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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 newly created,
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.
The investment adviser, administrator and distributor for the Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
subsidiary of PaineWebber Incorporated ("PaineWebber"). As the Fund's
distributor, Mitchell Hutchins has appointed PaineWebber to serve 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 December 18, 1996,
as revised January 24, 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 December 18, 1996, as revised January 24, 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 will generally invest 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
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concerning 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. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. 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.
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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
rated below investment grade are commonly referred to as "junk bonds" and 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 will manage
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 will value 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. Although foreign exchange dealers generally do not charge a
stated commission or fee for conversion, the prices posted generally include a
"spread," which is the difference between the prices at which the dealers are
buying and selling foreign currencies.
The Fund's assets are invested in foreign securities and substantially all
income is received by the Fund in foreign currencies. The value of the assets
of the Fund as measured in U.S. dollars also 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 will conduct 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.
The following table sets forth historical exchange rates (which are not
predictive of future rates) per U.S. dollar for the Asia Pacific Region
currencies listed.
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CURRENCY EXCHANGE RATES
PER U.S. DOLLAR
END OF PERIOD
<TABLE>
<CAPTION>
SOUTH
CHINA HONG KONG INDIA INDONESIA KOREA MALAYSIA NEW PAKISTAN PHILIPPINES SINGAPORE SRI LANKA
AUSTRALIA RMB HK$ RS RUPIAH W RM ZEALAND PRS P S$ SLRS
--------- ------ --------- ------ --------- ----- -------- ------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985............ .6809 3.2015 7.811 12.166 1125 890.2 2.4265 .7059 15.98 19.032 2.1050 27,408
1986............ .6642 3.7221 7.790 13.122 1641 861.4 2.6030 .7009 17.25 20.530 2.1750 28.520
1987............ .7208 3.7221 7.760 12.877 1650 792.3 2.4928 N/A 17.45 20.800 1.9985 30.763
1988............ .8555 3.7221 7.806 14.949 1731 684.1 2.7153 N/A 18.65 21.335 1.9462 33.033
1989............ .8555 4.7221 7.807 17.035 1797 679.6 2.7033 .5955 21.42 22.440 1.8944 40.000
1990............ .7715 5.2221 7.801 18.073 1901 716.4 2.7015 .5861 21.90 28.000 1.7445 40.240
1991............ .7622 5.4342 7.781 25.834 1992 760.8 2.7240 .5406 24.72 26.650 1.6305 42.580
1992............ .6895 5.7518 7.741 26.200 2062 788.4 2.6120 .5135 25.70 25.096 1.6449 46.000
1993............ .6761 5.8000 7.726 31.380 2100 808.1 2.7015 .5581 30.120 27,699 1.6080 49.562
1994............ .7753 8.4462 7.737 31.380 2200 788.7 2.5600 .6388 38.800 24.418 1.4607 49.980
1995............ .7428 8.3179 7.733 35.055 2289 775.7 2.5413 .6538 34.216 26.235 1.4148 53.498
1996............ .7941 8.2984 7.7345 35.850 2363 840.9 2.525 .7067 40.05 26.30 1.3993 56.75
<CAPTION>
TAIWAN THAILAND
NT$ B
------ --------
<S> <C> <C>
1985............ 39.850 26.65
1986............ 35.500 26.13
1987............ 28.550 25.07
1988............ 28.170 25.24
1989............ 26.160 25.69
1990............ 27,108 25.29
1991............ 25.748 25.28
1992............ 25.403 25.52
1993............ 26.626 25.54
1994............ 26.240 25.09
1995............ 27,286 25.19
1996............ 27.488 25.655
</TABLE>
- -------
Sources: International Monetary Fund, International Financial Statistics of
November 1995; Wall Street Journal, 30 December 1995.
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 payment 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.
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 may 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 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
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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 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,
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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 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. 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
7
<PAGE>
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 is scheduled to assume sovereignty over Hong Kong in July 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 recently
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.
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 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 and,
therefore, it is 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
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
8
<PAGE>
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 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.
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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 administrative
and custodial 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.
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 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
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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,"
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 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.
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(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.
HEDGING AND RELATED STRATEGIES
HEDGING INSTRUMENTS. Schroder Capital may use a variety of financial
instruments ("Hedging 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 Hedging 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 Hedging 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
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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 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 Hedging 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 Hedging
Instrument whose price is expected to move in the opposite direction of the
price of the investment being hedged. For example, the Fund might
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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 Hedging 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 Hedging 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.
Hedging 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. Hedging 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. Hedging
Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Hedging 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") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging 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.
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SPECIAL RISKS OF HEDGING AND RELATED STRATEGIES. The use of Hedging
Instruments involves special considerations and risks, as described below.
Risks pertaining to particular Hedging Instruments are described in the
sections that follow.
(1) Successful use of most Hedging 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 Hedging 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 Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging 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 Hedging Instruments are traded.
The effectiveness of hedges using Hedging 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 Hedging Instrument. Moreover, if the price of the
Hedging 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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging 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 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 Hedging 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 HEDGING AND RELATED STRATEGIES. Transactions using Hedging
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.
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Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging 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 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.
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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 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
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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.
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.
18
<PAGE>
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 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
19
<PAGE>
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 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.
20
<PAGE>
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
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
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
---------------------- ----------------------- --------------------
<C> <C> <S>
Margo N. Alexander**; 49 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; 49 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
---------------------- ----------------------- --------------------
<C> <C> <S>
Meyer Feldberg; 54 Trustee Dean 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 Communi-
cations 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 di-
rector of Columbia Real Estate In-
vestments, Inc. Mr. Gowen is a di-
rector or trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer
1455 Pennsylvania Avenue, N.W. Capital Partners (investment bank).
Suite 350 From January 1992 to November 1992,
Washington, D.C. 20004 he was campaign manager of Bush-
Quayle '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 Corporation (hotels, res-
taurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Man-
agement Systems, Inc. (management
consulting and computer-related
services), Automatic Data Process-
ing, Inc., CB Commercial Group Inc.
(real estate), Choice Hotels In-
ternational (hotel and hotel fran-
chising), FPL Group, Inc. (electric
services), Integra, Inc. (biomedi-
cal), Manor Care, Inc. (health
care), National Education Corpora-
tion 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>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; 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), Hidden Lake Gold Mines
Ltd., Electronic Clearing House,
Inc. (financial transactions
processing), Wainoco Oil Corpora-
tion and Nutraceutix, Inc. (bio-
technology). Prior to January 1993,
he was chairman of the Investment
Advisory Committee of the Howard
Hughes Medical Institute. Mr. Scha-
fer is a director or trustee of 28
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
John R. Torell III; 57 Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm), chairman of Telesphere
New York, NY 10153 Corporation (electronic provider of
financial information) and a manag-
ing director of Zikha & Company
(merchant banking and private in-
vestment company). He is the former
chairman and chief executive offi-
cer of Fortune Bancorp (1990-1994),
the former chairman, president and
chief executive officer of CalFed,
Inc. (savings association) (1988 to
1989) and former president of Manu-
facturers Hanover Corp. (bank)
(prior to 1988). Mr. Torell is a
director of American Home Products
Corp., New Colt Inc. (armament man-
ufacturer) and Volt Information
Sciences Inc. Mr. Torell is a di-
rector or trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS*; BUSINESS EXPERIENCE;
AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
------------------ ----------------------- --------------------
<C> <C> <S>
Julieanna Berry; 33 Vice President Ms. Berry is a vice president and a
portfolio manager of Mitchell
Hutchins. Ms. Berry is a vice
president of two investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president
of Mitchell Hutchins. Prior to No-
vember 1993, she was compliance
manager of Hyperion Capital Man-
agement, Inc., an investment advi-
sory firm. Prior to April 1993, Ms.
Boyle was a vice president
and manager--legal administration
of Mitchell Hutchins. Ms. Boyle is
a vice president of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Karen L. Finkel; 38 Vice President Mrs. Finkel is a first vice presi-
dent and a portfolio manager of
Mitchell Hutchins. Mrs. Finkel is a
vice president of two investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ellen R. Harris; 50 Vice President Mrs. Harris is a managing director
and a portfolio manager of Mitchell
Hutchins. Mrs. Harris is a vice
president of three investment com-
panies 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
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
---------------------- ----------------------- --------------------
<C> <C> <S>
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.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice
president and assistant treasurer
of 29 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 of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant trea-
surer 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
Secretary president and deputy general coun-
sel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and
secretary of 28 investment compa-
nies 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.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<C> <C> <S>
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director
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
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 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 president and assistant
treasurer of 29 investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Nirmal Singh; 40 Vice President Mr. Singh is a first vice president
and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior vice pres-
Treasurer ident and the director of the mu-
tual fund finance division of
Mitchell Hutchins. Mr. Sluyters is
a vice president and treasurer of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<C> <C> <S>
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director
and chief investment officer--eq-
uities of Mitchell Hutchins. Prior
to March 1995, he was a vice pres-
ident and directed the U.S. funds
management and equity research
areas of Chase Manhattan Private
Bank. Mr. Tincher is a vice presi-
dent of 13 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Craig M. Varrelman; 38 Vice President Mr. Varrelman is a first 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 29 investment 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.
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. Messrs. Feldberg and Torell serve as 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.
29
<PAGE>
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............................ 4,139 92,431
Carl W. Schafer, Trustee.............................. 8,750 62,307
John R. Torell III, Trustee........................... 4,139 60,123
</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 during the fiscal year ended November
30, 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.
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
30
<PAGE>
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 $100 million. Schroder Capital bears
all expenses incurred by it in connection with its services under the Sub-
Advisory Contract.
Under the Sub-Advisory Contract, Schroder Capital will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust, the
Fund, its shareholders or Mitchell Hutchins in connection with the Sub-
Advisory Contract, except any liability to the Trust, the Fund, its
shareholders or Mitchell Hutchins to which Schroder Capital would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by the board or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' notice to Schroder Capital, or by
Schroder Capital on 120 days' written notice to Mitchell Hutchins. The Sub-
Advisory Contract may also be terminated by Mitchell Hutchins (1) upon
material breach by Schroder Capital of its representations and warranties,
which breach shall not have been cured within a 20-day period after notice of
such breach; (2) if the Sub-Adviser becomes unable to discharge its duties and
obligations under the Sub-Advisory Contract or (3) on 120 days' notice to
Schroder Capital.
31
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
December 31, 1996, sorted by category of investment objective, of the
investment companies as to which Mitchell Hutchins serves as adviser or sub-
adviser. An investment company may fall into more than one of the categories
below.
<TABLE>
<CAPTION>
NET ASSETS
($ MIL)
INVESTMENT CATEGORY ----------
<S> <C>
Domestic (excluding Money Market).............................. $ 5,664.1
Global......................................................... 2,882.5
Equity/Balanced................................................ 3,389.7
Fixed Income (excluding Money Market).......................... 5,156.9
Taxable Fixed Income......................................... 3,540.4
Tax-Free Fixed Income........................................ 1,616.5
Money Market Funds............................................. 22,918.7
</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 and Class C shares under separate distribution
contracts with the Fund dated July 7, 1993 or November 10, 1995 (collectively,
"Distribution Contracts") that require 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 dated July 7, 1993 or
November 10, 1995 relating to the Class A, Class B and Class C 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.
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 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
32
<PAGE>
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 PricingSM 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 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.
33
<PAGE>
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 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 authorize Mitchell Hutchins and any of its affiliates
that is a member of a national securities exchange to effect portfolio
transactions for the Fund on such
34
<PAGE>
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.
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
35
<PAGE>
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);
(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
36
<PAGE>
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. 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.
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.
37
<PAGE>
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 shares of the Fund concurrent with
withdrawals are ordinarily disadvantageous to shareholders because of tax
liabilities and, for Class A shares, initial sales charges. On or about the
15th of each month for monthly plans and on or about the 15th of the months
selected for quarterly or semi-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 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 PLANSM;
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.
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<PAGE>
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:
. 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;
39
<PAGE>
. 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, a pro rata portion of the Class B shares in the sub-
account will also convert 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.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service 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 (2) the
continuing availability of an opinion of counsel to the effect 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
40
<PAGE>
the following holidays: New Year's 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.
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> <C> <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>
41
<PAGE>
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.
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
42
<PAGE>
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 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 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
43
<PAGE>
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 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
44
<PAGE>
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 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 or Class C 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.
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<PAGE>
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.
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<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 exist
throughout 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 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. Additionally, for a wide variety of
historical and/or ideological reasons, foreign ownership restrictions have at
times been imposed over most stock exchanges in the region. Up until 1987,
investment in Indonesia was effectively closed to foreigners; South Korea
opened up 15% of equity ownership to foreigners by 1995; Taiwan offers limited
access to foreign investors; and India authorized direct access for approved
international institutional investors in 1995. Many companies in China, India,
Indonesia, South Korea, Malaysia, the Philippines, Singapore and Thailand have
foreign investment restrictions, which can result in foreign-owned stock
trading at a substantial premium or discount to locally owned shares.
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 edge." 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. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the
B-1
<PAGE>
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; C1. The rating C1
is reserved for income bonds on which no interest is being paid; D. Debt rated
D is in default, and payment of interest and/or repayment of principal is in
arrears.
BB Debt rated "BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB--' rating.
B Debt rated "B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB' or "BB--' rating.
CCC Debt rated "CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B' or "B--' rating.
CC The rating "CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC' rating.
C The rating "C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC--' debt rating. The "C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI The rating "CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated "D' is in payment default. The "D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging and Related Strategies........................................... 12
Trustees and Officers.................................................... 22
Investment Advisory and Distribution Arrangements........................ 30
Portfolio Transactions................................................... 34
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 36
Conversion of Class B Shares............................................. 40
Valuation of Shares...................................................... 40
Performance Information.................................................. 41
Taxes.................................................................... 43
Other Information........................................................ 45
Appendix A............................................................... A-1
Appendix B .............................................................. B-1
</TABLE>
(C)1997 PaineWebber Incorporated
PaineWebber
Asia Pacific Growth Fund
- --------------------------------------------------------------------------------
Statement of Additional Information
December 18, 1996,
as revised January 24, 1997
- --------------------------------------------------------------------------------
(C) 1997 PaineWebber Incorporated
PaineWebber
