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Filed pursuant to Rule 497(e)
Registration Nos. 33-11025 and 811-5259
Registration Nos. 2-91362 and 811-4040
Registration Nos. 33-39659 and 811-6292
Registration Nos. 33-50716 and 811-7104
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PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above (each a 'Fund' and, collectively, 'Funds') are
series of professionally managed open-end management investment companies
organized as Massachusetts business trusts (each a 'Trust' and, collectively,
'Trusts'). PaineWebber Asia Pacific Growth Fund ('Asia Pacific Growth Fund'), a
diversified series of PaineWebber Managed Investments Trust ('Managed Trust'),
seeks long-term capital appreciation by investing primarily in equity securities
of companies in the Asia Pacific region, excluding Japan. PaineWebber Emerging
Markets Equity Fund ('Emerging Markets Equity Fund'), a diversified series of
PaineWebber Investment Trust II ('Investment Trust II'), seeks long-term capital
appreciation by investing primarily in equity securities of companies in newly
industrializing countries. PaineWebber Global Equity Fund ('Global Equity
Fund'), a diversified series of PaineWebber Investment Trust ('Investment
Trust'), seeks long-term growth of capital by investing primarily in U.S. and
foreign equity securities. PaineWebber Global Income Fund ('Global Income
Fund'), a non-diversified series of PaineWebber Investment Series ('Investment
Series'), seeks high current income and, secondarily, capital appreciation by
investing primarily in high-quality bonds of foreign and U.S. issuers.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'). As
distributor for the Funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of Fund shares. Schroder Capital Management
International Inc. ('Schroder Capital') serves as investment sub-adviser for
Asia Pacific Growth Fund and Emerging Markets Equity Fund. GE Investment
Management Incorporated ('GE Investment Management') serves as investment
sub-adviser for Global Equity Fund. Schroder Capital and GE Investment
Management are each sometimes referred to as a 'Sub-Adviser.'
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated March 1,
1998. 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 March 1, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
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
(bonds) and certain other securities. A description of the ratings assigned to
corporate bonds by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The process by which S&P and Moody's determine
ratings for mortgage-backed securities includes consideration of the likelihood
of the receipt by security holders of all distributions, the nature of the
underlying securities, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with such securities. Not even the
highest such ratings represents an assessment of the likelihood that principal
prepayments will be made by mortgagors or the degree to which such prepayments
may differ from that originally anticipated, nor do such ratings
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address the possibility that investors may suffer a lower than anticipated yield
or that investors in such securities may fail to recoup fully their initial
investment due to prepayments.
The Funds 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.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or a Sub-Adviser will analyze interest rate trends and developments
that may affect individual issuers, including factors such as liquidity,
profitability and asset quality. The yields on bonds are dependent on a variety
of factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of bonds, both within a particular classification and between
classifications. An issuer's obligations under its bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Asia Pacific Growth Fund is authorized to invest up to 10% of its total
assets in non-investment grade debt securities. Global Income Fund is authorized
to invest up to 20% of its total assets in non-investment grade debt securities.
Global Equity Fund may invest up to 10% of its net assets in convertible
securities rated below investment grade. Non-investment grade debt securities
are 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 Mitchell Hutchins or a Sub-Adviser, as appropriate, to be
of comparable quality. Non-investment grade debt securities are commonly refered
to as 'junk bonds'; they are deemed by the NRSROs to be predominantly
speculative and may involve significant risk exposure to adverse conditions.
Non-investment grade debt securities generally offer a higher current yield than
that available for investment grade issues; however, they involve higher risks,
in that they are especially sensitive to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for non-investment grade debt securities, especially those of
foreign issuers, has expanded rapidly in recent years, which has been a period
of generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities, particularly in Asia. In the past,
many lower rated debt securities experienced substantial price declines
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur. The market for non-investment grade
debt issues generally is thinner and less active than that for higher quality
securities, which may limit a 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 non-investment grade
securities, especially in a thinly traded market.
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
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may include expropriation, confiscatory taxation, withholding taxes on interest
and/or dividends, 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 Funds generally
invest only in securities that are traded on recognized exchanges or in
over-the-counter markets ('OTC'), 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 Funds than is available concerning
U.S. companies. Transactions in foreign securities may be subject to less
efficient settlement practices. Foreign securities trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Funds 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 Funds 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 Funds may invest in foreign securities by purchasing depository
receipts, including American Depository Receipts ('ADRs'), European Depository
Receipts ('EDRs') and Global Depository Receipts ('GDRs'), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each 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.
ADRs are publicy traded on exchanges or OTC in the United States and are
issued through 'sponsored' or 'unsponsored' arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid directly by the ADR holders. In addition, less information is available in
the United States about an unsponsored ADR than about a sponsored ADR.
The Funds anticipate that their 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.
Although each Fund will endeavor to achieve the best net results in effecting
its portfolio transactions, transactions on foreign exchanges are usually
subject to fixed commissions that are generally higher than negotiated
commissions on U.S. 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 Funds 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 Funds would be subject. In addition, substantial limitations may
exist in certain countries with respect to the Funds' ability to repatriate
investment capital or the proceeds of sales of securities.
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FOREIGN SOVEREIGN DEBT. Investment by the Funds 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 Funds 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 Funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins and the Sub-Advisers manage the
Funds' portfolios 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 Funds to suffer a loss of interest or principal on any of its holdings.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments
in other investment companies may be the most effective available means by which
a Fund may invest in securities of issuers in certain countries. Such
investments may include, for example, World Equity Benchmark SharesSM (commonly
known as 'WEBS'), which are exchange-traded shares of series of an investment
company that are designed to replicate the composition and performance of
publicly traded issuers in particular foreign countries. 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, a
Fund would continue to pay its own management fees and other expenses. Each Fund
may invest in such investment companies when, in the judgment of Mitchell
Hutchins or a Sub-Adviser, the potential benefits of such investment outweigh
the payment of any applicable premium, sales load and expenses. In addition, the
Funds' investments in such investment companies 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.
FOREIGN CURRENCY TRANSACTIONS. A significant portion of each Fund's assets
may be invested in foreign securities, and substantially all related income may
be received by a Fund in foreign currencies. Each Fund values its assets daily
in U.S. dollars and does not intend to convert its holdings of foreign
currencies to U.S. dollars on a daily basis. From time to time a Fund's foreign
currencies may be held 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, a Fund could suffer a loss of some or all of the amounts deposited.
Each Fund may convert foreign currency to U.S. dollars from time to time.
The value of the assets of a Fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a 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 a Fund at one rate, while offering a lesser rate of exchange should
a
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Fund desire immediately to resell that currency to the dealer. Each Fund
conducts its currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
SPECIAL CONSIDERATIONS RELATING TO ASIA PACIFIC REGION AND OTHER EMERGING
MARKET INVESTMENTS. Certain of the risks associated with international
investments are heightened for investments in emerging markets, including many
Asia Pacific Region countries (as defined in the Prospectus). For example, many
of the currencies of Asia Pacific Region countries recently have experienced
significant devaluations relative to the U.S. dollar, and major adjustments have
been made periodically in various emerging market currencies.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a Fund's investment
in these countries and may increase its expenses. 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 some
emerging market 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 a Fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A 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 on investments.
For example, in China, India, Indonesia, Malaysia, the Philippines,
Singapore, South Korea and Thailand, government regulation or a company's
charter may limit the maximum foreign aggregate ownership of equity in any one
company. South Korea restricts foreign investment in Won-denominated debt
securities and Sri Lanka prohibits foreign investment in government debt
securities. South Korea prohibits foreign investment in specified
telecommunications companies and the Philippines prohibits foreign investment in
mass media companies and companies providing certain professional services. In
the Philippines, a 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, a 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 Shenzhen Stock Exchange are generally settled in Hong Kong dollars.
If, because of restrictions on repatriation or conversion, a Fund were
unable to distribute substantially all of its net investment income, including
net short-term capital gains and net long-term capital gains within applicable
time periods, the Fund could be subject to federal income and excise taxes that
would not otherwise be incurred and could cease to qualify for the favorable tax
treatment afforded to regulated investment companies ('RICs') under the Internal
Revenue Code ('Code'). In such case, it would become subject to federal income
tax on all of its income and net gains.
Differences Between the U.S. and Emerging Market Securities Markets. Most
of the securities markets of emerging market countries have substantially less
volume than the New York Stock Exchange, and equity securities of most companies
in emerging market countries are less liquid and more volatile than equity
securities of U.S. companies of comparable size. Some of the stock exchanges in
emerging market 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 emerging market 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
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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 an emerging market country experiences rapid increases in its money
supply and investment in equity securities for speculative purposes, the equity
securities traded in that 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 Emerging Market Securities Markets; Legal
Systems. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to a Fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to a Fund than to local market
participants. Brokers in other 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
emerging market 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 emerging market 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 emerging market 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 emerging market 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 financial markets in those countries
and elsewhere and could adversely affect the value of a Fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a 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. Such problems also have
occurred in other emerging markets throughout the world.
As in some other regions, several Asia Pacific Region countries have or in
the past have had hostile relationships with neighboring nations or have
experienced internal insurgency. For example, Thailand has
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experienced border conflicts with Laos and Cambodia, and India is engaged in
border disputes with several of its neighbors, including China and Pakistan.
Tension between the Tamil and Sinhalese communities in Sri Lanka has resulted in
periodic outbreaks of violence. An uneasy truce exists between North Korea and
South Korea, and the recurrence of hostilities remains possible. Reunification
of North Korea and South Korea could have a detrimental effect on the economy of
South Korea. Also, China continues to claim sovereignty over Taiwan and has
conducted military maneuvers near Taiwan. China is acknowledged to possess
nuclear weapons capability; North Korea is alleged to possess or be in the
process of developing such a capability.
China assumed sovereignty over Hong Kong on July 1, 1997. Although China
has committed by treaty to preserve the economic and social freedoms enjoyed in
Hong Kong for 50 years after regaining control, there can be no assurance that
China will not renege, and in fact China has announced its intent to repeal
certain laws. Business confidence and market and business performance in Hong
Kong, therefore, can be significantly affected by political developments.
The reversion of Hong Kong also presents a risk that the Hong Kong dollar
will be devalued and a risk of possible loss of investor confidence in the Hong
Kong markets and dollar. However, factors exist that may mitigate this risk.
First, China has stated its intention to implement a 'one country, two systems'
policy, which would preserve monetary sovereignty and leave control in the hands
of the Hong Kong Monetary Authority ('HKMA'). Second, fixed rate parity with the
U.S. dollar is seen as critical to maintaining investors' confidence in the
transition to Chinese rule. Therefore, it is generally anticipated that, in the
event international investors lose confidence in Hong Kong dollar assets, the
HKMA would intervene to support the currency, though such intervention cannot be
assured. Third, Hong Kong's and China's sizable combined foreign exchange
reserve may be used to support the value of the Hong Kong dollar, provided that
China does not appropriate such reserves for other uses, which is not
anticipated, but cannot be assured. Finally, China would be likely to experience
significant adverse political and economic consequences if confidence in the
Hong Kong dollar and the territory's assets were to be endangered.
As is the case in many other emerging markets, 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 these countries. In addition, the economies of some
countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
U.S. GOVERNMENT SECURITIES. The Funds may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of it agencies or instrumentalities (collectively, 'U.S.
government securities'). Among the U.S. government securities that may be held
by the Funds are securities that are supported by the full faith and credit of
the United States; securities that are supported primarily or solely by the
creditworthiness of the government-related issuer; and securities, such as
mortgage-backed securities, that are supported in part by pools of assets.
CONVERTIBLE SECURITIES. Each Fund is permitted to invest in convertible
securities. Before conversion, convertible securities have characteristics
similar to non-convertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable non-convertible securities.
The value of a convertible security is a function of its 'investment value'
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
'conversion value' (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible
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security is governed principally by its investment value. Generally, the
conversion value decreases as the convertible security approaches maturity. To
the extent the market price of the underlying common stock approaches or exceeds
the conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. In addition, a convertible security
generally will sell at a premium over its conversion value determined by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. U.S. government
mortgage-backed securities include mortgage-backed securities issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association) or Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government-sponsored enterprises. Other mortgage-backed
securities are issued by private issuers, generally originators of and investors
in mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers and special purpose entities (collectively 'Private
Mortgage Lenders'). Payments of principal and interest (but not the market
value) of such private mortgage-backed securities may be supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, directly
or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any government guarantee of the
underlying mortgage assets but with some form of non-government credit
enhancement.
New types of mortgage-backed securities are developed and marketed from
time to time and, consistent with their investment limitations, the Funds expect
to invest in those new types of mortgage-backed securities that Mitchell
Hutchins or the Sub-Advisers believe may assist the Funds in achieving their
investment objectives. Similarly, the Funds may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein. The Funds also may invest in foreign mortgage-backed
securities which may be structured differently than domestic mortgage-backed
securities.
Ginnie Mae Certificates--Ginnie Mae guarantees certain mortgage
pass-through certificates ('Ginnie Mae certificates') that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are 'passed through' to certificateholders such as Global Income Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
Fannie Mae Certificates--Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as 'conventional mortgage loans' or 'conventional loans')
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ('Fannie Mae
certificates'), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates--Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ('PCs') and guaranteed mortgage certificates
('GMCs'). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also
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represent a pro rata interest in a pool of mortgages. These instruments,
however, pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The Freddie Mac guarantee is not backed by the full
faith and credit of the U.S. government.
Private Mortgage-Backed Securities--Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to CMOs issued or guaranteed
by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may
be supported by pools of U.S. government or agency insured or guaranteed
mortgage loans or by other mortgage-backed securities issued by a government
agency or instrumentality, but they generally are supported by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans. Since
such mortgage-backed securities normally are not guaranteed by an entity having
the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are
structured with one or more types of credit enhancement. See '--Types of Credit
Enhancement.' These credit enhancements do not protect investors from changes in
market value.
Collateralized Mortgage Obligations and Multi-Class Mortgage
Pass-Throughs--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called 'Mortgage Assets'). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt services on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only or 'PO' class) on a monthly, quarterly or semiannual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an inverse interest-only ('IO') class, on which the
holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.
Types of Credit Enhancement--To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement
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falls into two categories: (1) liquidity protection and (2) protection against
losses resulting after default by an obligor on the underlying assets and
collection of all amounts recoverable directly from the obligor and through
liquidation of the collateral. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets (usually the
bank, savings association or mortgage banker that transferred the underlying
loans to the issuer of the security), to ensure that the receipt of payments on
the underlying pool occurs in a timely fashion. Protection against losses
resulting after default and liquidation ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor, from third parties, through various means of
structuring the transaction or through a combination of such approaches. A Fund
will not pay any additional fees for such credit enhancement, although the
existence of credit enhancement may increase the price of a security. Credit
enhancements do not provide protection against changes in the market value of
the security. Examples of credit enhancement arising out of the structure of the
transaction include 'senior-subordinated securities' (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of 'spread accounts' or 'reserve funds' (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and 'over-collateralization' (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
Special Characteristics of Mortgage-Backed Securities--The yield
characteristics of mortgage-backed securities differ from those of traditiona1
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans generally may be
prepaid at any time. Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time
the issuer makes the payments on the mortgage-backed securities, and this delay
reduces the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment
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of prepayments may occur at lower interest rates than the original investment,
thus adversely affecting the yield of a Fund.
Adjustable Rate Mortgage and Floating Rate Mortgage-Backed
Securities--Adjustable Rate Mortgage ('ARM') mortgage-backed securities are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest (such mortgage loans are
referred to as 'ARMs'). Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right to
receive interest payments at rates that fluctuate in accordance with an index
but that generally are supported by pools comprised of fixed-rate mortgage
loans. Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ('negative
amortization'), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
and the principal payment that would have been necessary to amortize the
oustanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
'lock-in' at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ('COFI'), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global Income Fund may invest in
secured or unsecured fixed or floating rate loans ('Loans') arranged through
private negotiations between a borrowing corporation, government or other entity
and one or more financial institutions ('Lenders'). The Fund's investments in
Loans may be in the form of participations ('Participations') in Loans or
assignments ('Assignments') of all or a portion of Loans from third parties.
Participations typically result in the Fund having a contractual relationship
only with the Lender, not with the borrower. The Fund has the right to receive
payments of
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principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally has no direct right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund assumes the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the selling Lender,
the Fund may be treated as a general creditor of that Lender and may not benefit
from any set-off between the Lender and the borrower. Global Income Fund will
acquire Participations only if Mitchell Hutchins determines that the selling
Lender is creditworthy.
When Global Income Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the 1933
Act and thus may be subject to the Fund's limitation on investment in illiquid
securities. Because there may be no liquid market for such securities, the Fund
anticipates that such securities may be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on the Fund's ability to
dispose of particular Assignments or Participations when necessary to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower.
MONEY MARKET INVESTMENTS. Each Fund may invest in money market
investments. Such investments include, among other things, (i) securities issued
or guaranteed by the U.S. government or one of its agencies or
instrumentalities, (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers, (iii) commercial paper
and notes, including those with variable and floating rates of interest, (iv)
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks, (v) debt obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (vi) debt securities issued by foreign issuers, (vii)
repurchase agreements and (viii) other investment companies that invest
exclusively in money market instruments.
Global Equity Fund may invest up to 25% of its assets in the GEIM
Short-Term Investment Fund (the 'Investment Fund'), an investment fund created
specifically to serve as a vehicle for the collective investment of cash
balances of the Fund and other accounts advised by either GE Investment
Management, or its affiliate, General Electric Investment Corporation. The
Investment Fund invests exclusively in the money market instruments described in
(i) through (vii) above. The Investment Fund is advised by GE Investment
Management. No advisory fee is charged by GE Investment Management to the
Investment Fund, nor will the Fund incur any sales charge, redemption fee,
distribution fee or service fee in connection with its investments in the
Investment Fund.
WARRANTS. Warrants are securities permitting, but not obligating, holders
to subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
ILLIQUID SECURITIES. Global Equity Fund and Global Income Fund each may
invest up to 10% of its net assets, and Asia Pacific Growth Fund and Emerging
Markets Equity Fund each 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 a Fund has valued the securities and
includes, among other things, purchased OTC options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins or a Sub-Adviser, as applicable, has determined are liquid
pursuant to guidelines established by each Fund's board. The assets used as
cover for OTC options written by the Funds will be considered illiquid unless
the OTC options are sold to qualified dealers who agree that the Funds may
repurchase any OTC options they write at a
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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. Under current SEC
guidelines, IO and PO classes of mortgage-backed securities are considered
illiquid. However, IO and PO classes of fixed-rate mortgage-backed securities
issued by the U.S. government or one of its agencies or instrumentalities will
not be considered illiquid if Mitchell Hutchins or a Sub-Adviser has determined
that they are liquid pursuant to guidelines established by each Fund's board. To
the extent a Fund invests in illiquid securities, it may not be able to readily
liquidate such investments and may have to sell other investments if necessary
to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933
('1933 Act') and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time a Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the 1933 Act.
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.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a 'safe harbor' from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. 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
a 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.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or a Sub-Adviser, as applicable, pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser 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 bids are solicited and the mechanics of transfer).
Mitchell Hutchins or a Sub-Adviser monitors the liquidity of restricted
securities in each Fund's portfolio and reports periodically on such decisions
to the applicable board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
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 or upon demand 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 a 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
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underlying securities and delays and costs to a Fund if the other party to a
repurchase agreement becomes insolvent.
The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins or a Sub-Adviser to
present minimal credit risks in accordance with guidelines established by each
board. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. As indicated in the Prospectus, each Fund
may enter into reverse repurchase agreements with banks and securities dealers.
While a reverse repurchase agreement is outstanding, a Fund will maintain, in a
segregated account with its custodian, cash or liquid securities, marked to
market daily, in an amount at least equal to its obligations under the reverse
repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a Fund might be unable to deliver them when that Fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with that Fund's custodian 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. Each Fund may reinvest any cash
collateral in money market investments or other short-term liquid investments.
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. Each Fund will retain authority to terminate
any of its loans at any time. Each Fund may pay reasonable fees in connection
with a loan and may pay the borrower or placing broker a negotiated portion of
the interest earned on the reinvestment of cash held as collateral. A Fund will
receive amounts equivalent to any dividends, interest or other distributions on
the securities loaned. Each Fund will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
SHORT SALES 'AGAINST THE BOX.' Each 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 make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
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, in a segregated account with its custodian, the securities that could
be used to cover the short sale. Each Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales 'against the box.'
A Fund might make a short sale 'against the box' in order to hedge against
market risks when Mitchell Hutchins or a Sub-Adviser 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. In such case, any loss in the Fund's long position after the
short sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be reduced
by a corresponding loss in the short position. The extent to which gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the
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securities a 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 a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, 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 Other Strategies Using
Derivative Instruments,' segregated accounts may also be required in connection
with certain transactions involving options, futures or forward currency
contracts (and, for Asia Pacific Growth Fund and Global Income Fund, swaps).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase
securities on a 'when-issued' basis or may purchase or sell for delayed
delivery. 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 a Fund's net asset value. When a Fund commits 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.' A 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 Mitchell Hutchins or a Sub-Adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of the
shares of the Fund 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, later changes 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.
Each Fund will not:
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
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(6) 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.
In addition, Asia Pacific Growth Fund, Emerging Markets Equity Fund and
Global Equity Fund will not:
(7) 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.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets (15% of net assets for Asia
Pacific Growth Fund and Emerging Markets Equity Fund) in illiquid securities;
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding;
(3) 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;
(4) 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; or
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of reorganization, consolidation, or merger (and except that a Fund
will not purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act).
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HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins and the
Sub-Advisers may use a variety of financial instruments ('Derivative
Instruments'), including certain options, futures contracts (sometimes referred
to as 'futures'), options on futures contracts and forward currency contracts,
to attempt to hedge each Fund's portfolio. Global Income Fund also may use these
Derivative Instruments to attempt to enhance income or realize gains. Asia
Pacific Growth Fund and Global Income Fund may enter into interest rate swaps,
and Asia Pacific Growth Fund may engage in currency swaps, as also described
below. A Fund may enter into transactions involving one or more types of
Derivative Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, each Fund's use of these instruments will
place at risk a much smaller portion of its assets. In particular, each Fund may
use the Derivative Instruments described below.
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option or at
specified times or at the expiration of the option, depending on the type of
option involved. 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 or at specified times or at the expiration of the option,
depending on the type of option involved. 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 SECURITIES INDICES--A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities 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 securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities 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 securities 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 securities 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.
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GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as 'short hedges' and 'long hedges.' A
short hedge is a purchase or sale of a Derivative Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a Fund's portfolio. Thus, in a short hedge a Fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, a Fund might purchase
a put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declined below the exercise price of
the put, a 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, a Fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge, a Fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a 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, a Fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a Fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A Fund may purchase and write (sell) 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. A Fund might enter into a long straddle when Mitchell Hutchins or a
Sub-Adviser 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. A Fund might enter into a short straddle when Mitchell Hutchins or a
Sub-Adviser believes it unlikely that the prices of the securities will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ('CFTC'). In addition, a Fund's
ability to use Derivative Instruments will be limited by tax considerations. See
'Taxes.'
Income strategies that Global Income Fund may use include the writing of
covered options to obtain the related option premiums. Gain strategies that
Global Income Fund may use include the use of Derivative Instruments to increase
or reduce the Fund's exposure to an asset class without buying or selling the
underlying instruments.
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the Sub-Advisers may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins or a Sub-Adviser may
utilize these opportunities for a Fund to the extent that they are consistent
with the Fund's investment objective and permitted by its investment limitations
and applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
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(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins or a Sub-Adviser to predict movements of the overall
securities, interest rate or currency exchange markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Advisers are experienced in the use of Derivative
Instruments, there can be no assurance that any particular strategy adopted will
succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins or a Sub-Adviser projected a decline in the
price of a security in that Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if the
price of the Derivative Instrument declined by more than the increase in the
price of the security, that 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, a Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a 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. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Funds to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, in the case of Asia Pacific Growth Fund, Emerging
Markets Equity Fund and Global Equity Fund, on equity and debt securities, stock
and bond indices and foreign currencies, or in the case of Global Income Fund,
on debt securities, bond indices and foreign currencies. The purchase of call
options may serve as a long hedge, and the purchase of put options may serve as
a short hedge. In addition, Global Income Fund may purchase options to realize
gains by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying securities. Writing covered put or call
options can enable a Fund to enhance income by reason of the premiums paid by
the purchasers of such options. 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
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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 affected 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 a 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.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a 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, a 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 a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds 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 a Fund and its contra party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a 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 Funds 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
Funds 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. There are also other types of options exercisable on certain specified
dates before expiration.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend 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
Funds will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that a 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, a Fund might be unable to close out an OTC option position at any
time prior to its expiration.
If a 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.
A Fund may purchase and write put and call options on 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 a securities market
(or market sector) rather than anticipated increases or decreases in the value
of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by each respective Fund's board
without shareholder vote:
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(1) Each Fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with
the premiums on all other options held by the Fund, does not exceed 5% of
its total assets.
(2) The aggregate value of securities underlying put options written
by each Fund, determined as of the date the put options are written will
not exceed 50% of its 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 each Fund that are held at any time will
not exceed 20% of its net assets.
FUTURES. The Funds may purchase and sell securities index futures
contracts, interest rate futures contracts, bond index future contracts and
foreign currency futures contracts. A 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. In addition, Global
Income Fund may purchase or sell futures contracts or purchase options thereon
to realize gains by increasing or reducing its exposure to an asset class
without purchasing or selling the underlying securities.
Futures strategies also can be used to manage the average duration of
Global Income Fund's portfolio. If Mitchell Hutchins wishes to shorten the
average duration of this Fund's portfolio, the Fund may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the Fund's
portfolio, the Fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
A Fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A Fund will engage in this
strategy only when it is more advantageous to a Fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a 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, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a 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 each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a 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 a 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 Funds intend 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
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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 a 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. A Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a 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.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by a Fund's board without shareholder vote:
(1) To the extent a 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 its 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 each Fund that are held at any time will
not exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of its total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each 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 a 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.
A Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the Fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins or a Sub-Adviser believes will have a positive
correlation to the value of the currency being hedged. For example, if a Fund
owned securities denominated in a foreign currency and Mitchell Hutchins or the
Sub-Adviser 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.' The risk that movements in the price of the Derivative 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 Derivative 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 Derivative
Instruments, a 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.
22
<PAGE>
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 Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Funds might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each 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, a 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, a 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. Global Income Fund may use forward
currency contracts to realize gains from favorable changes in exchange rates.
A Fund 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 Mitchell Hutchins or a Sub-Adviser believes will
have a positive correlation to the values of the currency being hedged. In
addition, a Fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a Fund owned
securities denominated in a foreign currency and Mitchell Hutchins or a
Sub-Adviser believes 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.
The purpose of entering into these contracts is to minimize the risk to the Fund
from adverse changes in the relationship between the U.S. and foreign
currencies. 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 a hedging instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The cost to a 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 a 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 a 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, a 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, a Fund might need to purchase or
sell
23
<PAGE>
foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Each 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.
SWAP TRANSACTIONS. Asia Pacific Growth Fund and Global Income Fund each
may enter into interest rate swap transactions. Asia Pacific Growth Fund also
may enter into currency swap transactions. Swap transactions include swaps,
caps, floors and collars. Interest rate swaps 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 contra party
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. Currency swaps, caps, floors and collars are similar to interest rate
swaps, caps, floors and collars but they are based on currency exchange rates
rather than interest rates.
Asia Pacific Growth Fund and Global Income Fund each may enter into
interest rate swap transactions to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities it anticipates purchasing at a later date. Each of these
Funds intends to use these transactions as a hedge and not as a speculative
investment. Interest rate swap transactions are subject to risks comparable to
those described above with respect to other hedging strategies.
Asia Pacific Growth Fund and Global Income Fund each may enter into
interest rate swaps, caps, floors and collars 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 a Fund receiving or paying,
as the case may be, only the net amount of the two payments. Inasmuch as these
interest rate swap transactions are entered into for good faith hedging
purposes, and inasmuch as segregated accounts will be established with respect
to such transactions, Mitchell Hutchins and Schroder Capital believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to either Fund's borrowing restrictions. The net amount of
the excess, if any, of a 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.' Each Fund also will
establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps, floors and collars that are written by the Fund.
Asia Pacific Growth Fund and Global Income Fund each will enter into swap
transactions only with banks and recognized securities dealers believed by
Mitchell Hutchins or, in the case of Asia Pacific Growth Fund, 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, a
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.
24
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutch-
ins (since January 1995), and also an ex-
ecutive vice president and a director of
PaineWebber. Mrs. Alexander is president
and a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard Q. Armstrong; 62 Trustee Mr. Armstrong is chairman and principal of
78 West Brother Drive RQA Enterprises (management consulting
Greenwich, CT 06830 firm) (since April 1991 and principal
occupation since March 1995). Mr. Arm-
strong is also a director of Hi Lo Auto-
motive, Inc. He was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and spar-
kling/still waters) (October 1993-March
1995). Mr. Armstrong was a partner of The
New England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 71 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber
Board of Trustees Group Inc. ('PW Group') (holding company of
PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company. Mr.
Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeu-
tics, Inc. Mr. Bewkes is a director or
trustee of 30 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1101 Connecticut Avenue, N.W. (international investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a
partner of McKinsey & Company (management
consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural
commodities). He was the chief negotiator
in the Strategic Arms Reduction Talks with
the former 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 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Mary C. Farrell**; 48 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 appears 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 Business. Ms. Farrell is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, New York 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director or
trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager
Washington, D.C. 20004 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 North-
west Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to
1989, he was employed by the Marriott
Corporation (hotels, restaurants, 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 Management Systems, Inc.
(management consulting and computer
related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc.
(real estate services), Choice Hotels
International (hotel and hotel
franchising), FPL Group, Inc. (electric
services), Integra, Inc. (bio-medical),
Manor Care, Inc. (health care), National
Education Corporation and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
P.O. Box 1164 Foundation (charitable foundation sup-
Princeton, NJ 08542 porting mainly oceanographic exploration
and research). He is a director of Roadway
Express, Inc. (trucking), The Guardian
Group of Mutual Funds, Evans Systems, Inc.
(motor fuels, convenience store and
diversified company), Electronic Clearing
House, Inc., (financial transactions
processing), Wainoco Oil Corporation and
Nutraceutix, Inc. (biotechnology company).
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 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as an
investment adviser.
T. Kirkham Barneby; 51 Vice President Mr. Barneby is a managing director and chief
(Investment Trust only) investment officer--quantitative investment
of Mitchell Hutchins. Prior to September
1994, he was a senior vice president at
Vantage Global Management. Prior to June
1993, he was a senior vice president at
Mitchell Hutchins. Mr. Barneby is a vice
president of six investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Julieanna Berry; 34 Vice President Ms. Berry is a first vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins. Ms.
Berry is a vice president of two in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Karen L. Finkel; 40 Vice President Mrs. Finkel is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Mrs. Finkel is a vice president of two in-
vestment companies for which Mitchell
Hutchins serves as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
James F. Keegan; 37 Vice President Mr. Keegan is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to March 1996, he was director of
fixed income strategy and research of
Merrion Group, L.P. From 1987 to 1994, he
was a vice president of global investment
management of Bankers Trust. Mr. Keegan is
a vice president of three investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Thomas J. Libassi; 39 Vice President Mr. Libassi is a senior vice president and
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to May 1994, he was a vice president
of Keystone Custodian Funds Inc. with
portfolio management responsibility. Mr.
Libassi is a vice president of six
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 51 Vice President (Managed Mr. McCauley is a managing director
Trust and Investment Series and chief investment officer--fixed income
only) 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 companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance division of
Mitchell Hutchins. Ms. Moran is also a vice
president and assistant treasurer of 30
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice presi-
dent and secretary of 29 investment
companies and a vice president and
assistant secretary of one investment
company for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and di-
rector 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 presi-
dent of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 47 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
and a vice president and secretary of one
investment company for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a first vice president and
Treasurer director of the mutual fund finance divi-
sion of Mitchell Hutchins. From August 1992
to August 1994, he was a vice president at
BlackRock Financial Management L.P. Mr.
Schubert is a vice president and treasurer
of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to 1993, he was a member of the
portfolio management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is a vice
president of four investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance divi-
sion of Mitchell Hutchins. Prior to Feb-
ruary 1995, he was a manager of the mutual
fund finance division of Kidder Peabody
Asset Management, Inc. Mr. Taglialatela is
a vice president and assistant treasurer of
30 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and chief
(Investment Trust, investment officer--equities of Mitchell
Investment Trust II and Hutchins. Prior to March 1995, he was a
Managed Trust only) vice president and directed the U.S. funds
management and equity research areas of
Chase Manhattan Private Bank. Mr. Tincher
is a vice president of 14 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior vice president and
(Managed Trust only) a portfolio manager of Mitchell Hutchins.
Mr. Varrelman is a vice president of four
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Stuart Waugh; 42 Vice President (Investment Mr. Waugh is a managing director and a
Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income invest-
ments and currency trading. Mr. Waugh is
a vice president of five investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice president and as-
Assistant Secretary sociate 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>
31
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president and a man-
Assistant Treasurer ager of the mutual fund finance division of
Mitchell Hutchins. Mr. Williams is a vice
president and assistant treasurer of 30
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 each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber, and/or PW Group.
Board members are compensated as follows:
o MANAGED TRUST has six series and pays each trustee who is not an
'interested person' of the Trust $1,000 annually for each series.
Therefore, Managed Trust pays each such trustee $6,000 annually,
plus any additional amounts due for board or committee meetings.
o INVESTMENT TRUST II and INVESTMENT SERIES each pays board members
who are not 'interested persons' of the Trust $1,000 annually for
its sole series, plus any additional amounts due for board or
committee meetings.
o INVESTMENT TRUST has two series and pays each board member who is
not an 'interested person' of the Trust $1,000 annually for Global
Equity Fund and an additional $1,500 annually for its second series.
Therefore, Investment Trust pays each such board member $2,500
annually, plus any additional amounts due for board or committee
meetings.
Each Trust pays an additional $150 for each board meeting and each separate
meeting of a board committee with respect to each series. Each chairman of the
audit and contract review committees of individual funds within the PaineWebber
fund complex receives additional compensation, aggregating $15,000 annually,
from the relevant funds. All board members are reimbursed for any expenses
incurred in attending meetings. Board members and officers own in the aggregate
less than 1% of the outstanding shares of each Fund. Because PaineWebber,
Mitchell Hutchins and, as applicable, a Sub-Adviser perform substantially all
the services necessary for the operation of the Trusts and each Fund, the Trusts
require no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trusts for acting as a
board member or officer.
32
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who held office with the Trusts or with other
PaineWebber funds during the Funds' fiscal years ended October 31, 1997.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
AGGREGATE AGGREGATE AGGREGATE COMPENSATION
AGGREGATE COMPENSATION COMPENSATION COMPENSATION FROM THE
COMPENSATION FROM FROM FROM TRUSTS AND
FROM MANAGED INVESTMENT INVESTMENT INVESTMENT THE FUND
NAME OF PERSON, POSITION TRUST * SERIES* TRUST* TRUST II* COMPLEX**
- --------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 94,885
Richard R. Burt,
Trustee........................ $7,300 $1,750 $3,075 $1,350 $ 87,085
Meyer Feldberg,
Trustee........................ $7,300 $3,053 $4,965 $2,305 $117,853
George W. Gowen,
Trustee........................ $7,700 $1,900 $3,075 $1,350 $101,567
Frederic V. Malek,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 95,845
Carl W. Schafer,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 94,885
</TABLE>
- ------------------
+ Only independent board members are compensated by the Trusts 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 from the Trust indicated for the fiscal
year ended October 31, 1997.
** Represents total compensation paid to each board member during the calendar
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholder is shown in the Global Equity Fund records as
owning more than 5% of its shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF JANUARY 31, 1998
- ----------------- ----------------------------
<S> <C>
Northern Trust Company as Trustee 1,783,111.002
FBO PaineWebber 401 K Plan 6.16%
</TABLE>
- ------------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 1285 Avenue of the Americas, New York, NY 10019.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Fund pursuant to separate contracts (each an
'Advisory Contract') with each Trust. Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rates indicated below.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as
33
<PAGE>
defined in the 1940 Act) of the applicable 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
applicable 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 each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a 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. Each 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.
ASIA PACIFIC GROWTH FUND. Mitchell Hutchins acts as the investment adviser
and administrator of Asia Pacific Growth Fund pursuant to an Investment Advisory
and Administration Contract with Managed Trust, dated April 21, 1988, made
applicable to the Fund by means of an Investment Advisory and Administration Fee
Agreement dated December 18, 1996 (together an 'Advisory Contract'). 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 and including $100 million and at an annual rate of 1.10% of its average
daily net assets in excess of $100 million. During the period March 25, 1997
(commencement of operations) through October 31, 1997, the Fund paid (or
accrued) to Mitchell Hutchins advisory and administrative fees of $533,412.
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 separate 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 Asia Pacific Growth 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 and including $100 million and at an
annual rate of 0.55% of the Fund's average daily net assets in excess of $100
million. Schroder Capital bears all expenses incurred by it in connection with
its services under the Sub-Advisory Contract. During the period March 25, 1997
(commencement of operations) through October 31, 1997, Mitchell Hutchins (not
the Fund) paid (or accrued) to Schroder Capital $284,106 in sub-advisory fees.
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 Managed
Trust, Asia Pacific Growth Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to Managed
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 Managed Trust's 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
34
<PAGE>
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.
Prior to August 1, 1997, PaineWebber provided certain services to Asia
Pacific Growth Fund not otherwise provided by its transfer agent. Pursuant to an
agreement between PaineWebber and the Fund relating to those services, for the
period from March 25, 1997 (commencement of operations) through July 31, 1997,
Asia Pacific Growth Fund paid (or accrued) to PaineWebber $9,958.
EMERGING MARKETS EQUITY FUND. Mitchell Hutchins acts as the investment
adviser and administrator of Emerging Markets Equity Fund pursuant to an
Advisory Contract with Investment Trust II dated February 25, 1997. 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. During the fiscal year ended October 31, 1997, the four months ended
October 31, 1996, and the fiscal years ended June 30, 1996 and June 30, 1995,
the Fund paid (or accrued) to Mitchell Hutchins, under either the current or a
prior contract, and/or to Kidder Peabody Asset Management, Inc. ('KPAM') (the
Fund's investment adviser prior to February 13, 1995) advisory and
administrative fees of $438,676, $220,071, $867,093 and $1,261,493,
respectively.
During the fiscal year ended October 31, 1997, the four months ended
October 31, 1996 and the fiscal years ended June 30, 1996 and June 30, 1995,
Mitchell Hutchins waived part of its management fees and reimbursed Emerging
Markets Equity Fund in the amounts of $180,568, $142,160, $538,618 and $81,217,
respectively; during these periods, certain expense limitations were applicable
which are no longer in effect. As of the date of this Statement of Additional
Information, Mitchell Hutchins was voluntarily waiving part of its management
fees and/or making reimbursements to Emerging Markets Equity Fund so that the
Fund's 'Total Operating Expenses' were as listed in the Expense Table in the
Prospectus. Mitchell Hutchins may discontinue these voluntary waivers and/or
reimbursements at any time.
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 separate contract with Schroder Capital, dated February 25,
1997 ('Sub-Advisory Contract'), pursuant to which Schroder Capital determines
what securities will be purchased, sold or held by Emerging Markets Equity 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 0.70% of
the Fund's average daily net assets. Schroder Capital bears all expenses
incurred by it in connection with its services under the Sub-Advisory Contract.
During the fiscal year ended October 31, 1997, Mitchell Hutchins (not the Fund)
paid (or accrued) to Schroder Capital $161,715 in sub-advisory fees. Under
sub-advisory contracts with the Fund's former sub-adviser, Emerging Markets
Management, from November 1, 1996 through February 24, 1997, for the four months
ended October 31, 1996 and the fiscal years ended June 30, 1996, and June 30,
1995, Mitchell Hutchins and/or KPAM paid (or accrued) fees of $86,731, $152,148,
$599,472 and $872,143, respectively, to Emerging Markets Management.
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 Investment
Trust II, Emerging Markets Equity Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to Investment
Trust II, 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 the assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by Investment Trust II's board or by vote of the holders of a majority
of the Fund's outstanding securities on 60 days' notice to Schroder Capital, or
by Schroder Capital on 60 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.
35
<PAGE>
GLOBAL EQUITY FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Equity Fund pursuant to an Advisory Contract with
Investment Trust dated August 25, 1995. Under the Advisory Contract, the Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.85% of the Fund's average daily net assets up to and including $500
million, 0.83% of amounts over $500 million and up to and including $1 billion,
and 0.805% of amounts over $1 billion. During the fiscal year ended October 31,
1997, the two months ended October 31, 1996 and for the fiscal years ended
August 31, 1996 and August 31, 1995, the Fund paid (or accrued) to Mitchell
Hutchins and/or KPAM (the Fund's investment adviser prior to February 13, 1995)
advisory and administrative fees of $4,689,662, $794,518, $4,990,588 and
$2,109,091, respectively.
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 separate contract with GE Investment Management dated August
25, 1995 ('Sub-Advisory Contract'), pursuant to which GE Investment Management
determines what securities will be purchased, sold or held by Global Equity
Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays GE
Investment Management a fee, computed daily and paid monthly, at an annual rate
of 0.31% of the Fund's average daily net assets up to and including $500
million, 0.29% of amounts over $500 million up to and including $1 billion, and
0.265% of amounts over $1 billion. GE Investment Management bears all expenses
incurred by it in connection with its services under the Sub-Advisory Contract.
Under the Sub-Advisory Contract (or a prior sub-advisory contract between KPAM
and GE Investment Management) for the fiscal year ended October 31, 1997, the
two months ended October 31, 1996 and the fiscal years ended August 31, 1996 and
August 31, 1995, Mitchell Hutchins and/or KPAM paid (or accrued) fees of
$1,695,840, $287,688, $1,808,760 and $1,523,282, respectively, to GE Investment
Management.
Under the Sub-Advisory Contract, GE Investment Management will not be
liable for any error of judgment or mistake of law or for any loss suffered by
Investment Trust, Global Equity Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to Investment
Trust, the Fund, its shareholders or Mitchell Hutchins to which GE Investment
Management 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 Investment Trust's board or by vote of the holders of a majority of
the Fund's outstanding voting securities on 60 days' notice to GE Investment
Management and Mitchell Hutchins, or by GE Investment Management or Mitchell
Hutchins on 60 days' written notice to Investment Trust.
GLOBAL INCOME FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Income Fund pursuant to an Advisory Contract with
Investment Series dated April 21, 1988. Under the Advisory Contract, the Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.75% of the value of its average daily net assets up to and including
$500 million, 0.725% of amounts in excess of $500 million and up to $1 billion,
0.70% of amounts in excess of $1 billion and up to $1.5 billion, 0.675% of
amounts in excess of $1.5 billion and up to $2.0 billion, and 0.65% of amounts
over $2 billion. For the fiscal years ended October 31, 1997, October 31, 1996
and October 31, 1995, the Fund paid (or accrued) to Mitchell Hutchins advisory
and administrative fees of $5,683,381, $7,812,766 and $9,229,318, respectively.
Prior to August 1, 1997, PaineWebber provided certain services to Global
Income Fund not otherwise provided by its transfer agent. Pursuant to an
agreement between PaineWebber and the Fund relating to those services, for the
period from November 1, 1996 to July 31, 1997 and for the fiscal years ended
October 31, 1996 and October 31, 1995, Global Income Fund paid (or accrued) to
PaineWebber $189,131, $305,944 and $376,299, respectively.
36
<PAGE>
ALL FUNDS. During its fiscal year (or period) ended October 31, 1997, the
indicated Fund paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:
<TABLE>
<CAPTION>
FUND AMOUNT
- ---- ------
<S> <C>
Asia Pacific Growth Fund.......................................................... $ 14,324
Emerging Markets Equity Fund...................................................... $ 5,582
Global Equity Fund................................................................ $ 42,125
Global Income Fund................................................................ $ 26,057
</TABLE>
Subsequent to August 1, 1997, PFPC (not the Funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
NET ASSETS. The following table shows the approximate net assets as of
January 31, 1998, 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
INVESTMENT CATEGORY ($ MIL)
- ------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................ $ 6,697.8
Global........................................................................... $ 3,365.6
Equity/Balanced.................................................................. $ 5,173.7
Fixed Income (excluding Money Market)............................................ $ 4,889.7
Taxable Fixed Income........................................................ $ 3,300.0
Tax-Free Fixed Income....................................................... $ 1,589.7
Money Market Funds............................................................... $ 27,372.6
</TABLE>
PERSONNEL 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. Personnel of
each Sub-Adviser may also invest in securities for their own accounts pursuant
to comparable codes of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with
each Trust (collectively, 'Distribution Contracts'). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable Fund. Shares of each Fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the Funds
(collectively, 'Exclusive Dealer Agreements'), PaineWebber and its correspondent
firms sell each Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of each Fund adopted by each Trust in the manner prescribed under
Rule 12b-1 under the 1940 Act (each, respectively, a 'Class A Plan,' 'Class B
Plan' and 'Class C Plan,' and collectively, 'Plans'), each 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. Under the Class B
Plan, each 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. Under the Class C Plan, each Fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
(in the case of Asia Pacific Growth Fund, Emerging Markets Equity Fund and
Global Equity Fund) or 0.50% (in the case of Global Income Fund) of the average
daily net assets of the Class C shares. There is no distribution plan with
respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable 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 applicable board,
37
<PAGE>
including those board members who are not 'interested persons' of the Trust 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 and (4) while the Plan remains in
effect, the selection and nomination of board members who are not 'interested
persons' of the Trust shall be committed to the discretion of the board members
who are not 'interested persons' of that Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
each 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
a Fund's shares will not be used to subsidize the sale of any other class of
Fund shares.
The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year (or period) ended
October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A........................... $ 43,850 $ 32,006 $ 789,664 $ 1,317,917
Class B........................... $ 167,837 $ 13,867 $ 1,070,444 $ 1,847,036
Class C........................... $ 101,270 $ 66,418 $ 650,447 $ 325,118
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each Fund during the fiscal year
(or period) ended October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
CLASS A
Marketing and advertising......... $ 0 $60,062 $ 199,199 $ 348,403
Amortization of commissions....... $ 0 $ 0 $ 0 $ 0
Printing of prospectuses and
statements of additional
information..................... $11,988 $ 938 $ 16,675 $ 1,896
Branch network costs allocated and
interest expense................ $79,808 $88,809 $ 1,269,679 $ 2,405,758
Service fees paid to PaineWebber
investment executives........... $16,663 $12,073 $ 298,221 $ 500,809
CLASS B
Marketing and advertising......... $ 0 $ 6,508 $ 67,518 $ 114,697
Amortization of commissions....... $44,419 $ 3,985 $ 310,227 $ 539,463
Printing of prospectuses and
statements of additional
information..................... $11,470 $ 102 $ 5,652 $ 624
Branch network costs allocated and
interest expense................ $90,536 $ 9,624 $ 465,675 $ 799,194
Service fees paid to PaineWebber
investment executives........... $15,945 $ 1,311 $ 101,024 $ 175,469
CLASS C
Marketing and advertising......... $ 0 $31,153 $ 41,022 $ 28,228
Amortization of commissions....... $28,862 $18,795 $ 184,177 $ 82,363
Printing of prospectuses and
statement of additional
information..................... $ 6,919 $ 487 $ 3,434 $ 154
Branch network costs allocated and
interest expense................ $46,407 $46,067 $ 263,148 $ 194,222
Service fees paid to PaineWebber
investment executives........... $ 9,621 $ 6,265 $ 61,393 $ 41,182
</TABLE>
38
<PAGE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' 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 Funds' shares, including the PaineWebber retail branch system.
In approving each Fund's overall Flexible Pricing(Service Mark) system of
distribution, the applicable 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, each 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 of each Fund 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.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) 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, (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
39
<PAGE>
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 boards 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 boards 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 a Fund, which
fees would increase if the Plan were successful and the Fund attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell Hutchins
for the Class A shares for the fiscal years (or periods) set forth below,
Mitchell Hutchins earned the following approximate amounts of sales charges and
retained the following approximate amounts, net of concessions to PaineWebber as
exclusive dealer.
PERIOD ENDED
OCTOBER 31, 1997
------------------
ASIA PACIFIC GROWTH FUND
Earned.......................................... $1,142,055
Retained........................................ $ 67,143
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
FOUR MONTHS JUNE 30,
FISCAL YEAR ENDED ENDED OCTOBER 31, --------------------
OCTOBER 31, 1997 1996 1996 1995
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
EMERGING MARKETS EQUITY FUND
Earned.......................................... $ 10,692 $ 4,109 $ 25,696 $ 28,289
Retained........................................ $ 662 $ 251 $ 1,280 $ 225
<CAPTION>
FISCAL YEARS ENDED
TWO MONTHS AUGUST 31,
FISCAL YEAR ENDED ENDED OCTOBER 31, --------------------
OCTOBER 31, 1997 1996 1996 1995
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
GLOBAL EQUITY FUND
Earned.......................................... $ 132,728 $ 22,360 $229,590 $130,094
Retained........................................ $ 8,400 $ 1,366 $ 10,949 $ 3,353
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------------------
1997 1996 1995
------------------ ----------------- --------
<S> <C> <C> <C>
GLOBAL INCOME FUND
Earned.......................................... $ 29,617 $ 37,752 $ 43,136
Retained........................................ $ 2,950 $ 6,564 $ 12,003
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year (or
period) ended October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A........................... $ 0 $ 0 $ 0 $ 0
Class B........................... $ 7,821 $ 785 $ 249,534 $ 387,664
Class C........................... $10,620 $ 1,792 $ 2,641 $ 8,479
</TABLE>
40
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins or a
Sub-Adviser, as applicable, is responsible for the execution of each Fund's
portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks to
obtain the best net results for a 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 Mitchell Hutchins and the Sub-Advisers generally seek 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 Funds 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. For the period March 25, 1997 (commencement
of operations) to October 31, 1997, Asia Pacific Growth Fund paid $454,243 in
brokerage commissions. For the fiscal year ended October 31, 1997, the four
months ended October 31, 1996, and the fiscal years ended June 30, 1996 and June
30, 1995, Emerging Markets Equity Fund paid $266,325, $80,726, $264,723 and
$531,901, respectively, in brokerage commissions. For the fiscal year ended
October 31, 1997, the two months ended October 31, 1996 and the fiscal years
ended August 31, 1996 and August 31, 1995, Global Equity Fund paid $384,903,
$118,589, $1,472,329 and $850,531, respectively, in brokerage commissions. For
the fiscal years ended October 31, 1997, 1996 and 1995, Global Income Fund paid
$3,330, $0 and $0, respectively, in brokerage commissions.
The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate 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 or GE Investment Management. Each 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 or GE Investment Management are reasonable and
fair. Specific provisions in the Advisory Contracts and the applicable
Sub-Advisory Contracts authorize Mitchell Hutchins and Schroder Capital or GE
Investment Management, respectively, and any of their affiliates that is a
member of a national securities exchange to effect portfolio transactions for
the applicable Funds on such exchange and to retain compensation in connection
with such transactions. Any such transactions will be effected and related
compensation paid only in accordance with applicable SEC regulations. None of
the Funds paid brokerage commissions to PaineWebber or Schroder Capital's or GE
Investment Management's affiliates during its last three fiscal years (or with
respect to Asia Pacific Growth Fund, since operations commenced).
Transactions in futures contracts are executed through futures commission
merchants ('FCMs'), who receive brokerage commissions for their services. The
Funds' 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 or GE Investment
Management, are similar to those in effect with respect to brokerage
transactions in securities.
Consistent with the interests of the Funds and subject to the review of
each board, Mitchell Hutchins or a Sub-Adviser may cause a 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 Funds
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or the Sub-Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins or the
Sub-Adviser, as applicable, to that 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 the fiscal period March 25, 1997
(commencement of operations) to October 31, 1997, Schroder Capital directed
$882,017 in Asia Pacific Growth Fund's portfolio transactions to brokers chosen
because they provided research services, for which Asia Pacific Growth Fund paid
$4,678 in commissions. For the fiscal year ended October 31, 1997, Schroder
Capital directed none of Emerging Markets Equity Fund's portfolio transactions
to brokers chosen for research services. For the fiscal year ended October 31,
1997, GE Investment Management directed none of Global Equity Fund's portfolio
transactions
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to brokers chosen research services. For the fiscal year ended October 31, 1997,
Mitchell Hutchins directed none of Global Income Fund's portfolio transactions
to brokers chosen for research services.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the applicable Sub-Adviser seeks best execution. Although
Mitchell Hutchins and the Sub-Adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the
Sub-Advisers 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, Mitchell Hutchins and the
Sub-Advisers 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. Mitchell Hutchins or
a Sub-Adviser 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 Mitchell Hutchins or the Sub-Adviser
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 Funds effect securities transactions may be used by
Mitchell Hutchins or a Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or a Sub-Adviser by
brokers or dealers in connection with other funds or accounts that either of
them advises may be used in advising the Funds. 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 Mitchell Hutchins under the Advisory
Contracts or the Sub-Advisers under the Sub-Advisory Contracts.
Investment decisions for a Fund and for other investment accounts managed
by Mitchell Hutchins or by a Sub-Adviser 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 a 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 that 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 Funds
are concerned, or upon their ability to complete their entire order, in other
cases it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Funds.
The Funds will not purchase securities that are offered in underwritings in
which PaineWebber or an affiliate of a Sub-Adviser is a member of the
underwriting or selling group, except pursuant to procedures adopted by each
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
a Sub-Adviser not participate in or benefit from the sale to the Funds.
As of October 31, 1997, Global Equity Fund owned common stock issued by the
following company which is a regular broker-dealer for the Fund: Morgan Stanley,
Dean Witter, Discover & Co. ($4,289,901). In addition, the Fund had entered into
repurchase agreement transactions as of that date with State Street Bank & Trust
Company ($10,510,000), also one of its regular broker-dealers.
As of October 31, 1997, Emerging Markets Equity Fund had entered into a
repurchase agreement transaction with the following regular broker-dealer for
the Fund: State Street Bank & Trust Company ($269,000).
As of October 31, 1997, Asia Pacific Growth Fund had entered into
repurchase agreement transactions with the following regular broker-dealers for
the Fund: Union Bank of Switzerland ($2,740,000); State Street Bank & Trust
Company ($1,010,000); and Dresdner Bank AG ($2,740,000).
As of October 31, 1997, Global Income Fund had entered into repurchase
agreement transactions with the following regular broker-dealers for the Fund:
Citicorp Securities Inc. ($20,000,000); Dresdner Securities (USA) Inc.
($1,466,000); Salomon Brothers Inc. ($13,247,000); J.P. Morgan Inc.
($15,368,000); and Union Bank of Switzerland ($30,000,000).
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<PAGE>
PORTFOLIO TURNOVER. The Funds' 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 a 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.
The Funds' respective portfolio turnover rates for the fiscal periods shown
were:
<TABLE>
<S> <C>
ASIA PACIFIC GROWTH FUND
Fiscal Period March 25, 1997 (commencement of operations) to October 31, 1997............................. 13%
EMERGING MARKETS EQUITY FUND
Fiscal Year ended October 31, 1997........................................................................ 87%
Four Months ended October 31, 1996........................................................................ 22%
Fiscal Year ended June 30, 1996........................................................................... 69%
GLOBAL EQUITY FUND
Fiscal Year ended October 31, 1997........................................................................ 86%
Two Months ended October 31, 1996......................................................................... 3%
Fiscal Year ended August 31, 1996......................................................................... 33%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1997........................................................................ 172%
Fiscal Year ended October 31, 1996........................................................................ 126%
</TABLE>
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 Funds
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 tables of
sales charges for Class A shares in the Prospectus. The sales charge payable on
the purchase of Class A shares of the Funds 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 the 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 ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Funds among related accounts at the offering price
applicable to
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<PAGE>
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 sole 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 Funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given if, under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a 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, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each Fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
it is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of its net asset value during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal.
The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ('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 a 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 a 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 an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a 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 both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the 'Initial Account Balance' (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional shares of a 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 20th of a month for monthly,
quarterly, semiannual and annual plans, PaineWebber will arrange for redemption
by the Funds of sufficient Fund shares to provide the withdrawal payments
specified by participants in the Funds' systematic withdrawal plan. The payments
generally are 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
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<PAGE>
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 Class A shares of a Fund may reinstate their
account 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 PLAN(SERVICE MARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a 'PW Fund' and, collectively, the
'PW Funds') are available for purchase through the RMA Resource Accumulation
Plan ('Plan') by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ('RMA accountholders'). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under 'Valuation of Shares') after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of 'dollar cost
averaging.' By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices.
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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:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities held
in the account;
o comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
o 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;
o 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;
o 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;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $100 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
o 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 a Fund will automatically convert to Class A shares of
that 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 to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
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 the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
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'preferential dividends' under the Code and that the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Class B shares 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 this
condition for the availability of the conversion feature will not continue to be
met.
VALUATION OF SHARES
Each Fund determines its net asset value per share separately for each
class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Martin Luther King, Jr. 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 the Sub-Adviser as the primary
market. Securities traded in the OTC market and listed on the Nasdaq Stock
Market ('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 (other than short-term investments that mature in 60 days or
less which are valued as described further below). 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 applicable board. It
should be recognized that judgment often plays a greater role in valuing thinly
traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.
All investments 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 a Fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular 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 the
computation of a 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 applicable board. The
foreign currency exchange transactions of the Funds 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. Under normal market conditions this
rate differs from the prevailing exchange rate by less than one-tenth of one
percent due to the costs of converting from one currency to another.
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PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and are 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 each Fund's Performance Advertisements are calculated according
to the following formula:
<TABLE>
<C> <S>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge (4.0% for Global Income Fund) 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 Funds 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 Funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following tables show performance information for each class of the
Funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average return.
ASIA PACIFIC GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Inception** to October 31, 1997:
Standardized Return*.................. (31.55)% (32.21)% (29.35)%
Non-Standardized Return............... (23.82)% (28.64)% (28.64)%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for Class A, Class B and Class C shares was March 25,
1997. There were no Class Y shares outstanding as of October 31, 1997.
48
<PAGE>
EMERGING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. (5.25)% (6.39)% (2.61)% (0.53)%
Non-Standardized Return............... (0.74)% (1.39)% (1.61)% (0.53)%
Inception** to October 31, 1997:
Standardized Return*.................. (7.27)% (1.76)% (6.85)% (5.90)%
Non-Standardized Return............... (6.13)% 0.34 % (6.85)% (5.90)%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
** The inception date for each Class of shares is as follows: Class A--January
19, 1994, Class B--December 5, 1995, Class C--January 19, 1994, and Class
Y--January 19, 1994.
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. 3.98% 3.05% 7.05% 9.31%
Non-Standardized Return............... 8.87% 8.05% 8.05% 9.31%
Five Years ended October 31, 1997:
Standardized Return*.................. 11.00% N/A N/A N/A
Non-Standardized Return............... 12.04% N/A N/A N/A
Inception** to October 31, 1997:
Standardized Return*.................. 9.90% 7.38% 9.74% 10.92%
Non-Standardized Return............... 10.76% 8.63% 9.74% 10.92%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
** The inception date for each Class of shares is as follows: Class A--November
14, 1991, Class B--August 25, 1995, and Class C--May 10, 1993 and Class
Y--May 10, 1993.
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. 0.75% (0.89)% 3.73% 5.20%
Non-Standardized Return............... 4.99% 4.11 % 4.48% 5.20%
Five years ended October 31, 1997:
Standardized Return*.................. 5.78% 5.49 % 6.10% 6.91%
Non-Standardized Return............... 6.64% 5.81 % 6.10% 6.91%
Ten years ended October 31, 1997:
Standardized Return*.................. N/A 9.02 % N/A N/A
Non-Standardized Return............... N/A 9.02 % N/A N/A
Inception*** to October 31, 1997:
Standardized Return*.................. 6.55% 9.08 % 5.82% 7.43%
Non-Standardized Return............... 7.23% 9.08 % 5.82% 7.43%
</TABLE>
(Footnotes on next page)
49
<PAGE>
(Footnotes from previous page)
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period. Class Y
shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
** The inception date for each Class of shares is as follows: Class A--July 1,
1991, Class B--March 20, 1987, and Class C--July 2, 1992 and Class Y--August
26, 1991.
YIELD. Yields used in Global Income Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to a Class of
shares for a 30-day period ('Period'), net of expenses attributable to such
Class, by the average number of shares of such Class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:
a-b 6
YIELD = 2 [( --- +1) -1]
cd
<TABLE>
<S> <C>
where: a = interest earned during the Period attributable to a Class of shares
b = expenses accrued for the Period attributable to a Class of shares (net of
reimbursements)
c = the average daily number of shares of a Class outstanding during the Period that were
entitled to receive dividends
d = the maximum offering price per share (in the case of Class A shares) or the net asset
value per share (in the case of Class B and Class C shares) on the last day of the
Period.
</TABLE>
Except as noted below, in determining interest income earned during the
Period (variable 'a' in the above formula), Global Income Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the Fund, interest earned during the Period is then determined by totalling
the interest earned on all debt obligations. For purposes of these calculations,
the maturity of an obligation with one or more call provisions is assumed to be
the next date on which the obligation reasonably can be expected to be called
or, if none, the maturity date. With respect to Class A shares, in calculating
the maximum offering price per share at the end of the Period (variable 'd' in
the above formula) the Fund's current maximum 4% initial sales charge on Class A
shares is included. For the 30-day period ended October 31, 1997, the yields for
its Class A shares, Class B shares, Class C shares and Class Y shares were
6.06%, 5.52%, 5.63%, and 6.66% respectively.
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their 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 (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ('S&P 500'), the Dow Jones Industrial Average, the
International Finance Corporation Global Total Return Index, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman
Brothers Government/Corporate Bond Index, other similar Lehman Brothers indices
or components thereof, 30-year and 10-year U.S. Treasury bonds, the Morgan
Stanley Capital International Perspective Indices, the Morgan Stanley Capital
International Energy Sources Index, the Standard & Poor's Oil Composite Index,
the Morgan Stanley Capital International World Index (including Asia Pacific
regional
50
<PAGE>
indices), the Salomon Brothers Non-U.S. Dollar Index, the Salomon Brothers
Non-U.S. World Government Bond Index, the Salomon Brothers World Government
Index, other similar Salomon Brothers indices or components thereof and changes
in the Consumer Price Index as published by the U.S. Department of Commerce. The
Funds 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 Funds and comparative mutual fund data and
ratings reported in independent periodicals, including (but not limited to) 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 Funds 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 a Fund investment are reinvested in
additional Fund shares, any future income or capital appreciation of a 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 a Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Funds may also compare their 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(Registered) Money Markets. In comparing the
Funds' performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Funds are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the Funds generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term debt securities. An
investment in any Fund involves greater risks than an investment in either a
money market fund or a CD.
51
<PAGE>
Each Fund may also compare its performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
[CHART]
PLOT POINTS
S&P 500 TR U.S. LT Gvt TR U.S. 30 Day Tbill TR U.S. Inflation
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $10,327 $9,851
1927 $15,347 $11,739 $10,649 $9,646
1928 $22,040 $11,751 $11,028 $9,553
1929 $20,185 $12,153 $11,552 $9,572
1930 $15,159 $12,719 $11,830 $8,994
1931 $8,590 $12,044 $11,957 $8,138
1932 $7,886 $14,073 $12,072 $7,300
1933 $12,144 $14,062 $12,108 $7,337
1934 $11,969 $15,472 $12,128 $7,486
1935 $17,674 $16,243 $12,148 $7,710
1936 $23,669 $17,464 $12,170 $7,803
1937 $15,379 $17,504 $12,207 $8,045
1938 $20,165 $18,473 $12,205 $7,821
1939 $20,082 $19,570 $12,208 $7,784
1940 $18,117 $20,761 $12,208 $7,859
1941 $16,017 $20,955 $12,216 $8,622
1942 $19,275 $21,629 $12,248 $9,423
1943 $24,267 $22,080 $12,291 $9,721
1944 $29,060 $22,702 $12,332 $9,926
1945 $39,649 $25,139 $12,372 $10,149
1946 $36,449 $25,113 $12,416 $11,993
1947 $38,529 $24,454 $12,478 $13,073
1948 $40,649 $25,285 $12,580 $13,426
1949 $48,287 $26,916 $12,718 $13,184
1950 $63,601 $26,932 $12,870 $13,948
1951 $78,875 $25,873 $13,063 $14,767
1952 $93,363 $26,173 $13,279 $14,898
1953 $92,439 $27,125 $13,521 $14,991
1954 $141,084 $29,075 $13,638 $14,916
1955 $185,614 $28,699 $13,852 $14,972
1956 $197,783 $27,096 $14,193 $15,400
1957 $176,457 $29,117 $14,639 $15,866
1958 $252,975 $27,342 $14,864 $16,145
1959 $283,219 $26,725 $15,303 $16,387
1960 $284,549 $30,407 $15,711 $16,629
1961 $361,060 $30,703 $16,045 $16,741
1962 $329,545 $32,818 $16,483 $16,946
1963 $404,685 $33,216 $16,997 $17,225
1964 $471,388 $34,381 $17,598 $17,430
1965 $530,081 $34,625 $18,289 $17,765
1966 $476,737 $35,889 $19,159 $18,361
1967 $591,038 $32,594 $19,966 $18,920
1968 $656,415 $32,509 $21,005 $19,814
1969 $600,590 $30,860 $22,388 $21,024
1970 $624,653 $34,596 $23,849 $22,179
1971 $714,058 $39,173 $24,895 $22,924
1972 $849,559 $41,400 $25,851 $23,706
1973 $725,003 $40,942 $27,643 $25,792
1974 $533,110 $42,725 $29,855 $28,939
1975 $731,443 $46,653 $31,588 $30,969
1976 $905,842 $54,470 $33,193 $32,458
1977 $840,766 $54,095 $34,893 $34,656
1978 $895,922 $53,458 $37,398 $37,784
1979 $1,061,126 $52,799 $41,279 $42,812
1980 $1,405,137 $50,715 $45,917 $48,120
1981 $1,336,161 $51,657 $52,671 $52,421
1982 $1,622,226 $72,507 $58,224 $54,451
1983 $1,987,451 $72,979 $63,347 $56,518
1984 $2,111,991 $84,274 $69,586 $58,753
1985 $2,791,168 $110,371 $74,960 $60,968
1986 $3,306,709 $137,446 $79,580 $61,657
1987 $3,479,675 $133,716 $83,929 $64,376
1988 $4,064,583 $146,650 $89,257 $67,221
1989 $5,344,555 $173,215 $98,728 $70,345
1990 $5,174,990 $183,924 $104,286 $74,640
1991 $6,755,922 $219,420 $110,121 $76,927
1992 $7,274,115 $237,092 $113,982 $79,159
1993 $8,000,785 $280,339 $117,284 $81,334
1994 $8,105,379 $258,556 $121,862 $83,510
1995 $11,139,184 $340,436 $128,681 $85,630
1996 $13,709,459 $337,265 $135,381 $88,475
1997 $18,272,762 $390,736 $142,496 $90,092
The chart is shown for illustrative purposes only and does not represent any
Fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investment results. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in certain markets from
time to time. Stocks are measured by the S&P 500, an unmanaged weighted index
comprising 500 widely held common stock and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
- ------------------
Source: Ibbotson Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex
A. Sinquefield).
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1925 to 1997, stocks beat all
other traditional asset classes. A $10,000 investment in the S&P 500 grew to
$18,272,762, significantly more than any other investment.
TAXES
In order to continue to qualify for treatment as a RIC under the Code, each
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 gains and net gains from certain foreign currency
transactions) ('Distribution Requirement') and must meet several additional
requirements. For each Fund, 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
52
<PAGE>
forward contracts) derived with respect to its business of investing in
securities or those currencies ('Income Requirement'); (2) 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 (3) 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. If a Fund failed to qualify for
treatment as a RIC for any taxable year, it would be taxed as an ordinary
corporation on its taxable income for that year (even if that income was
distributed to its shareholders) and all distributions out of its earnings and
profits would be taxable to its shareholders, as dividends (that is, ordinary
income).
Dividends and other distributions declared by a 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.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of a 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, and gains realized, by a Fund on foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions (collectively 'foreign taxes') that would
reduce the yield and/or total return on its securities. However, tax conventions
between certain countries and the United States may reduce or eliminate foreign
taxes and many foreign countries do not impose taxes on capital gains in respect
of investments by foreign investors. If more than 50% of the value of a 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 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 foreign 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. If a Fund makes
this election, it will report to its shareholders, shortly after each taxable
year, their respective shares of the foreign taxes paid by the Fund on its
income from foreign countries and U.S. possession sources.
Each 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.
Each Fund may invest in the stock of 'passive foreign investment companies'
('PFICs') if such stock is a permissible investment. A PFIC is a foreign
corporation--other than a 'controlled foreign corporation' (i.e., a foreign
corporation of which, on any day during its taxable year, more than 50% of the
total voting power of its voting stock or the total value of all of its stock is
owned, directly, indirectly, or constructively, by 'U.S.
53
<PAGE>
shareholders,' defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which a
Fund is U.S. shareholder (effective for their taxable years beginning November
1, 1998)--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, a 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 such 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 a 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 of its requirements.
Effective for their taxable years beginning November 1, 1998, each Fund may
elect to 'mark to market' its stock in any PFIC. 'Marking-to-market,' in this
context, means including in ordinary income each taxable year the excess, if
any, of the fair market value of a PFIC's stock over a Fund's adjusted basis
therein as of the end of that year. Pursuant to the election, a Fund also would
be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of
its adjusted basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market gains with
respect to that stock included by the Fund for prior taxable years. A Fund's
adjusted basis in each PFIC's stock with respect to which it has made this
election will be adjusted to reflect the amounts of income included and
deductions taken under the election. Regulations proposed in 1992 would have
provided a similar election with respect to the stock of certain PFIC's.
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 amount,
character and timing of recognition of the gains and losses a 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 a Fund with respect
to its business of investing in securities or foreign currencies, will qualify
as permissible income under the Income Requirement.
A Fund may acquire zero coupon or other securities issued with original
issue discount or Treasury Inflation-Protection Securities ('TIPS'), on which
principal is adjusted based on changes in the Consumer Price Index. A Fund must
include in its gross income the portion of the original issue discount
(including the amount of any principal increases on TIPS) that accrues on such
securities during the taxable year, even if the Fund receives no corresponding
payment on them during the year. Because a Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued original issue discount, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
OTHER INFORMATION
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the Fund
or its Trust. However, each 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 board members or by
54
<PAGE>
any officers or officer by or on behalf of the Trust or the Fund, the board
members or any of them in connection with the Trust. Each Declaration of Trust
provides for indemnification from the relevant 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 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 would be entitled to reimbursement from the
general assets of the relevant Fund. The board members intend to conduct each
Fund's operations in such a way as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Fund.
Prior to November 1, 1995, the name of Emerging Markets Equity Fund was
'Mitchell Hutchins/Kidder Peabody Emerging Markets Equity Fund.' Prior to
February 13, 1995, the name of the Fund was 'Kidder, Peabody Emerging Markets
Equity Fund.' Prior to November 10, 1995, the Fund's Class C shares were called
'Class B' shares, and the Fund's Class Y shares were called 'Class C'shares. New
Class B shares were not offered prior to December 5, 1995.
Prior to August 25, 1995, the name of Global Equity Fund was 'Mitchell
Hutchins/Kidder, Peabody Global Equity Fund.' Prior to February 13, 1995, the
name of the Fund was 'Kidder, Peabody Global Equity Fund.' Prior to November 10,
1995, the Fund's Class B shares were known as 'Class E' shares and its Class C
shares were known as 'Class B' shares, and the Fund's Class Y shares were known
as 'Class C' shares.
Prior to November 10, 1995, Global Income Fund's Class C shares were known
as 'Class D' shares, and the Fund's Class Y shares were known as 'Class C'
shares.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the 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. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Funds.
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 Asia Pacific Growth Fund, Emerging Markets
Equity Fund and Global Equity Fund. Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, serves as independent accountants for Global
Income Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for its last fiscal year (or
period) is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors or independent accountants appearing therein are
incorporated herein by this reference.
55
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APPENDIX
RATINGS INFORMATION
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
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risk 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 payment 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 Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the
A-1
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obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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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 A FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
Investment Policies and Restrictions........... 1
Hedging and Other Strategies Using Derivative
Instruments.................................. 17
Trustees and Officers; Principal Holders of
Securities................................... 25
Investment Advisory and Distribution
Arrangements................................. 33
Portfolio Transactions......................... 41
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 43
Conversion of Class B Shares................... 46
Valuation of Shares............................ 47
Performance Information........................ 48
Taxes.......................................... 52
Other Information.............................. 54
Financial Statements........................... 55
Appendix....................................... A-1
(Copyright)1998 PaineWebber Incorporated
PaineWebber
Asia Pacific
Growth Fund
PaineWebber
Emerging Markets
Equity Fund
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
- --------------------------------------------------------------------------------
Statement of Additional Information
March 1, 1998
- --------------------------------------------------------------------------------
PAINEWEBBER
