underlying
security. The size of the premiums that a Fund may receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly, to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which a Fund may write covered call options. For example, if the Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-
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money" and "out-of-the-money," respectively. A Fund may write (i) in-the-money
call options when Warburg Pincus Asset Management, Inc., each Fund's investment
adviser ("Warburg"), expects that the price of the underlying security will
remain flat or decline moderately during the option period, (ii) at-the-money
call options when Warburg expects that the price of the underlying security will
remain flat or advance moderately during the option period and (iii)
out-of-the-money call options when Warburg expects that the premiums received
from writing the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, the Fund will be required to deposit in escrow the underlying security
or other assets in accordance with the rules of the Options Clearing Corporation
(the "Clearing Corporation") and of the securities exchange on which the option
is written.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Fund may realize a profit or loss from the
sale. An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the OTC market. When a Fund has purchased an option and engages in a closing
sale transaction, whether the Fund realizes a profit or loss will depend upon
whether the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. The Fund may engage in a closing purchase
transaction to realize a profit, to prevent an underlying security with respect
to which it has written an option from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). The obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction, (the Fund would not be deemed to
own an option as a result of the transaction). So long as the obligation of the
Fund as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a closing
purchase transaction. The Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
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There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Fund's ability to
terminate options positions established in the OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. The Fund, however, intends to purchase OTC options only from
dealers whose debt securities, as determined by Warburg, are considered to be
investment grade. If, as a covered call option writer, a Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security and would continue to be at market risk on the
security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options a Fund will be
able to purchase on a particular security.
Securities Index Options. A Fund may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case
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of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the Securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
OTC Options. A Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the Fund were
to purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by a Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while OTC or dealer options do not. Consequently, a Fund will generally be able
to realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. Although the Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. The inability to
enter into a closing transaction may result in material losses to a Fund. Until
the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair the Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
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Currency Exchange Transactions. (Fixed Income and Global Fixed
Income Funds only) The value in U.S. dollars of the assets of a Fund that are
invested in foreign securities may be affected favorably or unfavorably by a
variety of factors not applicable to investment in U.S. securities, and the Fund
may incur costs in connection with conversion between various currencies.
Currency exchange transactions may be from any non-U.S. currency into U.S.
dollars or into other appropriate currencies. A Fund will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on such contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, a Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by negotiating with its trading partner to enter into an offsetting
transaction. If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. A Fund may purchase exchange-traded put and call
options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. A Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. No
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Fund may position hedge to an extent greater than the aggregate market value
(at the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which a
Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in the U.S.
dollar value of non-dollar denominated securities it holds, a Fund may purchase
foreign currency put options. If the value of the foreign currency does decline,
the Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, a Fund may purchase call options on the particular currency.
The purchase of these options could offset, at least partially, the effects of
the adverse movements in exchange rates. The benefit to the Fund derived from
purchases of currency options, like the benefit derived from other types of
options, will be reduced by premiums and other transaction costs. Because
transactions in currency exchange are generally conducted on a principal basis,
no fees or commissions are generally involved. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Fund may not be able to contract to
sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Fund against a price
decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options and futures
transactions for other purposes, including generating current income to offset
expenses or increase return, a Fund may enter into these transactions as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss in a portfolio position with a gain in the hedged position; at the same
time, however, a properly correlated hedge will result in a gain in the
portfolio position being offset by a loss in the hedged position. As a result,
the use of options and futures transactions for hedging purposes could limit any
potential gain from an increase in the value of the position hedged. In
addition, the movement in the portfolio position hedged may not be of the same
magnitude as movement in the hedge. With respect to futures contracts, since the
value of portfolio securities will far
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<PAGE> 96
exceed the value of the futures contracts sold by a Fund, an increase in the
value of the futures contracts could only mitigate, but not totally offset, the
decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will
realize a gain or loss depends upon movements in the level of securities prices
in the stock market generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a particular security.
The risk of imperfect correlation increases as the composition of the Fund's
portfolio varies from the composition of the index. In an effort to compensate
for imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect a Fund's net investment results if market
movements are not as anticipated when the hedge is established. Securities index
futures transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the securities index and futures
markets. Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market also may cause temporary price distortions. Because of the
possibility of price distortions in the futures market and the imperfect
correlation between movements in the securities index and movements in the price
of securities index futures, a correct forecast of general market trends by
Warburg still may not result in a successful hedging transaction.
A Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to predict correctly
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Fund's performance.
To the extent that a Fund engages in the strategies described above,
the Fund may experience losses greater than if these strategies had not been
utilized. In addition to the risks described above, these instruments may be
illiquid and/or subject to trading limits, and the Fund may be unable to close
out a position without incurring substantial losses, if at all. The Funds are
also subject to the risk of a default by a counterparty to an off-exchange
transaction.
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Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. Each Fund will comply with guidelines established by the U.S.
Securities and Exchange Commission (the "SEC") with respect to coverage of
forward currency contracts; options written by the Fund on securities, indexes
and currencies; and currency, interest rate and index futures contracts and
options on these futures contracts. These guidelines may, in certain instances,
require segregation by the Fund of cash or liquid securities with its custodian
or a designated sub-custodian to the extent the Fund's obligations with respect
to these strategies are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency or by other portfolio
positions or by other means consistent with applicable regulatory policies.
Segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. As a
result, there is a possibility that segregation of a large percentage of a
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
For example, a call option written by a Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written by
a Fund may require the Fund to segregate assets (as described above) equal to
the exercise price. The Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold by
the Fund. If the Fund holds a futures or forward contract, the Fund could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. The Fund may enter
into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Futures Activities. A Fund may enter into foreign currency, interest
rate and securities index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These futures contracts are standardized contracts for the future
delivery of foreign currency or an interest rate sensitive security or, in the
case of stock index and certain other futures contracts, a cash settlement with
reference to a specified multiplier times the change in the specified index,
exchange rate or interest rate. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract. These transactions may be entered into for "bona fide
hedging" purposes as defined in CFTC regulations and other permissible purposes
including hedging against changes in the value of portfolio securities due to
anticipated changes in currency values, interest rates and/or market conditions
and increasing return. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC will not exceed 5% of a Portfolio's net asset value after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. The Funds reserve the right to engage in
transactions involving futures contracts and options on futures contracts to the
extent allowed by CFTC regulations in effect from time to time and in accordance
with a Fund's policies. There is no overall limit on the percentage of Fund
assets that may be at risk with respect to futures activities.
Futures Contracts. (The Intermediate Government and New York
Municipal Funds may not engage in foreign currency futures transactions.) A
foreign currency futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified non-U.S.
currency at a specified price, date, time and place. An interest rate futures
contract provides for the future sale by one party and the purchase by the other
party of a certain amount of a specific interest rate sensitive financial
instrument (debt security) at a specified price, date, time and place.
Securities indexes are capitalization weighted indexes which reflect the market
value of the securities represented in the indexes. A securities index futures
contract is an agreement to be settled by delivery of an amount of cash equal to
a specified multiplier times the difference between the value of the index at
the close of the last trading day on the contract and the price at which the
agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, the Fund is required to segregate with its custodian
an amount of cash or securities acceptable to the broker equal to approximately
1% to 10% of the contract amount (this amount is subject to change by the
exchange on which the contract is traded, and brokers may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in the
margin account if a Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the currency, financial instrument or securities index underlying the
futures contract fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking-to-market." The Fund
will also incur brokerage costs in connection with entering into futures
transactions.
At any time prior to the expiration of a futures contract, a Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
Fund may enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting a Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if a Fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect the Fund's
performance.
Options on Futures Contracts. (The Intermediate Government and New
York Municipal Funds may not purchase or write options on foreign currency.) A
Fund may purchase and write put and call options on foreign currency, interest
rate and stock index futures contracts and may enter into closing
transactions with respect to such options to terminate existing positions. There
is no guarantee that such closing transactions can be effected; the ability to
establish and close out positions on such options will be subject to the
existence of a liquid market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future contract. The potential loss related to the purchase of an option on
a futures contract is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of a
Fund.
Money Market Obligations. Each Fund is authorized to invest, under
normal conditions, up to 35% of its total assets in short-term money market
obligations having remaining maturities of less than one year at the time of
purchase. These short-term instruments consist of obligations issued or
guaranteed by the United States government, its agencies or instrumentalities
("Government Securities"); bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of domestic or foreign banks, domestic
savings and loans and similar institutions) that are high quality investments
or, if unrated, deemed by Warburg to be high quality investments; commercial
paper rated no lower than A-2 by Standard & Poor's Ratings Services ("S&P") or
Prime-2 by Moody's Investors Service, Inc. ("Moody's") or the equivalent from
another major rating service or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating categories; in
the case of the Fixed Income Fund and the Global Fixed Income Fund, obligations
of foreign governments, their agencies or instrumentalities; and repurchase
agreements with respect
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to portfolio securities. The short-term money market obligations in which the
New York Municipal Fund is authorized to invest generally will be tax-exempt
obligations; however, the Fund may invest in taxable obligations when suitable
tax-exempt obligations are unavailable or to maintain liquidity for meeting
anticipated redemptions and paying operating expenses. Tax-exempt money market
obligations in which the New York Municipal Fund may invest consist of
investment grade tax-exempt notes and tax-exempt commercial paper rated no lower
than A-2 by S&P or Prime-2 by Moody's or the equivalent from another major
rating service or, if not rated, of municipal issuers having an issue of
outstanding municipal obligations rated within the three highest grades by
Moody's or S&P.
Temporary Defensive Strategies. For temporary defensive purposes or,
in the case of the Global Fixed Income Fund, during times of international
political or economic uncertainty, each Fund other than the Intermediate
Government Fund may invest without limit in short-term money market obligations,
and the Intermediate Government Fund may invest without limit in short-term
Government Securities.
Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or Warburg. A money
market mutual fund is an investment company that invests in short-term high
quality money market instruments. A money market mutual fund generally does not
purchase securities with a remaining maturity of more than one year. The
Intermediate Government Fund and the New York Municipal Fund would invest in
money market mutual funds that invest in Government Securities and tax-exempt
securities, respectively. As a shareholder in any mutual fund, a Fund will bear
its ratable share of the mutual fund's expenses, including management fees, and
will remain subject to payment of the Fund's management fees and other expenses
with respect to assets so invested.
Convertible Securities. Convertible securities in which the Fixed
Income and Global Fixed Income Funds may invest, including both convertible debt
and convertible preferred stock, may be converted at either a stated price or
stated rate into underlying shares of common stock. Because of this feature,
convertible securities enable an investor to benefit from increases in the
market price of the underlying common stock. Convertible securities provide
higher yields than the underlying equity securities, but generally offer lower
yields than non-convertible securities of similar quality. The value of
convertible securities fluctuates in relation to changes in interest rates like
bonds and, in addition, fluctuates in relation to the underlying common stock.
Structured Securities. The Funds may purchase any type of publicly
traded or privately negotiated fixed income security, including mortgage-backed
securities; structured notes, bonds or debentures; and assignments of and
participations in loans.
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Mortgage-Backed Securities. A Fund may invest in mortgage-backed
securities, such as those issued by the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") or certain foreign issuers. Mortgage-backed
securities represent direct or indirect participations in, or are secured by and
payable from, mortgage loans secured by real property. The mortgages backing
these securities include, among other mortgage instruments, conventional 30-year
fixed-rate mortgages, 15-year fixed-rate mortgages, graduated payment mortgages
and adjustable rate mortgages. The government or the issuing agency typically
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. These securities generally
are "pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the Fund's
yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the
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servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Asset-Backed Securities. A Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized.
Structured Notes, Bonds or Debentures. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Fund's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Fund may invest in
assignments of and participations in loans issued by banks and other
financial institutions.
When a Fund purchases assignments from lending financial
institutions, the Fund will acquire direct rights against the borrower on the
loan. However, since assignments are generally arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by a Fund as the purchaser of an assignment may differ
from, and be more limited than, those held by the assigning lender.
Participations in loans will typically result in a Fund having a
contractual relationship with the lending financial institution, not the
borrower. A Fund would have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender of the payments from
the borrower. In connection with purchasing a participation, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not benefit directly from any collateral supporting
the loan in which it has purchased a participation. As a result, a Fund
purchasing a participation will assume the credit risk of both the borrower and
the lender selling the participation. In the event of the insolvency of the
lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any set-off between the lender and the
borrower.
A Fund may have difficulty disposing of assignments and
participations because there is no liquid market for such securities. The lack
of a liquid secondary market will have an adverse impact on the value of such
securities and on a Fund's
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ability to dispose of particular assignments or participations when necessary to
meet the Fund's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the borrower. The lack of a
liquid market for assignments and participations also may make it more difficult
for a Fund to assign a value to these securities for purposes of valuing the
Fund's portfolio and calculating its net asset value.
With respect to the New York Municipal Fund, income derived from
participations or assignments may not be tax-exempt, depending on the structure
of the particular securities. To the extent such income is not tax-exempt it
will be subject to the New York Municipal Fund's 20% limit on investing in
non-municipal securities.
A Fund may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a foreign government (a
"Borrower") and one or more financial institutions ("Lenders"). The majority of
the Fund's investments in Loans are expected to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans from third
parties ("Assignments"). Participations typically will result in the Fund having
a contractual relationship only with the Lender, not with the Borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the Borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the Borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the Borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the Borrower is determined by
Warburg to be creditworthy.
When a Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Fund as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Fund may have difficulty disposing of them because there is no
liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Fund's ability
to dispose of particular Participations or Assignments when necessary to meet
the Fund's liquidity needs or in response to a specific economic event, such as
a deterioration in the creditworthiness of the Borrower. The lack of a liquid
market for Participations and Assignments also may make it more difficult for a
Fund to assign a value to these securities for purposes of valuing the Fund's
portfolio and calculating its net asset value.
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate
Caps, Floors and Collars. Each Fund may enter into interest rate, index and
mortgage swaps and interest rate caps, floors and collars for hedging purposes
or to seek to increase total return; the Fixed Income and Global Fixed Income
Funds may enter into currency swaps for hedging purposes. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Index swaps involve the exchange by the
Fund with another party of the respective amounts payable with respect to a
notional principal amount related to one or more indexes. Mortgage swaps are
similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a reference
pool or pools of mortgages. Currency swaps involve the exchange of cash flows on
a notional amount of two or more currencies based on their relative future
values. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payment of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling the interest rate floor. An interest rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates.
A Fund will enter into interest rate, index and mortgage swaps only
on a net basis, which means that the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate, index and mortgage swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the other party to an interest rate, index or mortgage swap defaults, the Fund's
risk of loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of a gross payment stream in one designated currency in exchange
for the gross payment stream in another designated currency. Therefore, the
entire payment stream under a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations. To
the extent that the net
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amount payable by the Fund under an interest rate, index or mortgage swap and
the entire amount of the payment stream payable by the Fund under a currency
swap or an interest rate cap, floor or collar are held in a segregated account
consisting of cash or liquid securities, the Funds and Warburg believe that
swaps do not constitute senior securities under the Investment Company Act of
1940, as amended (the "1940 Act") and, accordingly, will not treat them as being
subject to each Fund's borrowing restriction.
The Fund will not enter into interest rate, index, mortgage or
currency swaps, or interest rate cap, floor or collar transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party is rated either AA or A-1 or better by S&P or Aa or P-1 or better by
Moody's or, if unrated by such rating organizations, determined to be of
comparable quality by Warburg.
Foreign Investments. (Fixed Income and Global Fixed Income Funds
only) Investors should recognize that investing in foreign companies involves
certain risks, including those discussed below, which are not typically
associated with investing in United States issuers. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments positions. A Fund may invest
in securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
Foreign Currency Exchange. Since a Fund may invest in securities
denominated in currencies other than the U.S. dollar, and since the Fund may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Fund may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholder by the Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United States and a particular foreign country,
including economic and political developments in other countries. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. A Fund may use hedging techniques
with the objective of protecting against loss through the fluctuation of the
value of foreign currencies against the U.S. dollar,
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particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Exchange Transactions" and "Futures Activities"
above.
Euro Conversion. The introduction of a single European currency, the
euro, on January 1, 1999 for participating European nations in the Economic and
Monetary Union presented unique risks and uncertainties for investors in those
countries, including (i) the functioning of the payment and operational systems
of banks and other financial institutions; (ii) the creation of suitable
clearing and settlement payment schemes for the euro; (iii) the fluctuation of
the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; and (iv) whether the interest
rate, tax and labor regimes of the European countries participating in the euro
will converge over time. Further, the conversion of the currencies of other
Economic Monetary Union countries, such as the United Kingdom, and the admission
of other countries, including Central and Eastern European countries, to the
Economic Monetary Union could adversely affect the euro. These or other factors
may cause market disruptions and could adversely affect the value of foreign
securities and currencies held by the Funds.
Information. Many of the foreign securities held by a Fund will not
be registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
such securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign companies are
generally subject to financial reporting standards, practices and requirements
that are not uniform or less rigorous than those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Fund, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
Foreign Markets. Securities of some foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays
between the trade and settlement dates of securities purchased or sold which
may result in increased exposure to market and foreign exchange fluctuations
and increased illiquidity.
Increased Expenses. The operating expenses of a Fund can be expected
to be higher than that of an investment company investing exclusively in U.S.
securities, since the expenses of the Fund, such as cost of converting foreign
currency into U.S. dollars, the payment of fixed brokerage commissions on
foreign exchanges, custodial costs, valuation costs and communication costs, as
well as the rate of the investment advisory fees, though similar to such
expenses of some other international funds, are higher than those costs incurred
by other investment companies.
Dollar-Denominated Debt Securities of Foreign Issuers. The returns
on foreign debt securities reflect interest rates and other market conditions
prevailing in those countries. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign fixed
income securities. The relative performance of various countries' fixed income
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Year-to-year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
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The foreign government securities in which a Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
Privatizations. Each Fund may invest in privatizations (i.e. foreign
government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Brady Bonds. The Fund may invest in so-called "Brady Bonds," which
have been issued by Costa Rica, Mexico, Uruguay and Venezuela and which may be
issued by other Latin American countries. Brady Bonds are issued as part of a
debt restructuring in which the bonds are issued in exchange for cash and
certain of the country's outstanding commercial bank loans. Investors should
recognize that Brady Bonds do not have a long payment history. Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the over-the-counter
("OTC") secondary market for debt of Latin American issuers. In light of the
history of commercial bank loan defaults by Latin American public and private
entities, investments in Brady Bonds may be viewed as speculative.
Depositary Receipts. Assets of a Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe and IDRs, which are sometimes referred to as Global
Depositary Receipts, are issued outside the United States. EDRs and IDRs are
typically issued by non-U.S. banks and trust companies and evidence ownership of
either foreign or domestic securities. Generally, ADRs in registered form are
designed for use in U.S. securities markets and EDRs and IDRs in bearer form are
designed for use in European securities markets and non-U.S. securities markets,
respectively.
U.S. Government Securities. A Fund may invest in Government
Securities. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. U.S. government securities also include securities issued or
guaranteed by the Federal Housing Administration, Farmers Home Loan
Administration, Export-Import Bank of the United States, Small Business
Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, FHLMC, Federal
Intermediate Credit Banks, Federal Land Banks, FNMA, Federal Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. A Fund may also invest in instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in obligations issued by such
an instrumentality only if Warburg determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for investment by
the Fund.
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Government Trust Certificates. (Intermediate Government Fund only) A
Fund may invest in Government Trust Certificates. Each Certificate evidences an
undivided fractional interest in a Government Trust (each, a "Trust"). The
assets of each Trust consist of a promissory note, payable in U.S. Dollars (the
"Loan Note"), representing a loan made by the Trust to the government of Israel
(the "Borrower"), backed by a full faith and credit guaranty issued by the
United States of America, acting through the Defense Security Assistance Agency
of the Department of Defense (the "Guaranty"), of the due and punctual payment
of 90% of payments of principal and interest due on the Loan Note and a security
interest in collateral, consisting of non-callable securities issued or
guaranteed by the United States government, or derivatives thereof, such as
trust receipts or other securities evidencing an interest in such United States
government securities, sufficient to pay the remaining 10% of all payments of
principal and interest due on the Loan Notes. Each Certificate issued by a Trust
represents the right to receive a portion of the payments due on the Loan Note
held by that Trust. The Certificates are not subject to prepayment or
acceleration. Each Guaranty is entitled to the full faith and credit of the
United States of America. A certificate-holder's right to receive any payments
with respect to the Guaranty will be subject to termination if such holder
breaches the terms of its Certificate.
Certificates are not considered by the Fund to be Government
Securities. The Certificates represent undivided fractional interests in the
Loan Notes, but the Certificates are not direct obligations of, and are not
guaranteed by, the Borrower. Thus, in the event of a failure to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the Borrower.
Municipal Obligations. Under normal circumstances, each Fund may and
the Municipal Fund will invest in "Municipal Obligations." Municipal Obligations
are debt obligations issued by or on behalf of states (including the State of
New York), territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities.
Except for temporary defensive purposes, the New York Municipal Fund will invest
its assets in intermediate and long term obligations with interest which is
excluded from gross income for federal income tax purposes and which is exempt
from New York State and New York City personal income taxes ("New York Municipal
Obligations") and intends to invest substantially all of its assets in those
obligations. New York Municipal Obligations include obligations issued by or on
the behalf of the State of New York, its political subdivisions, agencies and
instrumentalities.
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Municipal Obligations are issued by governmental entities to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately-operated facilities are included within
the term Municipal Obligations if the interest paid thereon is exempt from
federal income tax.
The two principal types of Municipal Obligations, in terms of the
source of payment of debt service on the bonds, consist of "general obligation"
and "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenues derived from a
particular facility or class of facilities or in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Consequently, the credit quality of revenue bonds is
usually directly related to the credit standing of the user of the facility
involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields while
Municipal Obligations of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Fund, an issue
of Municipal Obligations may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Fund's
investment adviser will consider such an event in determining whether the Fund
should continue to hold the obligation. See the Appendix attached hereto for
further information concerning the ratings of Moody's and S&P and their
significance.
Among other instruments, a 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.
The yields on Municipal Obligations are dependent upon a variety of
factors, including general economic and monetary conditions, money market
factors, conditions of the municipal bond market, size of a particular offering,
maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal
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Bankruptcy Code, and laws, if any, which may be enacted by Congress or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the possibility that as a
result of litigation or other conditions, the power or ability of any one or
more issuers to pay, when due, principal of and interest on its, or their,
Municipal Obligations may be materially affected.
Alternative Minimum Tax Bonds. (Fixed Income and New York Municipal
Funds only) A Fund may invest without limit in "Alternative Minimum Tax Bonds,"
which are certain bonds issued after August 7, 1986 to finance certain
non-governmental activities. While the income from Alternative Minimum Tax Bonds
is exempt from regular federal income tax, it is a tax preference item for
purposes of the federal individual and corporate "alternative minimum tax." The
alternative minimum tax is a special tax that applies to a limited number of
taxpayers who have certain adjustments or tax preference items. Available
returns on Alternative Minimum Tax Bonds acquired by a Fund may be lower than
those from other Municipal Obligations acquired by a Fund due to the possibility
of federal, state and local alternative minimum or minimum income tax liability
on Alternative Minimum Tax Bonds. At present, the Fixed Income Fund does not
intend to purchase Alternative Minimum Tax Bonds.
Securities of Other Investment Companies. A Fund may invest in
securities of other investment companies to the extent permitted under the 1940
Act. Presently, under the 1940 Act, the Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Below Investment Grade Securities. (Fixed Income and Global Fixed
Income Funds only) A Fund may invest up to 35% of its net assets in fixed
income securities rated below investment grade and as low as C by Moody's or D
by S&P, and in comparable unrated securities. While the market values of these
securities tend to react less to fluctuations in interest rate levels than do
those of investment grade securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than investment grade securities. In
addition, these securities generally present a higher degree of credit risk.
Issuers of such securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their ability to
service their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. Investors should be aware
that ratings are relative and subjective and are not absolute standards of
quality.
The market for below investment grade securities and unrated
securities is relatively new and has not weathered a major economic recession.
Any such recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
A Fund may have difficulty disposing of certain of these securities
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, the Fund anticipates that
these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market for
investment grade securities. The lack of a liquid secondary market, as well as
adverse publicity and investor perception with respect to these securities, may
have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities
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also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund and calculating its net asset value.
Subsequent to its purchase by a Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require sale of such securities by the
Fund, although Warburg will consider such event in its determination of whether
the Fund should continue to hold the securities. The Fixed Income Fund and the
Global Fixed Income Fund may invest in securities rated as low as C by Moody's
or D by S&P and in unrated securities considered to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt rated D by S&P is in default or is expected to default
upon maturity or payment date.
Below investment grade and comparable unrated securities (commonly
referred to as "junk bonds") (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions and (ii)
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. The
market values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
The market value of securities rated below investment grade is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact a Fund's net asset
value. A Fund will rely on the judgment, analysis and experience of Warburg in
evaluating the creditworthiness of an issuer. In this evaluation, Warburg will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, these
securities are not intended for short-term investment. The Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings of such
securities.
Lending Portfolio Securities. A Fund may lend portfolio securities
to brokers, dealers and other financial organizations that meet capital and
other credit requirements or other criteria established by a Fund's Board of
Directors/Trustees (the "Board"). These loans, if and when made, may not exceed
33-1/3% of the Fund's total assets taken at value (including the loan
collateral). The Fund will not lend portfolio securities to Warburg or its
affiliates unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash or
liquid securities,
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which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. From time to time, a Fund may return a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. The Fund will
adhere to the following conditions whenever its portfolio securities are loaned:
(i) the Fund must receive at least 100% cash collateral or equivalent securities
of the type discussed in the preceding paragraph from the borrower; (ii) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (iii) the Fund must be able
to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower, provided, however,
that if a material event adversely affecting the investment occurs, the Board of
a Fund must terminate the loan and regain the right to vote the securities. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon the Fund's ability to
recover the loaned securities or dispose of the collateral for the loan. The
Fund bears a risk of loss in the event that the other party to the loan
agreement defaults on its obligations or becomes bankrupt and the Fund is
delayed or prevented from exercising its right to retrieve and dispose of the
loaned securities, including the risk of a possible decline in the value of the
loaned securities during the period in which the Fund seeks to assert its
rights.
Repurchase Agreements. Each Fund may invest up to 20% of its total
assets in repurchase agreement transactions with member banks of the Federal
Reserve System and certain non-bank dealers. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to resell the
security to the seller at an agreed-upon price and date. Under the terms of a
typical repurchase agreement, a Fund would acquire any underlying security for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the underlying securities will at all times be at least equal to the
total amount of the purchase obligation, including interest. The Fund bears a
risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations or becomes bankrupt and the Fund is delayed or
prevented from exercising its right to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert this right. Warburg,
acting under the
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supervision of each Fund's Board, monitors the creditworthiness of those bank
and non-bank dealers with which the Fund enters into repurchase agreements to
evaluate this risk. A repurchase agreement is considered to be a loan under the
1940 Act.
Reverse Repurchase Agreements and Dollar Rolls. A Fund may enter
into reverse repurchase agreements with member banks of the Federal Reserve
System and certain non-bank dealers. Reverse repurchase agreements involve the
sale of securities held by a Fund pursuant to its agreement to repurchase them
at a mutually agreed upon date, price and rate of interest. At the time a Fund
enters into a reverse repurchase agreement, it will with an approved custodian
cash or liquid high-grade debt securities having a value not less than the
repurchase price (including accrued interest). The segregated assets will be
marked-to-market daily and additional assets will be segregated on any day in
which the assets fall below the repurchase price (plus accrued interest). A
Fund's liquidity and ability to manage its assets might be affected when it sets
aside cash or portfolio securities to cover such commitments.
A Fund also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, a Fund
would forego principal and interest paid on such securities. A Fund would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. At the time a Fund enters into a dollar roll
transaction, it will segregate with an approved custodian cash or liquid
securities having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the segregated assets to ensure that
its value is maintained. Reverse assets to ensure that its value is maintained.
Reverse repurchase agreements and dollar rolls that are accounted for as
financings are considered to be borrowings under the 1940 Act.
Reverse repurchase agreements and dollar rolls involve the risk that
the market value of the securities retained in lieu of sale may decline below
the price of the securities a Fund has sold but is obligated to repurchase. In
the event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce a Fund's obligation
to repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Zero Coupon Securities. A Fund may invest without limit in "zero
coupon" U.S. Treasury, foreign government and U.S. and foreign corporate
convertible and nonconvertible debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and custodial
receipts or certificates of participation representation interests in such
stripped debt obligations and coupons. A zero coupon security pays no interest
to its holder prior to maturity. Accordingly, such securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. The Fund anticipates that it will not normally hold zero coupon
securities to maturity. Federal tax law requires that a holder of a zero coupon
security accrue a portion of the discount at which the security was purchased as
income each year, even though the holder receives no interest payment on the
security during the year. Such accrued discount will be includible in
determining the amount of dividends the Fund must pay each year and, in order to
generate cash necessary to pay such dividends, the Fund may liquidate portfolio
securities at a time when it would not otherwise have done so. At present, the
U.S. Treasury and certain U.S. agencies issue stripped Government Securities. In
addition, in the recent past, a number of banks and brokerage firms have
separated the principal portions from the coupon portions of U.S. Treasury bonds
and notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments.
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Government Zero Coupon Securities. The Fund may invest in (i)
Government Securities that have been stripped of their unmatured interest
coupons, (ii) the coupons themselves and (iii) receipts or certificates
representing interests in stripped Government Securities and coupons
(collectively referred to as "Government zero coupon securities"). The market
value of Government zero coupon securities that are considered Government
Securities is used for purposes of determining whether at least 65% of the
Fund's total assets is invested in Government Securities. However, receipts or
certificates which are underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. government, its agencies, authorities or
instrumentalities will not be considered Government Securities for purposes of
the 65% test.
Short Sales. (Fixed Income, Global Fixed Income and Intermediate
Government Funds only) In a short sale, a Fund sells a borrowed security and has
a corresponding obligation to the lender to return the identical security. The
seller does not immediately deliver the securities sold and is said to have a
short position in those securities until delivery occurs. If the Fund engages in
a short sale, the collateral for the short position will be maintained by the
Fund's custodian or qualified sub-custodian. While the short sale is open, the
Fund will maintain in a segregated account an amount of securities equal in
value to the securities sold short.
While a short sale is made by selling a security a Fund does not
own, a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. Not more than 10% of a Fund's net assets (taken
at current value) may be held as collateral for short sales against the box at
any one time. A Fund does not intend to engage in short sales against the box
for investment purposes. The Fund may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security). In such case, any future losses in the Fund's
long position should be offset by a gain in the short position and, conversely,
any gain in the long position should be reduced by a loss in the short position.
The extent to which such gains or losses are reduced will depend upon the amount
of the security sold short relative to the amount the Fund owns. There will be
certain additional transaction costs associated with short sales against the
box, but the Fund will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when it has
an unrealized gain on the securities, it may be required to recognize that gain
as if it had actually sold the securities (as a "constructive sale") on the date
it effects the short sale. However, such constructive sale treatment may not
apply if the Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other
conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Fund may effect short
sales.
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Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers. Investing in securities of companies with continuous operations of less
than three years ("unseasoned issuers") may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile than
securities of larger, more established companies or the market in general.
Because such companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. These
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, these companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning these companies than for larger, more established ones.
Although investing in securities of unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in a Fund may involve a
greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in more established, larger companies.
"Special Situation" Companies. (Fixed Income and Global Fixed
Income Funds only) "Special situation companies" are companies involved in an
actual or prospective acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the company's stock. If the actual or prospective situation does not materialize
as anticipated, the market price of the securities of a "special situation
company" may decline significantly. Warburg believes, however, that if it
analyzes "special situation companies" carefully and invests in the securities
of these companies at the appropriate time, the Fund may achieve capital growth.
There can be no assurance, however, that a special situation that exists at the
time of an its investment will be consummated under the terms and within the
time period contemplated.
Variable Rate and Master Demand Notes. (Fixed Income and New York
Municipal Funds only) Variable rate demand notes ("VRDNs") are obligations
issued by corporate or governmental entities which contain a floating or
variable interest rate adjustment formula and an unconditional right of demand
to receive payment of the unpaid principal balance plus accrued interest upon a
short notice period not to exceed seven days. The interest rates are adjustable
at intervals ranging from daily to up to every six months to some prevailing
market rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic
adjustment in the interest rate paid (usually tied to the Treasury Bill auction
rate) and permit daily changes in the principal amount borrowed. While there may
be no active secondary market with respect to a particular VRDN purchased by a
Fund, the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of the VRDN
involved in the event the issuer of the note defaulted on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss to the
extent of the default.
When-Issued Securities and Delayed-Delivery Transactions. A Fund may
utilize its assets to purchase securities on a "when-issued" basis or purchase
or sell securities for delayed delivery (i.e., payment or delivery occur beyond
the normal settlement date at a stated price and yield). The Fund will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the purpose of leverage, but may sell the securities before the
settlement date if
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Warburg deems it advantageous to do so. The payment obligation and the interest
rate that will be received on when-issued securities are fixed at the time the
buyer enters into the commitment. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party 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. (Fixed Income and New York Municipal
Funds only) A Fund may acquire "stand-by commitments" with respect to securities
held in its portfolio. Under a stand-by commitment, a dealer agrees to purchase
at the Fund's option specified securities at a specified price. The Fund's right
to exercise stand-by commitments is unconditional and unqualified. Stand-by
commitments acquired by the Fund may also be referred to as "put" options. 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 stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. When investing in stand-by commitments, a Fund will seek to enter into
stand-by commitments only with brokers, dealers and banks that, in the opinion
of Warburg, present minimal credit risks. In evaluating the creditworthiness of
the issuer of a stand-by commitment, Warburg will periodically review relevant
financial information concerning the issuer's assets, liabilities and contingent
claims. The Fund acquires stand-by commitments only in order to facilitate
portfolio liquidity and does not expect to exercise its rights under stand-by
commitments for trading purposes.
The amount payable to a Fund upon its exercise of a stand-by
commitment is normally (i) the Fund's acquisition cost of the 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.
A 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
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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.
A 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 securities. 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 a Fund's portfolio.
The Internal Revenue Service ("IRS") 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 Obligations acquired subject
to a stand-by commitment and the interest on the Municipal Obligations will be
tax exempt to a Fund.
REITs. (Fixed Income and Global Fixed Income Funds only) A fund may
invest in real estate investment trusts ("REITs"), which are pooled investment
vehicles that invest primarily in income-producing real estate or real estate
related loans or interests. Like regulated investment companies such as the
Funds, REITs are not taxed on income distributed to shareholders provided they
comply with several requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund investing in a REIT will indirectly bear its
proportionate share of any expenses paid by the REIT in addition to the expenses
of the Fund.
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Investing in REITs involves certain risks. A REIT may be affected by
changes in the value of the underlying property owned by such REIT or by the
quality of any credit extended by the REIT. REITs are dependent on management
skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation, the possibilities of failing
to qualify for the exemption from tax for distributed income under the Code and
failing to maintain their exemptions from the 1940 Act. REITs are also subject
to interest rate risks.
Warrants. (Fixed Income and Global Fixed Income Funds only) A Fund
may utilize up to 10% of its net assets to purchase warrants issued by domestic
and foreign companies to purchase newly created equity securities consisting of
common and preferred stock. Neither Fund currently intends to invest in
warrants. The equity security underlying a warrant is outstanding at the time
the warrant is issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and, thus, can be
a speculative investment. The value of a warrant may decline because of a
decline in the value of the underlying security, the passage of time, changes in
interest rates or in the dividend or other policies of the company whose equity
underlies the warrant or a change in the perception as to the future price of
the underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. A Fund may not invest
more than 15% of its net assets in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, repurchase agreements which have a maturity of longer than
seven days, VRDNs and 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. Securities that have legal or contractual restrictions on
resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund
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might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk and may result in
substantial losses. These securities may be less liquid than publicly traded
securities, and a Fund may take longer to liquidate these positions than would
be the case for publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Fund. Further, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that would be applicable if their
securities were publicly traded. A Fund's investment in illiquid securities is
subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Fund's net assets could be
adversely affected.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act for resales of certain securities to qualified institutional buyers. Warburg
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid
and therefore subject to a Fund's limit on the purchase of illiquid securities
unless the Fund's Board of Directors/Trustees or its delegates determines that
the Rule 144A Securities are liquid. In reaching liquidity decisions, Warburg
may consider, inter alia, the following factors: (i) the unregistered nature of
the security; (ii) the frequency of trades and quotes for the security; (iii)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
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Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Funds. The Boards may adopt guidelines and delegate to
Warburg the daily function of determining and monitoring the liquidity of Rule
144A Securities, although each Board will retain ultimate responsibility for any
determination regarding liquidity determinations.
Borrowing. A Fund may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption requests
so as to permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Fund's net assets.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. The Fund expects
that some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Non-Diversified Status. (Global Fixed Income and New York Municipal
Funds only) The Funds are classified as non-diversified within the meaning of
the 1940 Act, which means that they are not limited by such Act in the
proportion of its assets that it may invest in securities of a single issuer. As
non-diversified investment companies, the Funds may invest a greater proportion
of their assets in the obligations of a small number of issuers and, as a
result, may be subject to greater risk with respect to portfolio securities. To
the extent that the Funds assume large positions in the securities of a small
number of issuers, their return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
A Fund's investments will be limited, however, in order to qualify
as a "regulated investment company" for purposes of the Code. See "Additional
Information Concerning Taxes." To qualify, a Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
Taxable Investments. (New York Municipal Fund only) Because the
Fund's purpose is to provide income exempt from federal income tax and New York
State and New York City personal income tax, the Fund generally will invest in
taxable obligations only if and when the Fund's 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 portfolio
securities or (ii) when the Fund requires highly liquid securities in order to
meet
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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 Obligations
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 engage in repurchase agreement transactions on Government
Securities with member banks of the Federal Reserve System or with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. A repurchase agreement
is considered to be a loan under the 1940 Act. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Fund seeks to assert
these rights. The Fund's investment adviser, acting under the supervision of the
Board, reviews on an ongoing basis, the creditworthiness and the values of the
collateral of those banks and dealers with which the Fund enters into repurchase
agreements to evaluate potential risks.
INVESTMENT RESTRICTIONS
Fixed Income Fund. The investment limitations numbered 1 through 12
may not be changed without the affirmative vote of the holders of a majority of
the Fixed Income Fund's outstanding shares. Such majority is defined as the
lesser of (i) 67% or more of the shares present at the meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares.
Investment limitations 13 through 15 may be changed by a vote of the Board at
any time.
The Fixed Income Fund may not:
1. Borrow money except that the Fund may (i) borrow from banks for
temporary or emergency purposes, and (ii) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
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2. Purchase any securities which would cause 25% or more 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 U.S.
government securities.
3. Make loans except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and structured
securities; lend portfolio securities; and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Fund may invest in (a) securities secured by real estate, mortgages or
interests therein and (b) securities of companies that invest in or sponsor oil,
gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position,
except the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short sales
"against the box."
7. Purchase more than 10% of the voting securities of any one
issuer; provided that this limitation shall not apply to investments in U.S.
government securities.
8. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Issue any senior security except as permitted in these
Investment Restrictions.
11. Purchase the securities of any issuer if as a result more than
5% of the value of the Fund's total assets would be invested in the securities
of such issuer, except that this 5% limitation does not apply to U.S. government
securities and except that up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation.
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<PAGE> 120
12. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as otherwise permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) VRDNs and master demand notes providing for
settlement upon more than seven days notice by the Fund and (c) time deposits
maturing in more than seven calendar days shall be considered illiquid
securities.
15. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
Global Fixed Income Fund. The investment limitations numbered 1
through 10 may not be changed without the affirmative vote of the holders of a
majority (as defined above) of the Global Fixed Income Fund's outstanding
shares. Investment limitations 11 through 13 may be changed by a vote of the
Board at any time.
The Global Fixed Income Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the 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 U.S.
government securities.
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<PAGE> 121
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations and assignments and
structured securities; lend portfolio securities; and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate or invest in real estate limited
partnerships, oil, gas or mineral exploration or development programs or oil,
gas and mineral leases, except that the Fund may invest in (a) securities
secured by real estate, mortgages or interests therein and (b) securities of
companies that invest in or sponsor oil, gas or mineral exploration or
development programs.
6. Make short sales of securities or maintain a short position,
except the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short sales
"against the box."
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
9. Issue any senior security except as permitted in these Investment
Restrictions.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation,
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repurchase agreements with maturities greater than seven days shall be
considered illiquid securities.
13. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
Intermediate Government Fund. The investment limitations numbered 1
through 12 may not be changed without the affirmative vote of the holders of a
majority (as defined above) of the Intermediate Government Fund's outstanding
shares. Investment limitations 13 through 15 may be changed by a vote of the
Board at any time.
The Intermediate Government Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the 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 Government
Securities.
3. Make loans except that the Fund may purchase or hold fixed
income securities, including loan participations, assignments and structured
securities; lend portfolio securities and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities or invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in securities secured by real estate, mortgages
or interests therein.
6. Make short sales of securities or maintain a short position,
except the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short sales
"against the box".
7. Purchase more than 10% of the voting securities of any one
issuer; provided that this limitation shall not apply to investments in
Government Securities.
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8. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Fund may purchase and
sell futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Issue any senior security except as permitted in these
Investment Restrictions.
11. Purchase the securities of any issuer if as a result more than
5% of the value of the Fund's total assets would be invested in the securities
of such issuer, except that this 5% limitation does not apply to Government
Securities and except that up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation.
12. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
15. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
New York Municipal Fund. The investment limitations numbered 1
through 10 may not be changed without the affirmative vote of the holders of a
majority (as defined above) of the Municipal Fund's outstanding shares.
Investment limitations 11 and 14 may be changed by a vote of the Board at any
time.
The New York Municipal Fund may not:
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1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 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 (a) U.S.
government securities, (b) certificates of deposit issued by United States
branches of United States banks or (c) Municipal Obligations. For purposes of
this restriction, private purpose bonds ultimately payable by companies within
the same industry are treated as if they were issued by issuers in the same
industry.
3. Make loans except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and structured
securities, and enter into repurchase agreements in accordance with its
investment objective, policies and limitations.
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities or invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in securities secured by real estate, mortgages
or interests therein.
6. Make short sales of securities or maintain a short position,
except the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities or indexes, and purchase
and sell currencies or securities on a forward commitment or delayed-delivery
basis.
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9. Issue any senior security except as permitted in these Investment
Restrictions.
10. Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition or reorganization or (b) as
permitted under the 1940 Act.
11. 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.
12. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchased securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
13. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) variable rate and master demand notes providing for
settlement upon more than seven days' notice by the Fund and (c) time deposits
maturing in more than seven calendar days shall be considered illiquid
securities.
14. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage limitation
set forth in each of No. 1 above) is adhered to at the time of an investment, a
later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of a Fund's assets will
not constitute a violation of such restriction.
PORTFOLIO VALUATION
The following is a description of the procedures used by the Fund in
valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the highest bid and lowest asked quotations. If there
are no such quotations, the value of the securities will be taken to be the
lowest bid quotation on the exchange or market. Options or futures contracts
will be valued similarly. A security which is listed or traded on more than one
exchange is valued at the
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quotation on the exchange determined to be the primary market for such security.
In determining the market value of portfolio investments, each Fund may employ
outside organizations (each, a "Pricing Service") which may use a matrix,
formula or other objective method that takes into consideration market indexes,
matrices, yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of each Fund under the
general supervision and responsibility of the Board, which may replace a Pricing
Service at any time. Short-term obligations with maturities of 60 days or less
are valued at amortized cost, which constitutes fair value as determined by the
Board. Amortized cost involves valuing a portfolio instrument at its initial
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. Securities, options, futures contracts and other assets for which
market quotations are not available will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. In addition, the Board or its delegates may value a security at
fair value if it determines that such security's value determined by the
methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which a Fund's net asset value is not calculated. As a result,
calculation of the Fund's net asset value may not take place contemporaneously
with the determination of the prices of certain foreign portfolio securities
used in such calculation. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the
prevailing rate as quoted by a Pricing Service as of 12:00 noon (Eastern time).
If such quotations are not available, the rate of exchange will be determined in
good faith pursuant to consistently applied procedures established by the Board.
PORTFOLIO TRANSACTIONS
Warburg is responsible for establishing, reviewing and, where
necessary, modifying a Fund's investment program to achieve its investment
objectives. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On
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<PAGE> 127
exchanges on which commissions are negotiated, the cost of transactions may vary
among different brokers. On most foreign exchanges, commissions are generally
fixed. There is generally no stated commission in the case of securities traded
in domestic or foreign over-the-counter markets, but the price of securities
traded in over-the-counter markets includes an undisclosed commission or
mark-up. Government Securities are generally purchased from underwriters or
dealers, although certain newly issued Government Securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of Government
Securities.
Warburg will select specific portfolio investments and effect
transactions for a Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to
the Fund and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving its other clients and, due to brokerage
business on behalf of the Fund, research or other services obtained by the
placement of business of other clients may be useful to Warburg in carrying out
its obligations to the Fund. Research may include furnishing advice, either
directly or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends and portfolio strategy; access to
research analysts, corporate management personnel, industry experts, economists
and government officials; comparative performance evaluation and technical
measurement services and quotation services; and products and other services
(such as third party publications, reports and analyses, and computer and
electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information, including the research
described above) that assist Warburg in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to Warburg's own
research program. The fees to Warburg under its advisory agreement with a Fund
are not reduced by reason of its receiving any brokerage and research services.
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The following table details amounts paid by each Fund in commissions
to broker-dealers for execution of portfolio transactions during the indicated
fiscal year or period.
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed Income Fund $31,906 $29,433 $4,572
Global Fixed Income Fund -0- $ 900 $ 900
Intermediate Government -0- -0- -0-
Fund
New York Municipal Fund -0- -0- -0-
</TABLE>
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg. Such other investment clients may invest in the same securities as 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 Warburg
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 a
Fund or the size of the position obtained or sold for the Fund. To the extent
permitted by law, Warburg 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.
Any portfolio transaction for a Fund may be executed through
Counsellors Securities Inc., located at 466 Lexington Avenue, New York, New York
10017, the Fund's distributor and a wholly-owned subsidiary of Warburg
("Counsellors Securities"), if, in Warburg's judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act. No portfolio
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transactions have been executed through Counsellors Securities since the
commencement of the Fund's operations.
In no instance will portfolio securities be purchased from or sold
to Warburg or Counsellors Securities or any affiliated person of such companies.
In addition, a Fund will not give preference to any institutions with whom the
Fund enters into distribution or shareholder servicing agreements concerning the
provision of distribution services or support services.
Transactions for the Fixed Income and Global Fixed Income Funds may
be effected on foreign securities exchanges. In transactions for securities not
actively traded on a foreign securities exchange, a Fund will deal directly with
the dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve brokerage
commissions. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities for the Fund's portfolio directly from an issuer 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, in its
sole discretion, believes such practice to be otherwise in the Fund's interest.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. A Fund's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the Fund could result in
high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what Warburg believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
securities. In addition, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in
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trading activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of the Fund may be higher than mutual funds
having a similar objective that do not utilize these strategies.
It is not possible to predict the Funds' portfolio turnover rates.
High portfolio turnover rates (100% or more) may result in higher brokerage
commission, higher dealer markups or underwriting commissions as well as other
transaction costs. In addition, gains realized from portfolio turnover may be
taxable to shareholders.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL
OBLIGATIONS
The New York Municipal Fund's ability to achieve its investment
objective is dependent upon the ability of the issuers of New York Municipal
Obligations 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 Obligations to meet their financial obligations. Certain substantial
issuers of New York Municipal Obligations (including issuers whose obligations
may be acquired by the Fund) have experienced serious financial difficulties in
recent years. These difficulties have at times jeopardized the credit standing
and impaired the borrowing abilities of all New York issuers and have generally
contributed to higher interest costs for their borrowings and fewer markets for
their outstanding debt obligations. Although several different issues of
municipal securities of New York State and its agencies and instrumentalities
and of New York City have been downgraded by S&P and Moody's in recent years,
the most recent actions of S&P and Moody's have been to place the debt
obligations of New York State and New York City on CreditWatch with positive
implications and to upgrade the debt obligations of New York City, respectively.
Strong demand for New York Municipal Obligations has also at times had the
effect of permitting New York Municipal Obligations 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 Obligations 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 Obligations.
Although as of the date of this Prospectus, no issuers of New York Municipal
Obligations are in default with respect to the payment of their municipal
obligations, the occurrence of any such default could affect adversely the
market values and marketability of all New York Municipal Obligations and,
consequently, the net asset value of the New York Municipal Fund's portfolio.
Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Obligations are summarized below.
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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 Obligations 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's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The State economic forecast has been raised slightly from the
enacted budget forecast. Continued growth is projected in 1998 and 1999 for
employment, wages, and personal income, although the growth rates of personal
income and wages are expected to be lower than those in 1997. The growth of
personal income is projected to decline from 5.7 percent in 1997 to 4.8 percent
in 1998 and 4.2 percent in 1999, in part because growth in bonus payments is
expected to slow down, a distinct shift from the torrid rate of the last few
years. Overall employment growth is expected to be 1.9 percent in 1998, the
strongest in a decade, but will drop to 1.0 percent in 1999, reflecting the
slowing growth in the national economy, continued restraint in governmental
spending, and restructuring in the health care, social service, and banking
sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget
The State Constitution requires the governor (the "Governor") to
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
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<PAGE> 132
State law requires the Governor to propose a balanced budget
each year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and
less than $1 billion (1998-99). The State, as a part of the 1998-99 Executive
Budget projections submitted to the Legislature in February 1998, projected a
1999-00 General Fund budget gap of approximately $1.7 billion and a 2000-01 gap
of $3.7 billion. As a result of changes made in the 1998-99 enacted budget, the
1999-00 gap is now expected to be roughly $1.3 billion, or about $400 million
less than previously projected, after application of reserves created as part of
the 1998-99 budget process. Such reserves would not be available against
subsequent year imbalances.
Sustained growth in the State's economy could contribute to
closing projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of
receipts and disbursements for the 2000-01 and 2001-02 fiscal years as a part of
the 1999-00 Executive Budget process, as required by law. The revised
expectations for years 2000-01 and 2001-02 will reflect the cumulative impact of
tax reductions and spending commitments enacted over the last several years as
well as new 1999-00 Executive Budget recommendations. The School Tax Relief
Program ("STAR") program, which dedicates a portion of personal income tax
receipts to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available to
the General Fund by an estimated $1.3 billion in 2000-01. Measured from the
1998-99 base, scheduled reductions to estate and gift, sales and other taxes,
reflecting tax cuts enacted in 1997-98 and 1998-99, will lower General Fund
taxes and fees by an estimated $1.8 billion in 2000-01. Disbursement projections
for the outyears currently assume additional outlays for school aid, Medicaid,
welfare reform, mental health community reinvestment, and other multi-year
spending commitments in law.
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On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps could become
a significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and
ends on March 31, 1999 and is referred to herein as the State's 1998-99 fiscal
year. The Legislature adopted the debt service component of the State budget for
the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for the current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to
grow by $2.43 billion over 1997-98 levels, or $690 million more than proposed in
the Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the STAR, expansion of the child
care income-tax credit for middle-income families, a phased-in reduction of the
general business tax, and reduction of several other taxes and fees, including
an accelerated phase-out of assessments on medical providers. The enacted budget
also provides for significant increases in spending for public schools, special
education programs, and for the State and City university systems. It also
allocates $50 million for a new Debt Reduction Reserve Fund ("DRRF") that may
eventually be used to pay debt service costs on or to prepay outstanding
State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in
the General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund ("TSRF"), a balance of $158 million in the Community Projects Fund
("CPF"), and a balance of $100 million in the Contingency Reserve Fund ("CRF").
The TSRF can be used in the event of an unanticipated General Fund cash
operating deficit, as provided under the State Constitution and State Finance
Law. The CPF is used to finance various legislative and executive initiatives.
The CRF provides resource to help finance any extraordinary litigation costs
during the fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates
several Executive Budget tax proposals that, if enacted, would further reduce
receipts otherwise available to the General Fund by approximately $700 million
during 1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that are projected to further reduce receipts available to the
General Fund by over $200 million. These initiatives include reducing the fee to
register passenger motor vehicles and earmarking a larger portion of such fees
to dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In
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addition to the specific tax and fee reductions discussed above, the Executive
Budget also proposes establishing a reserve of $100 million to permit the
acceleration into 1998-99 of other tax reductions that are otherwise scheduled
in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99
Financial Plan includes approximately $64 million in non-recurring resources,
comprising less than two-tenths of one percent of General Fund disbursements.
The non-recurring resources projected for use in 1998-99 consist of $27 million
in retroactive federal welfare reimbursements for family assistance recipients
with HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated
at $4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending
plan includes: $2.51 billion in disbursements for transportation purposes,
including the State and local highway and bridge program; $815 million for
environmental activities; $379 million for correctional services; $228 million
for the State University of New York ("SUNY") and the City University of New
York ("CUNY"); $290 million for mental hygiene projects; and $375 million for
CEFAP. Approximately 28 percent of capital projects are proposed to be financed
by "pay-as-you-go" resources. State-supported bond issuances finance 46 percent
of capital projects, with federal grants financing the remaining 26 percent.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from their projections, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
Division of Budget believes it could take similar actions should variances occur
in its projections for the current fiscal year.
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.
On March 31, 1998, the State recorded, on a GAAP-basis, its
first-ever, accumulated positive balance in its General Fund. This "accumulated
surplus" was $567 million. The improvement in the State's GAAP position is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-98 fiscal year. Much of that surplus is reserved for future requirements,
but a portion is being used to meet spending needs in 1998-99. Thus, the State
expects some deterioration in its GAAP position, but expects to maintain a
positive GAAP balance through the end of the current fiscal year.
The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset in
part by an operating deficit of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year, as compared to an operating surplus of
$1.93 billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of $195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
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Debt Limits and Outstanding Debt
There are a number of methods by which the State of New York may
incur debt. Under the State Constitution, the State may not, with limited
exceptions for emergencies, undertake long-term general obligation borrowing
(i.e., borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
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
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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 to
restructure the way the State makes certain local aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. JDA recently resumed its lending activities
under a revised set of lending programs and underwriting guidelines.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
2, 1998, S&P affirmed its A rating on the State's outstanding bonds. On January
6, 1992, Moody's reduced its ratings on outstanding limited-liability State
lease
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purchase and contractual obligations from A to Baa1. On February 28, 1994,
Moody's reconfirmed its A rating on the State's general obligation long-term
indebtedness. On March 20, 1998, Moody's assigned the highest commercial
paper rating of P-1 to the short-term notes of the State. On July 6, 1998,
Moody's assigned an A2 rating with a stable outlook to the State's general
obligations.
The State anticipates that its capital programs will be
financed, in part, through borrowings by the State and its public authorities in
the 1998-99 fiscal year. Information on the State's five-year Capital Program
and Financing Plan for the 1998-99 through 2002-03 fiscal years, updated to
reflect actions taken in the 1998-99 State budget (the "Plan"), was released on
July 30, 1998. The projection of State borrowings for the 1998-99 fiscal year is
subject to change as market conditions, interest rates and other factors vary
throughout the fiscal year.
The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase
and contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
As a part of the Plan, changes were proposed to the State's
borrowing plan, including: the delay in the issuance of COPs to finance welfare
information systems until 1998-99 to permit a thorough assessment of needs; and
the elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation
Certain litigation pending against New York State or its officers or
employees could have a substantial or long-term adverse effect on New York State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) alleged responsibility of New York State officials to assist
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in remedying racial segregation in the City of Yonkers; (5) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (8) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware 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. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1998-97 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
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Although other litigation is pending against New York State,
except as described herein, no current litigation involves New York State's
authority, as a matter of law, to contract indebtedness, issue its obligations,
or pay such indebtedness when it matures, or affects New York State's power or
ability, as a matter of law, to impose or collect significant amounts of taxes
and revenues.
Authorities
The fiscal stability of New York State is related, in part, to
the fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities
The fiscal health of the State may also be impacted by the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The City
depends on State aid both to enable the City to balance its budget and to meet
its cash requirements. There can be no assurance that there will not be
reductions in State aid to the City from amounts currently projected or that
State budgets will be adopted by the April 1 statutory deadline or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in a reduction in or a delay in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired
the borrowing ability of both the City and New York State. In that year the City
lost access to the public
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credit markets. The City was not able to sell short-term notes to the public
again until 1979. In 1975, S&P suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward
to BBB+ and on November 19, 1987, to A-. On February 3, 1998 and again on May
27, 1998, S&P assigned a BBB+ rating to the City's general obligation debt and
placed the ratings on CreditWatch with positive implications. Moody's ratings of
City bonds were revised in November 1981 from B (in effect since 1977) to Ba1,
in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again in
February 1991 to Baa1. On February 25, 1998, Moody's upgraded nearly $28 billion
of the City's general obligations from Baa1 to A3. On June 9, 1998, Moody's
again assigned on A3 rating to the City's general obligations and stated that
its outlook was stable.
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.
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.
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<PAGE> 141
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-98 level. Recurring growth in the State General Fund tax base is projected
to be approximately six percent during 1998-99, after adjusting for tax law and
administrative changes. This growth rate is lower than the rates for 1996-97 or
currently estimated for 1997-98, but roughly equivalent to the rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the
impact of scheduled tax reductions that will lower receipts by $38 million, as
well as the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax
receipts are projected to decline slightly in 1998-99, falling from $4.98
million to $4.96 billion. The decline in this category is largely attributable
to scheduled tax reductions. In total, collections for corporation and utility
taxes and the petroleum business tax are projected to fall by $107 million from
1997-98. The decline in receipts in these categories is partially offset by
growth in the corporation franchise, insurance and bank taxes, which are
projected to grow by $88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus
of $131 million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99
in the General Fund, primarily as a result of the use of the 1997-98 cash
surplus. In 1998-99, the General Fund GAAP Financial Plan shows total revenues
of $34.68 billion, total expenditures of $35.94 billion, and net other financing
sources and uses of $42 million.
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<PAGE> 142
Although the City has maintained balanced budgets in each of
its last sixteen fiscal years and is projected to achieve balanced operating
results for the 1997 fiscal year, there can be no assurance that the gap-closing
actions proposed in the 1998-2001 Financial Plan can be successfully implemented
or that the City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could adversely affect
the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in the 1998-2001 Financial Plan, employment
growth, the ability to implement proposed reductions in City personnel and other
cost reduction initiatives, the ability of the Health and Hospitals Corporation
and the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also
dependent upon the City's ability to market its securities successfully. The
City's financing program for fiscal years 1998 through 2001 contemplates the
issuance of $5.7 billion of general obligation bonds and $5.7 billion of bonds
to be issued by the proposed New York City Transitional Finance Authority (the
"Finance Authority") to finance City capital projects. The Finance Authority,
was created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials
have issued reports and made public statements which, among other things, state
that projected revenues and expenditures may be different from those forecast in
the City's financial plans. It is reasonable
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to expect that such reports and statements will continue to be issued and to
engender public comment.
The City since 1981 has fully satisfied its seasonal financing
needs in the public credit markets, repaying all short-term obligations within
their fiscal year of issuance. Although the City's 1998 fiscal year financial
plan projected $2.4 billion of seasonal financing, the City expected to
undertake only approximately $1.4 billion of seasonal financing. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the re-establishment of the Financial Control Board for
the City of Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers
Board is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the State to assist Yonkers could result in increased State
expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance
during the 1996 legislative session through $50 million in special
appropriations targeted for distressed cities, and that was largely continued in
1997. Twenty-eight municipalities were scheduled to share in more than $32
million in targeted unrestricted aid allocated in the 1997-98 budget. An
additional $21 million will be dispersed among all cities, towns and villages, a
3.97% increase in General Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in
unrestricted aid targeted to 57 municipalities across the State. Other
assistance for municipalities with special needs totals more than $25.6 million.
Twelve upstate cities will receive $24.2 million in one-time assistance from a
cash flow acceleration of State aid.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1996, the total indebtedness
of all localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to
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review and make recommendations concerning the budgets of those local government
units other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
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 the State, the 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 the 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 the State assistance in
the future.
Year 2000 Compliance
The State is currently addressing "Year 2000" data processing
compliance issues. The Year 2000 compliance issue ("Y2K") arises because most
computer software programs allocate two digits to the data field for "year" on
the assumption that the first two digits will be "19". Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data.
MANAGEMENT OF THE FUNDS
Officers and Boards of Directors/Trustees
The business and affairs of the Global Fixed Income and
Intermediate Government Funds are managed by the Board of Directors in
accordance with the laws of the State of Maryland. The business and affairs of
the Fixed Income and New York Municipal Funds are managed by a Board of Trustees
in accordance with the laws of The Commonwealth of Massachusetts. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies authorized by the Board. Under each Fund's Charter, a Board
may classify or reclassify any unissued shares of the Funds 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. A Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Funds.
The names (and ages) of the Funds' Directors/Trustees and
officers, their addresses, present positions and principal occupations during
the past five years and other affiliations are set forth below.
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<PAGE> 145
<TABLE>
<CAPTION>
<S> <C>
Richard N. Cooper* (64) Director/Trustee
Harvard University Professor at Harvard University; National
1737 Cambridge Street Intelligence Council from June 1995 until January
Cambridge, Massachusetts 02138 1997; Director or Trustee of CircuitCity Stores, Inc.
(retail electronics and appliances) and
Phoenix Home Life Mutual Insurance Company;
Director/Trustee of other investment companies advised by
Warburg.
Jack W. Fritz (71) Director/Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications
Wilson, Wyoming 83014 (developers and operators of radio stations);
Director of Advo, Inc. (direct mail advertising);
Director/Trustee of other investment companies
advised by Warburg.
John L. Furth* (68) Chairman of the Board
466 Lexington Avenue Chief Executive Officer and Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1970; Chairman of the Board
and officer of other investment companies advised by Warburg;
Director/Trustee of other investment companies in the
Warburg Pincus family of funds.
Jeffrey E. Garten (58) Director/Trustee
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut 06520-8200 Beinecke Professor in the Practice of International
Trade and Finance; Undersecretary of Commerce for
International Trade from November 1993 to October 1995;
Professor at Columbia University from September 1992
to November 1993; Director/Trustee of other investment
companies advised by Warburg.
</TABLE>
- ------------------------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 146
<TABLE>
<CAPTION>
<S> <C>
Thomas A. Melfe (67) Director/Trustee
1251 Avenue of the Americas, 29th Floor Partner in the law firm of Piper & Marbury; Partner
New York, New York 10020-1104 in the law firm of Donovan Leisure Newton & Irvine
from April 1984 to April 1998; Chairman of the
Board, Municipal Fund for New York Investors,
Inc.; Director/Trustee of other investment
companies advised by Warburg.
Arnold M. Reichman* (50) Director/Trustee
466 Lexington Avenue Managing Director, Chief Operating Officer and
New York, New York 10017-3147 Assistant Secretary of Warburg; Associated with Warburg
since 1984; Officer of Counsellors Securities; Director/
Trustee of other investment companies advised by Warburg.
Alexander B. Trowbridge (69) Director/Trustee 1317 F Street, N.W., 5th Floor President
of Trowbridge Partners, Inc. (business Washington, DC
20004 consulting) from January 1990 to November 1996;
Director or Trustee of New England Life Insurance Co.,
ICOS Corporation (biopharmaceuticals), WMX Technologies
Inc. (solid and hazardous waste collection and disposal),
The Rouse Company (real estate development), Harris Corp.
(electronics and communications equipment), The Gillette
Co. (personal care products) and Sun Company Inc.
(petroleum refining and marketing); Director/Trustee of
other investment companies advised by Warburg.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1991; Officer of Counsellors Securities and of
other investment companies advised by Warburg.
Steven B. Plump (40) Executive Vice President
466 Lexington Avenue Senior Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1995; Associated with Chemical Investment
Services and its affiliates from 1993 until 1995.
Officer of Counsellors Securities and of other investment
companies in the Warburg Pincus family of funds.
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
<S> <C>
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1984; Officer of Counsellors Securities and
of other investment companies advised by Warburg.
Janna Manes, Esq. (31) Vice President and Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1996; Associated with the law firm of Willkie
Farr & Gallagher from 1993 to 1996; Officer of other
investment companies in the Warburg Pincus family of
funds.
Howard Conroy, CPA (45) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1992; Officer of other investment companies
in the Warburg Pincus family of funds.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1995; Associated with BlackRock Financial
Management, Inc. from September 1994 to October
1995; Associated with BEA Associates from April
1993 to September 1994; Associated with Ernst &
Young LLP from 1990 to 1993; Officer of other
investment companies in the Warburg Pincus family
of funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1997; Associated with the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein from 1995 to
1997; Officer of other investment companies in the
Warburg Pincus family of funds.
</TABLE>
No employee of Warburg or PFPC Inc., the Fund's co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Fund
for acting as an officer or director/trustee of a Fund. For each Fund in the
Warburg Pincus family of funds, each Director/Trustee who is not a director,
trustee, officer or employee of Warburg, PFPC or any of their affiliates
receives an annual fee of $500, $1,000 or $2,000 per fund for Director services
provided, and $250 for each Board meeting and, as applicable, Audit Committee
meeting attended in addition to reimbursement
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<PAGE> 148
for expenses incurred in connection with attendance at Board meetings.
Directors'/Trustees' Compensation
(for fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
Total Compensation from all
Total Compensation Investment Companies Managed by
Name of Director/Trustee from a Fund Warburg*
- ------------------------ ----------- --------
<S> <C> <C>
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $2,000 $44,500
Donald J. Donahue*** $2,000 $44,500
Jack W. Fritz $2,000 $44,500
Jeffrey E. Garten N/A N/A
Thomas A. Melfe* $2,000 $44,500
Alexander B. Trowbridge $2,000 $44,500
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 39 investment
companies in the Warburg Pincus family of funds, except for Mr. Melfe, who
also serves as a Director/Trustee of 72 investment companies in the Warburg
Pincus family of funds. Mr. Melfe is not a Director/Trustee of Global Fixed
Income and Intermediate Government Funds.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg,
and, accordingly, receive no compensation from any Fund or any other
investment companies in the Warburg Pincus family of funds.
*** Mr. Donahue resigned as a Director/Trustee of each Fund effective February
6, 1998.
As of January 31, 1999, the Directors and officers of each
Fund as a group owned less than 1% of the outstanding shares of each Fund.
Portfolio Managers of the Funds
Mr. M. Anthony E. van Daalen, Portfolio Manager of the
Intermediate Government Fund and Fixed Income Fund, earned a B.A. degree from
Wesleyan University and a M.B.A. degree from New York University. Mr. van
Daalen is Senior Vice President of Warburg. He has been with these Funds since
joining Warburg in 1992,
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<PAGE> 149
specializing in government and high yield bonds. Mr. van Daalen was an assistant
vice president, portfolio manager at Citibank in the Private Banking Group from
1985 to 1991. Prior to that Mr. van Daalen was a retail banking manager at The
Connecticut Bank and Trust Co. from 1983 to 1985 and an analyst at
Goldstein/Krall Market Research from 1982 to 1983.
Ms. Sharon B. Parente, Co-Portfolio Manager of the Municipal
Fund, earned a B.S. degree from the University of Virginia. Ms. Parente is a
Managing Director of Warburg. She has been with the Fund since joining Warburg
in 1992, specializing in municipal bonds and corporate cash. Ms. Parente was a
vice president at Citibank, N.A. in the Private Banking Group from 1985 to
1992. Prior to that, Ms. Parente was a fixed income portfolio manager at
Calvert Group from 1981 to 1985 and a municipal trader's assistant at Prescott,
Ball & Turben from 1979 to 1981.
Mr. Charles C. Van Vleet, Portfolio Manager of the Global
Fixed Income Fund, earned a B.A. degree from the University of California,
Berkeley. Mr. Van Vleet is a Vice President of Warburg. Prior to joining
Warburg in May 1998, Mr. Van Vleet was a senior vice president and senior
global strategist at Putnam Investment Management from 1994 to 1998. Prior to
that Mr. Van Vleet served as vice president and senior portfolio manager at
Alliance Capital Management.
Patrick A. Bittner, CFA, Co-Portfolio Manager of the
Municipal Fund, earned a B.S. degree from the University of Wisconsin (Madison)
and a Masters of Business Science from Temple University. Mr. Bittner is an
Assistant Vice President of Warburg. Prior to joining Warburg in 1994, Mr.
Bittner served as an assistant portfolio manager at First Fidelity Bank from
1991 to 1994.
Investment Adviser and Co-Administrators
Warburg, located at 466 Lexington Avenue, New York, New York
10017-3147, serves as investment adviser to the Funds, PFPC serves as
co-administrator to the Funds and Counsellors Funds Service, Inc. ("Counsellors
Service") serves as co-administrator to the Funds pursuant to separate written
agreements with each Fund (the "Advisory Agreement," the "PFPC Co-Administration
Agreement" and the "Counsellors Service Co-Administration Agreement,"
respectively). For the services provided by Warburg under the Advisory
Agreements, Fixed Income Fund, Global Fixed Income Fund, Intermediate Government
Fund and New York Intermediate Municipal Fund each pay Warburg a fee calculated
at an annual rate of .50%, 1.00%, .50%, and .40%, respectively, of the Fund's
average daily net assets. For the services provided by Counsellors Service under
the Counsellors Service Co-Administration Agreement, each Fund pays Counsellors
Service a fee calculated at an annual rate of .10% of the Fund's average daily
net assets. For the services provided by PFPC under the PFPC Co-Administration
Agreement, each Fund pays PFPC a fee calculated at an annual rate of .05% of the
Fund's average daily net assets, exclusive of out-of-pocket expense. Each class
of shares of the Fund bears its proportionate share of fees payable to Warburg,
Counsellors Service and PFPC in the proportion that its assets bear to the
aggregate assets of the Fund at the time of calculation. These fees are
calculated at an annual rate based on a percentage of a Portfolio's average
daily net assets.
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Advisory Fees paid to Warburg
(portions of fees waived, if any, are noted
in parenthesis next to the amount earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal Year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund $ 648,732 ($163,311) $ 973,381 ($151,599) $1,799,237 $(138,880)
Global Fixed Income Fund $1,031,630 ($514,200) $1,783,032 ($707,931) $1,811,063 $(821,020)
Intermediate Government Fund $ 254,649 ($196,577) $ 234,862 ($133,433) $ 274,007 $(165,038)
New York Municipal Fund $ 301,602 ($102,812) $ 332,574 ($65,877) $ 386,531 $ (67,141)
</TABLE>
Co-Administration Fees paid to PFPC
(portions of fees waived, if any, are noted
in parenthesis next to the amount earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund $117,711 ($28,629) $97,338 $189,784
Global Fixed Income $ 97,076
Fund $109,014 ($58,514) $89,151 $ 30,565 $(21,456)
Intermediate Government Fund $ 47,013 ($36,869) $23,486 ($22,971) $ 58,524
New York Municipal Fund $ 68,978 ($25,703) $41,572
</TABLE>
Co-Administration Fees paid to Counsellors Service
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed Income Fund $ 129,747 $ 194,676 $359,847
Global Fixed Income
Fund $ 103,163 $ 178,303 $181,107
Intermediate Government Fund $ 50,930 $ 46,972 $ 54,802
New York Municipal Fund $ 75,401 $ 83,144 $ 96,633
</TABLE>
Custodian and Transfer Agent
PNC Bank, National Association ("PNC") serves as custodian of
each Fund's assets pursuant to a custodian agreement (the "PNC Custodian
Agreements"). State Street
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Bank & Trust Company ("State Street") serves as custodian of the Fixed Income
Fund's and the Global Fixed Income Fund's non-U.S. assets pursuant to a
custodian agreement (the "State Street Custodian Agreement") (collectively, the
"Custodian Agreements"). Under the Custodian Agreements, PNC and State Street
each (i) maintains a separate account or accounts in the name of a 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 may delegate its duties under
its Custodian Agreement with a Fund to a wholly owned direct or indirect
subsidiary of PNC or PNC Bank Corp. upon notice to the Fund and upon the
satisfaction of certain other conditions. State Street is authorized to select
one or more foreign banking institutions and foreign securities depositories as
sub-custodian on behalf of the Global Fixed Income Fund. PNC is an indirect
wholly owned subsidiary of PNC Bank Corp., and its principal business address is
Broad and Chestnut Streets, Philadelphia, Pennsylvania 19101. The principal
business address of State Street is 225 Franklin Street, Boston, Massachusetts
02110.
State Street serves as the shareholder servicing, transfer and
dividend disbursing agent of each Fund pursuant to separate Transfer Agency and
Service Agreements, under which State Street (i) issues and redeems shares of a
Fund, (ii) addresses and mails all communications by the Fund to record owners
of 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 Fund's Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, Boston, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies. The
Fixed Income and New York Municipal Funds were organized in 1987 and 1986,
respectively, under the laws of The Commonwealth of Massachusetts and each is a
business entity commonly known as a "Massachusetts business trust." The Global
Fixed Income and Intermediate Government Funds were incorporated in 1990 and
1988, respectively, under the laws of the State of Maryland and each is an
entity commonly known as a "Maryland corporation." Each of the Funds is
"diversified" within the meaning of the 1940 Act, other than the Global Fixed
Income and New York Municipal Funds, which are "non-diversified." Each Fund
other than the New York Municipal Fund offers two classes of shares, Common
Shares and Advisor Shares. Unless otherwise indicated, references to a "Fund"
apply to each class of shares of that Fund.
The Fixed Income Fund's and New York Municipal Fund's
Agreement and Declaration of Trust (the "Trust Agreements") and the Global Fixed
Income Fund's and Intermediate Government Fund's charter authorizes the Board of
each Fund to issue full and
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fractional shares of common stock, $.001 par value per share ("Common Stock"),
of which one billion shares are designated Common Shares and two billion shares
are designated Advisor Shares.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of the
Fixed Income and New York Municipal Funds. However, the Trust Agreements
disclaim shareholder liability for acts or obligations of a Fund and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or a Trustee. The Trust
Agreements provide for indemnification from the Fund's property for all losses
and expenses of any shareholder held personally liable for the obligations of
the Fund. Thus, the risk of a shareholder's incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations, a possibility that Warburg believes is remote
and immaterial. Upon payment of any liability incurred by the Fund, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Fund.
All shareholders of a Fund in each class, 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/Trustees can elect all Directors/Trustees of a
Fund. Shares are transferable but have no preemptive, conversion or subscription
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 governing 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 the Intermediate Government
and New York Municipal Funds because he may be deemed to possess or share
investment power over shares owned by clients of Warburg.
The Fixed Income Fund and the New York Municipal Fund were
organized under the laws of The Commonwealth of Massachusetts as Massachusetts
business trusts in 1987 and 1986, respectively. In 1992, these Funds changed
their names from "Counsellors Fixed Income Fund" and "Counsellors New York
Municipal Bond Fund" to "Warburg, Pincus Fixed Income Fund" and "Warburg, Pincus
New York Municipal Bond Fund," respectively. On February 28, 1995, the New York
Municipal Fund
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changed its name to "Warburg, Pincus New York Intermediate Municipal Fund." The
Global Fixed Income Fund and the Intermediate Government Fund were incorporated
under the laws of the State of Maryland in 1990 and 1988, respectively, under
the names "Counsellors Global Fixed Income Fund, Inc." and "Counsellors
Intermediate Maturity Government Fund, Inc.," respectively. On October 27, 1995
and February 16, 1996, the Funds amended their respective charters to change
their names to "Warburg, Pincus Global Fixed Income Fund, Inc." and "Warburg,
Pincus Intermediate Maturity Government Fund, Inc."
Distribution and Shareholder Servicing
Counsellors Securities acts as distributor to each of the
Funds and is a wholly-owned subsidiary of Warburg.
The Funds have entered into agreements ("Agreements") with
institutional shareholders of record, broker-dealers, financial institutions,
depository institutions, retirement plans and financial intermediaries
("Institutions") to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients or customers (or
participants in the case of retirement plans) ("Customers") who are beneficial
owners of Advisor Shares. Agreements will be governed by a distribution plan
(the "Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The
Distribution Plan requires 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. For the fiscal year ended October 31,
1998, the Fixed Income, Global Fixed Income and Intermediate Government Fund.
Funds paid $8,768, $38,716 and $17 respectively, in 12b-1 fees in connection
with the Fund's Advisor Shares, all of which were paid to Institutions.
An Institution with which a Fund has entered into an Agreement
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 Institution: (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 each Fund's co-administration and distribution and
shareholder servicing arrangements. A Customer of an Institution should read the
relevant Prospectus and this Statement of Additional Information in conjunction
with the Agreement and other literature describing the services and related fees
that would be provided by the Institution to its Customers prior to any purchase
of Fund shares. Prospectuses are available from the Fund's distributor upon
request. No preference will be shown in the selection of Fund portfolio
investments for the instruments of Institutions.
Common Shares. Certain financial-services firms may receive
fees from the distributor, the adviser or their affiliates for providing
recordkeeping or other services in connection with investments in the Funds.
Financial-services firms may also be reimbursed for marketing costs. The service
fee may be up to 0.40% per year of the value of fund accounts maintained by the
firm. The Funds may reimburse part of the service fee at rates they would
normally pay to the transfer agent for providing the services.
Advisor shares. Certain Institutions may receive additional
fees from the distributor, the adviser or their affiliates for providing
supplemental services in connection with investments in a fund. Institutions may
also be reimbursed for marketing costs. Additional fees may be up to 0.10% per
year of the value of fund accounts maintained by the firm. Fees payable to any
particular Institution are determined based upon a number of factors, including
the nature and quality of the services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Institution. To the extent that the distributor, the adviser or their affiliates
provide additional compensation or reimbursements for marketing expenses, such
payments would not represent an additional expense to the fund or its
shareholders.
General. The Distribution Plans and 12b-1 Plans will continue
in effect for so long as its continuance is specifically approved at least
annually by the Board, including a majority of the Directors/Trustees who are
not interested persons of a Fund and who have no direct or indirect financial
interest in the operation of the Distribution Plan ("Independent
Directors/Trustees"). Any material amendment of the Distribution Plan would
require the
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approval of the Board in the same manner. The Distribution Plans or the 12b-1
Plans may not be amended to increase materially the amount to be spent under it
without shareholder approval of the Advisor Shares. The Distribution Plans or
the 12b-1 Plans may be terminated at any time, without penalty, by vote of a
majority of the Independent Directors/Trustees or by a vote of a majority of the
outstanding voting securities of the Advisor Shares of a Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of a Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (The Funds may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, a Fund may
make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Fund intends to comply with Rule 18f-1 promulgated
under the 1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of a Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a 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.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Warburg is available to investors in each Fund. A Common Shareholder may
exchange Common Shares of a Fund for Common Shares of another Fund or for Common
Shares of another Warburg Pincus fund at their respective net asset values. An
Advisor Shareholder may exchange Advisor Shares of a Fund for Advisor Shares of
another Warburg Pincus fund at their respective net asset values. 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
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made at each Fund's net asset value determined at the end of that business day.
Exchanges will be effected without a sales charge but must satisfy the minimum
dollar amount necessary for new purchases. The Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing
in any state in which the shares being acquired may legally be sold. When an
investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a redemption. Therefore, the investor may realize a
taxable gain or loss in connection with the exchange. Investors wishing to
exchange shares of a Fund for shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at 800-927-2874.
The Funds reserve the right to refuse exchange purchases by
any person or group if, in Warburg's judgment, a Fund would be unable to invest
the money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected. Examples of when an
exchange purchase could be refused are when the Fund receives or anticipates
receiving large exchange orders at or about the same time and/or when a pattern
of exchanges within a short period of time (often associated with a "market
timing" strategy) is discerned. The Funds reserve the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in each Fund. Each prospective shareholder is urged to
consult his own tax adviser with respect to the specific federal, state, local
and foreign tax consequences of investing in a Fund. The summary is based on the
laws in effect on the date of this Statement of Additional Information, which
are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify, a
Fund must, among other things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of the Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
securities of other regulated investment companies, Government Securities and
other securities, with such other
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securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its assets
is invested in the securities (other than Government Securities or securities of
other regulated investment companies) of any one issuer or any two or more
issuers that the Fund controls and are determined to be engaged in the same or
similar trades or businesses or related trades or businesses. Each Fund expects
that all of its foreign currency gains will be directly related to its principal
business of investing in stocks and securities.
As a regulated investment company, each Fund will not be
subject to United States federal income tax on its net investment income (i.e.,
income other than its net realized long- and short-term capital gains) and its
net realized long- and short-term capital gains, if any, that it distributes to
its shareholders, provided that an amount equal to at least 90% of the sum of
its investment company taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) and its net
tax-exempt income for the taxable year is distributed, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
distribute.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income, including the income
(if any) imputed with respect to investments in zero coupon securities. The
Board of each Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, a Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United Stares federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds to the
extent their credits exceed their liabilities, if any, and (c) will be entitled
to increase their tax basis, for United States federal income tax purposes, in
their shares by an amount equal to 65% of the amount of undistributed capital
gains included in the shareholder's income. Organizations or persons not subject
to federal income tax on such capital gains will be entitled to a refund of
their pro rata share of such taxes paid by the Fund upon filing appropriate
returns or claims for refund with the IRS. Even if a Fund makes such an
election, it is possible that it may incur an excise tax as a result of not
having distributed net capital gains.
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The Code imposes a 4% nondeductible excise tax on a Fund to
the extent the Fund does not distribute by the end of any calendar year at least
98% of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
With regard to each Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income and
capital or the proceeds of securities sales by foreign investors such as the
Fund and may limit the Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
a Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits (including amounts derived from interest on
tax-exempt obligations), would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as ordinary
income, even though those distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term capital gains. If a Fund
fails to qualify as a regulated investment company in any year, it must pay out
its earnings and profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if the Fund failed to qualify as a
regulated investment company for a period greater than one taxable year, the
Fund may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
Special Tax Matters Regarding the Fixed Income Fund, Global
Fixed Income Fund and Intermediate Government Fund. Each Fund's short sales
against the box, if any, and transactions in foreign currencies, forward
contracts, options and futures contracts (including options and futures
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer Fund losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require each Fund
to mark-to-market certain types of the
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positions in its portfolio (i.e., treat them as if they were closed out) and (b)
may cause the Fund to recognize income without receiving cash with which to pay
dividends or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. Each Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it engages in short sales
against the box or acquires any foreign currency, forward contract, option,
futures contract or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
Special Tax Matters Regarding the Intermediate Government
Fund. Investors in the Intermediate Government Fund do not have to pay state and
local income taxes with respect to interest income on most types of Government
Securities if the investors are the tax owners of these Government Securities.
Furthermore, some states, if certain requirements are satisfied, permit
investors to treat the portion of their regulated investment company dividends
that is attributable to interest income on these Government Securities as
tax-exempt income for state or local income tax purposes. Other states treat all
of these dividends as subject to state and local income taxation. Investors in
the Fund should consult their own tax advisers to assess the consequences of
investing in the Fund under state and local laws generally and to determine
whether dividends paid by the Fund that represent interest derived from
Government Securities are exempt from any applicable state or local taxes.
Special Tax Considerations Regarding the New York Municipal
Fund. Because the New York Municipal 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, New York State and New
York City personal income tax purposes. If a shareholder receives an
exempt-interest dividend with respect to any share of the Fund and if such share
is held by the shareholder for six months or less, then any loss on the sale or
exchange of such share, to the extent of such exempt-interest dividend, shall be
disallowed. 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 exempt interest dividend paid by the
Fund which represents income from private activity bonds may not retain its
tax-exempt status in the hands of a shareholder who is a "substantial user" (or
persons related thereto) of a facility financed by such bonds. Similar rules
apply for purposes of New York State and New York City personal income tax.
Under the Code, interest on specified private activity bonds
issued after August 7, 1986, although otherwise exempt from federal income tax,
is treated as an item of tax preference for purposes of the alternative minimum
tax on individuals and corporations. If the New York Municipal Fund invests in
such specified "private activity bonds," it will report a portion of the
"exempt-interest dividends" paid to its shareholders as interest on specified
private activity bonds, and hence as a tax preference item. Exempt interest
dividends are
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included in adjusted current earnings. The amount of the alternative minimum tax
imposed by the Code is the excess, if any, of the taxpayer's "tentative minimum
tax" over the taxpayer's regular tax liability for the taxable year. The
"tentative minimum tax" is equal to (i) 26% of the first $175,000, and 28% of
any amount over $175,000 (for corporations, 20% of the whole), of the taxpayer's
alternative minimum taxable income (defined as regular taxable income modified
by certain adjustments and increased by the taxpayer's "items of tax
preference," including the adjustment for corporate current earnings and the tax
preference for tax-exempt interest on private activity bonds described above)
for the taxable year in excess of the exemption amount, less (ii) the
alternative minimum tax foreign tax credit for the taxable year. The exemption
amount is $40,000 for corporations, $45,000 for those filing joint returns,
lesser amounts for others, and is phased out over certain income levels.
Prospective investors should consult their own tax advisers with respect to the
possible application of the alternative minimum tax to their tax situations.
In addition, the receipt of New York Municipal 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 are (i) substantial users with respect to a
facility or related to such users within the meaning of the Code or (ii) subject
to a federal alternative minimum tax, any applicable state alternative minimum
tax, the federal branch profits tax, or the federal excess net passive income
tax.
While the New York Municipal Fund does not expect to realize a
significant amount of net capital gains, any such gains realized will be
distributed annually as described in the Fund's Prospectus. Such distributions
("capital gain dividends"), if any, will be taxable to the shareholders as
long-term capital gains, regardless of how long a shareholder has held the
Fund's shares, and will be designated as capital gain dividends in a written
notice mailed by the Fund to the shareholders after the close of the Fund's
prior taxable year. If a shareholder receives a capital gain dividend with
respect to any share and if such share is held by the shareholder for six months
or less, then any loss (to the extent not disallowed pursuant to the other six
month rule described above) on the sale or exchange of such share, to the extent
of the capital gain dividend, shall be treated as a long-term capital loss.
Capital gain distributions by the New York Municipal 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 as ordinary income
or capital gain as described above, 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 will nevertheless be
taxable to them.
If, for any full fiscal year, the New York Municipal Fund's
total distributions exceed net investment income and net realized capital gains,
the excess distributions may be
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treated as a taxable dividend or as a tax-free return of capital (up to the
amount of the shareholder's tax basis in his or her shares). The amount treated
as a tax-free return of capital will reduce a shareholder's adjusted basis in
his or her shares. Pursuant to the requirements of the 1940 Act and other
applicable laws, a notice will accompany any distribution paid from sources
other than net investment income.
Dividends derived by the New York Municipal Fund from
tax-exempt interest are designated as tax-exempt in the same percentage of the
day's dividend as the actual tax-exempt income earned on that day. Thus, the
percentage of the dividend designated as tax-exempt may vary from day to day.
Similarly, dividends derived by the Fund from interest on New York State
Municipal Obligations will be designated as exempt from New York's personal
income taxation in the same percentage of the day's dividend as the actual
interest on New York's Municipal Obligations earned on that day.
It should be noted that the portion of any New York Municipal
Fund dividends constituting New York exempt-interest dividends is excludable
from income for New York State and New York City personal income tax purposes
only. Any dividends paid to the Fund's shareholders subject to state or city
franchise or corporate income tax therefore may be taxed as ordinary dividends
to such shareholders, notwithstanding that all or a portion of such dividends is
exempt from state or city personal income tax.
Potential shareholders in the New York Municipal Fund,
including, in particular, corporate shareholders which may be subject to either
New York franchise tax or New York corporate income tax, should consult their
tax advisers with respect to (i) the application of corporate and franchise
taxes to the receipt of Fund dividends and as to their own state tax situation
in general, and (ii) the application of other state and local taxes to the
receipt of the Fund's dividends and distributions.
Although the New York Municipal Fund expects to be relieved of
all or substantially all federal, New York State and New York City income or
franchise taxes, depending upon the extent of its activities in other 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 such taxes paid by the Fund would reduce the amount of income and gains
available for distribution to shareholders.
Passive Foreign Investment Companies (Fixed Income and Global Fixed Income Funds
only)
If a Fund purchases shares in certain foreign investment
entities, called "passive foreign investment companies" (a "PFIC"), it may be
subject to United States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on the Fund in respect of
deferred taxes arising from such distributions or gains. If a Fund were to
invest in a PFIC and elected to treat the PFIC as a "qualified electing fund"
under the
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Code, in lieu of the foregoing requirements, the Fund might be required to
include in income each year a portion of the ordinary earnings and net capital
gains of the qualified electing fund, even if not distributed to the Fund, and
such amounts would be subject to the 90% and excise tax distribution
requirements described above. In order to make this election, a Fund would be
required to obtain certain annual information from the passive foreign
investment companies in which it invests, which may be difficult or not possible
to obtain.
Alternatively, a Fund may make a mark-to-market election that
will result in a Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In this case, a Fund would report gains as
ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for all
subsequent taxable years of the Fund, unless revoked with the consent of the
IRS. By making the election, a Fund could potentially ameliorate the adverse tax
consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. A Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. Each Fund will make the appropriate tax elections if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Dividends and Distributions
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of
net-long-term capital gains, if any, that a Fund designates as capital gains
dividends are taxable as long-term capital gains, whether paid in cash or in
shares and regardless of how long a shareholder has held shares of the Fund.
Dividends and distributions paid by a Fund (except for the portion thereof, if
any, attributable to dividends on stock of U.S. corporations received by the
Fund) will not qualify for the deduction for dividends received by corporations.
Distributions in excess of a Fund's current and accumulated earnings and profits
will, as to each shareholder, be treated as a tax-free return of capital, to the
extent of a shareholder's basis in his shares of the Fund, and as a capital gain
thereafter (if the shareholder holds his shares of the Fund as capital assets).
Any dividend declared by a Fund in October, November or December of any calendar
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the Fund not later than such December 31,
provided that such dividend is actually paid by the Fund during January of the
following calendar year.
Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving
73
<PAGE> 162
cash dividends or distributions will receive, and should have a cost basis in
the shares received equal to such amount.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced, including replacement through
the reinvesting of dividends and capital gains distributions in a Fund, within a
61-day period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be
increased to reflect the disallowed loss. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six months or less will be
treated for United States federal income tax purposes as a long-term capital
loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Foreign Taxes
Dividends and interest received by a Fund with respect to its
foreign investments may be subject to withholding and other taxes imposed by
foreign countries. However, tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If either of the Fixed Income
Fund or the Global Fixed Income Fund qualifies as a regulated investment
company, if certain asset and distribution requirements are satisfied and if
more than 50% of the respective Fund's total assets at the close of its fiscal
year consists of stock or securities of foreign corporations, that Fund may
elect for U.S. income tax purposes to treat foreign income taxes paid by it as
paid by its shareholders. The Fixed Income Fund or the Global Fixed Income Fund
may qualify for and make this election in some, but not necessarily all, of its
taxable years. As a result, shareholders of the Fund would be required to
include their pro rata portions of such foreign taxes in computing their taxable
incomes and then treat an amount equal to those foreign taxes as a U.S. federal
income tax deduction or as a foreign tax credit
74
<PAGE> 163
against their U.S. federal income taxes. Shortly after any year for which it
makes such an election, each Fund will report to its shareholders the amount per
share of such foreign tax that must be included in each shareholder's gross
income and the amount which will be available for the deduction or credit. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Certain limitations will be imposed on the extent to which the
credit (but not the deduction) for foreign taxes may be claimed.
Backup Withholding
A Fund may be required to withhold, for United States federal
income tax purposes, 31% of the dividends and 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 IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices
Shareholders will be notified annually by a Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding the
United States federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by
a Fund to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING A FUND AND ITS SHAREHOLDERS.
SHAREHOLDERS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its
Common Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at 800-927-2874.
75
<PAGE> 164
With respect to a Funds' Common and Advisor Shares, the Fund's
average annual total returns for the period ended October 31, 1998 were as
follows (performance figures calculated without the waiver of fees, if any, are
noted in parenthesis):
Performance (Common Shares)
(performance figures calculated without the waiver of fees
by a Fund's service provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
-------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Fund 6.48% (6.44%) 6.92% (6.79%) 8.06% (7.91%) 8.11% (7.95%)
(commenced operations on
August 17, 1987)
Global Fixed Income Fund 4.10% (3.55%) 5.69% (5.12%) 7.92% (6.74%)
(commenced operations on
November 1, 1990)
Intermediate Government Fund 9.08% (8.70%) 6.25% (5.81%) 8.00% (7.47%) 8.28% (7.64%)
(commenced operations on
August 22, 1988)
New York Municipal Fund 6.24% (6.16%) 5.02% (4.86%) 6.37% (5.99%) 6.00% (5.47%)
(commenced operations on
April 1, 1987)
</TABLE>
Performance (Advisor Shares)
(performance figures calculated without the waiver of fees
by a Fund's service provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement of
One-Year operations
-------- ----------
<S> <C> <C> <C> <C>
Fixed Income Fund 6.21% (6.16%) 8.47% (8.38%)
(Advisor Class commenced operations on
July 3, 1996)
Global Fixed Income Fund 3.51% (3.13%) 5.48% (5.11%)
(Advisor Class commenced operations on
August 12, 1996)
Intermediate Government Fund 8.80% (7.01%) 9.16% (7.68%)
(Advisor Class commenced operations on
August 15, 1997)
</TABLE>
These total return figures show the average percentage change
in value of an investment in the Common Shares from the beginning of the
measuring period to the
76
<PAGE> 165
end of the measuring period. The figures reflect changes in the price of Common
Shares assuming that any income dividends and/or capital gain distributions made
by the Fund during the period were reinvested in Common Shares of the Fund.
Total return will be shown for recent one-, five- and ten-year periods, and may
be shown for other periods as well (such as from commencement of the Fund's
operations or on a year-by-year, quarterly or current year-to-date basis).
These figures are calculated by finding the average annual
compounded rates of return for the one-, five- and ten- (or such shorter period
as the relevant class of shares has been offered) year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a
hypothetical investment of $1,000; "T" is average annual total return; "n" is
number of years; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period. Investor should note that the performance may not be representative
of the Fund's total return over longer market cycles.
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that each Fund seeks long-term
appreciation and that such return may not be representative of any Fund's return
over a longer market cycle. Each Fund may also advertise aggregate total return
figures of its Common Shares for various periods, representing the cumulative
change in value of an investment in the Common Shares of the specific period
(again reflecting changes in share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. The Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph except
that the relevant measuring period would be the number of months that have
elapsed in the current calendar year or most recent three months, as the case
may be. Investors should note that this performance may not be representative of
the Fund's total return in longer market cycles.
Yield is calculated by annualizing the net investment income
generated by a Fund over a specified thirty-day period according to the
following formula:
YIELD = 2[(a-b+1)(6)-1]
---
cd
77
<PAGE> 166
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
<TABLE>
<CAPTION>
30-day annualized current yield
Fund (Common/Advisor Shares) as of October 31, 1998
- ---- ----------------------
<S> <C>
Fixed Income Fund 5.16%/4.90%
Global Fixed Income Fund 4.99%/4.49%
Intermediate Government Fund 4.86%/4.59%
New York Municipal Fund 3.45%/1.10%
</TABLE>
Tax equivalent yield is calculated over a specified thirty-day
period by dividing that portion of the Fund's yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Municipal Fund that is not tax-exempt. The New York
Municipal Fund's tax-equivalent yield for the thirty-day period ending October
31, 1998 was 6.44%.
The performance of a class of a Fund shares will vary from
time to time depending upon market conditions, the composition of the Fund's
portfolio and operating expenses allocable to it. As described above, total
return and yield are based on historical earnings and are not intended to
indicate future performance. Consequently, any given performance quotation
should not be considered as representative of performance for any specified
period in the future. Performance information may be useful as a basis for
comparison with other investment alternatives. However, the Fund's performance
will fluctuate, unlike certain bank deposits or other investments which pay a
fixed yield for a stated period of time. Any fees charged by Institutions or
other institutional investors directly to their customers in connection with
investments in Fund shares are not reflected in the Fund's performance figures
and such fees, if charged, will reduce the actual return received by customers
on their investments.
In addition, reference may be made in advertising a class of
Fund shares to opinions of Wall Street economists and analysts regarding
economic cycles and their effects historically on the performance of small
companies, both as a class and relative to other investments. A Fund may also
discuss its beta, or volatility relative to the market, and make reference to
its relative performance in various market cycles in the United States.
Each Fund may compare its performance with (i) that of other
mutual funds with similar investment objectives and policies, which may be based
on the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds; (ii) in the
case of the Fixed Income Fund, with
78
<PAGE> 167
the Lehman Intermediate Government/Corporate Bond Index an unmanaged index of
government and corporate bonds calculated by Lehman Brothers); in the case of
the Global Fixed Income Fund, with the Salomon Brothers World Government Bond
Index (a hedged, market-capitalization weighted index designed to track major
government debt markets), Lehman Brothers Aggregate Index and the Lipper World
Income Average (an average of funds that invest primarily in non-U.S. dollar and
U.S. dollar debt instruments); in the case of the Intermediate Government Fund,
with the Lehman Intermediate Government Bond Index (an unmanaged index of
government bonds calculated by Lehman Brothers); and in the case of the New York
Municipal Fund, with the Lehman 5-Year Municipal Bond Index and the Lipper New
York Intermediate Municipal Debt Funds Average (an unmanaged index of 61
Intermediate Municipal Debt Funds calculated by Lipper Analytical Services); or
(iii) other appropriate indexes of investment securities or with data developed
by Warburg derived from such indexes. A Fund may also include evaluations of the
Fund published by nationally recognized ranking services and by financial
publications, such as Barron's, Business Week, Financial Times, Forbes, Fortune,
Inc., Institutional Investor, Investor's Business Daily, Money, Morningstar,
Mutual Fund Magazine, SmartMoney, The Wall Street Journal and Worth.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various time periods. In addition, each Fund may from time to time compare
the expense ratio of its Common Shares to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in
advertising, each Fund may also describe the general biography or work
experience of the portfolio managers of the Fund and may include quotations
attributable to the portfolio managers describing approaches taken in managing
the Fund's investments, research methodology underlying stock selection or the
Fund's investment objective. In addition, a Fund and its portfolio managers may
render periodic updates of Fund activity, which may include a discussion of
significant portfolio holdings; analysis of holdings by industry, country,
credit quality and other characteristics; and comparison and analysis of the
Fund with respect to relevant market industry benchmarks. Each Fund may also
discuss measures of risk, the continuum of risk and return relating to different
investments and the potential impact of foreign stocks on a portfolio otherwise
composed of domestic securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for the Funds. The financial statements for the fiscal year ended
October 31, 1998 that are
79
<PAGE> 168
incorporated by reference in this Statement of Additional Information have been
audited by PwC, whose report thereon appears elsewhere herein and have been
incorporated by reference 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 Funds as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of [January 29], 1999, there were no persons (other than
Mr. Furth, see "Management of the Fund") that owned of record 5% or more of a
Fund's outstanding shares.
<TABLE>
<CAPTION>
FIXED INCOME FUND Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 30.46%
Special Custody Account for the Exclusive Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
IN Trust* 99.95%
c/o Brian Frambes
3435 Stelzer Road, Ste. 1000
Columbus, OH 43219-6004
John L. Vogelstein* 6.00%
466 Lexington Avenue
New York, NY 10017-3140
Salomon Smith Barney Inc.* 10.15%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
GLOBAL FIXED INCOME FUND Common Shares Advisor Shares
------------- --------------
Charles Schwab & Co., Inc.* 34.98%
Special Custody Account for the Exclusive Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
80
<PAGE> 169
<TABLE>
<CAPTION>
<S> <C> <C>
Corelink Financial Inc.* 16.06%
P.O. Box 4054
Concord, CA 94524-4054
Nat'l Financial Svcs. Corp.* 13.25%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Prudential Securities Inc.* 6.69%
For Exclusive Benefit of Customer PC
1 New York Plaza
New York, NY 10004-1902
SBT & CO FBO 8134* 83.58%
PO Box 8469
La Jolla, CA 92038-8469
Salomon Smith Barney Inc.* 17.28%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
Donaldson Lufkin & Jenrette 6.65%
Securities Corp Pershing
Division
Mutual Fund Balancing
1 Pershing Plaza Floor 14
Jersey City, NJ 07399-0001
INTERMEDIATE GOVERNMENT FUND Common Shares Advisor Shares
------------- --------------
Charles Schwab & Co., Inc.* 34.12%
Special Custody Account for the Exclusive Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
Albert J. Lagerman 99.43%
Gene W. Reisinger TTEES
Family Practice Center PC
401k Trust
307 E. Chestnut Street
Mifflinburg, PA 17844-9678
Nat'l Financial Svcs. Corp.* 7.29%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
81
<PAGE> 170
<TABLE>
<CAPTION>
<S> <C>
NEW YORK MUNICIPAL FUND Common Shares
Christopher W. Brody 13.93%
30 East 71st Street
New York, NY 10021-4956
Charles Schwab & Co., Inc.* 8.49%
Special Custody Account for the Exclusive Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
* The Funds believe that these entities are not the beneficial owner of shares
held of record by them.
Mr. Lionel I. Pincus, Chief Executive Officer of Warburg, may
be deemed to have beneficially owned 23.78%, 31.29% and 47.40% of the
Common Shares outstanding of the Fixed Income, Intermediate Government and New
York Municipal Funds, respectively, including shares owned by clients for which
Warburg has investment discretion and by companies that Warburg may be deemed to
control. Mr. Pincus disclaims ownership of these shares and does not intend to
exercise voting rights with respect to these shares.
FINANCIAL STATEMENTS
Each Fund's audited annual report, dated October 31, 1998,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference with respect to
all information regarding the relevant Fund included therein. Each Fund will
furnish without charge a copy of the annual reports upon request by calling
Warburg Pincus Funds at 800-927-2874.
82
<PAGE> 171
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poor's Ratings
Services ("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have
<PAGE> 172
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest
A-2
<PAGE> 173
payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B". The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-3
<PAGE> 174
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
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.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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BB - Bonds rated BB have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the highest four municipal ratings
used by Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
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Aa - Bonds which are rated as are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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