<PAGE>
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PAINEWEBBER ASIA PACIFIC GROWTH FUND
1285 AVENUE OF THE AMERICAS, NEW YORK, NY 10019
PROSPECTUS --JULY 7, 1997
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PaineWebber Asia Pacific Growth Fund ("Fund") is designed for investors who
want to expand their investment horizons by investing in the Asia Pacific Re-
gion (except Japan). The Fund, a diversified series of PaineWebber Managed In-
vestments Trust, seeks long-term capital appreciation by investing primarily in
equity securities of companies in the Asia Pacific Region, which includes the
following countries: Australia, China, Hong Kong, India, Indonesia, Malaysia,
New Zealand, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Tai-
wan and Thailand. The Fund is not designed to provide current income.
This Prospectus concisely sets forth information that a prospective investor
should know about the Fund before investing. Please read it carefully and re-
tain a copy of this Prospectus for future reference.
A Statement of Additional Information dated July 7, 1997, has been filed with
the Securities and Exchange Commission and is legally part of this Prospectus.
The Statement of Additional Information can be obtained without charge, and
further inquiries can be made, by contacting the Fund, your investment execu-
tive at PaineWebber or one of its correspondent firms or by calling toll-free
1-800-647-1568.
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THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad categories, which
are presented here. Generally, investors seeking to maximize return must assume
greater risk. The Fund is in the GLOBAL FUNDS category.
. MONEY MARKET FUND . ASSET ALLOCATION FUNDS for high total return by
for income and investing in stocks and bonds.
stability by
investing in high
quality, short-term
investments.
. BOND FUNDS for . STOCK FUNDS for long-term growth by investing mainly
income by investing in equity securities.
mainly in bonds.
. TAx-FREE BOND FUNDS . GLOBAL FUNDS for long-term growth by investing mainly
for income exempt in foreign stocks or high current income by investing
from federal income mainly in global debt instruments.
tax and, in some
cases, state and
local income tax,
by investing in
municipal bonds.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
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INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUND AND ITS DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE
INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO
SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND OR ITS DISTRIBUTOR
MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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Prospectus Page 1
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PaineWebber Asia Pacific Growth Fund
----------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
----
<S> <C>
The Fund at a Glance....................................................... 3
Expense Table.............................................................. 4
Investment Objective and Policies.......................................... 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 9
The Fund's Investments..................................................... 10
Flexible Pricing SM........................................................ 13
How to Buy Shares.......................................................... 16
How to Sell Shares......................................................... 17
Other Services............................................................. 18
Management................................................................. 19
Determining the Shares' Net Asset Value.................................... 20
Dividends & Taxes.......................................................... 21
General Information........................................................ 22
</TABLE>
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Prospectus Page 2
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PaineWebber Asia Pacific Growth Fund
THE FUND AT A GLANCE
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GOAL: To increase the value of your investment by investing primarily in equity
securities of Asia Pacific Region companies (as described below). As with any
mutual fund, there is no assurance that PaineWebber Asia Pacific Growth Fund
("Fund") will achieve its goals.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its share price will rise and
fall. Investors in the Fund should be able to assume the special risks of in-
vesting in Asia Pacific Region securities, which include possible adverse po-
litical, social and economic developments within the Asia Pacific Region and
differing characteristics of foreign economies and markets. These risks are
greater with respect to securities in emerging markets, which includes most of
the markets in the Asia Pacific Region. Most of the securities held by the Fund
are denominated in foreign currencies, and the value of these investments thus
can be adversely affected by fluctuations in foreign currency values. The Fund
may use derivatives, such as options, futures and forward currency contracts
and interest rate or currency swaps, which may involve additional risks. In-
vestors may lose money by investing in the Fund; the investment is not guaran-
teed.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset manage-
ment subsidiary of PaineWebber Incorporated ("PaineWebber"), is the Fund's in-
vestment adviser and administrator. Mitchell Hutchins has appointed Schroder
Capital Management International Inc. ("Schroder Capital") as the investment
sub-adviser for the Fund.
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
SIZE
On May 31, 1997, the Fund had approximately $74.2 million in assets.
WHO SHOULD INVEST
The Fund is for investors who want long-term capital appreciation and can with-
stand short-term market fluctuations. Accordingly, the Fund is designed for in-
vestors seeking long-term growth who are able to bear risks that are not nor-
mally associated with investments in the United States and that come with
investments in the equity securities of Asia Pacific Region companies. Asia Pa-
cific Region countries have experienced among the highest real economic growth
rates in the world during the past 15 years. Schroder Capital believes that ex-
isting economic conditions in the Asia Pacific Region may provide for high lev-
els of economic activity in the long term, offering the potential for long-term
capital appreciation from investment in equity securities of Asia Pacific Re-
gion companies. However, because the value of these securities tends to be more
volatile than that of U.S. stocks, investors must be willing to tolerate
greater fluctuations in the value of the Fund's investments. These fluctuations
may be caused by events affecting the companies' businesses, as well as market
conditions, currency fluctuations, interest rate changes, liquidity concerns,
and adverse changes in economic, political and social conditions.
The Fund may be appropriate as a longer-term component of an investor's overall
portfolio, but it is not intended to provide current income or to constitute a
complete or balanced investment program. Some common reasons to invest in this
Fund are to finance college educations or retirement. When selling shares, in-
vestors should be aware that they may get more or less for their shares than
they originally paid for them.
HOW TO PURCHASE SHARES
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge (the maximum is
4.5% of the public offering price). Although investors pay an initial sales
charge when they buy Class A shares, the ongoing expenses for this Class are
lower than the ongoing expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immedi-
ately invested. However, Class B shares have higher ongoing expenses than Class
A shares. Depending upon how long they own the shares, investors may have to
pay a sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their Class
B shares within six years after purchase. After six years, Class B shares con-
vert to Class A shares, which have lower ongoing expenses and no contingent de-
ferred sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immedi-
ately invested. However, Class C shares have higher ongoing expenses than Class
A shares. A contingent deferred sales charge of 1% is charged on shares sold
within one year of purchase. Class C shares never convert to any other class of
shares.
CLASS Y SHARES
Class Y shares are offered for sale only to limited groups of investors. Eligi-
ble investors may purchase Class Y shares of the Fund as follows:
The price of the Fund's Class Y shares is net asset value. Investors do not pay
an initial sales charge when they buy Class Y shares. As a result, 100% of
their purchase is immediately invested. Investors also do not pay a redemption
fee or contingent deferred sales charge when they sell Class Y shares.
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Prospectus Page 3
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PaineWebber Asia Pacific Growth Fund
EXPENSE TABLE
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The following table is intended to assist investors in understanding the ex-
penses associated with investing in each class of shares of the Fund. Because
the Fund did not offer its shares prior to March 25, 1997, "Other Expenses"
shown below represent those estimated for the first year of operations.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
SHAREHOLDER TRANSACTION EXPENSES ------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as
a % of offering price)........................ 4.50% None None None
Sales Charge on Reinvested Dividends (as a % of
offering price)............................... None None None None
Maximum Contingent Deferred Sales Charge (as a
% of offering price or net asset value at the
time of sale, whichever is less) ............. None 5% 1% None
Exchange Fee................................... None None None None
ANNUAL FUND OPERATING EXPENSES(1) (as a % of
average net assets)
Management Fees................................ 1.20% 1.20% 1.20% 1.20%
12b-1 Fees..................................... 0.25 1.00 1.00 None
Other Expenses................................. 0.47 0.53 0.53 0.47
---- ---- ---- ----
Total Fund Operating Expenses.................. 1.92% 2.73% 2.73% 1.67%
==== ==== ==== ====
</TABLE>
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(1) Class Y shares may be purchased by participants in the INSIGHT Investment
Advisory Program ("INSIGHT") sponsored by PaineWebber, when purchased
through that program. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through
INSIGHT (generally charged quarterly in advance), which may be charged to
the INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Fund.
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase
plan are available. Purchases of $1 million or more are not subject to
an initial sales charge. However, if an investor sells these shares
within one year after purchase, a contingent deferred sales charge of 1%
of the offering price or the net asset value of the shares at the time
of sale by the shareholder, whichever is less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% con-
tingent deferred sales charge applies to sales of shares during the
first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years.
CLASS C SHARES: If an investor sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price
or the net asset value of the shares at the time of sale, whichever is
less, is imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is im-
posed, nor are Class Y shares subject to 12b-1 distribution or service
fees.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges (in-
cluding 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees.............................. 0.25% 0.25% 0.25% None
12b-1 distribution fees......................... None 0.75 0.75 None
</TABLE>
For more information, see "Management" and "Flexible Pricing/SM/."
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Prospectus Page 4
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PaineWebber Asia Pacific Growth Fund
EXPENSE TABLE
(Continued)
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of the Fund. The assumed 5% an-
nual return shown in the examples is required by regulations of the Securities
and Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF THE FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Class A.......................................................... $64 $103
Class B (Assuming sale of all shares at end of period)........... $78 $115
Class B (Assuming no sale of shares)............................. $28 $ 85
Class C (Assuming sale of all shares at end of period)........... $38 $ 85
Class C (Assuming no sale of shares)............................. $28 $ 85
Class Y.......................................................... $17 $ 53
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
. ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" re-
main the same for years shown.
. CLASS A SHARES: Deduction of the maximum 4.5% initial sales charge at
the time of purchase.
. CLASS B SHARES: Deduction of the maximum applicable contingent de-
ferred sales charge at the time of sale, which declines over a period
of six years.
. CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.
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Prospectus Page 5
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PaineWebber Asia Pacific Growth Fund
FINANCIAL HIGHLIGHTS
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The following table provides investors with data and ratios for one Class A,
Class B and Class C share for the period shown. This information is supple-
mented by the financial statements and accompanying notes which appear in the
Fund's Semi-Annual Report to Shareholders for the period ended April 30, 1997
and which are incorporated by reference into the Statement of Additional
Informa-tion. Further information about the Fund's performance is included in
the Semi-Annual Report to Shareholders, which may be obtained without charge by
calling 1-800-647-1568. The Fund had no Class Y shares outstanding during the
period shown.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------- --------------- ---------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
ENDED ENDED ENDED
APRIL 30, 1997+ APRIL 30, 1997+ APRIL 30, 1997+
(UNAUDITED) (UNAUDITED) (UNAUDITED)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.50 $ 12.50 $ 12.50
------- ------- -------
Net investment income.......... 0.02 0.01 0.01
Net realized and unrealized
losses from investments....... (0.04) (0.04) (0.04)
------- ------- -------
Net decrease from investment
operations.................... (0.02) (0.03) (0.03)
------- ------- -------
Net asset value, end of period. $ 12.48 $ 12.47 $ 12.47
======= ======= =======
Total investment return (1).... (0.16)% (0.24)% (0.24)%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's)...................... $26,255 $22,935 $13,710
Expense to average net assets. 1.92%* 2.73%* 2.73%*
Net investment income to
average net assets........... 1.32%* 0.51%* 0.49%*
Portfolio turnover............ 0% 0% 0%
Average commission rate paid
(2).......................... $0.0186 $0.0186 $0.0186
</TABLE>
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* Annualized
+ For the period March 25, 1997 (commencement of operations) through April
30, 1997
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods less than a
year have not been annualized.
(2) The average commission rate paid per share of common stock investments
purchased or sold.
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Prospectus Page 6
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PaineWebber Asia Pacific Growth Fund
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is long-term capital appreciation. The Fund's
investment objective may not be changed without shareholder approval. The
other investment policies, except where noted, are not fundamental and may be
changed by the Fund's board of trustees.
The Fund seeks to achieve its objective by investing primarily in equity secu-
rities of Asia Pacific Region companies. For purposes of this prospectus, the
"Asia Pacific Region" constitutes the region located south of the former So-
viet Union, east of Afghanistan and Iran and west of the International Date
Line (except Japan). The Asia Pacific Region countries that currently have es-
tablished securities markets and that Schroder Capital normally considers for
investments by the Fund include: Australia, China, Hong Kong, India, Indone-
sia, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea,
Sri Lanka, Taiwan and Thailand. The Fund may also invest in other Asia Pacific
Region countries whose securities markets become sufficiently established. Ex-
cept under unusual conditions, the Fund invests in companies in a minimum of
three, and generally in a larger number of, Asia Pacific Region countries. Ad-
ditionally, the Fund expects to invest across a broad spectrum of industries,
including trade, finance, real estate, transportation, communications, energy,
construction, manufacturing, services, food processing and others. The mix of
industries and countries will change over time as investment opportunities
change.
The Fund defines Asia Pacific Region companies as companies:
. that are organized under the laws of countries in the Asia Pacific Region
that now or in the future permit foreign investors to participate in their
stock markets,
. that regardless of where organized, and as determined by Schroder Capital,
either (A) derive at least 50% of their revenues from goods produced or
sold, investments made or services performed in Asia Pacific Region coun-
tries or (B) maintain at least 50% of their assets in Asia Pacific Region
countries, or
. for which the principal securities trading market is an exchange or over-
the-counter ("OTC") market in the Asia Pacific Region.
Schroder Capital believes that the Asia Pacific Region markets offer the po-
tential of superior returns through their ability to grow at rates substan-
tially in excess of the world overall. Under normal market conditions, the
Fund will invest at least 65% of its total assets in equity securities of Asia
Pacific Region companies. Most of the equity securities purchased by the Fund
are expected to be traded on a foreign stock exchange or in a foreign OTC mar-
ket. When Schroder Capital believes it is consistent with the Fund's invest-
ment objective, the Fund may invest up to 10% of its total assets in convert-
ible and non-convertible debt securities issued or guaranteed by Asia Pacific
Region issuers, including obligations of sovereign governmental issuers ("sov-
ereign debt").
* * * *
As with any mutual fund, there is no assurance that the Fund will achieve its
investment objective. The Fund's net asset value fluctuates based upon changes
in the value of its portfolio securities.
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Prospectus Page 7
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PaineWebber Asia Pacific Growth Fund
INVESTMENT PHILOSOPHY & PROCESS
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Stock selection is at the heart of Schroder Capital's investment philosophy.
Its approach to selecting investments emphasizes fundamental company analysis.
Schroder Capital's stock selection focuses on Asia Pacific Region companies
that it believes have a sustainable competitive advantage and whose growth po-
tential is undervalued by investors. In selecting companies for investment,
Schroder Capital considers historical growth rates and future growth pros-
pects, management capability, the ability of the company to access capital,
government regulation, market share, profit margins, competitive position in
both domestic and export markets and other factors. Schroder Capital allocates
investments among companies in various Asia Pacific Region countries based on
its assessment of the likelihood that those countries will have favorable
long-term business environments in which corporate growth will not be impeded
by adverse macroeconomic or political factors.
Schroder Capital is committed to maximizing risk-adjusted returns for invest-
ors through comprehensive research conducted by its extensive network of lo-
cally based analysts. This investment approach is consistent with the Fund's
overall strategy of taking a long-term view to investment based upon its as-
sessment of growth potential. Schroder Capital believes that one of its key
strengths is its worldwide network of investment management affiliates and ac-
cess to its extensive network of research offices, many long established, in
the Asia Pacific region, including, as of March 31, 1997, offices in Bangkok,
Beijing, Hong Kong, Singapore, Seoul, Sydney, Jakarta, Kuala Lumpur, Shanghai,
Taipei and Tokyo. As of that date, Schroder Capital's global research network
was staffed by over 50 investment professionals, including 12 Asia Pacific re-
gion specialists in Schroder Capital's London office.
Each year, the Schroder Group researches and conducts on-site visits with 700
companies in the Asia Pacific Region countries. Of those companies, the Schro-
der Group's investment professionals further develop extensive management con-
tacts with, and produce independent forecasts of earnings estimates for, 550
companies. Schroder Capital's analysis includes small and medium-sized compa-
nies, as well as the larger-capitalization companies. Schroder Capital be-
lieves that small companies are analyzed by fewer investors and are less
likely than larger companies to be efficiently priced.
Asia Pacific Region countries have experienced among the highest real economic
growth rates in the world for the past 15-year period. Schroder Capital be-
lieves that existing economic conditions in the Asia Pacific Region may pro-
vide for high levels of economic activity in the long term, offering the po-
tential for long-term capital appreciation from investment in equity
securities of Asia Pacific Region companies. These conditions include (1) the
increasing industrialization of Asia Pacific Region economies, (2) favorable
demographics and competitive wage rates, (3) high rates of domestic savings
available to fund investment, particularly in the area of infrastructure, (4)
the ability to attract foreign direct investment, (5) the emergence of a re-
gional trading zone and (6) rising per capita incomes available to support lo-
cal markets for consumer goods. See the Statement of Additional Information
for further information. There can be no assurance, however, that economic
growth in the Asia Pacific Region will occur, that the growth rate will be as
high on either an absolute or relative scale as in the past or that market
performance will reflect any actual economic growth in the Asia Pacific Region
overall.
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Prospectus Page 8
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PaineWebber Asia Pacific Growth Fund
PERFORMANCE
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FUND PERFORMANCE INFORMATION
The Fund performs a standardized computation of annualized total return and
may show this return in advertisements or promotional materials. Standardized
return shows the change in value of an investment in the Fund as a steady com-
pound annual rate of return. Actual year-by-year returns fluctuate and may be
higher or lower than standardized return. Standardized return for Class A
shares of the Fund reflects deduction of the Fund's maximum initial sales
charge of 4.5% at the time of purchase, and standardized return for Class B
and Class C shares of the Fund reflects deduction of the applicable contingent
deferred sales charge imposed on the sale of shares held for the period. One-,
five- and ten-year periods will be shown, unless the Fund or class has been in
existence for a shorter period. If so, returns will be shown for the period
since inception. Total return calculations assume reinvestment of dividends
and other distributions.
The Fund may use other total return presentations in conjunction with stan-
dardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
Total return information reflects past performance and does not necessarily
indicate future results. The investment return and principal value of shares
of the Fund will fluctuate. The amount investors receive when selling shares
may be more or less than what they paid.
INDEX PERFORMANCE
In its advertisements the Fund may compare itself to the Morgan Stanley Capi-
tal International All Country Asia Pacific Free ex Japan Index ("MSCI Index")
(Gross Dividends) and MSCI Index (Price Only).
The MSCI Index is a well-known, unmanaged index that reflects developed and
developing markets throughout the Asia Pacific Region. MSCI stands for Morgan
Stanley Capital International. AC stands for All Country, both emerging and
developed countries in that region, previously referred to as "combined." Free
stands for "investable" (i.e., free of foreign ownership limits or legal re-
strictions at the security or country level). The MSCI Index is calculated in
U.S. dollars and is weighted by market capitalization. The MSCI Index (Price
Only) does not reflect the reinvestment of dividends. The MSCI Index (Gross
Dividends) reflects the reinvestment of dividends without accounting for any
transaction costs or local withholding or other taxes on dividends. According-
ly, the MSCI Index (Gross Dividends) reflects a higher return than a U.S. in-
vestor would receive even if its investments precisely tracked the composition
of the MSCI Index. Taiwan and China were added to the MSCI Index as of Septem-
ber 1996, making a total of 14 countries in this Index. The MSCI Index con-
tained 12 countries as of February 1994, 9 countries as of January 1992 and 8
countries as of January 1988.
The Fund also may compare itself to the Standard & Poor's Index of 500 Common
Stocks Daily Reinvest ("S&P 500 Daily Reinvest"). This is a widely recognized
index of market activity based on the aggregate performance of a selected, un-
managed portfolio of large capitalization publicly traded U.S. common stocks.
The performance data includes reinvested dividends.
The following tables set forth the historical results of the MSCI Index, the
S&P 500 Daily Reinvest and the Lipper Pacific ex-Japan Funds Average. The re-
sults do not represent performance of the Fund nor are they intended to pre-
dict or suggest the returns that might be experienced by the Fund or an indi-
vidual investor investing in the Fund. They are illustrative of historic
performance and market volatility. The Fund does not operate as an "index"
fund and its performance will differ from that of each index. The composition
of the Fund's portfolio in terms of securities and countries will differ from
the MSCI Index. Also, unlike each Index, the Fund will incur transaction
costs, including brokerage and other operating expenses.
ANNUAL RATES OF RETURN
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ------ ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSCI AC Asia Pacific
Free ex Japan (Price
Only).................. 25.52 16.60 (15.79) 27.18 6.40 80.18 (14.13) 3.67 9.18
MSCI AC Asia Pacific
Free ex Japan (Gross
Dividends)............. 30.45 21.42 (11.85) 32.39 9.89 84.93 (12.29) 6.08 11.64
S&P 500 Daily Reinvest.. 16.61 31.69 (3.10) 30.47 7.82 10.08 1.32 37.58 22.96
Lipper Pacific ex-Japan
Funds Average.......... 23.20 48.12 (13.05) 22.85 11.81 73.30 (19.14) 1.84 11.15
</TABLE>
AVERAGE ANNUAL RATES OF RETURN
(for period ended 5/31/97)
<TABLE>
<CAPTION>
12/31/87-
5/31/97 5 YEAR 3 YEAR 1 YEAR
--------- ------ ------ ------
<S> <C> <C> <C> <C>
MSCI AC Asia Pacific Free ex Japan (Price Only). 15.49 10.37 2.85 (1.65)
MSCI AC Asia Pacific Free ex Japan (Gross
Dividends)..................................... 18.52 13.06 5.25 (2.05)
S&P 500 Daily Reinvest.......................... 17.46 18.38 25.94 29.41
Lipper Pacific ex-Japan Funds Average........... 10.64 10.88 2.87 4.13
</TABLE>
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Source: Lipper Analytical Services. The Lipper Pacific ex-Japan Funds Average
reflects the average return, excluding any applicable sales charges, of all
Pacific ex-Japan mutual funds tracked by Lipper for the periods shown. The
countries in which the Lipper Pacific ex-Japan mutual funds invest may differ
from those in which the Fund invests.
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Prospectus Page 9
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---------------------
PaineWebber Asia Pacific Growth Fund
THE FUND'S INVESTMENTS
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EQUITY SECURITIES include common stocks, preferred stocks and debt or equity
securities that are convertible into them, including common stock purchase
warrants and rights, equity interests in trusts, partnerships, joint ventures
or similar enterprises and depository receipts. Common stocks, the most famil-
iar type, represent an equity (ownership) interest in a corporation. Preferred
stock has certain fixed income features, like a bond, but is actually equity
in a company, like common stock. Depository receipts typically are issued by
banks or trust companies and evidence ownership of underlying securities.
DEBT SECURITIES, including bonds, debentures and notes, are used by corpora-
tions and governments to borrow money from investors. The issuer pays the in-
vestor a fixed or variable rate of interest and must repay the amount borrowed
at maturity. Debt securities have varying degrees of investment risk and vary-
ing levels of sensitivity to changes in interest rates.
RISKS
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth po-
tential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and
in overall market and economic conditions. Common stocks generally represent
the riskiest investment in a company. It is possible that the Fund may experi-
ence a substantial or complete loss on an individual equity investment.
FOREIGN INVESTING. Investing in foreign securitiesinvolves more risks than in-
vesting in the U.S. Their value is subject to economic and political develop-
ments in the countries where the companies operate and to changes in foreign
currency values. Values may also be affected by foreign tax laws, changes in
foreign economic or monetary policies, exchange control regulations and regu-
lations involving prohibitions on the repatriation of foreign currencies.
Transactions in foreign securities may be subject to less efficient settlement
practices. The costs of investing outside the United States frequently are
higher than those in the United States. These costs include relatively higher
brokerage commissions and foreign custody expenses.
Currency risk is the risk that changes in foreign exchange rates may reduce
the U.S. dollar value of the Fund's foreign investments. The Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the imposi-
tion of currency controls or other political developments inside and outside
the United States.
ASIA PACIFIC REGION COUNTRIES. In general, less information is available about
Asia Pacific Region companies than about U.S. companies, and Asia Pacific Re-
gion companies are not subject to the same accounting, auditing and financial
reporting standards as are U.S. companies. Asia Pacific Region securities mar-
kets are less liquid and subject to less regulation than the U.S. securities
markets. Many of the countries within the Asia Pacific Region may experience
political, social or economic instability in the future.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies lo-
cated in emerging markets involves additional risks. These countries typically
have economic and political systems that are relatively less mature, and can
be expected to be less stable, than those of developed countries. The emerging
markets in which the Fund may invest include China, India, Indonesia, Paki-
stan, the Philippines, South Korea, Sri Lanka, Taiwan and Thailand and, in the
future, also may include other Asia Pacific Region countries whose markets
currently are not considered by Schroder Capital to be sufficiently estab-
lished to warrant Fund investment. Emerging markets located in the Asia Pa-
cific Region may have policies that restrict investment by foreigners in those
countries, and there is a risk of government expropriation or nationalization
of private property. The possibility of low or nonexistent trading volume in
the securities of Asia Pacific Region companies in developing countries may
also result in a lack of liquidity and in price volatility.
Included among the emerging markets countries in which the Fund may invest is
the People's Republic of China. Upon the accession to power of the regime, the
government of China expropriated a large amount of property. The claims of
many property owners against
----------
Prospectus Page 10
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
those governments were never finally settled. There can be no assurance that
the Fund's investment in China, if any, would not be expropriated, national-
ized or otherwise confiscated, in which case the Fund could lose its entire
investment in China. In addition, any change in the leadership or policies of
China may halt the expansion of or reverse the recent liberalization of for-
eign investment policies.
The Fund may invest in Hong Kong, which reverted to Chinese administration on
July 1, 1997. The potential effects of this reversion cannot be known at this
time. However, the Fund's investments in Hong Kong may now be subject to the
same or similar risks as any investment in China. In addition, the reversion
of Hong Kong also presents a risk that the Hong Kong dollar will be devalued
and a risk of possible loss of investor confidence in Hong Kong's curren-
cy, stock market and assets.
DEBT SECURITIES. The Fund may invest up to 10% of its net assets in convert-
ible and non-convertible debt securities, including sovereign debt. Debt secu-
rities are subject to interest rate risk and credit risk. Interest rate risk
is the risk that interest rates will rise and bonds prices will fall, lowering
the value of the Fund's bond investments. Credit risk is the risk that adverse
changes in economic conditions can affect an issuer's ability to pay principal
and interest.
The debt securities in which the Fund may invest may be unrated or rated lower
than investment grade, that is, rated lower than BBB by Standard & Poor's, a
division of The McGraw Hill Companies, Inc., Baa by Moody's Investors Service,
Inc. or comparably rated by another nationally recognized ratings agency. Such
securities, commonly referred to as "junk bonds," are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposure to adverse conditions. These se-
curities may be rated in the lowest rating category by a ratings agency and
may be in default.
Credit ratings attempt to evaluate the safety of principal and interest pay-
ments and do not evaluate the volatility of the bond's value or its liquidity
and do not guarantee the performance of the issuer. The rating agencies also
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than the rating indicates. There is a risk that rating agencies will downgrade
bonds, which can be expected to lower value and liquidity.
The sovereign debt in which the Fund may invest generally consists of obliga-
tions supported by national, state or provincial governments or similar polit-
ical sub-divisions. Investments in sovereign debt involve special risks. The
issuer of the debt or the governmental authorities that control the repayment
of the debt may be unable or unwilling to pay interest or repay principal when
due in accordance with the terms of such debt, and the Fund may have limited
legal recourse in the event of default. Political conditions, especially a
sovereign entity's willingness to meet the terms of its debt obligations, are
of consid-erable significance.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A con-
vertible security is a bond, debenture, note, preferred stock or other secu-
rity that may be converted into or exchanged for a prescribed amount of common
stock of the same or a different issuer within a particular period of time at
a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. While no securities investment is with-
out some risk, investments in convertible securities generally entail less
risk than the issuer's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible se-
curity sells above its value as a fixed income security.
INVESTMENTS IN CLOSED-END FUNDS. The Fund may invest up to 10% of its total
assets in the shares of closed-end funds that are permitted to invest in mar-
kets where the Fund is significantly restricted from investing or in other
markets in the Asia Pacific Region when, in the opinion of Schroder Capital,
those closed-end funds represent attractive investment opportunities. As
closed-end funds normally have their own investment advisers and associated
expenses, the Fund effectively incurs higher expenses by investing indirectly
through these funds than it would by investing directly.
OTHER INVESTMENT TECHNIQUES AND STRATEGIES
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in illiq-
uid securities, including certain cover for OTC options and securities whose
disposition is restricted under the federal securities laws other
----------
Prospectus Page 11
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
than those Schroder Capital has determined to be liquid pursuant to guidelines
established by the Fund's board. However, to the extent that securities are
freely tradeable in the country in which they are principally traded, they are
not considered illiquid even if they are not freely tradeable in the United
States. The Fund may invest in restricted securities that are eligible for re-
sale to qualified institutional buyers pursuant to SEC Rule 144A, but the Fund
will not consider those securities to be illiquid if Schroder Capital deter-
mines them to be liquid in accordance with procedures approved by the Fund's
board.
TEMPORARY DEFENSIVE POSITIONS. When Schroder Capital believes that unusual
circumstances warrant a defensive posture, the Fund may temporarily commit all
or any portion of its assets to cash (U.S. dollars or foreign currencies) or
money market instruments, including repurchase agreements. The Fund intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins or Schroder Capital to present minimum credit
risks in accordance with guidelines established by the Fund's board.
LENDING PORTFOLIO SECURITIES. The Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of the
Fund's total assets. Lending securities enables the Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
PORTFOLIO TURNOVER. The Fund does not anticipate that portfolio turnover will
exceed 100% during its' first year of operations.
HEDGING STRATEGIES USING DERIVATIVE CONTRACTS. The Fund may use certain in-
struments and strategies designed to adjust the overall risk of its investment
portfolio. These "hedging" strategies involve derivative contracts, including
options (on securities, futures and stock indexes), futures contracts (on
stock indexes and interest rates) and interest rate swaps. The Fund also may
use derivative contracts involving foreign currencies, including options and
futures contracts on foreign currencies and forward currency contracts and in-
terest rate or currency swaps. New financial products and risk management
techniques continue to be developed and may be used if consistent with the
Fund's investment objectives and policies. The Statement of Additional Infor-
mation for the Fund contains further information on these derivative contracts
and related hedging strategies.
The Fund might not use any derivative contract or hedging strategy, and there
can be no assurance that any hedging strategy will succeed. If Schroder Capi-
tal is incorrect in its judgment on market values, interest rates or other
economic factors in using a hedging strategy, the Fund may have lower net in-
come and a net loss on the investment. Each of these strategies involves cer-
tain risks, which include:
. the fact that the skills needed to use hedging instruments are different
from those needed to select securities for the Fund;
. the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and
price movements of the securities or currencies being hedged;
. possible constraints placed on the Fund's ability to purchase or sell port-
folio investments at advantageous times due to the need for the Fund to
maintain "cover" or to segregate securities; and
. the possibility that the Fund is unable to close out or liquidate its hedged
position.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities
on a when-issued basis or may purchase or sell securities for delayed deliv-
ery. The Fund generally does not pay for such securities or start earning in-
terest on them until they are delivered, but it immediately assumes the risks
of ownership, including the risk of price fluctuation.
OTHER INFORMATION. The Fund may borrow money from banks or through reverse re-
purchase agreements for temporary or emergency purposes, but not in excess of
33 1/3% of its total assets. The Fund may sell securities short "against the
box" to defer realization of gains or losses for tax or other purposes. When a
security is sold against the box, the seller owns the security. For liquidity
purposes, such as clearance of portfolio transactions, the payment of divi-
dends, other distributions and expenses and payments to selling (redeeming)
shareholders, or pending investment, the Fund may commit up to 35% of its to-
tal assets to cash (U.S. dollar-denominated or foreign), or money market in-
struments, including repurchase agreements.
----------
Prospectus Page 12
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
FLEXIBLE PRICING/SM/
- -------------------------------------------------------------------------------
The Fund offers four classes of shares that differ in terms of sales charges
and expenses. An investor can select the class that is best suited to his or
her investment needs, based upon the holding period and the amount of invest-
ment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is 4.5% of the public offering price) next calcu-
lated after PaineWebber's New York City headquarters or PFPC Inc., the Fund's
transfer agent ("Transfer Agent"), receives the purchase order. Although in-
vestors pay an initial sales charge when they buy Class A shares, the ongoing
expenses for this class are lower than the ongoing expenses of Class B and
Class C shares. Sales charges on Class A shares are calculated as follows:
<TABLE>
<CAPTION>
DISCOUNT TO SELECTED
SALES CHARGE AS A PERCENTAGE OF: DEALERS AS PERCENTAGE
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OF OFFERING PRICE
- -------------------- -------------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.25%
$50,000 to $99,999...... 4.00 4.17 3.75
$100,000 to $249,999.... 3.50 3.63 3.25
$250,000 to $499,999.... 2.50 2.56 2.25
$500,000 to $999,999.... 1.75 1.78 1.50
$1,000,000 and
over/(1)/.............. None None 1.00(/2/)
</TABLE>
- -------
/(1)/ A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw annually more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
/(2)/ Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS AND WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mu-
tual fund may combine those purchases to get a reduced sales charge. Investors
who already own Class A shares in one or more PaineWebber mutual funds may
combine the amount they are currently purchasing with the value of such previ-
ously owned shares to qualify for a reduced sales charge. To determine the
sales charge reduction in either case, please refer to the chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
. their spouses, parents or children under age 21;
. their Individual Retirement Accounts (IRAs);
. certain employee benefit plans, including 401(k) plans;
. any company controlled by the investor;
. trusts created by the investor;
. Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of individuals for the benefit of the investors'
children; or
. accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
. is an employee, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;
. is the spouse, parent or child of any of the above;
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Prospectus Page 13
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
. buys these shares through a PaineWebber investment executive who was for-
merly employed as a broker with a competing brokerage firm that was regis-
tered as a broker-dealer with the SEC; and
. was the investment executive's client at the competing brokerage firm;
. within 90 days of buying Class A shares in the Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor ei-
ther paid a sales charge to buy those shares, paid a contingent deferred
sales charge when selling them or held those shares until the contingent
deferred sales charge was waived; and
. the amount that the investor purchases does not exceed the total amount of
money the investor received from the sale of the other mutual fund;
. is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that invest-
ment automatically invested in Class A shares;
. is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or
section 403(b) of the Internal Revenue Code ("Code") (each a "qualified pen-
sion plan"). (This waiver is subject to minimum requirements, with respect
to the number of employees and amount of plan assets, established by Mitch-
ell Hutchins. Currently, a plan must have 50 or more eligible employees and
at least $1 million in plan assets.) For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested;
. is a participant in the PaineWebber Members Only Program/TM/. For invest-
ments made pursuant to this waiver, Mitchell Hutchins may make payments out
of its own resources to PaineWebber and to participating membership organi-
zations in a total amount not to exceed 1% of the amount invested;
. is a variable annuity offered only to qualified pension plans. For invest-
ments made pursuant to this waiver, Mitchell Hutchins may make payments out
of its own resources to PaineWebber and to the variable annuity's sponsor,
adviser or distributor in a total amount not to exceed 1% of the amount
invested;
. acquires Class A shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a writ-
ten agreement with PaineWebber permitting the sale of Class A shares at net
asset value to that program. For investments made pursuant to this waiver,
Mitchell Hutchins may make a payment to PaineWebber out of its own resources
in an amount not to exceed 1% of the amount invested. For subsequent invest-
ments or exchanges made to implement a rebalancing feature of such an in-
vestment program, the minimum subsequent investment requirement is also
waived; or
. acquires Class A shares in connection with a reorganization pursuant to
which the Fund acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Fund.
For more information on how to get reduced sales charge, investors should con-
tact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information
to PaineWebber or the Fund if they seek any of these waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated af-
ter PaineWebber's New York City headquarters or the Transfer Agent receives
the purchase order. The ongoing expenses investors pay for Class B shares are
higher than those of Class A shares. Because investors do not pay an initial
sales charge when they buy Class B shares, 100% of their purchase is immedi-
ately invested.
Depending on how long they own their Fund investment, investors may have to
pay a sales charge when they sell their Fund shares. This sales charge is
called a "contingent deferred sales charge." The amount of the charge depends
on how long the investor owned the shares. The sales charge is calculated by
multiplying the offering price (the net asset value of the shares at the time
of purchase) or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, by the percentage shown on the following ta-
ble. Investors who own shares for more than six years do
----------
Prospectus Page 14
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
not have to pay a sales charge when selling those shares.
<TABLE>
<CAPTION>
IF THE INVESTOR PERCENTAGE BY WHICH THE SHARES'
SELLS SHARES WITHIN: NET ASSET VALUE IS MULTIPLIED:
- ----------------------- -------------------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A
shares of equal dollar value after the investor has owned them for six years.
Dividends and other distributions paid to the investor by the Fund in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing ex-
penses than Class B shares. If the investor has exchanged Class B shares be-
tween PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
. First, Class B shares owned through reinvested dividends and capital gain
distributions; and
. Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
. sales of shares under the Fund's "Systematic Withdrawal Plan" (investors may
not withdraw annually more than 12% of the value of the Fund account under
the Plan);
. a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under section 403(b) of the Internal
Revenue Code after the investor reaches age 59 1/2;
. a tax-free return of an excess IRA contribution;
. a tax-qualified retirement plan distribution following retirement; or
. Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
Investors must provide satisfactory information to PaineWebber or the Fund to
seek any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales charge
when they buy Class C shares, but the ongoing expenses of Class C shares are
higher than those of Class A shares. Because investors do not pay an initial
sales charge when they buy Class C shares, 100% of their purchase is immedi-
ately invested. Class C shares never convert to any other class of shares.
A contingent deferred sales charge of 1% of the offering price (the net asset
value at the time of purchase) or the net asset value of the shares at the time
of sale by the shareholder, whichever is less, is charged on sales of shares
made within one year of the purchase date. Other PaineWebber mutual funds may
impose a different contingent deferred sales charge on Class C shares sold
within one year of the purchase date. A sale of Class C shares acquired through
an exchange and held less than one year will be subject to the same contingent
deferred sales charge that would have been imposed on Class C shares of the
PaineWebber mutual fund originally purchased. Class C shares representing rein-
vestment of any dividends or capital gain distributions will not be subject to
the 1% charge. Withdrawals under the Systematic Withdrawal Plan also will not
be subject to this charge. However, investors may not withdraw annually more
than 12% of the value of the Fund account under the Plan in the first year af-
ter purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Class Y shares are sold to eligible investors at the
net asset value next calculated after the purchase order is received at
PaineWebber's New York City headquarters or the Transfer Agent. No initial or
contingent deferred sales charge is imposed, nor are Class Y shares subject to
12b-1 distribution or service fees. The Fund and Mitchell Hutchins reserve the
right to reject any purchase order and to suspend the offering of Class Y
shares for a period of time. Mitchell Hutchins, the distributor for the Fund's
----------
Prospectus Page 15
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
Class Y shares, has appointed PaineWebber to serve as the exclusive dealer for
the Fund's Class Y shares.
The following investors are eligible to buy Class Y shares:
. a participant in INSIGHT when Class Y shares are purchased through that pro-
gram;
. an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible PricingSM System;
. an employee benefit plan qualified under section 401 (including a salary re-
duction plan qualified under section 401(k)) or 403(b) of the Internal Reve-
nue Code that has either
5,000 or more eligible employees or
$50 million or more in assets; and
. an investment company advised by PaineWebber or an affiliate of PaineWebber.
The Fund is authorized to offer Class Y shares to employee benefit and retire-
ment plans of Paine Webber Group Inc. and its affiliates and certain other in-
vestment programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds.
INSIGHT
An investor who purchases $50,000 or more of shares of the mutual funds that
are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing System and certain other specified mutual funds)
may take part in INSIGHT, a total portfolio asset allocation program sponsored
by PaineWebber, and thus become eligible to purchase Class Y shares. INSIGHT
offers comprehensive investment services, including a personalized asset allo-
cation investment strategy using an appropriate combination of funds, monitor-
ing of investment performance and comprehensive quarterly reports that cover
market trends, portfolio summaries and personalized account information.
Participating in INSIGHT is subject to payment of an advisory fee to
PaineWebber at the maximum annual rate of 1.50% of assets held through the
program (generally charged quarterly in advance), which covers all INSIGHT in-
vestment advisory services and program administration fees. Employees of
PaineWebber and its affiliates are entitled to a 50% reduction in the fee oth-
erwise payable for participation in INSIGHT. INSIGHT clients may elect to have
their INSIGHT fees charged to their PaineWebber accounts (by the automatic re-
demption of money market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber correspon-
dent firm for more information concerning mutual funds that are available to
INSIGHT participants or for other INSIGHT program information.
- -------------------------------------------------------------------------------
HOW TO BUY SHARES
- -------------------------------------------------------------------------------
Prices are calculated for each class of the Fund's shares once each Business
Day, at the close of regular trading on the New York Stock Exchange (currently
4:00 p.m., Eastern time). A "Business Day" is any day, Monday through Friday,
on which the New York Stock Exchange is open for business. The Fund and Mitch-
ell Hutchins reserve the right to reject any purchase order and to suspend the
offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will au-
tomatically receive Class A shares, which include an initial sales charge. In-
vestors in Class Y shares must provide satisfactory information to PaineWebber
or the Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber in-
vestment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1 mil-
lion). PaineWebber investment executives and correspondent firms are responsi-
ble for promptly sending investors' purchase orders to PaineWebber's New York
City headquarters.
----------
Prospectus Page 16
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspon-
dent firms. Payment is due on the third Business Day after PaineWebber's New
York City headquarters office receives the purchase order.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up
an account through the Transfer Agent (PFPC Inc.) by completing an account ap-
plication, which may be obtained by calling 1-800-647-1568. The application
and check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and
want to invest in another PaineWebber mutual fund, can:
. mail an application with a check; or
. open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional invest-
ments in the Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account:............ $1,000
To add to an account:.......... $ 100
</TABLE>
The Fund may waive or reduce these minimums for:
. employees of PaineWebber or its affiliates;
. participants in certain pension plans, retirement accounts, unaffiliated in-
vestment programs or the Fund's automatic investment plan; or
. transactions in Class A shares made to implement a rebalancing feature in
certain investment programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of other PaineWebber mutual fund shares. Class Y
shares are not exchangeable. For classes of shares where no initial sales
charge is imposed, a contingent deferred sales charge may apply if the in-
vestor sells the shares acquired through the exchange. Exchanges may be sub-
ject to minimum investment requirements of the fund into which exchanges are
made.
. Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.
. Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of in-
struction must include:
. the investor's name and address;
. the Fund's name;
. the Fund account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature by an eligible institu-
tion, such as a commercial bank, trust company or stock exchange member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for
the corresponding class of shares of other PaineWebber mutual funds. The Fund
will use the purchase date of the initial investment to determine any contin-
gent deferred sales charge due when the acquired shares are sold. Fund shares
may be exchanged only after the settlement date has passed and payment for the
shares has been made. The exchange privilege is available only in those juris-
dictions where the sale of the Fund shares to be acquired is authorized. This
exchange privilege may be modified or terminated at any time and, when re-
quired by SEC rules, upon 60 days' notice. See the back cover of this Prospec-
tus for a list of other PaineWebber mutual funds.
- -------------------------------------------------------------------------------
HOW TO SELL SHARES
- -------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated after the order is received and
accepted (less any applicable contingent deferred sales charge). Share
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Prospectus Page 17
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
prices are normally calculated at the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class
they are selling. If they do not, the Fund will assume they are first selling
their Class A shares, then Class C, and last, Class B.
If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's corre-
spondent firms can sell their shares by contacting their investment executive.
Investors who do not have an account and have bought their shares through PFPC
Inc., the Fund's Transfer Agent, may sell shares by writing a "letter of in-
struction," as detailed in "How to Exchange Shares."
Because the Fund incurs certain fixed costs in maintaining shareholder ac-
counts, it reserves the right to purchase back all of its shares in any share-
holder account with a net asset value of less than $500. If the Fund elects to
do so, it will notify the shareholder of the opportunity to increase the
amount invested to $500 or more within 60 days of the notice. The Fund will
not purchase back accounts that fall below $500 solely due to a reduction in
net asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this rein-
statement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
- -------------------------------------------------------------------------------
OTHER SERVICES
- -------------------------------------------------------------------------------
Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Fund's Class A, B and C shares:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial invest-
ment of $1,000 through which the Fund will deduct $50 or more monthly, quar-
terly, semi-annually or annually from the investor's bank account to invest
directly in the Fund. In addition to providing a convenient and disciplined
manner of investing, participation in the Automatic Investment Plan enables
the investor to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semi-annual (June and December) or
annual (December) withdrawals from their PaineWebber Mutual Fund accounts.
Minimum balances and withdrawals vary according to the class of shares:
. CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
. CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly, semi-annual and annual withdrawals of $200, $400, $600 and $800,
respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a con-
tingent deferred sales charge. Investors may not withdraw more than 12% of the
value of the Fund account when the investor signed up for the Plan (for Class
B shares annually; for Class A and C shares, during the first year under the
Plan.) Shareholders who elect to receive dividends or other distributions in
cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors consid-
ering establishing an IRA should review applicable tax laws and should consult
their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of the Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be
moved to an account with the Transfer Agent. However, if the other firm has
entered into a selected dealer agreement with Mitchell Hutchins relating to
the Fund, the shareholder may be able to hold Fund shares in an account with
the other firm.
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Prospectus Page 18
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
MANAGEMENT
- -------------------------------------------------------------------------------
The Fund is governed by a board of trustees, which oversees the Fund's opera-
tions. The Fund has appointed Mitchell Hutchins as investment adviser and ad-
ministrator responsible for the Fund's operations (subject to the authority of
the board). Mitchell Hutchins has appointed the investment sub-adviser, Schro-
der Capital, to be responsible for day-to-day management of the Fund's invest-
ments.
Mitchell Hutchins and Schroder Capital personnel may engage in securities
transactions for their own accounts pursuant to each firm's code of ethics
that establishes procedures for personal investing and restricts certain
transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York,
10019, is the asset management subsidiary of PaineWebber, which is wholly
owned by Paine Webber Group Inc., a publicly owned financial services holding
company. On May 31, 1997, Mitchell Hutchins was adviser or sub-adviser of 30
investment companies with 65 separate portfolios and aggregate assets of over
$32.7 billion.
ABOUT THE INVESTMENT SUB-ADVISER
The investment sub-adviser, Schroder Capital, is located at 787 Seventh Ave-
nue, New York, New York 10019. It is a wholly owned U.S. subsidiary of
Schroders Incorporated, the wholly owned U.S. holding company subsidiary of
Schroders plc. Schroders plc, which is listed on the London Stock Exchange, is
the holding company parent of a large worldwide group of banks and financial
services companies (referred to as the "Schroder Group"), with associated com-
panies and branch and representative offices located in 18 countries world-
wide. The investment management subsidiaries of the Schroder Group had approx-
imately $150 billion in client assets under management as of March 31, 1997.
As of March 31, 1997, Schroder Capital, together with its United Kingdom af-
filiate Schroder Capital Management International Limited, had over $23 bil-
lion in assets under management. Since its founding in 1980, Schroder Capital
has developed an expertise in Asia Pacific Region investments. Louise Croset
and Heather Crighton, with the assistance of Schroder Capital's Asia Pacific
region investment committee, are primarily responsible for the day-to-day man-
agement of the Fund. Ms. Croset, a first vice president and director of Schro-
der Capital, has been with the firm since 1993. Previously, she was a Vice
President of Wellington Management Co. Ms. Croset has managed Asia Pacific re-
gion equity investments for the past 13 years. Ms. Crighton, a first vice
president of Schroder Capital, has also been with the firm since 1993. Previ-
ously, she was fund manager at Mercantile & General Reinsurance Co. She has
managed Asia Pacific region equity investments for the past eight years.
MANAGEMENT FEES & OTHER EXPENSES
The Fund pays Mitchell Hutchins a monthly fee for its services at the annual
rate of 1.20% of its average daily net assets up to $100 million and 1.10% of
its average daily net assets over $100 million.
The Fund also pays PaineWebber an annual fee of $4.00 per active shareholder
account held at PaineWebber for services not provided by the Transfer Agent.
The Fund incurs various other expenses in its operations, such as custody and
transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its shares, taxes and governmental fees, fees and expenses of trustees, costs
of obtaining insurance, expenses of printing and distributing shareholder ma-
terials, organizational expenses and extraordinary expenses, including costs
or losses in any litigation.
Mitchell Hutchins (not the Fund) pays Schroder Capital a monthly fee for in-
vestment sub-advisory services at an annual rate of 0.65% of the Fund's aver-
age daily net assets up to $100 million and 0.55% of the Fund's average daily
net assets over $100 million.
In accordance with procedures adopted by the Fund's board, brokerage transac-
tions for the Fund may be conducted through PaineWebber or its affiliates and
the Fund may pay fees to PaineWebber for its services as lending agent in its
portfolio securities lending program.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribu-
----------
Prospectus Page 19
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
tion plan with respect to the Fund's Class Y shares. Under distribution plans
for Class A, Class B and Class C shares ("Class A Plan," "Class B Plan" and
"Class C Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins:
. Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
. Monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class B and Class C shares.
Mitchell Hutchins primarily uses the service fees under the Plans for Class A,
B and C shares to pay PaineWebber for shareholder servicing, currently at the
annual rate of 0.25% of the aggregate investment amounts maintained in the
Fund by PaineWebber clients. PaineWebber then compensates its investment exec-
utives for shareholder servicing that they perform and offsets its own ex-
penses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
. Offset the commissions it pays to PaineWebber for selling the Fund's Class B
and Class C shares, respectively.
. Offset the Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins re-
ceives no special compensation from the Fund or the Fund's investors at the
time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution ex-
penses.
The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that the Fund must pay service and distri-
bution fees to Mitchell Hutchins for its activities, not as reimbursement for
specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses ex-
ceed the service or distribution fees it receives, the Fund will not be obli-
gated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or ac-
crued through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Fund. Annually, the Fund's board reviews
the Plans and Mitchell Hutchins' corresponding expenses for each class sepa-
rately from the Plans and expenses of the other classes.
- -------------------------------------------------------------------------------
DETERMINING THE SHARES' NET ASSET VALUE
- -------------------------------------------------------------------------------
The net asset value of the Fund's shares fluctuates and is determined sepa-
rately for each class as of the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time) each Business Day. The Fund's net
asset value per share is determined by dividing the value of the securities
held by the Fund, plus any cash or other assets, minus all liabilities, by the
total number of Fund shares outstanding.
The Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily avail-
able, assets are valued at fair value as determined in good faith by or under
the direction of its board. The amortized cost method of valuation generally
is used to value debt obligations with 60 days or less remaining to maturity,
unless the board determines that this does not represent fair value. Invest-
ments denominated in foreign currencies are valued daily in U.S. dollars based
on the then-prevailing exchange rates. It should be recognized that judgment
plays a greater role in valuing thinly traded securities and lower rated debt
securities in which the Fund may invest, because there is less reliable, ob-
jective data available.
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Prospectus Page 20
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
DIVIDENDS & TAXES
- -------------------------------------------------------------------------------
DIVIDENDS
The Fund will pay an annual dividend from its net investment income, net
short-term capital gain and net realized gains from foreign currency transac-
tions, if any. The Fund also will distribute annually substantially all of its
net capital gain (the excess of net long-term capital gain over net short-term
capital loss), if any. The Fund may make additional distributions, if neces-
sary, to avoid a 4% excise tax on certain undistributed income and capital
gain.
Dividends and other distributions paid on all classes of Fund shares will be
calculated at the same time and in the same manner. Dividends on Class A, B
and C shares of the Fund are expected to be lower than those on its Class Y
shares because the other shares have higher expenses resulting from their
service fees and, in the case of Class B and Class C shares, their distribu-
tion fees. Dividends from net investment income on Class B and Class C shares
are expected to be lower than those on Class A shares because Class B and
Class C shares have higher expenses resulting from their distribution fees.
Dividends on each class also might be affected differently by the allocation
of other class-specific expenses. See "General Information."
The Fund's dividends and other distributions will be paid in additional Fund
shares of the same class at net asset value, unless the shareholder has re-
quested cash payments. Shareholders who wish to receive dividends and other
distributions in cash, either mailed to the shareholder by check or credited
to the shareholder's PaineWebber account, should contact their PaineWebber in-
vestment executives or one of its correspondent firms or complete the appro-
priate section of the account application.
TAXES
The Fund intends to continue to qualify for treatment as a regulated invest-
ment company under the Internal Revenue Code so that it will not have to pay
federal income tax on that part of its investment company taxable income (gen-
erally consisting of net investment income, net short-term capital gain and
net gains from certain foreign currency transactions) and net capital gain
that it distributes to its shareholders.
Dividends from the Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as ordi-
nary income. Distributions of the Fund's net capital gain (whether paid in
cash or additional shares) are taxable to shareholders as a long-term capital
gain, regardless of how long they have held their Fund shares. Shareholders
who are not subject to tax on their income generally will not be required to
pay tax on distributions from the Fund.
YEAR-END TAX REPORTING
Following the end of each calendar year, the Fund will notify its shareholders
of the amounts of dividends and capital gain distributions paid (or deemed
paid that year), their share of any foreign taxes paid by the Fund that year
and any portion of those dividends that qualifies for special treatment.
BACKUP WITHHOLDING
The Fund is required to withhold 31% of all dividends, capital gain distribu-
tions and redemption proceeds payable to individuals and certain other non-
corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from divi-
dends and capital gain distributions payable to shareholders who otherwise are
subject to backup withholding.
TAX ON THE SALE OR EXCHANGE
OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends on whether the shareholder receives more or less than the
adjusted basis for the shares (which normally includes any initial sales
charge paid on Class A shares). An exchange of the Fund's shares for shares of
another PaineWebber mutual fund generally will have similar tax consequences.
In addition, if the Fund's shares are bought within 30 days before or after
selling other shares of the Fund (regardless of class) at a loss, all or a
portion of that loss will not be deductible and will increase the basis of the
newly purchased shares.
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Prospectus Page 21
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
SPECIAL TAX RULES
FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day rein-
statement privilege or the exchange privilege. In these cases, any gain on the
sale or exchange of the original Class A shares would be increased (or any loss
would be decreased) by the amount of the sales charge paid when those shares
were bought, and that amount will increase the basis of the PaineWebber mutual
fund shares subsequently acquired.
* * * *
The foregoing only summarizes some of the important tax considerations affect-
ing the Fund and its shareholders, see the Statement of Additional Information
for a further discussion. There may be other federal, state, local or foreign
tax considerations applicable to a particular investor. Accordingly, prospec-
tive shareholders are urged to consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
The Fund is a diversified series of PaineWebber Managed Investments Trust
("Trust"), an open-end management investment company that was organized as a
business trust under the laws of the Commonwealth of Massachusetts by Declara-
tion of Trust dated November 21, 1986. The Trust's board has authority to issue
an unlimited number of shares of beneficial interest of separate series, with a
par value $0.001 per share.
SHARES
The shares of the Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. A share of each class represents an identical
interest in the Fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable ex-
clusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and
other expenses applicable to the different classes of shares of the Fund will
affect the performance of those classes.
Each share of the Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of the Fund. However, due to
the differing expenses of the classes, dividends on Class A, B, C and Y shares
will differ.
VOTING RIGHTS
Shareholders of the Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of the Trust
(which has more than one series) may elect all of the board members of the
Trust. The shares of the Fund will be voted together, except that only the
shareholders of a particular class of the Fund may vote on matters affecting
only that class, such as the terms of a Plan as it relates to that class. The
shares of all series of the Trust will be voted separately, except when an ag-
gregate vote of all the series is required by law.
SHAREHOLDER MEETINGS
The Fund does not hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a board member through a declaration in writing or by vote
cast in person or by proxy at a meeting called for that purpose. A meeting will
be called to vote on the removal of a board member at the written request of
holders of 10% of the outstanding shares of the Trust.
REPORTS TO SHAREHOLDERS
The Fund sends its shareholders audited annual and unaudited semiannual re-
ports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of Addi-
tional Information, which is incorporated herein by reference, is available to
shareholders upon request.
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Prospectus Page 22
<PAGE>
---------------------
PaineWebber Asia Pacific Growth Fund
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts, 02171, serves as the Fund's custodian and recordkeeping
agent and employs foreign sub-custodians approved by the Trust's board in ac-
cordance with applicable requirements under the 1940 Act to provide custody of
the Fund's foreign assets. PFPC Inc., a subsidiary of PNC Bank, N.A., serves
as the Fund's transfer and dividend disbursing agent. It is located at 400
Bellevue Parkway, Wilmington, DE 19809.
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Prospectus Page 23
<PAGE>
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<PAGE>
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PAINEWEBBER ASIA PACIFIC GROWTH FUND
PROSPECTUS -- JULY 7, 1997
- --------------------------------------------------------------------------------
. PAINEWEBBER BOND FUNDS . PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Financial Services Growth Fund
Fund Growth Fund
Low Duration U.S. Growth and Income Fund
Government Income Fund Small Cap Fund
Strategic Income Fund Utility Income Fund
U.S. Government Income
Fund
. PAINEWEBBER TAX-FREE BOND . PAINEWEBBER GLOBAL FUNDS
FUNDS
California Tax-Free Asia Pacific Growth Fund
Income Fund Emerging Markets Equity Fund
Municipal High Income Global Equity Fund
Fund Global Income Fund
National Tax-Free
Income Fund
New York Tax-Free
Income Fund
. PAINEWEBBER ASSET . PAINEWEBBER MONEY MARKET
ALLOCATION FUNDS FUND
Balanced Fund
Tactical Allocation
Fund
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber invest-
ment executive or correspondent firm. Please read it carefully before in-
vesting. It is important you have all the information you need to make a
sound investment decision.
(C) 1997 PaineWebber Incorporated
----------
<PAGE>
PAINEWEBBER ASIA PACIFIC GROWTH FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Asia Pacific Growth Fund ("Fund") is a diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed,
open-end management investment company organized as a Massachusetts business
trust. The Fund seeks long-term capital appreciation; it invests primarily in
equity securities of Asia Pacific Region companies. The Fund is not designed
to provide current income.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned subsidiary of PaineWebber Incorporated ("PaineWebber") serves as
investment adviser, administrator and distributor for the Fund. As
distributor, Mitchell Hutchins has appointed PaineWebber as the exclusive
dealer for the sale of Fund shares. Schroder Capital Management International
Inc. ("Schroder Capital" or "Sub-Adviser") serves as the Fund's investment
sub-adviser.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's Prospectus, dated July 7, 1997. A
copy of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free 1-800-647-1568. This
Statement of Additional Information is dated July 7, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations. Except as otherwise
indicated in the Prospectus or Statement of Additional Information, there are
no policy limitations on the Fund's ability to use the investments or
techniques discussed in these documents.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Investors should
recognize that investing in non-U.S. securities involves certain risks and
special considerations, including those set forth below, which are not
typically associated with investing in securities of U.S. companies.
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on interest, limitations on the use of or transfer
of Fund assets and political or social instability or diplomatic developments.
Moreover, 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 position. Securities of many foreign companies may be less liquid
and their prices more volatile than securities of comparable U.S. companies.
While the Fund generally invests only in securities that are traded on
recognized exchanges or in over-the-counter markets, from time to time foreign
securities may be difficult to liquidate rapidly without significantly
depressing the price of such securities. There may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning
<PAGE>
U.S. companies. Foreign securities trading practices, including those
involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Fund to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose
procedures differ substantially from those of U.S. courts.
Securities of foreign issuers may not be registered with the Securities and
Exchange Commission ("SEC"), and the issuers thereof may not be subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or
to other regulatory requirements comparable to those applicable to U.S.
companies.
The Fund may invest in foreign securities by purchasing depository receipts,
including American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and global depository receipts ("GDRs"), or other securities
convertible into securities of issuers based in foreign countries. 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 evidencing ownership of the underlying
securities. They generally, are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in
other currencies and are designed for use in European securities markets. GDRs
are similar to EDRs and are designed for use in several international
financial markets. For purposes of the Fund's investment policies, ADRs, EDRs
and GDRs are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR, EDR or GDR representing ownership of
common stock will be treated as common stock.
The Fund anticipates that its brokerage transactions involving foreign
securities of companies headquartered in countries other than the United
States will be conducted primarily on the principal exchanges of such
countries. Transactions on foreign exchanges are usually subject to fixed
commissions that are generally higher than negotiated commissions on U.S.
transactions, although the Fund will endeavor to achieve the best net results
in effecting its portfolio transactions. There is generally less government
supervision and regulation of exchanges and brokers in foreign countries than
in the United States.
Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to
which the Fund would be subject. In addition, substantial limitations may
exist in certain countries with respect to the Fund's ability to repatriate
investment capital or the proceeds of sales of securities.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The Fund may use these ratings in determining
whether to purchase, sell or hold a security. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
2
<PAGE>
The Fund is authorized to invest up to 10% of its net assets in non-
investment grade debt securities, that is, debt securities that are not rated
at the time of purchase within one of the four highest grades assigned by S&P
or Moody's, comparably rated by another NRSRO or determined by Schroder
Capital to be of comparable quality. Non-investment grade debt securities are
commonly referred to as "junk bonds;" they are deemed by the NRSROs to be
predominantly speculative and may involve significant risk exposure to adverse
conditions. Non-investment grade debt securities generally offer a higher
current yield than that available for investment grade issues; however, they
involve higher risks, in that they are especially sensitive to adverse changes
in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price
fluctuations in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress, which could adversely affect their ability to
make payments of interest and principal and increase the possibility of
default. In addition, such issuers may not have more traditional methods of
financing available to them and may be unable to repay debt at maturity by
refinancing. The risk of loss due to default by such issuers is significantly
greater because such securities frequently are unsecured and subordinated to
the prior payment of senior indebtedness.
The market for non-investment grade foreign debt securities has expanded
rapidly in recent years, which has been a period of generally expanding
economic growth and lower inflation. These securities will be susceptible to
greater risk when economic growth slows or reverses and when inflation occurs.
The market for non-investment grade debt issues generally is thinner and less
active than that for higher quality securities, which may limit the Fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of lower rated securities, especially in a thinly traded market.
FOREIGN SOVEREIGN DEBT. Investment by the Fund in debt securities issued by
foreign governments and their political subdivisions or agencies ("Sovereign
Debt") involves special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling
to repay principal and/or interest when due in accordance with the terms of
such debt, and the Fund may have limited legal recourse in the event of a
default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of
its debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same
sovereign entity may not contest payments to the holders of Sovereign Debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's
trade account surplus, if any, or the credit standing of a particular local
government or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a
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country's domestic economy or balance of trade may affect the willingness of
countries to service their Sovereign Debt. While Schroder Capital manages the
Fund's portfolio in a manner that is intended to minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause
the Fund to suffer a loss of interest or principal on any of its holdings.
FOREIGN CURRENCY TRANSACTIONS. The Fund's assets are invested in foreign
securities and substantially all income is received by the Fund in foreign
currencies. The Fund values its assets daily in U.S. dollars and generally
intends to convert its holdings of foreign currencies to U.S. dollars on a
daily basis. From time to time the Fund's foreign currencies may be held in
foreign currency as "foreign currency call accounts" at foreign branches of
foreign or domestic banks. These accounts bear interest at negotiated rates
and are payable upon relatively short demand periods. If a bank became
insolvent, the Fund could suffer a loss of some or all of the amounts
deposited.
The value of the assets of the Fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and
exchange control regulations. Further, the Fund may incur costs in connection
with conversions between various currencies. Currency exchange dealers realize
a profit based on the difference between the prices at which they are buying
and selling various currencies. Thus, a dealer normally will offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire immediately to resell that currency to the
dealer. The Fund conducts its currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward, futures or options
contracts to purchase or sell foreign currencies.
SPECIAL CONSIDERATIONS AND RISK FACTORS RELATING TO ASIA PACIFIC REGION
INVESTMENTS
Foreign Currency and Exchange Rates. Certain of the risks associated with
international investments are heightened for investments in Asia Pacific
Region countries (as defined in the Prospectus). For example, some of the
currencies of Asia Pacific Region countries have experienced devaluations
relative to the U.S. dollar, and major adjustments have been made periodically
in certain of such currencies. Certain countries, such as India, face serious
exchange constraints.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several of the Asia Pacific Region countries is
restricted or controlled to varying degrees. These restrictions may limit
investment in these countries and may increase expenses of the Fund. For
example, certain countries may require governmental approval prior to
investments by foreign persons in a particular company or industry sector or
limit investment by foreign persons to only a specific class of securities of
a company, which may have less advantageous terms (including price) than
securities of the company available for purchase by nationals. Certain
countries may restrict or prohibit investment opportunities in issuers or
industries deemed important to national interests. In addition, the
repatriation of both investment income and capital from several Asia Pacific
Region countries is subject to restrictions, such as the need for certain
government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Fund. Although these restrictions may in the
future make it undesirable to invest in the countries to which they apply,
Schroder Capital does not believe that any current repatriation restrictions
would have a material impact on its ability to manage the Fund's assets. In
addition, if there is a deterioration in a country's balance of payments or
for other reasons, a country may impose restrictions on foreign capital
remittances abroad. The Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions or investments.
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If, because of restrictions on repatriation or conversion, the Fund were
unable to distribute substantially all of its net investment income (including
short-term capital gains) and long-term capital gains within applicable time
periods, the Fund could be subject to federal income and excise taxes, which
would not otherwise be incurred, and could cease to qualify for the favorable
tax treatment afforded to regulated investment companies under the Internal
Revenue Code ("Code"), in which case it would become subject to federal income
tax on all of its income and gains.
In China, India, Indonesia, Malaysia, the Philippines, Singapore, South
Korea and Thailand, government regulation or a company's charter may limit the
maximum foreign aggregate ownership of equity in any one company. South Korea
generally prohibits foreign investment in Won-denominated debt securities and
Sri Lanka prohibits foreign investment in government debt securities. South
Korea prohibits foreign investment in specified telecommunications companies
and the Philippines prohibits foreign investment in mass media companies and
companies providing certain professional services. In the Philippines, the
Fund may generally invest in "B" shares of Philippine issuers engaged in
partly nationalized business activities, the market prices, liquidity and
rights of which may vary from shares owned by nationals. Similarly, in China,
the Fund may only invest in "B" shares of securities traded on The Shanghai
Securities Exchange and The Shenzhen Stock Exchange, currently the two
officially recognized securities exchanges in China. "B" shares traded on The
Shanghai Securities Exchange are settled in U.S. dollars and those traded on
The Shenzen Stock Exchange are generally settled in Hong Kong dollars.
Investments in Other Investment Companies. From time to time, investments in
other investment companies may be the most effective available means by which
the Fund may invest in equity securities of certain Asia Pacific Region
countries. For example, prior to January 3, 1992, foreign investment in South
Korea was generally limited to a few investment companies that had been
granted a license from the government of South Korea, although since that date
direct foreign investment in individual stocks in South Korea has been
officially permitted within specified limits. Investment in such investment
companies may involve the payment of management expenses and, in connection
with some purchases, sales loads, and payment of substantial premiums above
the value of such companies' portfolio securities. At the same time, the Fund
would continue to pay its own advising and administration fees and other
expenses. The Fund may invest up to 10% of its total assets in such investment
companies when, in the judgment of Schroder Capital, the potential benefits of
such investment outweigh the payment of any applicable premium, sales load and
expenses. In addition, the Fund's investments in such investment funds are
subject to limitations under the Investment Company Act of 1940 ("1940 Act")
and market availability, and may result in special federal income tax
consequences.
Differences Between the U.S. and Asia Pacific Region Securities
Markets. Most of the securities markets of the Asia Pacific Region countries
have substantially less volume than the New York Stock Exchange, and equity
securities of most companies in the Asia Pacific Region countries are less
liquid and more volatile than equity securities of U.S. companies of
comparable size. Some of the stock exchanges in the Asia Pacific Region
countries, such as those in China, are in the earliest stages of their
development. As a result, security settlements may in some instances be
subject to delays and related administrative uncertainties. Many companies
traded on securities markets in Asia Pacific Region countries are smaller,
newer and less seasoned than companies whose securities are traded on
securities markets in the United States. Investments in smaller companies
involve greater risk than is customarily associated with investing in larger
companies. Smaller companies may have limited product lines, markets or
financial or managerial resources and may be more susceptible to losses and
risks of bankruptcy. Additionally, market-making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such
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markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the
United States. To the extent that any of the Asia Pacific Region countries
experiences rapid increases in its money supply and investment in equity
securities for speculative purposes, the equity securities traded in any such
country may trade at price-earnings multiples higher than those of comparable
companies trading on securities markets in the United States, which may not be
sustainable.
Government Supervision of Asia Pacific Region Securities Markets; Legal
Systems. There is also less government supervision and regulation of
securities exchanges, listed companies and brokers in the Asia Pacific Region
countries than exists in the United States. Less information may, therefore,
be available to the Fund than with respect to investments in the United
States. Further, in certain Asia Pacific Region countries, less information
may be available to the Fund than to local market participants. Brokers in
Asia Pacific Region countries may not be as well capitalized as those in the
United States, so that they are more susceptible to financial failure in times
of market, political or economic stress. In addition, existing laws and
regulations are often inconsistently applied. As legal systems in some of the
Asia Pacific Region countries develop, foreign investors may be adversely
affected by new laws and regulations, changes to existing laws and regulations
and preemption of local laws and regulations by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain
swift and equitable enforcement of the law.
Financial Information and Standards. Issuers in Asia Pacific Region
countries generally are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from
those applicable to U.S. issuers. In particular, the assets and profits
appearing on the financial statements of an Asia Pacific Region issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with
U.S. generally accepted accounting principles. In addition, for an issuer that
keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation accounting
may indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets.
Social, Political and Economic Factors. Many of the Asia Pacific Region
countries may be subject to a greater degree of social, political and economic
instability than is the case in the United States. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, and changes in
government through extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection. Such social,
political and economic instability could significantly disrupt the principal
financial markets in which the Fund invests and adversely affect the value of
the Fund's assets. In addition, there may be the possibility of asset
expropriations or future confiscatory levels of taxation affecting the Fund.
Few of the Asia Pacific Region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of
the last 25 years, governments in the region have been installed or removed as
a result of military coups, while others have periodically demonstrated
repressive police state characteristics. In several Asia Pacific Region
countries, the leadership ability of the government has suffered as a result
of recent corruption scandals. Disparities of wealth, among other factors,
have also led to social unrest in some of the Asia Pacific Region countries,
accompanied, in certain cases, by violence and labor unrest. Ethnic, religious
and racial
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disaffection, as evidenced in India, Pakistan and Sri Lanka, for example, have
created social, economic and political problems.
Several Asia Pacific Region countries have or in the past have had hostile
relationships with neighboring nations or have experienced internal
insurgency. For example, Thailand has experienced border conflicts with Laos
and Cambodia, and India is engaged in border disputes with several of its
neighbors, including China and Pakistan. Tension between the Tamil and
Sinhalese communities in Sri Lanka has resulted in periodic outbreaks of
violence. An uneasy truce exists between North Korea and South Korea, and the
recurrence of hostilities remains possible. Reunification of North Korea and
South Korea could have a detrimental effect on the economy of South Korea.
Also, China continues to claim sovereignty over Taiwan and recently has
conducted military maneuvers near Taiwan. China is acknowledged to possess
nuclear weapons capability; North Korea is alleged to possess or be in the
process of developing such a capability.
China assumed sovereignty over Hong Kong on July 1, 1997. Although China has
committed by treaty to preserve the economic and social freedoms enjoyed in
Hong Kong for 50 years after regaining control, there can be no assurance that
China will not renege, and in fact China has announced its intent to repeal
the law providing for civil rights for citizens of Hong Kong. Business
confidence and market and business performance in Hong Kong, therefore, can be
significantly affected by political developments.
The reversion of Hong Kong also presents a risk that the Hong Kong dollar
will be devalued and a risk of possible loss of investor confidence in the
Hong Kong markets and dollar. However, factors exist that may mitigate this
risk. First, China has stated its intention to implement a "one country, two
systems" policy, which would preserve monetary sovereignty and leave control
in the hands of the Hong Kong Monetary Authority ("HKMA"). Second, fixed rate
parity with the U.S. dollar is seen as critical to maintaining investors'
confidence in the transition to Chinese rule. Therefore, it is generally
anticipated that, in the event international investors lose confidence in Hong
Kong dollar assets, the HKMA would intervene to support the currency, though
such intervention cannot be assured. Third, Hong Kong's and China's sizable
combined foreign exchange reserve may be used to support the value of the Hong
Kong dollar, provided that China does not appropriate such reserves for other
uses, which is not anticipated, but cannot be assured. Finally, China would be
likely to experience significant adverse political and economic consequences
if confidence in the Hong Kong dollar and the territory's assets were to be
endangered.
The economies of most of the Asia Pacific Region countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally the United States, Japan, China and the European Community. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the securities markets of the Asia
Pacific Region countries. In addition, the economies of some Asia Pacific
Region countries, Australia, Indonesia and Malaysia, for example, are
vulnerable to weakness in world prices for their commodity exports, including
crude oil.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter
("OTC") options, repurchase agreements maturing in more than seven days and
restricted securities other than those Schroder Capital has determined are
liquid pursuant to guidelines established by the Trust's board of trustees
("board"). The assets used as cover for OTC options written by the Fund will
be considered illiquid unless the OTC options are sold to qualified dealers
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who agree that the Fund may repurchase any OTC options they write at a maximum
price to be calculated by a formula set forth in the option agreements. The
cover for an OTC option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement has become effective under the Securities Act of 1933 ("1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because the
securities are sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets include 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 insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the Fund, however, could affect adversely the
marketability of such portfolio securities and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The board has delegated the function of making day-to-day determinations of
liquidity to Schroder Capital, pursuant to guidelines approved by the board.
Schroder Capital takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Schroder Capital monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
decisions to the board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such securities. If the
value of these securities is less than
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the repurchase price, plus any agreed-upon additional amount, the other party
to the agreement must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by the Fund upon
acquisition is accrued as interest and included in its net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party
to a repurchase agreement becomes insolvent.
The Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by Schroder Capital to present minimal credit
risks in accordance with guidelines established by the board. Mitchell
Hutchins reviews and monitors the creditworthiness of those institutions under
the board's general supervision.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 33 1/3% of the Fund's total assets. Such agreements involve the sale
of securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date and price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund's custodian segregates assets to cover the
Fund's obligations under the reverse repurchase agreement. See "Investment
Policies and Restrictions--Segregated Accounts."
LENDING OF PORTFOLIO SECURITIES. The Fund is authorized to lend up to 33
1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with the Fund's custodian bank,
in an amount, marked to market daily, at least equal to the market value of
the securities loaned, plus accrued interest and dividends. Acceptable
collateral is limited to cash, U.S. government securities and irrevocable
letters of credit that meet certain guidelines established by Mitchell
Hutchins. In determining whether to lend securities to a particular broker-
dealer or institutional investor, Mitchell Hutchins will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Fund will retain authority
to terminate any loans at any time. The Fund may pay reasonable fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on
the securities loaned. The Fund will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the board governing the Fund's securities
lending program, the board has approved retention of PaineWebber to serve as
lending agent for the Fund. The board also has authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
SHORT SALES "AGAINST THE BOX." The Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of the Fund, and the Fund is
obligated to replace the securities borrowed at a date in the future. When the
Fund sells
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short, it establishes a margin account with the broker effecting the short
sale and deposits collateral with the broker. In addition, the Fund maintains
with its custodian, in a segregated account, the securities that could be used
to cover the short sale. The Fund incurs transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
against the box. The Fund currently does not expect to have obligations under
short sales at any time during the coming year that exceed 5% of its net
assets.
The Fund might make a short sale "against the box" in order to hedge against
market risks when Schroder Capital believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the
Fund or a security convertible into or exchangeable for a security owned by
the Fund, or when Schroder Capital wants to sell a security that the Fund owns
at a current price, but also wishes to defer recognition of gain or loss for
federal income tax purposes. In such case, any loss in the Fund's long
position after the short sale should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which gains or losses in the long
position are reduced will depend upon the amount of the securities sold short
relative to the amount of the securities the Fund owns, either directly or
indirectly, and in the case where the Fund owns convertible securities,
changes in the investment values or conversion premiums of such securities.
SEGREGATED ACCOUNTS. When the Fund enters into certain transactions to make
future payments to third parties, it will maintain with an approved custodian
in a segregated account cash or liquid securities, marked to market daily, in
an amount at least equal to the Fund's obligation or commitment under such
transactions. As described below under "Hedging and Related Strategies Using
Derivative Contracts," segregated accounts may also be required in connection
with certain transactions involving options, futures or forward currency
contracts and certain interest rate protection transactions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
the Fund may purchase securities on a "when-issued" or delayed delivery basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect
the Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "Investment Policies and
Restrictions--Segregated Accounts." The Fund purchases when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior to delivery if Schroder Capital deems it advantageous to do
so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following investment limitations cannot be
changed for the Fund without the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund or (2) 67% or more of the
shares present at a shareholders' meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting
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securities of that issuer, except that up to 25% of the Fund's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by
other investment companies.
(2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency
purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances
or similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except that
the Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are non-
fundamental and may be changed by the vote of the Trust's board without
shareholder approval.
The Fund will not:
(1) purchase securities while borrowings in excess of 5% of its total assets
are outstanding.
(2) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and futures,
forward and spot currency contracts, swap transactions and other financial
contracts or derivative instruments.
(3) engage in short sales of securities or maintain a short position, except
that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts
or derivative instruments.
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HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS
HEDGING STRATEGIES USING DERIVATIVE INSTRUMENTS. Schroder Capital may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures") and options on
futures contracts, to attempt to hedge the Fund's portfolio. The Fund may
enter into transactions involving one or more types of Derivative Instruments
under which the full value of its portfolio is at risk. Under normal
circumstances, however, the Fund's use of these instruments will place at risk
a much smaller portion of its assets. In particular, the Fund may use the
Derivative Instruments described below.
Options on Equity and Debt Securities and Foreign Currencies--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right
to sell the underlying security or currency at a specified price during the
option term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
Options on Stock Indexes--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values
of those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
Stock Index Futures Contracts--A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
Interest Rate and Foreign Currency Futures Contracts--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at
a specified price. Although such futures contracts by their terms call for
actual delivery or acceptance of debt securities or currency, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery.
Options on Futures Contracts--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security
or currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
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
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price of the option on the future. The writer of an option, upon exercise,
will assume a short position in the case of a call and a long position in the
case of a put.
Forward Currency Contracts--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by
the parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase
or sale of a Derivative Instrument intended partially or fully to offset
potential declines in the value of one or more investments held in the Fund's
portfolio. Thus, in a short hedge the Fund takes a position in a Derivative
Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged. For example, the Fund might purchase a
put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declined below the exercise price
of the put, the Fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value
of the underlying security declines, the Fund might be able to close out the
put option and realize a gain to offset the decline in the value of the
security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge, the Fund takes a position in a Derivative Instrument whose price
is expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on
a security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the
exercise price of the call, the Fund could exercise the call and thus limit
its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the Fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
The Fund may purchase and write (sell) covered straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where
the exercise price of the put is less than or equal to the exercise price of
the call. The Fund might enter into a long straddle when Schroder Capital
believes it likely that the prices of the securities will be more volatile
during the term of the option than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security
where the exercise price of the put is less than or equal to the exercise
price of the call. The Fund might enter into a short straddle when Schroder
Capital believes it unlikely that the prices of the securities will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the Fund
owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which the Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
the Commodity Futures Trading Commission ("CFTC")
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and various state regulatory authorities. In addition, the Fund's ability to
use Derivative Instruments will be limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Schroder Capital may discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as regulatory authorities broaden the
range of permitted transactions and as new options, futures contracts, foreign
currency contracts or other techniques are developed. Schroder Capital may
utilize these opportunities to the extent that they are consistent with the
Fund's investment objective and permitted by the Fund's investment limitations
and applicable regulatory authorities. The Fund's Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Schroder Capital to predict movements of the overall securities and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. While Schroder Capital is experienced
in the use of Derivative Instruments, there can be no assurance that any
particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the
hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Derivative Instruments are traded.
The effectiveness of hedges using Derivative Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Schroder Capital projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of
the Derivative Instrument declined by more than the increase in the price of
the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair the
Fund's ability to sell a portfolio security or make an investment at a time
when it would otherwise be
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favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to close out a position in a
Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE CONTRACTS. Transactions using
Derivative Instruments, other than purchased options, expose the Fund to an
obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, other options or futures contracts or (2) cash and liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will
comply with SEC guidelines regarding cover for hedging transactions and will,
if the guidelines so require, set aside cash or liquid securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they
are replaced with similar assets. As a result, the commitment of a large
portion of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
OPTIONS. The Fund may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities and stock indices
and on foreign currencies. The purchase of call options serves as a long
hedge, and the purchase of put options serves as a short hedge. Writing
covered call options serves as a limited short hedge, because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a
price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Fund will be obligated to sell the
security at less than its market value. Writing covered put options serves as
a limited long hedge, because increases in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security depreciates to a price lower than the exercise price
of the put option, it can be expected that the put option will be exercised
and the Fund will be obligated to purchase the security at more than its
market value. The securities or other assets used as cover for OTC options
written by the Fund would be considered illiquid to the extent described under
"Investment Policies and Restrictions-Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Fund may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist
but are relatively new, and these instruments are primarily
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traded on the OTC market. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed which, in effect, guarantees completion of every exchange-
traded option transaction. In contrast, OTC options are contracts between the
Fund and its contra party (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the Fund purchases or writes an
OTC option, it relies on the contra party to make or take delivery of the
underlying investment upon exercise of the option. Failure by the contra party
to do so would result in the loss of any premium paid by the Fund as well as
the loss of any expected benefit of the transaction. The Fund will enter into
OTC option transactions only with contra parties that have a net worth of at
least $20 million.
Generally, the OTC debt options or foreign currency options used by the Fund
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing transactions can be made
for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or
call option written by the Fund could cause material losses, because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
The Fund may purchase and write put and call options on stock indices in
much the same manner as the more traditional options discussed above, except
the index options may serve as a hedge against overall fluctuations in the
equity securities market (or market sectors) rather than anticipated increases
or decreases in the value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The Fund's use of options is governed by
the following guidelines, which can be changed by the Fund's board without
shareholder vote:
(1) The Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums
on all other options held by that Fund, does not exceed 5% of its total
assets.
(2) The aggregate value of securities underlying put options written by the
Fund determined as of the date the put options are written will not exceed 50%
of the Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.
FUTURES. The Fund may purchase and sell stock index futures contracts and
interest rate futures contracts and foreign currency futures contracts. The
Fund may also purchase put and call options, and write
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covered put and call options, on futures in which it is allowed to invest. The
purchase of futures or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a
limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for
writing covered options on securities or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of
cash, U.S. government securities or other liquid, high-grade debt securities,
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such
sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Fund would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
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Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Fund's use of
futures and related options is governed by the following guidelines, which can
be changed by the Fund's board without shareholder vote:
(1) To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5%
of that Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by the Fund that are held at any time will not
exceed 20% of the Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of its total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Fund may
use options and futures on foreign currencies, as described above, and forward
currency contracts, as described below, to hedge against movements in the
values of the foreign currencies in which the Fund's securities are
denominated. Such currency hedges can protect against price movements in a
security the Fund owns or intends to acquire that are attributable to changes
in the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are
attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on another currency or a
basket of currencies, the value of which Schroder Capital believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the Hedging Instrument will not correlate perfectly
with movements in the price of the currency being hedged is magnified when
this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, the Fund
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could be disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions
in the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the Hedging Instruments
until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, the Fund may purchase a forward currency contract to lock
in the U.S. dollar price of a security denominated in a foreign currency that
the Fund intends to acquire. Forward currency contract transactions may also
serve as short hedges--for example, the Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
As noted above, the Fund also may seek to hedge against changes in the value
of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Schroder Capital
believes will have a positive correlation to the values of the currency being
hedged. In addition, the Fund may use forward currency contracts to shift its
exposure to foreign currency fluctuations from one country to another. For
example, if the Fund owned securities denominated in a foreign currency and
Schroder Capital believed that currency would decline relative to another
currency, it might enter into a forward contract to sell an appropriate amount
of the first foreign currency, with payment to be made in the second foreign
currency. Transactions that use two foreign currencies are sometimes referred
to as "cross hedging." Use of a different foreign currency magnifies the risk
that movements in the price of the Hedging Instrument will not correlate or
will correlate unfavorably with the foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward
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currency contracts only by negotiating directly with the contra party. Thus,
there can be no assurance that the Fund will in fact be able to close out a
forward currency contract at a favorable price prior to maturity. In addition,
in the event of insolvency of the contra party, the Fund might be unable to
close out a forward currency contract at any time prior to maturity. In either
event, the Fund would continue to be subject to market risk with respect to
the position, and would continue to be required to maintain a position in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. The Fund may enter
into forward currency contracts or maintain a net exposure to such contracts
only if (1) the consummation of the contracts would not obligate the Fund to
deliver an amount of foreign currency in excess of the value of the position
being hedged by such contracts or (2) the Fund segregates with its custodian
cash or liquid securities in an amount not less than the value of its total
assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily.
INTEREST RATE PROTECTION TRANSACTIONS. The Fund may enter into interest rate
protection transactions, including interest rate swaps and interest rate caps,
collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the "notional principal amount") for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which payments are
made when a designated market interest rate either goes above a designated
ceiling level or goes below a designated floor level on predetermined dates or
during a specified time period. The Fund intends to use these transactions as
a hedge and not as a speculative investment. Interest rate protection
transactions are subject to risks comparable to those described above with
respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., 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. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Schroder
Capital believes such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and appropriate Fund assets having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account as described above in "Investment Policies and Restrictions--
Segregated Accounts." The Fund also will establish and maintain such
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segregated accounts with respect to its total obligations under any interest
rate swaps that are not entered into on a net basis and with respect to any
interest rate caps, collars and floors that are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by Schroder Capital to
present minimal credit risk in accordance with guidelines established by the
Fund's board. If there is a default by the other party to such a transaction,
the Fund will have to rely on its contractual remedies (which may be limited
by bankruptcy, insolvency or similar laws) pursuant to the agreements related
to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
21
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 50 Trustee and President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins (since January
1995) and also an executive vice
president and a director of
PaineWebber. Mrs. Alexander is
president and a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and principal occupation since
March 1995). Mr. Armstrong is also
a director of Hi Lo Automotive,
Inc. He was chairman of the board,
chief executive officer and co-
owner of Adirondack Beverages
(producer and distributor of soft
drinks and sparkling/still waters)
(October 1993-March 1995). Mr.
Armstrong was a partner of the New
England Consulting Group (manage-
ment consulting firm) (December
1992-September 1993). He was man-
aging director of LVMH U.S. Corpo-
ration (U.S. subsidiary of the
French luxury goods conglomerate,
Luis Vuitton Moet Hennessey Corpo-
ration) (1987-1991) and chairman of
its wine and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 28 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Chairman of Mr. Bewkes is a director of Paine
Jr.**; 70 the Board of Trustees Webber Group Inc. ("PW Group")
(holding company of PaineWebber and
Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to 1988, he was chair-
man of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is a
director of Interstate
Bakeries Corporation and NaPro
BioTherapeutics, Inc. Mr. Bewkes is
a director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, tional Equity Partners (interna-
N.W. tional investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a
partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing Company and Ar-
cher-Daniels-Midland Co. (agricul-
tural commodities). He was the
chief negotiator in the Strategic
Arms Reduction Talks with the for-
mer Soviet Union (1989-1991) and
the U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or trustee
of 28 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms.
Farrell joined PaineWebber in 1982.
She is a member of the Financial
Women's Association and Women's
Economic Roundtable, and is em-
ployed as a regular panelist on
Wall $treet Week with Louis
Rukeyser. She also serves on the
Board of Overseers of New York
University's Stern School of Busi-
ness. Ms. Farrell is a director
or trustee of 28 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of K-III Communica-
tions Corporation, Federated De-
partment Stores, Inc. and Revlon,
Inc. Dean Feldberg is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a direc-
tor of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director
or trustee of 28 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Cap-
1455 Pennsylvania Ave- ital Partners (merchant bank). From
nue, N.W. January 1992 to November 1992, he
Suite 350 was campaign manager of Bush-Quayle
Washington, D.C. 20004 '92. From 1990 to 1992, he was vice
chairman and, from 1989 to 1990, he
was president of Northwest Airlines
Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of
NWA Inc.). Prior to 1989, he was
employed by the Marriott Corpora-
tion (hotels, restaurants, airline
catering and contract feeding),
where he most recently was an exec-
utive vice president and president
of Marriott Hotels and Resorts. Mr.
Malek is also a director of Ameri-
can Management Systems, Inc. (man-
agement consulting and computer-re-
lated services), Automatic Data
Processing, Inc., CB Commercial
Group Inc. (real estate), Choice
Hotels International (hotel and ho-
tel franchising), FPL Group, Inc.
(electric services), Integra, Inc.
(biomedical), Manor Care, Inc.
(health care), National Education
Corporation and Northwest Airlines
Inc. Mr. Malek is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS*; BUSINESS EXPERIENCE;
AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
------------------ ----------------------- --------------------
<S> <C> <C>
Carl W. Schafer; 61 Trustee Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, NJ 08542 dation supporting mainly oceano-
graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Ev-
ans Systems, Inc. (motor fuels,
convenience store and diversified
company), Electronic Clearing
House, Inc. (financial transactions
processing), Wainoco Oil Corpora-
tion and Nutraceutix, Inc.
(biotechnology). Prior to January
1993, he was chairman of the In-
vestment Advisory Committee of the
Howard Hughes Medical Institute.
Mr. Schafer is a director or
trustee of 28 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
<TABLE>
<S> <C> <C>
Julieanna Berry; 33 Vice President Ms. Berry is a first vice president
and a portfolio manager of Mitchell
Hutchins. Ms. Berry is a vice pres-
ident of two investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Karen L. Finkel; 39 Vice President Ms. Finkel is a senior vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Ms. Finkel is a
vice president of two investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
James F. Keegan; 36 Vice President Mr. Keegan is a senior vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Prior to March
1996, he was director of fixed in-
come strategy and research of
Merrion Group, L.P. From 1987 to
1994, he was a vice president of
global investment management of
Bankers Trust Company. Mr. Keegan
is a vice president of three in-
vestment companies for which Mitch-
ell Hutchins or PaineWebber serves
as investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Thomas J. Libassi; 38 Vice President Mr. Libassi is a senior vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Prior to May
1994, he was a vice president of
Keystone Custodian Funds Inc. with
portfolio management responsibili-
ty. Mr. Libassi is a vice president
of four investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director
and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income investments of IBM
Corporation. Mr. McCauley is a vice
president of 19 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice president and
Assistant Treasurer manager of the mutual fund finance
division of Mitchell Hutchins. Ms.
Moran is a vice president and as-
sistant treasurer of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
28 investment companies and vice
president and assistant secretary
of one investment company for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice presi-
dent and director of operations and
control for Mitchell Hutchins. From
March, 1991 to September, 1993 he
was director of the Mutual Funds
Sales Support and Service Center
for Mitchell Hutchins and
PaineWebber. Mr. Polito is a vice
president of 29 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
46 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the
law firm of Arnold & Porter. Ms.
Schonfeld is a vice president of 29
investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. From August 1992 to Au-
gust 1994, he was a vice president
of BlackRock Financial Management
Inc. Prior to August 1992, he was
an audit manager with Ernst & Young
LLP. Mr. Schubert is a vice presi-
dent and treasurer of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president
and a portfolio manager of Mitchell
Hutchins. Prior to 1993, he was a
member of the portfolio management
team at Merrill Lynch Asset Manage-
ment, Inc. Mr. Singh is a vice
president of five investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Barney A. Taglialatela; Vice President and Mr. Taglialatela is a vice president
36 Assistant Treasurer and a manager of the mutual fund
finance division of Mitchell
Hutchins. Prior to February 1995,
he was a manager of the mutual fund
finance division of Kidder Peabody
Asset Management, Inc. Mr.
Taglialatela is a vice president of
28 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director
and chief investment officer--equi-
ties of Mitchell Hutchins. Prior to
March 1995, he was a vice president
and directed the U.S. funds manage-
ment and equity research areas of
Chase Manhattan Private Bank. Mr.
Tincher is a vice president of 13
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ---------------------- ----------------------- --------------------
<S> <C> <C>
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a senior vice pres-
ident and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of
Mitchell Hutchins. Prior to May
1995, he was an attorney in private
practice. Mr. Weller is a vice
president and assistant secretary
of 28 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Ian W. Williams; 39 Vice President and Mr. Williams is a vice president and
Assistant Treasurer a manager of the mutual fund fi-
nance division of Mitchell
Hutchins. Prior to June 1992, he
was an audit senior accountant with
Price Waterhouse LLP. Mr. Williams
is a vice president of 28 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of the
Fund as defined in the 1940 Act by virtue of their positions with PW Group,
PaineWebber and/or Mitchell Hutchins.
28
<PAGE>
The Trust pays board members who are not "interested persons" of the Trust
$1,000 annually for each series and $150 for each board meeting and each
meeting of a board committee (other than committee meetings held on the same
day as a board meeting). The Trust presently has six series and thus pays each
such trustee $6,000 annually, plus any additional amounts due for board or
committee meetings. The chairmen of the audit and contract review committees
of individual funds within the PaineWebber fund complex and receive additional
annual compensation, aggregating $15,000 each, from the relevant funds. All
board members are reimbursed for any expenses incurred in attending meetings.
Board members own in the aggregate less than 1% of the outstanding shares of
the Fund. Because PaineWebber and Mitchell Hutchins perform substantially all
the services necessary for the operation of the Trust and the Fund, the Trust
requires no employees. No officer, director or employee of Mitchell Hutchins
or PaineWebber presently receives any compensation from the Trust for acting
as a board member or officer.
The table below includes certain information relating to the compensation of
the current board members who held office with the Trust or with other
PaineWebber funds during the years indicated.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION TRUST AND
FROM THE FUND
NAME OF PERSON, POSITION THE TRUST* COMPLEX**
- ------------------------ ------------ ------------
<S> <C> <C>
Richard Q. Armstrong, Trustee......................... $4,139 $59,873
Richard R. Burt, Trustee.............................. 3,389 51,173
Meyer Feldberg, Trustee............................... 8,750 96,181
George W. Gowen, Trustee.............................. 8,750 92,431
Frederic V. Malek, Trustee............................ 8,750 92,431
Carl W. Schafer, Trustee.............................. 4,139 62,307
</TABLE>
- --------
Only independent members of the board are compensated by the Trust and
identified above; board members who are "interested persons," as defined by
the 1940 Act, do not receive compensation.
* Represents fees paid to each trustee, for the five existing funds in the
Trust, during the fiscal year ended October 31, 1996.
** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to the Fund pursuant to a contract (the "Advisory
Contract"), dated April 21, 1988 with the Trust. Under the Advisory Contract,
the Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 1.20% of the Fund's average daily net assets up to $100 million
and at annual rate of 1.10% of its average daily net assets over $100 million.
The Fund incurs various other expenses in its operations, such as custody and
transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its shares, taxes and governmental fees, fees and expenses of trustees, costs
of obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses and extraordinary expenses, including costs
or losses in any litigation. Furthermore, under a service agreement with the
Trust that is reviewed by the board annually, PaineWebber provides certain
services to the Fund not otherwise provided by the Fund's transfer agent.
29
<PAGE>
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to board members and officers who are not
"interested persons" (as defined in the 1940 Act) of the Trust or Mitchell
Hutchins; (6) all expenses incurred in connection with the board members'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages
or other relief asserted against the Trust or Fund for violation of any law;
(10) legal, accounting and auditing expenses, including legal fees of special
counsel for the independent board members; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of setting in type and printing prospectuses, statements of
additional information and supplements thereto, reports and proxy materials
for existing shareholders, and costs of mailing such materials to
shareholders; (14) any extraordinary expenses (including fees and
disbursements of counsel) incurred by the Fund; (15) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (16) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the board and any committees thereof;
(17) the cost of investment company literature and other publications provided
to board members and officers; and (18) costs of mailing, stationery and
communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the Fund's board or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a contract with Schroder Capital, dated December 18,
1996 ("Sub-Advisory Contract"), pursuant to which Schroder Capital determines
what securities will be purchased, sold or held by the Fund. Under the Sub-
Advisory Contract, Mitchell Hutchins (not the Fund) pays Schroder Capital a
fee, computed daily and paid monthly, at an annual rate of 0.65% of the Fund's
average daily net assets up to $100 million and at an annual rate of 0.55% of
the Fund's average daily net assets over $100 million. Schroder Capital bears
all expenses incurred by it in connection with its services under the Sub-
Advisory Contract.
Under the Sub-Advisory Contract, Schroder Capital will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust, the
Fund, its shareholders or Mitchell Hutchins in connection with the Sub-
Advisory Contract, except any liability to the Trust, the Fund, its
shareholders or Mitchell Hutchins to which Schroder Capital would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by the board or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' notice to Schroder Capital, or by
Schroder
30
<PAGE>
Capital on 120 days' written notice to Mitchell Hutchins. The Sub-Advisory
Contract may also be terminated by Mitchell Hutchins (1) upon material breach
by Schroder Capital of its representations and warranties, which breach shall
not have been cured within a 20-day period after notice of such breach; (2) if
the Sub-Adviser becomes unable to discharge its duties and obligations under
the Sub-Advisory Contract or (3) on 120 days' notice to Schroder Capital.
NET ASSETS. The following table shows the approximate net assets as of May
31, 1997, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
($ MIL)
INVESTMENT CATEGORY ----------
<S> <C>
Domestic (excluding Money Market).............................. $5,757.7
Global......................................................... 3,109.4
Equity/Balanced................................................ 3,943.5
Fixed Income (excluding Money Market).......................... 4,923.6
Taxable Fixed Income......................................... 3,379.7
Tax-Free Fixed Income........................................ 1,543.9
Money Market Funds............................................. 23,869.9
</TABLE>
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must
be maintained at PaineWebber, personal trades in most securities require pre-
clearance and short-term trading and participation in initial public offerings
generally are prohibited. In addition, the code of ethics puts restrictions on
the timing of personal investing in relation to trades by PaineWebber funds
and other Mitchell Hutchins' advisory clients. Schroder Capital personnel may
also invest in securities for their own accounts pursuant to a comparable code
of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Fund's Class A, Class B, Class C and Class Y shares under separate
distribution contracts with the Trust (collectively, "Distribution
Contracts"). Each Distribution Contract requires Mitchell Hutchins to use its
best efforts, consistent with its other businesses, to sell shares of the
Fund. Shares of the Fund are offered continuously. Under separate exclusive
dealer agreements between Mitchell Hutchins and PaineWebber relating to the
Class A, Class B, Class C and Class Y shares (collectively, "Exclusive Dealer
Agreements"), PaineWebber and its correspondent firms sell the Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the 1940 Act ("Class A Plan," "Class B Plan" and "Class C Plan,"
collectively, "Plans"), the Fund pays Mitchell Hutchins a service fee, accrued
daily and payable monthly, at the annual rate of 0.25% of the average daily
net assets of each Class of shares for the Fund. Under the Class B Plan and
the Class C Plan, the Fund pays Mitchell Hutchins a distribution fee, accrued
daily and payable monthly, at the annual rate of 0.75% of the average daily
net assets of the Class B shares and Class C shares of the Fund. There is no
distribution plan with respect to the Fund's Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the board members will review,
reports regarding all amounts expended under the Plan and
31
<PAGE>
the purposes for which such expenditures were made, (2) the Plan will continue
in effect only so long as it is approved at least annually, and any material
amendment thereto is approved, by the board, including those board members who
are not "interested persons" of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan, acting in person at a meeting called for that purpose, (3) payments
by a Fund under the Plan shall not be materially increased without the
affirmative vote of the holders of a majority of the outstanding shares of the
relevant class of the respective Fund and (4) while the Plan remains in
effect, the selection and nomination of board members who are not "interested
persons" of the Fund shall be committed to the discretion of the board members
who are not "interested persons" of the Funds.
In reporting amounts expended under the Plans to the board members, Mitchell
Hutchins allocates expenses attributable to the sale of each class of the
Fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class
of the Fund's shares will not be used to subsidize the sale of any other class
of Fund shares.
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Fund's shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion
of the expenses of various PaineWebber departments involved in the
distribution of the Fund's shares, including the PaineWebber retail branch
system.
In approving the Fund's overall Flexible Pricing/SM/ system of distribution,
the board considered several factors, including that implementation of
Flexible Pricing would (1) enable investors to choose the purchasing option
best suited to their individual situation, thereby encouraging current
shareholders to make additional investments in the Fund and attracting new
investors and assets to the Fund to the benefit of the Fund and its
shareholders, (2) facilitate distribution of the Fund's shares and (3)
maintain the competitive position of the Fund in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan, the board considered all the features of the
distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee
would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (4) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class B Plan, the board considered all the features of the
distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2)
the advantage to investors in having no initial sales charges deducted from
Fund purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales commissions when Class B shares are sold and continuing
service fees thereafter while their customers invest their entire purchase
payments immediately in Class B shares would prove attractive to
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<PAGE>
the investment executives and correspondent firms, resulting in greater growth
of the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness
to compensate PaineWebber and its investment executives, without the
concomitant receipt by Mitchell Hutchins of initial sales charges, was
conditioned upon its expectation of being compensated under the Class B Plan.
In approving the Class C Plan, the board considered all the features of the
distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from the Fund purchase payments and instead
having the entire amount of their purchase payments immediately invested in
Fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not
face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness
to compensate PaineWebber and its investment executives, without the
concomitant receipt by Mitchell Hutchins of initial sales charges or
contingent deferred sales charges upon redemption, was conditioned upon its
expectation of being compensated under the Class C Plan.
With respect to each Plan, the board members considered all compensation
that Mitchell Hutchins would receive under the Plan and the Distribution
Contract, including service fees and, as applicable, initial sales charges,
distribution fees and contingent deferred sales charges. The board members
also considered the benefits that would accrue to Mitchell Hutchins under each
Plan in that Mitchell Hutchins would receive service, distribution and
advisory fees that are calculated based upon a percentage of the average net
assets of the Fund, which fees would increase if the Plan were successful and
the Fund attained and maintained significant asset levels.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Schroder Capital is
responsible for the execution of the Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Schroder Capital seeks to obtain the best net results for the Fund, taking
into account such factors as the price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved. While Schroder Capital generally
seeks reasonably competitive commission rates, payment of the lowest
commission is not necessarily consistent with obtaining the best net results.
Prices paid to dealers in principal transactions, through which most debt
securities and some equity securities are traded, generally include a
"spread," which is the difference between the prices at which the dealer is
willing to purchase and sell a specific security at the time. The Fund may
invest in securities traded
33
<PAGE>
in the OTC market and will engage primarily in transactions directly with the
dealers who make markets in such securities, unless a better price or
execution could be obtained by using a broker.
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber, or brokerage affiliates of Schroder Capital. The board
has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to
ensure that all brokerage commissions paid to PaineWebber or brokerage
affiliates of Schroder Capital are reasonable and fair. Specific provisions in
the Advisory Contract and the Sub-Advisory Contract authorize Mitchell
Hutchins and Schroder Capital, respectively, and any of their affiliates that
is a member of a national securities exchange to effect portfolio transactions
for the Fund on such exchange and to retain compensation in connection with
such transactions. Any such transactions will be effected and related
compensation paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and
its affiliates or brokerage affiliates of Schroder Capital, are similar to
those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the Fund and subject to the review of the
board, Schroder Capital may cause the Fund to purchase and sell portfolio
securities through brokers who provide that Fund with research, analysis,
advice and similar services. In return for such services, the Fund may pay to
those brokers a higher commission than may be charged by other brokers,
provided that Schroder Capital determines in good faith that such commission
is reasonable in terms either of that particular transaction or of the overall
responsibility of Schroder Capital to the Fund and its other clients, and that
the total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term.
For purchases or sales with broker-dealer firms that act as principal,
Schroder Capital seeks best execution. Although Schroder Capital may receive
certain research or execution services in connection with these transactions,
it will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Schroder Capital will not
enter into any explicit soft dollar arrangements relating to principal
transactions and will not receive in principal transactions the types of
services that could be purchased for hard dollars. Schroder Capital may engage
in agency transactions in OTC equity and debt securities in return for
research and execution services. These transactions are entered into only in
compliance with procedures ensuring that the transaction (including
commissions) is at least as favorable as it would have been if effected
directly with a market-maker that did not provide research or execution
services. These procedures include Schroder Capital receiving multiple quotes
from dealers before executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Fund effects securities transactions may be used by
Schroder Capital in advising other funds or accounts and, conversely, research
services furnished to Schroder Capital by brokers or dealers in connection
with other funds or accounts that it advises may be used in advising the Fund.
Information and research received from brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by Schroder
Capital under the Sub-Advisory Contract.
34
<PAGE>
Investment decisions for the Fund and for other investment accounts managed
by Schroder Capital are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for the Fund and one or more of such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund
and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund
is concerned, or upon its ability to complete its entire order, in other cases
it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which PaineWebber or an affiliate of Schroder Capital is a member of the
underwriting or selling group, except pursuant to procedures adopted by the
board pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the spread or commission paid in connection with such
a purchase be reasonable and fair, the purchase be at not more than the public
offering price prior to the end of the first business day after the date of
the public offering and that PaineWebber or any affiliate thereof or an
affiliate of Schroder Capital not participate in or benefit from the sale to
the Funds.
PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups of
related Fund investors may combine purchases of Class A shares of the Fund
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Fund and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
35
<PAGE>
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed
related to that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Fund investors (as defined above) are permitted to purchase Class A
shares of the Fund among related accounts at the offering price applicable to
the total of (1) the dollar amount then being purchased plus (2) an amount
equal to the then-current net asset value of the purchaser's combined holdings
of Class A Fund shares and Class A shares of any other PaineWebber mutual
fund. The purchaser must provide sufficient information to permit confirmation
of his or her holdings, and the acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Fund may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. This exchange
privilege is available only in those jurisdictions where the sale of
PaineWebber fund shares to be acquired through such exchange may be legally
made. Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given
(since the exchange fee is gone) if, under extraordinary circumstances, either
redemptions are suspended under the circumstances described below or the Fund
temporarily delays or ceases the sales of its shares because it is unable to
invest amounts effectively in accordance with the Fund's investment objective,
policies and restrictions.
If conditions exist that make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
one shareholder. This election is irrevocable unless the SEC permits its
withdrawal.
36
<PAGE>
The Fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for the Fund to dispose
of securities owned by it or fairly to determine the value of its assets or
(3) as the SEC may otherwise permit. The redemption price may be more or less
than the shareholder's cost, depending on the market value of the Fund's
portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When the
investor invests the same dollar amount each month under the Plan, the
investor will purchase more shares when the Fund's net asset value per share
is low and fewer shares when the net asset value per share is high. Using this
technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares
on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, because the automatic investment plan
involves continuous investing regardless of price levels, an investor should
consider his or her financial ability to continue purchases through periods of
low price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance"
(a term that means the value of the Fund account at the time the investor
elects to participate in the systematic withdrawal plan) less aggregate
redemptions made other than pursuant to the systematic withdrawal plan is less
than $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. Purchases of additional Fund shares concurrent with withdrawals
are ordinarily disadvantageous to shareholders because of tax liabilities and,
for Class A shares, initial sales charges. On or about the 20th of each month
for monthly, quarterly, semi-annual, and annual plans, PaineWebber will
arrange for redemption by the Fund of sufficient Fund shares to provide the
withdrawal payment specified by participants in the Fund's systematic
withdrawal plan. The payment generally is mailed approximately five Business
Days (defined under "Valuation of Shares") after the redemption date.
Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends & Taxes" in the
Prospectus. If periodic withdrawals continually exceed reinvested dividends
and other distributions, a shareholder's investment may be correspondingly
reduced. A shareholder may change the amount of the systematic withdrawal or
terminate participation in the systematic withdrawal plan at any time without
charge or penalty by written instructions with signatures guaranteed to
PaineWebber or PFPC Inc. ("Transfer Agent"). Instructions to participate in
the plan, change the withdrawal amount or terminate participation in the plan
will not be effective until five days after written instructions with
signatures guaranteed are received by the Transfer Agent. Shareholders may
request the forms needed to establish a systematic withdrawal plan from their
PaineWebber investment executives, correspondent firms or the Transfer Agent
at 1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Fund without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the reinstatement
privilege is exercised within 30 days after redemption, and an adjustment will
be made to the shareholder's
37
<PAGE>
tax basis for shares acquired pursuant to the reinstatement privilege. Gain or
loss on a redemption also will be adjusted for federal income tax purposes by
the amount of any sales charge paid on Class A shares, under the circumstances
and to the extent described in "Dividends & Taxes" in the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN/SM/;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA)(R)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively, the
"PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows
an RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted
from the client's RMA account. The client may elect to invest at monthly or
quarterly intervals and may elect either to invest a fixed dollar amount
(minimum $100 per period) or to purchase a fixed number of shares. A client
can elect to have Plan purchases executed on the first or fifteenth day of the
month. Settlement occurs three Business Days (defined under "Valuation of
Shares") after the trade date, and the purchase price of the shares is
withdrawn from the investor's RMA account on the settlement date from the
following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable
to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to
enrolling in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may
take up to two weeks to become effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an
investor to take advantage of "dollar cost averaging." By investing a fixed
amount in mutual fund shares at established intervals, an investor purchases
more shares when the price is lower and fewer shares when the price is higher,
thereby increasing his or her earning potential. Of course, dollar cost
averaging does not guarantee a profit or protect against a loss in a declining
market, and an investor should consider his or her financial ability to
continue investing through periods of low share prices. However, over time,
dollar cost averaging generally results in a lower average original investment
cost than if an investor invested a larger dollar amount in a mutual fund at
one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
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<PAGE>
. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(R) transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
. automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the six RMA money market funds-RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New York
Municipal Money Fund. Each money market fund attempts to maintain a
stable price per share of $1.00, although there can be no assurance that
it will be able to do so. Investments in the money market funds are not
insured or guaranteed by the U.S. government;
. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
. expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the Transfer Agent and not through PaineWebber; and
. automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Fund will automatically convert to Class A shares of
the Fund, based on the relative net asset values per share of the two classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) for Class B shares obtained through an exchange, or a series
of exchanges, the date on which the original Class B shares were issued. For
purposes of conversion into Class A shares, Class B shares purchased through
the reinvestment of dividends and other distributions paid in respect of Class
B shares will be held in a separate sub-account. Each time any Class B shares
in the shareholder's regular account (other than those in the sub-account)
convert to Class A shares, a pro rata portion of the Class B shares in the
sub-account also converts to Class A shares. The portion will be determined by
the ratio that the shareholder's Class B shares converting to Class A shares
bears to the shareholder's total Class B shares not acquired through dividends
and other distributions.
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<PAGE>
The availability of the conversion feature is subject to the continuing
applicability of an opinion of counsel to the effect that the dividends and
other distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares of the Funds would not be
converted and would continue to be subject to the higher ongoing expenses of
the Class B shares beyond six years from the date of purchase. Mitchell
Hutchins has no reason to believe that these conditions for the availability
of the conversion feature will not continue to be met.
VALUATION OF SHARES
The Fund determines its net asset values per share separately for each class
of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are valued or, lacking any sales
on such day, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins or Schroder Capital as the primary
market. Securities traded in the OTC market and listed on The Nasdaq Stock
Market, Inc. ("Nasdaq") are valued at the last trade price on Nasdaq at 4:00
p.m., Eastern time; other OTC securities are valued at the last bid price
available prior to valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the board. In valuing thinly traded
securities and lower rated corporate debt securities, it should be recognized
that judgment often plays a greater role than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. All investments of the Fund quoted in foreign
currency will be valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is determined by
the Fund's custodian. Investments in U.S. government securities and other OTC
securities (other than short-term investments that mature in 60 days or less)
are valued at the last quoted bid price in the over-the-counter market. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity unless the board determines that
this does not represent fair value.
Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events would not be
reflected in a computation of the Fund's net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the board.
The foreign currency exchange transactions of the Fund conducted on a spot
(that is, cash) basis are valued at the spot rate for purchasing or selling
currency prevailing on the foreign exchange market. This rate under normal
market conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting
from one currency to another.
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<PAGE>
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in the Fund's Performance Advertisements are calculated
according to the following formula:
<TABLE>
<S> <C>
P(1 + T)/n/ = ERV
a hypothetical initial payment of $1,000 to purchase shares of a
where: P = specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the
beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value, for Class A shares,
the maximum 4.5% sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales
charge imposed on a redemption of Class B or Class C shares held for the
period is deducted. All dividends and other distributions are assumed to have
been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following returns are for the period March 25, 1997* through April 30,
1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Standardized Return**................................ (4.66)% (5.24)% (1.24)%
Non-Standardized Return.............................. (0.16)% (0.24)% (0.24)%
</TABLE>
- --------
* Commencement of operations was March 25, 1997 for Class A, Class B and
Class C shares. There are currently no Class Y shares outstanding.
** All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
41
<PAGE>
OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or its Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc.
("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"),
Investment Company Data, Inc. ("ICD") or Morningstar Mutual Funds
("Morningstar"), with the performance of recognized stock and other indices,
including the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"),
the Dow Jones Industrial Average, the Nasdaq Composite Index, the Russell 2000
Index, the Wilshire 5000 Index, the Lehman Bond Index, 30-year and 10-year
U.S. Treasury bonds, the Morgan Stanley Capital International World Index
(including Asia Pacific regional indexes) and changes in the Consumer Price
Index as published by the U.S. Department of Commerce. The Fund also may refer
in such materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals, including THE WALL STREET JOURNAL, MONEY MAGAZINE,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are
reinvested in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(R) Money Markets. In comparing the
Fund's performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank
CD yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Fund are not insured or guaranteed by
the U.S. government and returns and net asset value will fluctuate. The
securities held by the Fund generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term securities. An
investment in the Fund involves greater risks than an investment in either a
money market fund or a CD.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) the
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for
42
<PAGE>
less than three months--options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
Dividends and interest received by the Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, it will be eligible to, and may, file an
election with the Internal Revenue Service that will enable its shareholders,
in effect, to receive the benefit of the foreign tax credit with respect to
any foreign and U.S. possessions income taxes paid by it. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of
those taxes; (2) treat his or her share of those taxes and of any dividend
paid by the Fund that represents income from foreign or U.S. possessions
sources as his or her own income from those sources; and (3) either deduct the
taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his or her federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of the
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive
43
<PAGE>
income. Under certain circumstances, the Fund will be subject to federal
income tax on a portion of any "excess distribution" received on the stock of
a PFIC or of any gain from disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income
as a taxable dividend to its shareholders. The balance of the PFIC income will
be included in the Fund's investment company taxable income and, accordingly,
will not be taxable to it to the extent that income is distributed to its
shareholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net short-term capital loss)--
which may have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax--even if those earnings and
gain are not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Fund, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).
The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts, and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Fund realizes
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains that may be excluded by future regulations), and gains
from options, futures and forward currency contracts derived by the Fund with
respect to its business of investing in securities or foreign currencies, will
qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward contracts on foreign currencies
also will be subject to the Short-Short Limitation if they are held for less
than three months and are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities).
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Fund satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options, futures, forward currency contracts and/or foreign currency
positions beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to qualify as a RIC.
OTHER INFORMATION
Prior to February 26, 1992, PaineWebber Managed Investments Trust was known
as "PaineWebber Fixed Income Portfolios."
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of the Fund could,
under certain circumstances, be held personally liable for
44
<PAGE>
the obligations of the Trust or the Fund. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of the Trust or
the Fund and requires that notice of such disclaimer be given in each note,
bond, contract, instrument, certificate or undertaking made or issued by the
trustees or by any officers or officer by or on behalf of the Trust or the
Fund, the trustees or any of them in connection with the Trust. The
Declaration of Trust provides 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 itself would be unable to meet its obligations, a possibility that
Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Fund. The trustees intend to
conduct the Fund's operations in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Fund.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A, Class C or Class Y shares. The higher fee is imposed due to
the higher costs incurred by the Fund's transfer agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Moreover, the tracking and calculations
required by the automatic conversion feature of the Class B shares will cause
the transfer agent to incur additional costs. Although the transfer agency fee
will differ on a per account basis as stated above, the specific extent to
which the transfer agency fees will differ between the classes as a percentage
of net assets is not certain, because the fee as a percentage of net assets
will be affected by the number of shareholder accounts in each class and the
relative amounts of net assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
45
<PAGE>
APPENDIX A:
ASIA PACIFIC REGION ECONOMIES & STOCK MARKETS
The Asian continent covers approximately one-fifth of the earth's surface
and is home to over half the world's population. The Fund's investment focus
does not include the countries contained in the areas of Asia west of the
Pakistan border and north of the continent's southernmost border of the former
Soviet Union. In Schroder Capital's judgment, economic development in the Asia
Pacific Region encompasses three main stages--the emerging stage, the
developing/modernizing stage and the advanced stage. Investment in the Fund
normally provides exposure to markets in each of these stages.
The discussion and tables below provide certain economic and stock market
information for a number of the primary Asia Pacific Region countries in which
the Fund may generally invest. Data on the United States appears for
comparative purposes.
ECONOMIES
Background
During the past 14 years, countries in the Asia Pacific region have
experienced real economic growth rates exceeding those experienced by many
Western industrialized countries. As Table 1 shows, all of the economies of
the Asia Pacific Region countries listed therein, except for that of the
Philippines and New Zealand, grew faster than that of the United States. The
fastest growing economies in Asia between 1981 and 1995 were China and South
Korea, with an average annual growth rate of 10.9%, followed by Thailand, with
an annual average growth rate of 8.1%.
TABLE 1
REAL GDP
<TABLE>
<CAPTION>
AVERAGE REAL GDP
GROWTH FOR THE PERIOD
1981-1995
---------------------
(%)
<S> <C>
Australia................................................. 3.2
China..................................................... 10.9
Hong Kong................................................. 6.5
India..................................................... 5.4
Indonesia................................................. 6.6
Malaysia.................................................. 6.3
New Zealand............................................... 2.3
Philippines............................................... 1.4
Singapore................................................. 7.1
South Korea............................................... 10.9
Taiwan.................................................... 7.6
Thailand.................................................. 8.1
United States............................................. 2.6
</TABLE>
- --------
Source: Asian Development Bank: Key Indicators of Developing Asian and Pacific
Economies 1996, OECD 1996.
A-1
<PAGE>
Schroder Capital believes that existing economic conditions in the Asia
Pacific Region provide for high levels of economic activity in the long term,
offering the potential for long-term capital appreciation from investment in
equity securities of Asia Pacific companies. Among these conditions, discussed
in turn below, are the following: (1) the increasing industrialization of
Asian economies, (2) favorable demographics and competitive wage rates, (3)
high rates of domestic savings available to fund investment, particularly in
the area of infrastructure, (4) the ability to attract foreign direct
investment, (5) the emergence of a regional trading zone and (6) rising per
capita incomes available to support local markets for consumer goods.
Although, in general, all the necessary conditions for continuing growth are
believed to exist throughout much of the Asia Pacific region, it is possible
that economies that experienced the fastest growth in GDP in the past (as
shown in Table 1 above) may not continue to expand at such a strong pace, and
may in fact experience little or no growth, in the future.
Industrialization
The rapid ongoing shift from primary industries into industrial
manufacturing has contributed to high rates of economic activity, as shown in
Table 2. Between 1970 and 1994, there was a significant shift in the
percentage of GDP accounted for by the agricultural sector in these markets
and a marked increase in output by the industrial sector, most markedly in
South Korea, Indonesia and Malaysia. Generally in the Asia Pacific Region
countries there is still potential for further industrialization so as to
reach the levels presently attained by the countries of the industrialized
world.
TABLE 2
BREAKDOWN OF GDP: PERCENTAGES FOR AGRICULTURE, INDUSTRY AND SERVICES
<TABLE>
<CAPTION>
AGRICULTURE (%) INDUSTRY (%) SERVICES (%)
---------------- -------------- --------------
1970 1994 1970 1994 1970 1994
------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Australia......................... N/A 3 N/A 19 N/A 20
China............................. 34 19 38 26 28 43
Hong Kong......................... 2 0 36 21 62 79
India............................. 45 31 22 27 33 41
Indonesia......................... 45 19 19 39 36 42
Malaysia.......................... 29 16 25 44 46 40
Philippines....................... 30 22 32 33 39 45
Singapore......................... 2 0 30 37 68 63
South Korea....................... 26 7 29 43 46 50
Taiwan............................ 13 3 44 42 43 55
Thailand.......................... 26 10 25 39 49 51
United States..................... 3 1 54 44 43 55
</TABLE>
- --------
Sources: World Bank: World Development Report 1996; Asian Development Bank:
Key Indicators of Developing Asian and Pacific Economies 1995; 1970
statistics: Aremos database.
A-2
<PAGE>
It is estimated that by 2005, more than one-fifth of worldwide production
will take place in the Asia Pacific Region.
<TABLE>
<CAPTION>
1970 1980 1995 2005(EST.)
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Industrialized Countries........................... 88.0% 82.8% 80.3% 71.0%
ASIA PACIFIC REGION................................ 5.4 8.1 12.6 21.7
Latin America...................................... 4.7 6.5 4.6 4.4
Africa and West Asia............................... 1.5 2.1 2.2 2.7
</TABLE>
- --------
Source: UNIDO 1996.
Favorable Demographics and Competitive Wages
Based on favorable demographic statistics as to the Asia Pacific Region
countries relative to the United States and Western Europe and the existence
in the region of low relative wage rates, Schroder Capital believes that the
competitive advantages of Asia, particularly access to a large pool of
disciplined and low cost (and in East Asia, well educated) labor, will
continue to lead to high levels of inward capital investment by companies
based in the industrialized world. Moreover, the demographic profile of Asia
Pacific Region countries, as shown in Table 3 below, shows a plentiful
potential supply of new labor force participants as indicated by the high
percentage of the populations under 15 years of age. In this respect, India,
Indonesia, Malaysia, the Philippines and Thailand are well positioned. The
larger this percentage, the lower the likelihood of significant upward
pressure on wage rates over the medium term, thus ensuring a continuation of
the current favorable cost structure these countries enjoy relative to the
United States and Japan. In addition, these countries in particular need to
maintain a sufficient level of overall economic activity in order to provide
employment opportunities to new entrants. If this cannot be achieved, as in
the case of the Philippines, the export of labor may occur. Direct investment
and the establishment of labor intensive industries, such as textiles, have
had a favorable impact on job creation in the Asia Pacific Region. However,
direct investment may be deterred by the absence of basic infrastructure, such
as energy, telephone lines, ports, roads and railways, as has occurred in the
Philippines with shortages of electricity.
TABLE 3
DEMOGRAPHIC STRUCTURE OF CERTAIN ASIA PACIFIC REGION COUNTRIES
<TABLE>
<CAPTION>
AVERAGE
% OF % OF % OF MANUFACTURING
POPULATION POPULATION POPULATION HOURLY WAGE
UNDER 15-64 65 AND COST IN
15 YEARS YEARS ABOVE US$(B)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
China............................ 27 66 7 0.57
Hong Kong........................ 21 66 9 4.89
India............................ 36 56 4 0.35
Indonesia........................ 36 59 4 0.75
Malaysia......................... 39 53 2 2.26
Philippines...................... 39 54 2 0.90
Singapore........................ 23 66 6 7.11
South Korea...................... 25 70 4 6.25
Taiwan(a)........................ 25 68 7 5.98
Thailand......................... 32 62 2 1.14
United States.................... 22 63 12 17.63
</TABLE>
- --------
Source: World Bank: World Development Report 1996. Based on latest census
(1991).
(a) Source: Statistical Yearbook, 1994.
(b) Source: Data Resources Inc.--McGraw-Hill, 1995
A-3
<PAGE>
Savings and Infrastructure
There is a need in the Asia Pacific Region countries for substantial
investment in infrastructure. As shown in Table 4, a low penetration rate of
telephone lines per 1,000 population exists in each of China, India,
Indonesia, Malaysia and Thailand. Asia has the potential to overcome the
deficiency in infrastructure given its high domestic savings rates, which are
also shown in Table 4. A high rate of savings is generally associated with
strong investment, rising productivity and faster GDP growth. Singapore, with
savings equal to 55.6% of GDP, followed by China at 42.2% and Malaysia at
37.2%, in particular compare favorably with the United States in this regard.
The savings rates of India and the Philippines are among the lowest in the
region and, in the opinion of Schroder Capital, will have to be raised if
investment, and hence growth, is to accelerate in such countries. China is
still in the process of developing a network of financial intermediaries
capable of channeling available funds between savers and investors, the lack
of which may constrain growth in the short term.
TABLE 4
SAVINGS AND INFRASTRUCTURE
<TABLE>
<CAPTION>
1995
1995 TELEPHONE
SAVINGS AS LINES
% OF PER 1000
GDP* POPULATION**
---------- ------------
<S> <C> <C>
Australia............................................... 17.0 504
China................................................... 42.2 22
Hong Kong............................................... 34.5 523
India................................................... 22.1 11
Indonesia............................................... 36.0 13
Malaysia................................................ 37.2 147
New Zealand............................................. 21.0 476
Philippines............................................. 14.7 17
Singapore............................................... 55.6 426
South Korea............................................. 37.0 399
Taiwan.................................................. 26.3 415
Thailand................................................ 34.2 48
United States........................................... 16.5 599
</TABLE>
- --------
Sources: *World Bank: World Bank Development Report 1996. **The World
Competitiveness Report, 1996.
Foreign Direct Investment
Foreign direct investment has underpinned economic growth in the Asia
Pacific Region. Schroder Capital believes that in addition to increasing the
foreign supply of capital, direct foreign investment generally confers a
number of benefits which enhance the long-term growth potential of a recipient
country, including, but not limited to, (1) the mobilization of domestic
savings for productive purposes in joint ventures between multinational
corporations and local companies, (2) the improvement of local training and
education as local employees are exposed to modern production techniques and
established training methods, (3) the modernization of management and
accounting, (4) a transfer of technology and (5) the promotion of exports.
A-4
<PAGE>
Trade and Exports
Many of the countries in the Asia Pacific Region have historically pursued
the Japanese development model of export-led growth. This, together with the
inflow of foreign manufacturing facilities, has led in general to strong
export sector performances. During the 1980s, a significant proportion of
Asian exports was shipped to the United States and Europe, which resulted in
severe trade account imbalances. The appreciation of the Japanese Yen since
the end of 1985, together with increasingly persistent attempts on the part of
various U.S. administrations to lower Asian trade barriers, has resulted in a
shift in the pattern of trade. Today, Asian companies are as likely to conduct
business and trade with their regional neighbors as they are to export goods
to other industrialized markets--a dramatic increase over the early 1980's
when most Asian exports were shipped to the U.S. and Europe. Asian-to-Asian
trade currently equals roughly half of all Asian exports and is growing at
approximately 15% annually.
Rising Per Capita Incomes
Overall economic activity in the Asia Pacific Region has been supported by a
rising trend in per capita GDP. This trend is highly significant in light of
the fact that the Asian region contains three of the world's four most
populous nations, China (1.16 billion), India (876 million) and Indonesia (183
million). Consequently, in Schroder Capital's opinion, the prospects for the
establishment of substantial local markets for a wide range of consumer
products, both imported and locally manufactured, are attractive.
Table 5 shows 1996 per capita GDP and the potential for catch-up by the
poorer Asia Pacific Region countries, such as China, India, Indonesia, the
Philippines and Thailand.
TABLE 5
GDP PER CAPITA
(U.S.$)
<TABLE>
<CAPTION>
1996
------
<S> <C>
Australia................................................................ 16,510
China.................................................................... 650
Hong Kong................................................................ 24,800
India.................................................................... 364
Indonesia................................................................ 1,125
Malaysia................................................................. 4,162
New Zealand.............................................................. 15,700
Philippines.............................................................. 1,300
Singapore................................................................ 24,189
South Korea.............................................................. 10,000
Taiwan................................................................... 12,233
Thailand................................................................. 2,776
United States............................................................ 25,860
</TABLE>
- --------
Source: Schroder Investment Management S.E. Asian Market Economic Data.
A-5
<PAGE>
China and Hong Kong. In 1978, China's then Premier, Deng Xiaoping, initiated
an open door policy which allowed for the establishment of special economic
zones and the acceptance of foreign direct investment. As a result, there has
been a more market-oriented Chinese economy. This has included a shift by non-
state enterprises into China's industrial sector. Schroder Capital believes
that it is unlikely that the long term reform process in China will be
reversed, although, at times, there may be breakdowns of consensus within the
Chinese ruling party concerning the pace of reform.
Hong Kong's economy is the most likely to be affected by reform in China.
Shenzhen, one of the earliest and most successful economic zones in China, is
located close to the Hong Kong/Chinese border. Hong Kong companies have set up
a broad range of manufacturing facilities in Southern China and Hong Kong
provides an array of services to Southern China, including finance,
telecommunications, energy and management knowhow.
SECURITIES MARKETS
There has been no set pattern to the historical developments of the stock
markets in the region. Some stock exchanges, such as that in Bombay, India,
have been operating since as early as 1875, while the Shenzhen Exchange in
China has operated only since 1991.
Since the mid-1980s, stock market development throughout the region, both
with respect to daily trading volume and the number of securities traded, has
gained momentum. This development has taken place, in part, due to generally
positive returns in the stock markets. Such positive returns cannot be assured
in the future and negative returns may slow down the process of stock market
development in certain countries. These markets in general do not move
together and are not highly correlated with developed markets outside the
region, although many are sensitive to changes in U.S. interest rates and will
occasionally move in tandem with the U.S. stock market.
A-6
<PAGE>
APPENDIX B
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
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
a "gilt edged." Interest payments are protected by a large or by an
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 which 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 the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; CAA. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger 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.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security 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 issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong; AA. An
obligation rated AA differs from the highest rated issues only in small
degree; The obligor's capacity to meet its financial commitment on the
obligation is very strong; A. An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; however, the obligor's
capacity to meet its financial commitment on the obligation is still strong;
BBB. An obligation rated BBB exhibits adequate protection parameters however,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to meet, to financial commitment on the obligation; BB,
B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are regarded as having
significant speculative characteristics. BB indicates the
B-1
<PAGE>
least degree of speculation and C the highest. While such debt will likely
have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated `BB' is less near-term vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to the obligor's inadequate capacity to meet a financial commitment on
the obligation.
B An obligation rated `B' is more vulnerable to nonpayment than obligations
rated `BB', but the obligor currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC An obligation rated `CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated `CC' is currently highly vulnerable to nonpayment.
C The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken but payments on this
obligation are continued.
D An obligation rated `D' is in payment default. The `D' rating category is
used when payments on an obligation 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 or the taking of a similar
action if payments on the obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
B-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging and Other Strategies Using Derivative Contracts.................. 12
Trustees and Officers; Principal Holders of Securities................... 22
Investment Advisory and Distribution Arrangements........................ 29
Portfolio Transactions................................................... 33
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 35
Conversion of Class B Shares............................................. 39
Valuation of Shares...................................................... 40
Performance Information.................................................. 41
Taxes.................................................................... 42
Other Information........................................................ 44
Appendix A............................................................... A-1
Appendix B .............................................................. B-1
</TABLE>
(C)1997 PaineWebber Incorporated
PAINEWEBBER
ASIA PACIFIC GROWTH FUND
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Statement of Additional Information
July 7, 1997
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[LOGO OF PAINEWEBBER APPEARS HERE]
