-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L+7gu3w86k1XNZ8wnQlAttkFQiqzeIpkwjq6/PTVn2XwFJsB4qVc+mc9tabjYYCm 7RoTJ8vc5MAw9DtR8wFKdQ== 0000950117-98-000482.txt : 19980305 0000950117-98-000482.hdr.sgml : 19980305 ACCESSION NUMBER: 0000950117-98-000482 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980304 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARBURG PINCUS TRUST II CENTRAL INDEX KEY: 0001029879 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07999 FILM NUMBER: 98556904 BUSINESS ADDRESS: STREET 1: 466 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017-3147 BUSINESS PHONE: 2128780600 MAIL ADDRESS: STREET 1: 466 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017-3147 N-30D 1 WARBURG PINCUS TRUST II A/R ANNUAL REPORT December 31, 1997 WARBURG PINCUS TRUST II FIXED INCOME PORTFOLIO GLOBAL FIXED INCOME PORTFOLIO The Warburg Pincus Trust II (the "Trust") Shares are not available directly to individual investors but may be offered only through certain insurance products and pension and retirement plans. More complete information about the Fund, including charges and expenses and, where applicable, the special considerations and risks associated with international investing is provided in the Prospectus, which must precede or accompany this report and which should be read carefully before investing. You may obtain additional copies by calling 800-369-2728 or by writing to Warburg Pincus Funds, P.O. Box 9030, Boston, MA 02205-9030. WARBURG PINCUS ASSET MANAGEMENT From time to time, the Portfolios' investment adviser and co-administrator may waive some fees and/or reimburse some expenses, without which performance would be lower. Waivers and /or reimbursements are subject to change. Returns are historical and include changes in share price and reinvestment of dividends and capital gains. Past performance cannot guarantee future results. Returns and share price will fluctuate, and redemption value may be more or less than original cost. The views of the Portfolios' management are as of the date of the letters and Portfolios' holdings described in this annual report are as of December 31, 1997; these views and Portfolio holdings may have changed subsequent to these dates. Nothing in this annual report is a recommendation to purchase or sell securities. WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO ANNUAL INVESTMENT ADVISER'S REPORT--DECEMBER 31, 1997 February 9, 1998 Dear Shareholder: The objective of Warburg Pincus Trust II--Fixed Income Portfolio (the "Portfolio") is total return consistent with prudent investment management. The Portfolio pursues its objective by investing in fixed-income securities, such as corporate bonds, debentures and notes; convertible debt securities; convertible and non-convertible preferred stocks; government obligations; obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities and repurchase agreements with respect to portfolio securities. For the nine months ended December 31, 1997 (the Portfolio's inception date was March 31, 1997), the Portfolio had a total return of 8.96%, vs. a 7.99% gain for the Lehman Intermediate Government/Corporate Bond Index. The April-through-December period was a positive one for the domestic bond market. Despite a continued healthy economy--as measured, for example, by the unemployment rate, which fell to a 25-year low during the period--inflation remained under control. Also helping bonds was a "flight to safety" sparked by a worsening financial crisis in Asia. Many investors, concerned that the crisis could hamper corporate earnings, took refuge in fixed-income securities, in particular high-quality bonds such as U.S. Treasuries. These trends, along with projections of a federal budget surplus and the Federal Reserve's continued reluctance to raise interest rates, caused bonds to rally over the period. Our strategy throughout was to attempt to optimally position the Portfolio on the yield curve, given our outlook on the markets from a risk-vs.-reward perspective. Our efforts in this regard contributed positively to the Portfolio's performance for the nine months. We maintained a modestly longer-than-average duration (compared to that of the Portfolio's benchmark) over the period, which proved beneficial, given the bond market's rally. We also aimed to enhance the Portfolio's return through sector allocation. U.S. Treasuries accounted for the bulk of the Portfolio's assets during the period, as we continued to find them most attractive on a risk-reward basis. We also held a position in corporate bonds, a weighting we increased late in the period when their widening yield spreads over U.S. Treasuries created a number of buying opportunities (we saw particularly good values 1 among A-rated bonds). The Portfolio's corporate issues had a positive impact on its performance, thanks in large part to the economy's continued growth. Elsewhere, we maintained a significant weighting in mortgage-backed securities, where we saw the best value in the commercial mortgage-backed area. These issues helped the Portfolio's return over the 12 months, as did the Portfolio's smaller position in preferred securities. Dale C. Christensen M. Anthony E. van Daalen Co-Portfolio Manager Co-Portfolio Manager 2 WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO ANNUAL INVESTMENT ADVISER'S REPORT (CONT'D) - -------------------------------------------------------------------------------- GROWTH OF $10,000 INVESTED IN WARBURG PINCUS TRUST II--FIXED INCOME PORTFOLIO SINCE INCEPTION AS OF DECEMBER 31, 1997 The graph below illustrates the hypothetical investment of $10,000 in Warburg Pincus Trust II - Fixed Income Portfolio (the "Portfolio") from March 31, 1997 (inception) to December 31, 1997, compared to the Lehman Intermediate Government/Corporate Bond Index ("LIGC") * for the same time period. [PERFORMANCE GRAPH] Aggregate Total Returns Since Inception (3/31/97-12/13/97).............8.96%+ DATE Portfolio LIGC Mar-97 $10,000 $10,000 Apr-97 $10,110 $10,118 May-97 $10,200 $10,201 Jun-97 $10,330 $10,295 Jul-97 $10,629 $10,504 Aug-97 $10,529 $10,451 Sep-97 $10,649 $10,573 Oct-97 $10,770 $10,690 Nov-97 $10,790 $10,714 Dec-97 $10,896 $10,799 * The Lehman Intermediate Government/Corporate Bond Index is an unmanaged index (with no defined investment objective) of intermediate-term government and corporate bonds, and is calculated by Lehman Brothers Inc. + Non annualized. 3 WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME PORTFOLIO ANNUAL INVESTMENT ADVISER'S REPORT--DECEMBER 31, 1997 February 9, 1998 Dear Shareholder: The objective of Warburg Pincus Trust II--Global Fixed Income Portfolio (the "Portfolio") is total return, consisting of a combination of interest income, currency gains and capital appreciation, consistent with prudent management. For the nine months ended December 31, 1997 (the Portfolio's inception date was March 31,1997), the Portfolio gained 2.62% vs. gains of 9.80% for the Salomon Brothers World Government Bond Index (Currency-Hedged) and 5.44% for the Lipper World Income Funds Average. Supported by continued low inflation and declining interest rates, most foreign bond markets saw gains for the nine months in local-currency terms (in dollar terms, these returns were less impressive, as the dollar strengthened vs. most currencies over the period). Many markets were volatile, however, and thus we maintained a cautious approach throughout. In general, we found the most attractive inflation-adjusted yields (and risk-adjusted total-return potential) among intermediate-term bonds. In terms of geographic allocation, European and dollar-bloc countries accounted for the bulk of the Portfolio during the period. In Europe, we focused on high-quality bonds from the continent's "core" economies, most specifically Germany. The Portfolio's European holdings contributed positively to its performance for the period, buoyed by modest economic growth and lower budget deficits across the region. Within dollar-bloc markets, we emphasized the U.S., where we favored intermediate-maturity U.S. Treasuries for their historically high inflation-adjusted yields. These securities had a positive impact on the Portfolio's return, thanks to continued subdued inflation and declining domestic interest rates over the period. We also found value in Canadian issues, which likewise helped the Portfolio's performance. In other areas, we maintained a weighting in Asia, one that contributed negatively to the Fund's performance for the period. Asia's worsening currency crisis had a dramatic and negative impact on bond markets throughout the region. Our holdings, though denominated in dollars, and thus not as vulnerable to the crisis as bonds denominated in Asian currencies, nonetheless suffered due to growing credit-related concerns in the area. 4 We hedged the majority of the Portfolio's foreign currency exposure during the period (as of December 31, approximately 94% of the Portfolio was dollar-denominated or hedged into dollars). This proved beneficial to the Portfolio's return, given the dollar's continued rise vs. most currencies. Laxmi C. Bhandari Dale C. Christensen Co-Portfolio Manager Co-Portfolio Manager 5 WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME PORTFOLIO ANNUAL INVESTMENT ADVISER'S REPORT (CONT'D) - -------------------------------------------------------------------------------- GROWTH OF $10,000 INVESTED IN WARBURG PINCUS TRUST II--GLOBAL FIXED INCOME PORTFOLIO SINCE INCEPTION AS OF DECEMBER 31, 1997 The graph below illustrates the hypothetical investment of $10,000 in Warburg Pincus Trust 11 - Global Fixed Income Portfolio (the "Portfolio") from March 31, 1997 (inception) to December 31, 1997, compared to the Salomon Brothers World Government Bond Index (Currency-Hedged) ("Salomon")* and the Lipper World Income Funds Average ("Lipper")** for the same time period. [PERFORMANCE GRAPH] Aggregate Total Return Since Inception (3/31/97-12/31/97)...2.62%+ DATE Portfolio Salomon Lipper Mar-97 $10,000 $10,000 $10,000 Apr-97 $10,100 $10,110 $10,024 May-97 $10,160 $10,171 $10,212 Jun-97 $10,290 $10,322 $10,343 Jul-97 $10,510 $10,526 $10,401 Aug-97 $10,479 $10,504 $10,366 Sep-97 $10,589 $10,674 $10,594 Oct-97 $10,419 $10,785 $10,472 Nov-97 $10,389 $10,854 $10,490 Dec-97 $10,262 $10,980 $10,544 * The Salomon Brothers World Government Bond Index (Currency-Hedged) is a market capitalization-weighted index designed to track major government debt markets and is currency-hedged into U.S. dollars. **The Lipper World Income Funds Average is an arithmetic average of all world income funds, tracked by Lipper Analytical Services, that invest in non-U.S. dollar and U.S. dollar debt instruments with unspecified maturities and durations, or other income-producing securities. +Non annualized. 6 Warburg Pincus Trust II -- Fixed Income Portfolio Statement of Net Assets December 31, 1997 - --------------------------------------------------------------------------------
Ratings! Par (Moody's/S&P) Maturity Rate % Value --- ------------- -------- ------ ----- CORPORATE BONDS/NOTES (31.2%) $ 15,000 ABN-AMRO Bank NV New York Branch Subordinate Deposit Notes (Callable 08/01/04 @ $100.00) (Aa2, NR) 08/01/09 8.250 $ 16,275 10,000 Conagra, Inc. Senior Notes (Putable 08/01/09 @ $100.00) (Baa1, BBB+) 08/01/27 6.700 10,237 10,000 Countrywide Home Loan Inc. Medium Term Notes (A3, A) 10/08/02 6.380 10,025 10,000 First Industrial LP (Putable 05/15/02 @ $100.00) (Baa2, BBB)) 05/15/27 7.150 10,287 15,000 First Union Corp. Subordinate Debentures (Putable 10/15/05 @ $100.00) (A2,A-) 10/15/35 6.550 15,319 15,000 Ingersoll-Rand Co. (Putable 11/19/03 @ $100.00) (A3, A-) 11/19/27 6.230 15,056 15,000 J.C. Penney & Co., Inc. Debentures (Putable 08/15/26 @ $100.00) (A2, A) 08/15/26 6.900 15,656 10,000 Lowe's Companies Medium Term Notes (Putable 05/15/07 @ $100.00) (A2, A) 05/15/37 7.110 10,600 10,000 Merck and Company, Inc. Medium Term Notes (Putable 05/03/99 @ $100.00) (Aaa, AAA) 05/03/37 5.760 10,225 10,000 Midland Bank PLC Yankee Subordinate Notes (Putable 05/01/07 @ $100.00) (A1, A) 05/01/25 7.650 11,050 10,000 Norfolk Southern Corp. (Putable 05/01/04 @ $100.00) (Baa1, BBB+) 05/01/37 7.050 10,612 10,000 Philip Morris Companies, Inc. Notes (A2, A) 07/15/05 7.000 10,225 10,000 Philips Electronics NV Notes (Putable 06/01/06 @ $100.00) (A3, BBB+) 06/01/26 7.200 10,512 10,000 Rohr Industries Subordinated Debenture (Pre-refunded 03/01/98 @ $104.16) (B2, B) 03/01/98 9.250 10,363 10,000 Salomon Smith Barney Holdings, Inc. Notes (A2, A) 10/01/04 6.375 10,013 10,000 Times Mirror Co. Notes (Putable 09/15/04 @ $100.00) (A2, A+) 09/15/27 6.610 10,263 ------- TOTAL BONDS (Cost $181,203) 186,718 ------- MORTGAGED-BACKED SECURITIES (7.4%) 20,000 Federal National Mortgage Association, Guaranteed REMIC Trust Series 1997-51, Class KB (Aaa, AAA) 03/20/08 7.000 20,278 23,981 Nomura Asset Securities Corp. Series 1994-4B, Class 4A (Aaa, AAA) 09/25/24 8.300 24,588 ------- TOTAL MORTGAGED-BACKED SECURITIES (Cost $44,777) 44,866 ------- UNITED STATES TREASURY OBLIGATIONS (58.0%) 110,000 U.S. Treasury Note (Aaa, AAA) 08/15/02 6.375 112,880 90,000 U.S. Treasury Note (Aaa, AAA) 02/15/05 7.500 98,977 50,000 U.S. Treasury Principal Strip (Aaa, AAA) 08/15/99 5.705# 45,657 30,000 U.S. Treasury Interest Strip (Aaa, AAA) 05/15/02 5.840# 23,458 100,000 U.S. Treasury Interest Strip (Aaa, AAA) 02/15/05 5.800# 66,653 ------- TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost $338,297) 347,625 ------- Number of Shares Rate Value - --------- ---- ----- PREFERRED STOCK (1.8%) Real Estate (1.8%) 200 Equity Residential Properties Trust Series D REIT 8.600 5,213 200 Loewen Group Capital Series A REIT (Callable 08/31/04 @ $25.00) 9.450 5,425 ---------- TOTAL PREFERRED STOCK (Cost $10,375) 10,638 ---------- TOTAL INVESTMENTS AT VALUE (98.4%) (Cost $574,652*) 589,847 OTHER ASSETS IN EXCESS OF LIABILITIES (1.6%) 9,492 ---------- NET ASSETS (100.0%) (applicable to 60,114 Shares outstanding) $ 599,339 ========== NET ASSET VALUE, offering and redemption price per Share ($599,339 / 60,114) $ 9.97 ==========
INVESTMENT ABBREVIATIONS NR = Not Rated REMIC = Real Estate Mortgage Investment Conduit REIT = Real Estate Investment Trust - ------------------------------------------------------------------------------- ! Credit ratings given by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group are unaudited." # Rate shown reflects yield to maturity on date of purchase. * Also cost for federal income tax purposes. See Accompanying Notes to Financial Statements 7 Warburg Pincus Trust II -- Global Fixed Income Portfolio Schedule of Investments December 31, 1997 - --------------------------------------------------------------------------------
Ratings! Par++ (Moody's/S&P) Maturity Rate % Value - ----- ------------- -------- ------ ----- BONDS (53.3%) Canada (9.8%) 200,000 Canadian Government (Aa1, AAA) 08/01/99 6.500 $ 142,771 --------- Cayman Islands (7.1%) 50,000(A) Ayala Corp. International Finance (Convertible) (BBB, BBB) 12/08/00 8.280# 37,562 100,000(A) APP Global Finance FRN III (B3, NR) 04/17/02 10.094< 66,400 --------- 103,962 --------- Germany (21.3%) 324,000 Bundesrepublic Deutschland (Aaa, NR) 10/14/05 6.500 194,936 200,000 Bundesrepublic Deutschland (Aaa, NR) 06/20/16 6.000 115,448 --------- 310,384 --------- Indonesia (5.8%) 50,000(A) Bank Negara (Baa3, BBB) 02/15/07 7.625 36,438 50,000(A) Indah Kiat International Finance Co. (Callable 06/15/01 @ $106.25) (Ba2, BB) 06/15/06 12.500 48,000 --------- 84,438 --------- Moldova (6.2%) 100,000(A) Republic of Moldova (Ba2, NR) 06/13/02 9.875 90,500 --------- South Korea (3.1%) 50,000(A) Korea Development Bank (A1, A+) 12/01/00 9.600 44,875 --------- TOTAL BONDS (Cost $832,265) 776,930 --------- UNITED STATES TREASURY OBLIGATIONS (46.7%) 510,000 U.S. Treasury Note (Aaa, AAA) 11/30/02 5.750 510,612 100,000 U.S. Treasury Note (Aaa, AAA) 05/31/01 6.500 102,412 67,000 U.S. Treasury Note (Aaa, AAA) 06/30/99 6.000 67,360 --------- TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost $679,882) 680,384 --------- TOTAL INVESTMENTS AT VALUE (100.0%)(Cost $1,512,147*) 1,457,314 =========
INVESTMENT ABBREVIATIONS NR = Not Rated - -------------------------------------------------------------------------------- ++ Unless otherwise indicated below, all securities are denominated in the currency of the issuers' country of origin. ! Credit ratings given by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group are unaudited. (A) Denominated in U.S. Dollars # Rate shown reflects yield to maturity on date of purchase. * Also cost for federal income tax purposes. < Interest rate shown reflects current rate on instrument with variable rate or step coupon rate. See Accompanying Notes to Financial Statements 8 Warburg Pincus Trust II -- Global Fixed Income Portfolio Statement of Assets and Liabilities December 31, 1997 - -------------------------------------------------------------------------------- Assets: Investments at value (Cost $1,512,147) $1,457,314 Cash 3,787 Receivable for investment securities sold 100,000 Receivable for unrealized gains on forward contracts 22,084 Interest receivable (Cost $20,888) 20,724 Other assets 14,533 ---------- Total Assets 1,618,442 ---------- Liabilities: Accrued expenses payable 15,990 Payable to affiliate 6,044 ---------- Total Liabilities 22,034 ---------- NET ASSETS, applicable to 168,629 Shares outstanding $1,596,408 ========== NET ASSET VALUE, offering and redemption price per Share ($1,596,408/168,629) $ 9.47 ========== See Accompanying Notes to Financial Statements. 9 Warburg Pincus Trust II Portfolios Statements of Operations For the Period Ended December 31, 1997 - --------------------------------------------------------------------------------
Fixed Income Global Fixed Income Portfolio(1) Portfolio(1) ------------ ------------------- Investment Income: Dividends $ 881 $ 0 Interest 26,324 80,203 -------- -------- Total investment income 27,205 80,203 -------- -------- Expenses: Investment advisory 2,166 12,047 Administrative services 649 1,807 Professional fees 16,327 24,170 Custodian/Sub-custodian 9,203 1,400 Trustees 3,125 3,125 Interest 5 8 Offering/Organizational costs 21,634 21,774 Printing 1,625 1,625 Registration 200 400 Transfer agent 338 231 Miscellaneous 1,242 655 -------- ------- 56,514 67,242 Less fees waived, expenses reimbursed and transfer agent offsets (52,225) (55,316) -------- ------- Total expenses 4,289 11,926 -------- ------- Net investment income 22,916 68,277 -------- ------- Net Realized and Unrealized Gain (Loss)from Investments and Foreign Currency Related Items: Net realized gain from security transactions 11,155 24,275 Net realized loss from foreign currency related items 0 (13,304) Net unrealized appreciation (depreciation) from investments and foreign currency related items 15,195 (32,913) -------- -------- Net realized and unrealized gain (loss) from investments and foreign currency related items 26,350 (21,942) -------- -------- Net increase in net assets resulting from operations $ 49,266 $ 46,335 ======== ========
- -------------------------------------------------------------------------------- (1) For the Period March 31, 1997 (Commencement of Operations) through December 31, 1997. See Accompanying Notes to Financial Statements. 10 Warburg Pincus Trust II Portfolios Statements of Changes in Net Assets - --------------------------------------------------------------------------------
Fixed Income Global Fixed Income Portfolio Portfolio --------------- ------------------- For the Period For the Period March 31, 1997 March 31, 1997 (Commencement of (Commencement of Operations) through Operations) through December 31, 1997 December 31, 1997 ------------------ ------------------- From Operations: Net investment income $ 22,916 $ 68,277 Net realized gain from security transactions 11,155 24,275 Net realized loss from foreign currency related items 0 (13,304) Net unrealized appreciation (depreciation) from investments and foreign currency related items 15,195 (32,913) ----------- ----------- Net increase in net assets resulting from operations 49,266 46,335 ----------- ----------- From Distributions: Dividends from net investment income (22,916) (68,277) Distributions in excess of net investment income (16,849) (16,847) Distributions from realized gains (11,155) (10,971) Distributions in excess of realized gains 0 (32,902) ----------- ----------- Net decrease in net assets from distributions (50,920) (128,997) ----------- ----------- From Capital Share Transactions: Proceeds from sale of shares 500,075 1,500,075 Reinvested Dividends 50,918 128,995 ----------- ----------- Net increase in net assets from capital share transactions 550,993 1,629,070 ----------- ----------- Net increase in net assets 549,339 1,546,408 Net Assets: Beginning of period 50,000 50,000 ----------- ----------- End of period $ 599,339 $ 1,596,408 =========== =========== Undistributed net investment income $ 0 $ 0 =========== ===========
See Accompanying Notes to Financial Statements. 11 Warburg Pincus Trust II -- Fixed Income Portfolio Financial Highlights (For a Share of the Portfolio Outstanding Throughout the Period) - --------------------------------------------------------------------------------
For the Period March 31, 1997 (Commencement of Operations) through December 31, 1997 --------------------- Net Asset Value, Beginning of Period $ 10.00 --------- Income from Investment Operations: Net Investment Income 0.44 Net Gain on Securities and Foreign Currency Related Items (both realized and unrealized) 0.45 --------- Total from Investment Operations 0.89 --------- Less Distributions: Dividends from Net Investment Income (0.41) Distributions in excess of Net Investment Income (0.31) Distributions from Realized Gains (0.20) --------- Total Distributions (0.92) --------- Net Asset Value, End of Period $ 9.97 --------- --------- Total Return 8.96 %+ Ratios/Supplemental Data: Net Assets, End of Period (000s) $599 Ratios to average daily net assets: Operating expenses 0.99 %@* Net investment income 5.29 %* Decrease reflected in above operating expense ratios due to waivers/reimbursements 12.05 %* Portfolio Turnover Rate 138.28 %+ Average Commission Rate $ 0.0600 #
- ------------------------------------------------------------------------------- + Non annualized. @ Interest earned on uninvested cash balances is used to offset portions of the transfer agent expense. These arrangements had no effect on the Portfolio's expense ratio. * Annualized. # Computed by dividing the total amount of commissions paid by the total number of shares purchased and sold during the period for which there was a commission charged. See Accompanying Notes to Financial Statements. 12 Warburg Pincus Trust II -- Global Fixed Income Portfolio Financial Highlights (For a Share of the Portfolio Outstanding Throughout the Year) - -------------------------------------------------------------------------------
For the Period March 31, 1997 (Commencement of Operations) through December 31, 1997 --------------------- Net Asset Value, Beginning of Period $ 10.00 -------- Income from Investment Operations: Net Investment Income 0.45 Net Loss on Securities and Foreign Currency Related Items (both realized and unrealized) (0.15) -------- Total from Investment Operations 0.30 -------- Less Distributions: Dividends from Net Investment Income (0.44) Distributions in excess of Net Investment Income (0.11) Distributions from Realized Gains (0.07) Distributions in excess of Realized Gains (0.21) -------- Total Distributions (0.83) -------- Net Asset Value, End of Period $ 9.47 ======== Total Return 2.62 %+ Ratios/Supplemental Data: Net Assets, End of Period (000s) $ 1,596 Ratios to average daily net assets: Operating expenses 0.99 %@* Net investment income 5.67 %* Decrease reflected in above operating expense ratios due to waivers/reimbursements 4.59 %* Portfolio Turnover Rate 139.81 %+
- ------------------------------------------------------------------------------- + Non annualized. @ Interest earned on uninvested cash balances is used to offset portions of the transfer agent expense. These arrangements had no effect on the Portfolio's expense ratio. * Annualized. See Accompanying Notes to Financial Statements. 13 WARBURG PINCUS TRUST II NOTES TO FINANCIAL STATEMENTS December 31, 1997 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES Warburg Pincus Trust II (the "Trust") is an open-end management investment company registered under the Investment Company Act of 1940, as amended, and currently offers two investment funds (the "Portfolios"): Fixed Income Portfolio is a non-diversified investment fund that seeks total return consistent with prudent investment management; Global Fixed Income Portfolio is a non-diversified investment fund that seeks total return consistent with prudent investment management, consisting of a combination of interest income, currency gains and capital appreciation. Shares of a Portfolio are not available directly to individual investors but may be offered only to certain (a) life insurance companies for allocation to certain of their separate accounts established for the purpose of funding variable annuity contracts and variable life insurance contracts and (b) tax-qualified pension and retirement plans ("Plans"), including participant-directed Plans which elect to make a Portfolio an investment option for Plan participants. The net asset value of each Portfolio is determined daily as of the close of regular trading on the New York Stock Exchange. Each Portfolio's investments are valued at market value, which is currently determined using the last reported sales price. If no sales are reported, investments are generally valued at the mean between the last reported bid and ask prices. In the absence of market quotations, investments are generally valued at fair value as determined by or under the direction of the Trust's Board of Trustees. Short-term investments that mature in 60 days or less are valued on the basis of amortized cost, which approximates market value. The books and records of the Portfolios are maintained in U.S. dollars. Transactions denominated in foreign currencies are recorded at the current prevailing exchange rates. All assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rate at the end of the period. Translation gains or losses resulting from changes in the exchange rate during the reporting period and realized gains and losses on the settlement of foreign currency transactions are reported in the results of operations for the current period. The Portfolios do not isolate that portion of gains and losses on investments in equity securities which are due to changes in the foreign exchange rate from that which are due to changes in market prices of equity securities. The Global Fixed Income portfolio isolates that portion of gains and losses on investments in debt securities which are due to changes in the foreign exchange rate from that which are due to changes in market prices of debt securities. The Portfolios may invest in securities of foreign countries and governments which involve certain risks in addition to those inherent in domestic investments. Such risks generally include, among other things fluctuations in currency exchange rates, revaluation of currencies, future adverse political and economic developments and the imposition of foreign laws and restrictions. Securities of foreign issuers are often subject to less rigorous regulatory practices and requirements than those applied in the United States and may also be less liquid (and their prices more volatile) than securities of comparable U.S companies. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S economy in many respects. Security transactions are accounted for on a trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. 14 WARBURG PINCUS TRUST II NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 1997 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D) Dividends from net investment income and distributions of net realized capital gains, if any, are declared and paid annually. However, to the extent that a net realized capital gain can be reduced by a capital loss carryover, such gain will not be distributed. Income and capital gain distributions are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. No provision is made for federal income taxes as it is the Trust's intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under the Internal Revenue Code and make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Costs incurred by the Trust in connection with its organization have been deferred and are being amortized over a period of five years from the date the Trust commenced its operations. Costs incurred by the Portfolios in connection with the offering of their shares have been deferred and are being amortized over a one year period from the date each Portfolio commenced its operations. The Trust, together with other funds advised by Warburg Pincus Asset Management, Inc., the Portfolio's investment adviser ("Warburg"), has established committed and uncommitted lines of credit facilities with certain banks for temporary or emergency purposes primarily relating to fund share redemption's and funding payments of dividend or capital gain distributions. Under the terms of the committed line of credit, the Warburg Funds with access to the facility pay a commitment fee at the rate of .10% per annum on the amount of the line of credit. In addition, under the terms of both the committed and uncommitted facilities, the Warburg Funds will pay interest on borrowings at the bank's base rate plus .55%. Aggregate borrowings for each fund under these credit facilities may not exceed the lower of (a) the maximum amount permitted by such fund's investment policies and restrictions or (b) thirty-three and one-third percent (33 1/3%) of such fund's total assets. At December 31, 1997 there were no outstanding balances under these lines of credit facilities for any of the Portfolios. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, each Portfolio, along with other Warburg Funds, transfers uninvested cash balances to a Pooled Cash Account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by the Portfolios' custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 15 WARBURG PINCUS TRUST II NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 1997 - -------------------------------------------------------------------------------- The Portfolios have an arrangement with their transfer agent whereby interest earned on uninvested cash balances was used to offset a portion of their transfer agent expense. For the period ended December 31, 1997, the Fixed Income Portfolio and the Global Fixed Income Portfolio received credits or reimbursements of $16 and $37, respectively under this arrangement. 2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR Warburg, which is indirectly controlled by Warburg, Pincus & Co., serves as each Portfolio's investment adviser. For its investment advisory services, Warburg receives a fee from the Fixed Income Portfolio and the Global Fixed Income Portfolio calculated at an annual rate of .50% and 1.00%, respectively, of each Portfolio's average daily net assets. For the period ended December 31, 1997, investment advisory fees earned and voluntarily waived, and reimbursements were as follows: GROSS NET EXPENSE PORTFOLIO ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS --------- ------------- --------- ------------ -------------- Fixed Income $ 2,166 $ (2,166) $ 0 $ (49,827) Global Fixed Income 12,047 (12,047) 0 (42,630) As of December 31, 1997, a net amount of $2,253 was due from Warburg for the Fixed Income Portfolio. Counsellors Fund Services, Inc. ("CFSI"), a wholly owned subsidiary of Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of PNC Bank Corp. ("PNC"), serve as each Portfolio's co-administrators. For its administrative services, CFSI currently receives a fee calculated at an annual rate of .10% of each Portfolio's average daily net assets. For the period ended December 31, 1997, administrative services fees earned by CFSI were as follows: PORTFOLIO CO-ADMINISTRATION FEE --------- --------------------- Fixed Income $ 433 Global Fixed Income 1,205 For its administrative services, PFPC currently receives a fee from the Fixed Income Portfolio and the Global Fixed Income Portfolio calculated at an annual rate of .05% of the Portfolio's average daily net assets. For the period ended December 31, 1997, administrative services fees earned and voluntarily waived by PFPC were as follows: NET PORTFOLIO CO-ADMINISTRATION FEE WAIVER CO-ADMINISTRATION FEE --------- --------------------- ------ --------------------- Fixed Income $ 216 $ (216) $ 0 Global Fixed Income 602 (602) 0 Counsellors Securities Inc. ("CSI"), a wholly owned subsidiary of Warburg, serves as each Portfolio's distributor. No compensation is paid by the Portfolios to CSI for its distribution services. 16 WARBURG PINCUS TRUST II NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 1997 - -------------------------------------------------------------------------------- 3. INVESTMENTS IN SECURITIES For the period ended December 31, 1997, purchases and sales of investment securities (excluding short-term investments) were as follows:
U.S. GOVERNMENT AND INVESTMENT SECURITIES AGENCY OBLIGATIONS PORTFOLIO PURCHASES SALES PURCHASES SALES --------- --------- ----- --------- ----- Fixed Income $ 239,541 $ 27,490 $1,010,946 $ 658,237 Global Fixed Income 1,641,684 794,276 1,816,713 1,152,941
At December 31, 1997, the net unrealized appreciation from investments for those securities having an excess of value over cost and net unrealized depreciation from investments for those securities having an excess of cost over value (based on cost for federal income tax purposes) was as follows: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION) --------- ------------ ------------ --------------- Fixed Income $ 15,250 $ (55) $ 15,195 Global Fixed Income 7,874 (62,707) (54,833) 4. FORWARD FOREIGN CURRENCY CONTRACTS The Portfolios may enter into forward currency contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The Portfolios will enter into forward contracts primarily for hedging purposes. The forward currency contracts are adjusted daily by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date. At December 31, 1997, the Global Fixed Income Portfolio had the following open forward currency contracts:
FORWARD FOREIGN UNREALIZED CURRENCY EXPIRATION CURRENCY CONTRACT CONTRACT FOREIGN EXCHANGE CONTACTS DATE TO BE SOLD AMOUNT VALUE GAIN -------- ---- ---------- ------ ----- ---- German Marks 02/23/98 520,000 $305,882 $290,098 $15,784 Canadian Dollars 02/02/98 200,000 146,199 139,899 6,300 -------- -------- ------- $452,081 $429,997 $22,084 ======== ======== =======
17 WARBURG PINCUS TRUST II NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 1997 - -------------------------------------------------------------------------------- 5. CAPITAL SHARE TRANSACTIONS The Fixed Income Portfolio and the Global Fixed Income Portfolio are each authorized to issue an unlimited number of full and fractional shares of beneficial interest, par value of $.001 per share. Warburg, Pincus & Co., owned all of the shares outstanding as of December 31, 1997, for both the Portfolio's. Transactions in shares of each Portfolio were as follows:
GLOBAL FIXED FIXED INCOME PORTFOLIO INCOME PORTFOLIO ---------------------- ---------------- FOR THE PERIOD FOR THE PERIOD MARCH 31, 1997 MARCH 31, 1997 COMMENCEMENT OF (COMMENCEMENT OF OPERATIONS) THROUGH OPERATIONS) THROUGH DECEMBER 31, 1997 DECEMBER 31, 1997 ----------------- ----------------- Shares sold 50,007 150,007 Shares issued to shareholders on reinvestment of dividends 5,107 13,622 ------ ------- Net increase in shares outstanding 55,114 163,629 ====== =======
6. NET ASSETS At December 31, 1997, capital contributions, and undistributed net investment income have been adjusted for current period permanent book/tax differences. The Fixed Income Portfolio and the Global Fixed Income Portfolio reclassified offering costs of $16,849 and $16,847 respectively from undistributed net investment income to capital contributions. Net assets at December 31, 1997, consisted of the following:
FIXED INCOME GLOBAL FIXED INCOME PORTFOLIO PORTFOLIO ------------ ------------------- Capital contributed, net $584,144 $1,662,223 Accumulated (or Distributions in excess of) net realized gain (loss) from security transactions 0 (32,902) Net unrealized appreciation (depreciation) from investments and foreign currency related items 15,195 (32,913) --------- ----------- Net Assets $599,339 $1,596,408 ========= ===========
18 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and Shareholders of WARBURG PINCUS TRUST II: We have audited the accompanying statement of assets and liabilities, including the schedule of investments of Warburg Pincus Trust II - Global Fixed Income Portfolio and the statement of net assets of Warburg Pincus Trust II - Fixed Income Portfolio (all portfolios collectively referred to as the "Warburg Pincus Trust II") as of December 31, 1997, and the related statements of operations, the statements of changes in net assets, and the financial highlights for the period then ended. These financial statements and financial highlights are the responsibility of the Warburg Pincus Trust II's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, by correspondence with the custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each portfolio of the Warburg Pincus Trust II as of December 31, 1997, the results of their operations, the changes in their net assets, and their financial highlights for the period then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 9, 1998 19 WARBURG PINCUS ASSET MANAGEMENT P.O. Box 9030, Boston, MA 02205-9030 800-Warburg (800-927-2874) WWW.WARBURG.COM COUNSELLORS SECURITIES INC., DISTRIBUTOR. -----END PRIVACY-ENHANCED MESSAGE-----