PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above are series of professionally managed open-end
management investment companies (each a "Trust"). PaineWebber Global Equity Fund
is a diversified series of PaineWebber Investment Trust ("Investment Trust").
PaineWebber Global Income Fund is a non-diversified series of PaineWebber
Investment Series ("Investment Series"). PaineWebber Asia Pacific Growth Fund is
a diversified series of PaineWebber Managed Investments Trust ("Managed Trust").
PaineWebber Emerging Markets Equity Fund is a diversified series of PaineWebber
Investment Trust II ("Investment Trust II").
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
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. Invista Capital Management,
LLC ("Invista") serves as sub-adviser for the foreign investments of Global
Equity Fund. Schroder Capital Management International Inc. ("Schroder Capital")
serves as sub-adviser for Asia Pacific Growth Fund and Emerging Markets Equity
Fund.
Portions of each fund's Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information. The Annual Reports
accompany this Statement of Additional Information. You may obtain an additional
copy of a fund's Annual Report by calling toll-free 1-800-647-1568.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the funds' current Prospectus, dated March 1,
1999. A copy of the Prospectus may be obtained by calling any PaineWebber
Financial Advisor or correspondent firm or by calling toll-free 1-800-647-1568.
This Statement of Additional Information is dated March 1, 1999.
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THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
PAINEWEBBER GLOBAL EQUITY FUND'S investment objective is long-term growth
of capital. The fund invests primarily in equity securities issued by companies
in developed foreign countries, as well as in the United States. Under normal
circumstances, the fund invests at least 80% of its total assets in securities
of issuers in the United States and countries represented in the MSCI Europe,
Australia and Far East Index ("EAFE Index"). The EAFE Index is a well known
index that reflects most major equity markets outside the United States. The
fund may invest up to 20% of its total assets in securities of issuers located
in other countries (for example, Canada and emerging markets).
Global Equity Fund normally invests in at least three countries, one of
which is typically the United States. The fund considers an issuer to be located
in the country in which the issuer (a) is organized, (b) derives at least 50% of
its revenues or profits from goods produced or sold, investments made or
services performed, (c) has at least 50% of its assets situated or (d) has the
principal trading market for its securities. The fund normally invests at least
65% of its total assets in equity securities of foreign and U.S. companies.
When Mitchell Hutchins or Invista believes it is consistent with Global
Equity Fund's investment objective, the fund may invest up to 35% of its total
assets in investment grade bonds that are issued by corporate or governmental
entities and that have maturities no longer than seven years. The fund may
invest up to 10% of its net assets in convertible securities rated below
investment grade. When Mitchell Hutchins or Invista considers market, economic,
political or currency conditions abroad to be unstable, the fund may assume a
temporary defensive position by investing all or a significant portion of its
assets in securities of U.S. and Canadian issuers or by holding cash or
short-term money market instruments. The fund may invest up to 35% of its total
assets in cash or investment grade money market instruments for liquidity
purposes, pending investment in other securities or to reinvest cash collateral
from securities lending.
Mitchell Hutchins reevaluates the allocation of the fund's assets between
U.S. and foreign securities monthly and does not expect to reallocate the fund's
assets to reflect relatively minor changes (that is, less than 5%) in the asset
allocation model employed. When Mitchell Hutchins determines that a reallocation
of the fund's assets is appropriate, the fund may effect the reallocation by
using cash available from the purchase of fund shares or by selectively selling
securities in a region to meet share redemption requests in addition to buying
or selling portfolio securities specifically to implement a reallocation. The
fund also may use futures contracts and forward currency contracts to adjust its
exposure to U.S. and foreign stock markets. Mitchell Hutchins determines the
extent to which the fund uses futures contracts and forward currency contracts
for this purpose and is responsible for implementing such transactions.
Mitchell Hutchins uses its proprietary Factor Valuation Model to identify
possible U.S. investments for the fund. While Mitchell Hutchins tends to favor
stocks that rank high in all categories considered by the Factor Valuation
Model, the fund may invest in companies that rank high in only a few categories.
Mitchell Hutchins or Invista may sell a portfolio security for a number of
reasons, such as the company reporting lower earnings than expected, the
company's stock price reaching the target price set by research analysts or a
decline in the company's ranking by the Factor Valuation Model.
Global Equity Fund may invest up to 10% of its net assets in illiquid
securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. When-issued and delayed-delivery securities may not exceed 10% of
the fund's net assets. The fund may borrow money from banks or through reverse
repurchase agreements for temporary or emergency purposes but not in excess of
20% of its total assets. The fund may invest in the securities of other
investment companies and may sell short "against the box."
PAINEWEBBER GLOBAL INCOME FUND'S primary investment objective is high
current income consistent with prudent investment risk; capital appreciation is
a secondary objective. The fund invests principally in high-quality bonds issued
or guaranteed by foreign governments, the U.S. government, their respective
agencies or instrumentalities or supranational organizations or issued by U.S.
or foreign companies.
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Global Income Fund's portfolio consists primarily of bonds rated within
one of the two highest grades assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's")
or another nationally or internationally recognized statistical rating
organization ("rating agency") or, if unrated, determined by Mitchell Hutchins
to be of comparable quality. Normally, at least 65% of the fund's total assets
consists of high-quality bonds (and receivables from the sale of such bonds)
denominated in foreign currencies or U.S. dollars of issuers located in at least
three of the following countries: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United
Kingdom and the United States. No more than 40% of the fund's total assets is
normally invested in securities of issuers located in any one country other than
the United States. At least 65% of the fund's total assets normally is invested
in income-producing securities, a term that may include zero coupon securities
and other bonds sold with a discount. Up to 5% of the fund's total assets may be
invested in bonds convertible to equity securities.
Global Income Fund may invest up to 35% of its total assets in bonds rated
below the two highest grades assigned by a rating agency. Except as noted below,
these securities must be investment grade (that is, rated at least BBB by S&P,
Baa by Moody's or comparably rated by another rating agency or, if unrated,
determined by Mitchell Hutchins to be of comparable quality). Within this 35%
limitation, the fund may invest up to 20% of its total assets in bonds that are
below investment grade. These bonds may be rated as low as D by S&P, C by
Moody's or comparably rated by another rating agency or, in the case of bonds
assigned a short-term debt rating, as low as D by S&P or comparably rated by
another rating agency or, if not so rated, determined by Mitchell Hutchins to be
of comparable quality. Bonds rated D by S&P are in payment default or the rating
is assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. Mitchell Hutchins will
purchase these securities for the fund only when it concludes that the
anticipated return to the fund on the investment warrants exposure to the
additional level of risk. Lower-rated bonds are often issued by businesses and
governments in emerging markets. Because the fund may also invest in emerging
market bonds that are investment grade, the fund's total investment in emerging
market bonds may exceed 20% of its total assets.
In the event that, due to a downgrade of one or more bonds, an amount in
excess of 20% of Global Income Fund's total assets is held in securities rated
below investment grade and comparable unrated securities, Mitchell Hutchins will
engage in an orderly disposition of such securities to the extent necessary to
ensure that the fund's holdings of these securities do not exceed 20% of its
total assets.
Global Income Fund may invest up to 35% of its total assets in
mortgage-backed securities of U.S. or foreign issuers that are rated in one of
the two highest rating categories by S&P, Moody's or another rating agency or,
if unrated, determined by Mitchell Hutchins to be of comparable quality. Up to
20% of the fund's total assets may be invested in bonds that are not paying
current income. The fund may purchase these bonds if Mitchell Hutchins believes
that they have a potential for capital appreciation. The fund also may invest in
secured and unsecured fixed or floating rate loans in the form of participations
and assignments.
Global Income Fund may invest up to 35% of its total assets in cash or
investment grade money market instruments as part of its ordinary investment
activities. The fund's investment of cash collateral from securities lending in
these money market instruments is not subject to this 35% limitation, and there
is no limitation on the fund's investments in short-term bonds denominated in
foreign currencies.
Global Income Fund may invest up to 10% of its net assets in illiquid
securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
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PAINEWEBBER ASIA PACIFIC GROWTH FUND'S investment objective is long-term
capital appreciation. The fund seeks to achieve its objective by investing
primarily in equity securities of companies in the Asia Pacific Region, except
Japan. The Fund considers the "Asia Pacific Region" to be the region located
south of the former Soviet Union, east of Afghanistan and Iran and west of the
International Date Line, but excluding Japan. The Asia Pacific Region countries
that currently have established securities markets and that Schroder Capital
normally considers for investments by the fund include Australia, China, Hong
Kong, India, Indonesia, Malaysia, New Zealand, Pakistan, the Philippines,
Singapore, South Korea, Sri Lanka, Taiwan and Thailand. The fund may also invest
in other Asia Pacific Region countries whose markets become sufficiently
established. Except under unusual conditions, the fund invests in a minimum of
three, and generally in more, Asia Pacific Region countries. The fund invests
across a broad spectrum of industries, including trade, finance, real estate,
transportation, communications, energy, construction, manufacturing, services,
food processing and others. The mix of industries and countries changes over
time as investment opportunities change.
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Asia Pacific Growth Fund defines Asia Pacific Region companies as
companies:
. that are organized under the laws of countries in the Asia Pacific
Region that now or in the future permit foreign investors to
participate in their stock markets,
. that regardless of where organized, and as determined by Schroder
Capital, either (1) derive at least 50% of their revenues from goods
produced or sold, investments made or services performed in Asia
Pacific Region countries or (2) maintain at least 50% of their
assets in Asia Pacific Region countries, or
. for which the principal trading market is an exchange or
over-the-counter market in the Asia Pacific Region.
Each year, the Schroder Group researches and conducts on-site visits with
approximately 1,200 companies in Asia Pacific Region countries. Of those
companies, the Schroder Group's investment professionals further develop
extensive management contacts with, and produce independent forecasts of
earnings estimates for, approximately 550 companies. Schroder Capital's analysis
includes small and medium-size companies, as well as larger capitalization
companies.
Asia Pacific Growth Fund's investments have included securities issued by
Malaysian companies. As of the date of this Statement of Additional Information,
restrictions imposed by the Malaysian government may impose a significant exit
levy on repatriated investments.
Under normal market conditions, Asia Pacific Growth Fund invests at least
65% of its total assets in equity securities of Asia Pacific Region companies.
Most of the equity securities purchased by the fund are expected to be traded on
a foreign stock exchange or in a foreign over-the-counter market. When Schroder
Capital believes it is consistent with the fund's investment objective, the fund
may invest up to 10% of its total assets in convertible and non-convertible
bonds (which may be below investment grade) that are issued or guaranteed by
Asia Pacific Region issuers, including obligations of sovereign governmental
issuers.
Asia Pacific Growth Fund may invest up to 35% of its total assets in cash
or investment grade money market instruments for liquidity purposes, pending
investment in other securities or to reinvest cash collateral from securities
lending. Asia Pacific Growth Fund may invest up to 15% of its net assets in
illiquid securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 33-1/3% of
its total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
PAINEWEBBER EMERGING MARKETS EQUITY FUND'S investment objective is
long-term capital appreciation. The fund invests in a diversified portfolio
consisting primarily of equity securities of issuers in emerging markets.
"Emerging markets" are the markets in all the countries not included in the
Morgan Stanley Capital International World Index, an index of major world
economies. Under normal market conditions, the fund invests at least 65% of its
total assets in equity securities of issuers located in emerging market
countries and maintains investments in at least three emerging market countries.
The fund considers issuers to be located in an emerging market country if
. the principal securities trading market for the issuer is in an
emerging market country,
. the issuer derives 50% or more of its annual revenue or profit from
either goods produced, sales made, investments made or services
performed in emerging market countries, or
. the issuer is organized under the laws of an emerging market
country.
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Generally, Schroder Capital will invest no more than 35% of Emerging
Markets Equity Fund's total assets in any single country. The fund also does not
invest 25% or more of its total assets in any single industry. The fund
diversifies its investments within each emerging market by investing in a number
of local companies that Schroder believes are characterized by attractive
valuation relative to expected growth. Schroder Capital attempts to spread the
fund's investments over geographic as well as economic sectors.
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There are currently over 60 newly industrializing and developing countries
with equity markets. A number of these emerging markets are not yet easily
accessible to foreign investors and have unattractive tax barriers or
insufficient liquidity to make significant investments by the fund feasible or
attractive. However, many of the largest of the emerging market countries have
liberalized access in recent years, and more are expected to do so in the
future.
Schroder Capital believes that one of its key strengths is the Schroder
Group's worldwide network of local research offices, many long established, in
emerging market countries. Each year, the Schroder Group researches and conducts
on-site visits with approximately 1,200 companies in emerging market countries.
Of those companies, the Schroder Group's investment professionals further
develop extensive management contacts with, and produce independent forecasts of
earnings estimates for, approximately 1,000 companies. Schroder Capital's
analysis includes small and medium-sized companies, as well as larger
capitalization companies.
Emerging Markets Equity Fund may invest up to 35% of its total assets in
cash or investment grade money market instruments for liquidity purposes,
pending investment in other securities or to reinvest cash collateral from
securities lending. The fund may invest up to 15% of its net assets in illiquid
securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33-1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 33-1/3% of
its total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the funds' investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on their ability
to use the investments or techniques discussed in these documents.
EQUITY SECURITIES. Equity securities (referred to as "stocks" in the
Prospectus) include common stocks, most preferred stocks and securities that are
convertible into them, including common stock purchase warrants and rights,
equity interests in trusts, partnerships, joint ventures or similar enterprises
and depository receipts. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. Depository receipts typically are issued by banks or trust companies
and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment.
BONDS. Bonds are fixed or variable rate debt obligations, including bills,
notes, debentures, and similar instruments and securities and various money
market instruments. Mortgage- and asset-backed securities are types of bonds,
and certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
"perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond.
Credit risk can be affected by many factors, including adverse changes in the
issuer's own financial condition or in economic conditions.
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CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other rating
agencies are private services that provide ratings of the credit quality of debt
obligations 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 Moody's and S&P
determine ratings for mortgage-backed securities includes consideration of the
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likelihood of the receipt by security holders of all distributions, the nature
of the underlying assets, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with these securities. Not even the
highest such ratings represents an assessment of the likelihood that principal
prepayments will be made by obligors on the underlying assets or the degree to
which such prepayments may differ from that originally anticipated, nor do such
ratings 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.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a debt security's value or
its liquidity and do not guarantee the performance of the issuer. Rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies may
downgrade the rating of a bond. 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.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins or a sub-adviser to be of comparable
quality. Moody's considers bonds rated Baa (its lowest investment grade rating)
to have speculative characteristics. This means that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest paymenets than is the case for higher rated
bonds.
Non-investment grade bonds are rated Ba or lower by Moody's, BB or lower
by S&P, comparably rated by another rating agency or determined by Mitchell
Hutchins or a sub-adviser to be of comparable quality. A fund's investments in
non-investment grade bonds entail greater risk than its investments in higher
rated bonds. Non-investment grade bonds, which are sometimes referred to as
"high yield" bonds or "junk" bonds, are considered predominantly speculative
with respect to the issuer's ability to pay interest and repay principal and may
involve significant risk exposure to adverse conditions. Non-investment grade
bonds 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 by
collateral and will not receive payment until more senior claims are paid in
full.
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The market for non-investment grade bonds, 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 bonds 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 bonds 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 bonds 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.
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INVESTING IN FOREIGN SECURITIES. Investing in foreign securities involves
more risks than investing in the United States. The value of foreign securities
is subject to economic and political developments in the countries where the
companies operate and to changes in foreign currency values. Investments in
foreign securities involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject. These
risks may include expropriation, confiscatory taxation, withholding taxes on
interest 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 in securities that are traded on recognized exchanges or
over-the-counter, from time to time foreign securities may be difficult to
liquidate rapidly without significantly depressing the price of such securities.
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. Additionally, the costs of investing
outside the United States frequently are higher than those in the United States.
These costs include relatively higher brokerage commissions and foreign custody
expenses.
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, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter 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.
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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.
FOREIGN SOVEREIGN DEBT. Investment by the funds in bonds 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.
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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/or to
pay 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 Sovereign Debt
holdings.
SPECIAL CONSIDERATIONS RELATING TO EMERGING MARKET INVESTMENTS. Investing
in securities of issuers located in emerging market countries involves
additional risks. 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. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may result in a lack of liquidity and in price
volatility. Issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
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.
Currency restrictions imposed by the Malaysian government may impose a
significant exit levy on repatriated investments.
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If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income and 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 under the Internal Revenue Code. In such case, it would become subject
to federal income tax on all of its income and net gains. To avoid these adverse
consequences, the fund would be required to distribute as dividends amounts that
are greater than the total amount of cash it actually receives. These
distributions must be made from the fund's cash assets or, if necessary, from
the proceeds of sales of portfolio securities. A fund will not be able to
purchase additional securities with cash used to make such distributions and its
current income and the value of its shares may ultimately be reduced as a
result.
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
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emerging market countries 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 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. Changes in the leadership or policies of
these countries may halt the expansion of foreign investment or reverse any
liberalization of foreign investment policies now occurring. 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 could be asset expropriations or
confiscatory levels of taxation that could affect a fund.
Emerging markets include formerly communist countries of Eastern Europe,
Russia and the other countries that once formed the Soviet Union, and China.
Upon the accession to power of communist regimes approximately 50 to 80 years
ago, the governments of a number of these countries seized a large amount of
property. The claims of many property owners against those governments were
never finally settled. There can be no guarantee that a fund's investments in
these countries, if any, would not also be seized or otherwise taken away, in
which case the fund could lose its entire investment in the country involved.
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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 have created social, economic and political problems. Such problems
also have occurred in other emerging markets throughout the world. As in some
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other regions, several Asia Pacific Region countries have or in the past have
had hostile relationships with neighboring nations or have experienced internal
insurgency.
The funds may invest in Hong Kong, which reverted to Chinese
administration 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, business confidence and market and business performance
in Hong Kong could be significantly affected by adverse political developments.
A fund's investments in Hong Kong may be subject to the same or similar risks as
an investment in China.
The economies of most of the Asia Pacific Region countries and many other
emerging markets 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 Union. 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.
CURRENCY-LINKED INVESTMENTS. The funds may invest in securities that are
indexed to specific foreign currency exchange rates. The principal amount of
these securities may be adjusted up or down (but not below zero) at maturity to
reflect changes in the exchange rate between currencies. A fund may experience
loss of principal due to these adjustments.
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. Currency risk is the risk that
changes in foreign exchange rates may reduce the U.S. dollar value of a fund's
foreign investments. A fund's share value may change significantly when its
investments are denominated in foreign currencies. Generally, currency exchange
rates are determined by supply and demand in the foreign exchange markets and
the relative merits of investments in different countries. Currency exchange
rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
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 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.
Starting in mid-1997, some Asia Pacific Region countries began to
experience currency devaluations that resulted in high interest rate levels and
sharp reductions in economic activity. Emerging markets outside the Asia Pacific
Region, such as Latin American countries or Russia and other former members of
the Soviet Union, also are susceptible to diminished prospects for corporate
earnings growth and political, social or economic instability as a result of
currency crises or related events.
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EUROPEAN CURRENCY UNIFICATION. Several European countries are in the
process of adopting a single currency, the euro. Effective January 1, 1999,
exchange rates for countries participating in the Economic and Monetary Union
became irrevocably fixed. A newly created European Central Bank (ECB) will
attempt to manage monetary policy for this region. Pre-existing national
currencies will continue to be valid until they are replaced by euro coins and
bank notes, which is expected to occur by sometime in 2002. The participating
countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain.
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These changes may significantly impact European capital markets, and
related risks may increase volatility in world capital markets. This, in turn,
may impact a fund's share price. Risks include:
. The completion of currency unification could be delayed. This could
cause uncertainty in world markets and create unanticipated expenses
as a result of having to undo changes made in anticipation of the
timely completion of different stages of currency unification;
. Exchange rates between the U.S. dollar and European currencies may
become more volatile and unstable;
. European entities may face substantial conversion costs which may
not be accurately anticipated and could impact issuer profitability
and creditworthiness;
. Institutional investors may shift assets away from certain European
currencies because of the uncertainty, making markets less liquid;
. Some major European countries, including the United Kingdom, Sweden
and Denmark, initially are not participating in currency
unification, and it is not known whether they will participate in
the future. This non-participation could lead to greater volatility
in exchange rates between the currencies of countries participating
in the euro and those that are not;
. There is a risk that some contracts (e.g., bank loan agreements,
derivatives contracts, and foreign exchange contracts) may become
unenforceable when the currencies are unified. Certain political
units, including The European Council and the State of New York,
have enacted laws or regulations designed to ensure that financial
contracts will continue to be enforceable after the euro's
introduction; however, it is possible that these laws will not be
completely effective in preventing disputes from arising. Disputes
and litigation could negatively impact a fund's portfolio holdings
and may create uncertainties in the valuation of financial contracts
a fund could hold;
. Suitable clearing, settlement and operational systems may not be
ready for various stages of the euro conversion;
. European interest rates and exchange rates could become more
volatile as the ECB and market participants search for a common
understanding of policy targets and instruments; and
. A participating country will no longer be able to use monetary
policy changes to address economic or political concerns that affect
only that country.
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, as amended, and market availability and may
result in special federal income tax consequences.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the
U.S. government, its agencies or its instrumentalities (collectively, "U.S.
government securities"). U.S. government securities include mortgage-backed
securities issued or guaranteed by government agencies or
government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer
or, in the case of mortgage-backed securities, by pools of assets.
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Treasury inflation-protected securities ("TIPS") are Treasury bonds on
which the principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest on TIPS is payable semi-annually on the adjusted
principal value. The principal value of TIPS would decline during periods of
deflation, but the principal amount payable at maturity would not be less than
the original par amount. If inflation is lower than expected while a fund holds
TIPS, the fund may earn less on the TIPS than it would on conventional Treasury
bonds.
ZERO COUPON AND OTHER OID SECURITIES. Zero coupon securities are
securities on which no periodic interest payments are made and are sold at a
deep discount from their face value. The buyer of these securities receives a
rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.
The funds may invest in other securities with original issue discount
("OID"), a term that means the securities are issued at a price that is lower
than their value at maturity, even though the securities also may make cash
payments of interest prior to maturity. These OID securities usually trade at a
discount from their face value.
Zero coupon securities are generally more sensitive to changes in interest
rates than debt obligations of comparable maturities that make current interest
payments. This means that when interest rates fall, the value of zero coupon
securities rises more rapidly than securities paying interest on a current
basis. However, when interest rates rise, their value falls more dramatically.
Other OID securities also are subject to greater fluctuations in market value in
response to changing interest rates than bonds of comparable maturities that
make current distributions of interest in cash. Federal tax law requires that
the holder of a zero coupon or other OID security include in gross income each
year the OID that accrues on the security for the year, even though the holder
receives no interest payment on the security during the year. Accordingly, to
continue to qualify as a regulated investment company and avoid imposition of
federal income and excise taxes, a fund may be required to distribute as
dividends amounts that are greater than the total amount of cash it actually
receives. These distributions must be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. A fund will not
be able to purchase additional securities with cash used to make such
distributions and its current income and the value of its shares may ultimately
be reduced as a result.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
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Before conversion, convertible securities have characteristics similar to
non-convertible bonds 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 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.
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MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are 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), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
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. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and may
be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional
bonds is that interest and principal payments are made more frequently (usually
monthly) and that principal may be repaid at any time. When interest rates go
down and homeowners refinance their mortgages, mortgage-backed securities may be
paid off more quickly than investors expect. When interest rates rise,
mortgage-backed securities may be paid off more slowly than originally expected.
Changes in the rate or "speed" of these prepayments can cause the value of
mortgage-backed securities to fluctuate rapidly.
Because of prepayments, mortgage-backed securities may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security.
CMO classes may be specially structured in a manner that provides any of a
wide variety of investment characteristics, such as yield, effective maturity
and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest only ("IO") and principal only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. Some IOs and POs, as
well as other CMO classes, are structured to have special protections against
the effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances. Inverse floating rate CMO classes also
may be extremely volatile. These classes pay interest at a rate that decreases
when a specified index of market rates increases and vice versa.
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The market for privately issued mortgage-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets, but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.
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During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which a fund may invest, including IO and PO
classes of mortgage-backed securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins or a sub-adviser, as
applicable, seeks to manage the funds' investments in mortgage-backed securities
so that the volatility of the fund's portfolio, taken as a whole, is consistent
with the fund's investment objective. If market interest rates or other factors
that affect the volatility of securities held by the fund change in ways that
Mitchell Hutchins or a sub-adviser does not anticipate, a fund's ability to meet
its investment objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. 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. 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 represent a pro rata interest in a
pool of mortgages. These instruments 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.
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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)
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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 PO class) on
a monthly, quarterly or semi-annual 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 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 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.
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SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES--The yield
characteristics of mortgage-backed securities differ from those of traditiona1
bonds. 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.
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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 of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield.
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
outstanding 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.
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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
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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's having a contractual relationship
only with the Lender, not with the borrower. The fund has the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
fund generally 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. The 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. In an Assignment, the fund is
entitled to receive payments directly from the borrower and, therefore, does not
depend on the selling bank to pass these payments onto the fund. 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
Securities Act of 1933 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.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each fund
may invest in money market investments for temporary or defensive purposes or as
part of its normal investment program. Such investments include, among other
things, (1) securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, (2) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers, (3) commercial paper and
notes, including those with variable and floating rates of interest, (4) debt
obligations of foreign branches of U.S. banks, U.S. branches of foreign banks
and foreign branches of foreign banks, (5) 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,
(6) bonds issued by foreign issuers, (7) repurchase agreements and (8) other
investment companies that invest exclusively in money market instruments.
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.
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ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and Statement of Additional Information 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 over-the-counter options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins or the applicable sub-adviser has determined are liquid
pursuant to guidelines established by each fund's board. The assets used as
cover for over-the-counter options written by the funds will be considered
illiquid unless the over-the-counter options are sold to qualified dealers who
agree that the funds may repurchase any over-the-counter options they write at a
maximum price to be calculated by a formula set forth in the option agreements.
The cover for an over-the-counter 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 generally 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
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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. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a fund to assign a value to those securities for
purposes of valuing its portfolio and calculating its net asset value.
Restricted securities are not registered under the Securities Act of 1933
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 generally 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 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 the 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 or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
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 obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations. Repurchase agreements carry certain risks not associated
with direct investments in securities, including a possible decline in the
market value of the underlying obligations. If their value becomes less than the
repurchase price, plus any agreed-upon additional amount, the counterparty 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
obligations and the price that was paid by a fund upon acquisition is accrued as
interest and included in its net investment income. Repurchase agreements
involving obligations other than U.S. government securities (such as commercial
paper and corporate bonds) may be subject to special risks and may not have the
benefit of certain protections in the event of the counterparty's insolvency. If
the seller or guarantor becomes insolvent, the fund may suffer delays, costs and
possible losses in connection with the disposition of collateral. Each fund
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intends to enter into repurchase agreements only with counterparties in
transactions believed by Mitchell Hutchins or a sub-adviser to present minimum
credit risks in accordance with guidelines established by the fund's board.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and may
be entered into only with banks and securities dealers and for temporary or
emergency purposeS. While a reverse repurchase agreement is outstanding, a fund
will maintain, in a segregated account with its custodian, cash or liquid
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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.
DURATION. Duration is a measure of the expected life of a debt security on
a present value basis. Duration incorporates the debt security's yield, coupon
interest payments, final maturity and call features into one measure and is one
of the fundamental tools used by Mitchell Hutchins in portfolio selection and
yield curve positioning for a fund's bond investments. Duration was developed as
a more precise alternative to the concept "term to maturity." Traditionally, a
debt security's "term to maturity" has been used as a proxy for the sensitivity
of the security's price to changes in interest rates (which is the "interest
rate risk" or "volatility" of the security). However, "term to maturity"
measures only the time until a debt security provides for a final payment,
taking no account of the pattern of the security's payments prior to maturity.
Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable debt security, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For any
debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, depending on its
coupon and the level of market yields, a Treasury note with a remaining maturity
of five years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins to make certain predictions as to the
effect that changes in the level of interest rates will have on the value of a
fund's portfolio of bonds. For example, when the level of interest rates
increases by 1%, a debt security having a positive duration of three years
generally will decrease by approximately 3%. Thus, if Mitchell Hutchins
calculates the duration of a fund's portfolio of bonds as three years, it
normally would expect the portfolio to change in value by approximately 3% for
every 1% change in the level of interest rates. However, various factors, such
as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities, duration
calculations are estimates and are not precise. This is particularly true during
periods of market volatility. Accordingly, the net asset value of a fund's
portfolio of bonds may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions will lengthen portfolio duration
by approximately the same amount as would holding an equivalent amount of the
underlying securities. Short futures or put options have durations roughly equal
to the negative duration of the securities that underlie these positions, and
have the effect of reducing portfolio duration by approximately the same amount
as would selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
will use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its duration and, therefore, its
interest rate exposure.
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LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain 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,
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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.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
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 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 "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures or forward currency contracts
(and, for Global Income Fund and Asia Pacific Growth Fund, swaps).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield.
When-issued securities include TBA ("to be assigned") securities. TBA securities
are usually mortgage-backed securities that are purchased on a forward
commitment basis with an approximate principal amount and no defined maturity
date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including the risks
of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed-delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed-delivery securities held
by that fund, exceeds its net assets.
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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 "The Funds' Investments, Related Risks
and Limitations--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 the applicable
sub-adviser deems it advantageous to do so, which may result in a gain or loss
to the fund.
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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
Investment Company Act of 1940, as amended, 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.
(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, Global Equity Fund, Asia Pacific Growth Fund and Emerging
Markets 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.
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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;
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(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 Investment Company Act of 1940, as amended, 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 Investment Company Act of
1940, as amended).
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. Mitchell Hutchins also may use these
Derivative Instruments to adjust Global Equity Fund's exposure to U.S. and
foreign equity markets in connection with a reallocation of the fund's assets
and for cash management. Global Income Fund also may use these Derivative
Instruments to attempt to enhance income or realize gains and to manage the
duration of its portfolio. Global Income Fund and Asia Pacific Growth 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.
The funds might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If a sub-adviser
or Mitchell Hutchins, as applicable, is incorrect in its judgment on market
values, interest rates or other economic factors in using a derivative
instrument or strategy, a fund may have lower net income and a net loss on the
investment.
OPTIONS ON EQUITY SECURITIES, BONDS 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.
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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
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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 bonds 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 term of the option or at
specified times or at the expiration of the option, depending on the type of
option involved. Upon exercise of the option, the delivery of the futures
position to the holder of the option will be accompanied by delivery of the
accumulated balance that represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the future. The writer of an option,
upon exercise, will assume a short position in the case of a call and a long
position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF 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 transaction 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 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 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 bonds may be used to hedge either individual securities or broad
fixed income market sectors.
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Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
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 may be limited by tax considerations. See
"Taxes."
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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.
(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 counterparty 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.
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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 on securities in which they invest and related
indices and on 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. A fund
may also use options to attempt to realize gains by increasing or reducing its
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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
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 over-the-counter options written by
a fund would be considered illiquid to the extent described under "The Funds'
Investments, Related Risks and Limitations--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 over-the-counter
options. Exchange markets for options on bonds and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the
over-the-counter 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, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty 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.
Generally, the over-the-counter 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
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
funds will enter into over-the-counter options only with counterparties 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
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a fund might be unable to close out
an over-the-counter 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.
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LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by each fund's board without
shareholder vote:
(1) A 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 a
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 securities indices and options on futures
contracts) purchased by a 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 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 Equity Fund and Global
Income Fund may purchase or sell futures contracts or purchase options thereon
to increase or reduce 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.
26
<PAGE>
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 trades may be
26A
<PAGE>
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 securities 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. 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 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." Use of a different foreign currency magnifies the risk that movements
in the price of the Derivative Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
27
<PAGE>
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.
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
27A
<PAGE>
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. A 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.
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 counterparty 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 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. 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
28
<PAGE>
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.
A fund 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
28A
<PAGE>
later date. A fund may only 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.
A fund 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 the
sub-adviser (if applicable) believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to a 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 "The Funds' Investments, Related Risks
and Limitations--Segregated Accounts." A 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.
A fund will enter into swap transactions only with banks and recognized
securities dealers believed by Mitchell Hutchins or the sub-adviser 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.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
Each Trust was formed as a business trust under the laws of the
Commonwealth of Massachusetts. Investment Trust was formed on March 28, 1991 and
has two operating series. Managed Investments Trust was formed on November 21,
1986 and has seven operating series. Investment Series was formed on December
22, 1986 and Investment Trust II was formed on August 10, 1992. Each of these
Trusts has one operating series.
Each Trust is governed by a board of trustees, which is authorized to
establish additional series and to issue an unlimited number of shares of
beneficial interest of each existing or future series, par value $0.001 per
share. The board of each Trust oversees its operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Margo N. Alexander**; 52 Trustee and President Mrs. Alexander is president, chief
executive officer and a director of
Mitchell Hutchins (since January 1995),
and an executive vice president and a
director of PaineWebber (since March
1984). Mrs. Alexander is president and a
director or trustee of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
29
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal
One Old Church Road of R.Q.A. Enterprises (management
Unit #6 consulting firm) (since April 1991 and
Greenwich, CT 06830 principal occupation since March 1995).
Mr. Armstrong was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (October
1993-March 1995). He 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, Louis
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 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
E. Garrett Bewkes, Jr.**; 72 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber
the 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 a director of
Interstate Bakeries Corporation. Mr.
Bewkes is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave, N.W. (international investments and consulting
Washington, DC 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director
of Archer-Daniels-Midland Co.
(agricultural commodities), Hollinger
International Co. (publishing), Homestake
Mining Corp., Powerhouse Technologies Inc.
and Wierton Steel Corp. 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mary C. Farrell**; 49 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 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
30
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
Meyer Feldberg; 56 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, NY 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of Primedia, Inc.,
Federated Department Stores, Inc. and
Revlon, Inc. Dean Feldberg is a director
or trustee of 33 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller. Prior
New York, NY 10017 to May 1994, he was a partner in the law
firm of Fryer, Ross & Gowen. Mr. Gowen is
a director or trustee of 33 investment
companies for which Mitchell Hutchins,
Paine Webber or one of their affiliates
serves as investment adviser.
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank). From January
Suite 350 1992 to November 1992, he was campaign
Washington, DC 20004 manager of Bush-Quayle `92. From 1990 to
1992, he was vice chairman and, from 1989
to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company
of Northwest Airlines Inc.) and Wings
Holdings Inc. (holding company of NWA
Inc.). Prior to 1989, he was employed by
the Marriott Corporation (hotels,
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), Manor Care, Inc. (health care)
and Northwest Airlines Inc. Mr. Malek is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation
Princeton, NJ 08542 supporting mainly oceanographic
He is a director of Base Ten Systems, Inc.
(software), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, Evans
Systems, Inc. (motor fuels, convenience
store and diversified company), Electronic
Clearing House, Inc., (financial
transactions processing), Frontier 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. Schafer is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
31
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing director and
(Investment Trust and chief investment officer--quantitative
Managed Trust only) investments of Mitchell Hutchins. Prior
to September 1994, he was a senior vice
president at Vantage Global Management.
Mr. Barneby is a vice president of seven
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Julieanna Berry; 35 Vice President Ms. Berry is a first vice president
(Managed Trust only) and a portfolio manager of Mitchell
Hutchins. Ms. Berry is a vice president of
two investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
Karen L. Finkel; 41 Vice President Mrs. Finkel is a senior vice president
(Managed Trust only) and a portfolio manager of Mitchell
Hutchins. Mrs. Finkel is a vice president
of three investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
James F. Keegan; 38 Vice President Mr. Keegan is a senior vice president
(Managed Trust only) and a 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, PaineWebber or one of their
affiliates serves as investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager
Assistant Treasurer of the mutual fund finance department
of Mitchell Hutchins. Prior to September
1997, he was an audit manager in the
financial services practice of Ernst &
Young LLP. Mr. Lee is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as an investment adviser.
Thomas J. Libassi; 40 Vice President Mr. Libassi is a senior vice president
(Managed Trust only) and a 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, PaineWebber or one of their
affiliates serves as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and
(Managed Trust and chief investment officer--fixed income of
Investment Series only) Mitchell Hutchins. Prior to December 1994,
he was director of fixed income
investments of IBM Corporation. Mr.
McCauley is a vice president of 22
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Ms. Moran
is a vice president and assistant
treasurer of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
32
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president
Secretary and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice
president and secretary of 31 investment
companies and a vice president and
assistant secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president
and director of operations and control for
Mitchell Hutchins. Mr. Polito is a vice
president of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
Victoria E. Schonfeld; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins
(since May 1994) and a senior vice
president of PaineWebber (since July
1995). Prior to May 1994, she was a
partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president
of 31 investment companies and a vice
president and secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Paul H. Schubert; 36 Vice President and Mr. Schubert is a senior vice president
Treasurer and director of the mutual fund finance
department 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 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president
(Managed Trust only) and a portfolio manager of Mitchell
Hutchins. Mr. Singh is a vice president of
four investment companies for which
Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment
adviser.
Barney A. Taglialatela; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior to
February 1995, he was a manager of the
mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and
(Investment Trust, chief investment officer--equities of
Investment Trust II and Mitchell Hutchins. Prior to March 1995,
Managed Trust only) he was a 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 13
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
33
<PAGE>
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
---------------------- ------------------------ ----------------------------------------
Stuart Waugh; 43 Vice President Mr. Waugh is a managing director and a
(Investment Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income
investments and currency trading. Mr.
Waugh is a vice president of five
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president
Assistant Secretary and associate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller
is a vice president and assistant
secretary of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
one of their affiliates serves as
investment adviser.
- -------------------------
* 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
Investment Company Act of 1940, as amended, by virtue of their positions with Mitchell Hutchins, PaineWebber,
and/or PW Group.
</TABLE>
Board members are compensated as follows:
. MANAGED TRUST has seven operating 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 $7,000
annually, plus any additional amounts due for board or committee
meetings.
. 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.
. 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 up to $150 per series for each board meeting and each
separate meeting of a board committee. 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 any class 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 Trust for acting as a
board member or officer.
34
<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, 1998.
<TABLE>
<CAPTION>
COMPENSATION TABLE+
TOTAL
-----
AGGREGATE AGGREGATE AGGREGATE AGGREGATE COMPENSATION
--------- --------- --------- --------- ------------
COMPENSATION COMPENSATION COMPENSATION FROM COMPENSATION FROM THE TRUSTS
------------ ------------ ----------------- ------------ ---------------
NAME OF PERSON, FROM MANAGED FROM INVESTMENT INVESTMENT TRUST* FROM INVESTMENT AND THE FUND
--------------- ------------ --------------- ----------------- --------------- ------------
POSITION TRUST* SERIES* TRUST II* COMPLEX**
-------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong, $ 11,580 $ 1,930 $ 4,360 $ 1,930 $101,372
Trustee
Richard R. Burt, $ 11,580 $ 1,930 $ 4,360 $ 1,930 $101,372
Trustee
Meyer Feldberg, $ 9,580 $ 2,642 $ 5,785 $ 2,642 $116,222
Trustee
George W. Gowen, $ 13,470 $ 1,780 $ 4,060 $ 1,780 $108,272
Trustee
Frederic V. Malek, $ 11,580 $ 1,930 $ 4,360 $ 1,930 $101,372
Trustee
Carl W. Schafer, $ 11,580 $ 1,930 $ 4,360 $ 1,930 $101,372
Trustee
- -----------------------------------
+ Only independent board members are compensated by the Trusts and identified above; board members
who are "interested persons," as defined by the Investment Company Act of 1940, as amended, do not
receive compensation.
* Represents fees paid to each Trustee from the Trust indicated for the fiscal year ended October 31,
1998.
** Represents total compensation paid during the calendar year ended December 31, 1998, to each board
member by 31 investment companies (33 in the case of Messrs. Feldberg and Gowen) for which Mitchell
Hutchins, PaineWebber or one of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement plan.
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
The following shareholder is shown in Global Equity Fund's records as
owning 5% or more of any class of its shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS* NUMBER AND PERCENTAGE OF SHARES
----------------- BENEFICIALLY OWNED AS OF JANUARY 31, 1999
<S> <C> <C>
Northern Trust Company as Trustee 1,539,902 6.47%
FBO PaineWebber 401k Plan Class Y Shares
-------------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management Inc.,
1285 Avenue of the Americas, New York, NY 10019.
</TABLE>
35
<PAGE>
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
35A
<PAGE>
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as defined
in the Investment Company Act of 1940, as amended) 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.
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 October 1, 1998. 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. Under the Advisory Contract and a
substantially similar contract, for the fiscal years ended October 31, 1998 and
October 31, 1997, the two months ended October 31, 1996, and the fiscal year
ended August 31, 1996, the fund paid (or accrued) to Mitchell Hutchins advisory
and administrative fees of $3,918,629, $4,689,662, $794,518 and $4,990,588,
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 Invista dated October 1, 1998
("Sub-Advisory Contract"), pursuant to which Invista serves as investment
sub-adviser for the foreign investments of Global Equity Fund. (Mitchell
Hutchins allocates the fund's investments between U.S. and foreign investments
and is responsible for the day-to-day management of the fund's U.S.
investments.) Under the Sub-Advisory Contract, Mitchell Hutchins (not the fund)
is obligated to pay Invista at the annual rate of 0.40% of the fund's average
daily net assets allocated to its management up to and including $100 million.
This fee drops to 0.29% of the fund's average daily net assets allocated to
Invista's management in excess of $100 million up to and including $300 million
and to 0.26% of such assets in excess of $300 million. For the period October 1
through October 31, 1998, Mitchell Hutchins paid or accrued sub-advisory fees to
Invista of $95,901. Prior to October 1, 1998, GE Investment Management
Incorporated ("GEIM") served as investment sub-adviser for all the fund's assets
pursuant to a sub-advisory contract with Mitchell Hutchins. Under that
sub-advisory contract, Mitchell Hutchins paid or accrued sub-advisory fees to
GEIM for the period November 1, 1997 to September 30, 1998 and the fiscal years
ended October 31, 1997, the two months ended October 31, 1996, and the fiscal
year ended August 31, 1996, of $1,332,538, $1,695,840, $287,688 and $1,808,760,
respectively.
Under the Sub-Advisory Contract, Invista 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 Invista 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.
36
<PAGE>
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 Invista and
Mitchell Hutchins, or by Invista or Mitchell Hutchins on 120 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
36A
<PAGE>
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, 1998, October 31, 1997
and October 31, 1996, the fund paid (or accrued) to Mitchell Hutchins advisory
and administrative fees of $4,031,933, $5,683,381 and $7,812,766, 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 year ended
October 31, 1996, Global Income Fund paid (or accrued) to PaineWebber $189,131
and $305,944, respectively.
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. For the fiscal year ended October
31, 1998 and 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 $477,960 and $533,412, 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 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. For the fiscal year ended October
31, 1998 and the period March 25, 1997 (commencement of operations) through
October 31, 1997, Mitchell Hutchins (not the fund) paid (or accrued) to Schroder
Capital sub-advisory fees of $258,895 and $284,106, respectively.
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 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. Under the Advisory Contract and a similar prior advisory contract, for
the fiscal years ended October 31, 1998 and October 31, 1997, the four months
ended October 31, 1996 and the fiscal year ended June 30, 1996, the fund paid
(or accrued) to Mitchell Hutchins advisory and administrative fees of $161,312,
$438,676, $220,071 and $867,093, respectively.
37
<PAGE>
During the fiscal years ended October 31, 1998 and October 31, 1997, the
four months ended October 31, 1996 and the fiscal year ended June 30, 1996,
Mitchell Hutchins waived part of its management fees and reimbursed Emerging
Markets Equity Fund in the aggregate amounts of $170,652, $180,568, $142,160 and
$538,618, respectively. During these periods, certain expense limitations were
applicable which are no longer in effect. The fund and Mitchell Hutchins have
entered into an expense reimbursement agreement under which Mitchell Hutchins
has agreed to reimburse the fund to the extent that the fund's expenses through
the end of the current fiscal year otherwise would exceed the expense caps
described in the Prospectus.
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.
For the fiscal year ended October 31, 1998 and the period February 25, 1997 to
October 31, 1997, Mitchell Hutchins (not the fund) paid (or accrued) to Schroder
Capital $94,096 and $161,715, respectively, in sub-advisory fees. Under
contracts with the fund's former sub-adviser, Emerging Markets Management, for
the period November 1, 1996 through February 24, 1997, the four months ended
October 31, 1996 and the fiscal year ended June 30, 1996, Mitchell Hutchins paid
(or accrued) fees of $86,731, $152,148 and $599,472, 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.
ALL FUNDS. During the fiscal years (or periods) ended October 31, 1997 and
October 31, 1998, the indicated fund paid (or accrued) the following fees to
PaineWebber for its services as securities lending agent:
FUND FISCAL YEAR ENDED OCTOBER 31,
---- -----------------------------
1998 1997
---- ----
Global Equity Fund $42,839 $14,324
Global Income Fund $49,982 $26,057
Asia Pacific Growth Fund $25,777 $14,324
Emerging Markets Equity Fund $ 2,235 $ 6,225
Subsequent to August 1, 1997, PFPC (not the funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
38
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
January 31, 1999, 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.
INVESTMENT CATEGORY NET ASSETS
------------------- ($MIL)
------
Domestic (excluding Money Market) $ 8,382.1
Global $ 4,129.4
Equity/Balanced $ 7,359.7
Fixed Income (excluding Money Market) $ 5,151.8
Taxable Fixed Income $ 3,561.0
Tax-Free Fixed Income $ 1,590.8
Money Market Funds $ 35,232.8
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients. 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 Investment Company Act of 1940, as amended (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.
Mitchell Hutchins uses the service fees under the Plans for Class A, B and
C shares primarily to pay PaineWebber for shareholder servicing, currently at
the annual rate of 0.25% of the aggregate investment amounts maintained in each
fund by PaineWebber clients. PaineWebber then compensates its Financial Advisors
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
. Offset the commissions it pays to PaineWebber for selling each
fund's Class B and Class C shares, respectively.
. Offset each fund's marketing costs attributable to such classes,
such as preparation, printing and distribution of sales literature,
advertising and prospectuses to prospective investors and related
overhead expenses, such as employee salaries and bonuses.
PaineWebber compensates Financial Advisors when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the funds or investors at the time
Class B or C shares are bought.
39
<PAGE>
Mitchell Hutchins receives the proceeds of the initial sales charge paid
when Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related Distribution Contracts for Class A, Class B and
Class C shares specify that each fund must pay service and distribution fees to
Mitchell Hutchins for its activities, not as reimbursement for specific expenses
incurred. Therefore, even if Mitchell Hutchins' expenses exceed the service or
distribution fees it receives, the funds will not be obligated to pay more than
those fees. On the other hand, if Mitchell Hutchins' expenses are less than such
fees, it will retain its full fees and realize a profit. Expenses in excess of
service and distribution fees received or accrued through the termination date
of any Plan will be Mitchell Hutchins' sole responsibility and not that of the
funds. Annually, the board of each fund reviews the Plans and Mitchell Hutchins'
corresponding expenses for each class separately from the Plans and expenses of
the other classes.
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, 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 service and/or distribution fees
to Mitchell Hutchins under the Class A, Class B and Class C Plans during the
fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GLOBAL EQUITY FUND GLOBAL INCOME FUND GROWTH FUND EQUITY FUND
------------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C>
Class A....................... $ 705,814 $1,098,503 $ 37,060 $ 16,792
Class B....................... $ 699,953 $ 585,086 $ 165,647 $ 8,265
Class C....................... $ 504,588 $ 235,964 $ 84,301 $ 38,656
</TABLE>
40
<PAGE>
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
ended October 31, 1998:
<TABLE>
<CAPTION>
GLOBAL GLOBAL ASIA PACIFIC EMERGING MARKETS
EQUITY FUND INCOME FUND GROWTH FUND EQUITY FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS A
Marketing and advertising........ $ 236,654 $ 225,555 $ 248,031 $ 70,282
Amortization of commissions...... 0 0 0 0
Printing of prospectuses and
statements of additional
information...................... $ 3,054 $ 2,363 $ 144 $ 67
Branch network costs allocated and
interest expense................. $1,312,085 $2,371,992 $ 98,245 $ 71,232
Service fees paid to PaineWebber
Financial Advisors............... $ 268,209 $ 417,432 $ 14,083 $ 3,931
CLASS B
Marketing and advertising........ $ 58,800 $ 32,748 $ 277,147 $ 8,658
Amortization of commissions...... $ 210,314 $ 172,295 $ 48,856 $ 2,368
Printing of prospectuses and
statements of additional $ 640 $ 343 $ 159 $ 7
information......................
Branch network costs allocated and
interest expense................. $ 344,622 $ 340,719 $ 129,074 $ 9,347
Service fees paid to PaineWebber
Financial Advisors............... $ 66,495 $ 55,583 $ 15,737 $ 95
CLASS C
Marketing and advertising........ $ 42,353 $ 16,319 $ 141,043 $ 40,445
Amortization of commissions...... $ 143,808 $ 59,777 $ 24,026 $ 10,225
Printing of prospectuses and
statements of additional information $ 499 $ 171 $ 77 $ 41
Branch network costs allocated and
interest expense................. $ 236,640 $ 171,665 $ 56,202 $ 41,150
Service fees paid to PaineWebber
Financial Advisors............... $ 47,936 $ 29,889 $ 8,009 $ 1,903
</TABLE>
"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 PricingSM 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 Financial Advisors 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.
41
<PAGE>
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 Financial Advisors 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
Financial Advisors 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 Financial Advisors, 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 Financial Advisors 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 Financial Advisors 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 Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, within one year
after purchase 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, TWO MONTHS ENDED FISCAL YEAR ENDED
1998 1997 OCTOBER 31, 1996 AUGUST 31, 1996
---- ---- ---------------- ---------------
<S> <C> <C> <C> <C>
GLOBAL EQUITY FUND
Earned....................... $ 60,698 $132,728 $ 22,360 $229,590
Retained.................... $ 4,130 $ 8,400 $ 1,366 $ 10,949
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GLOBAL INCOME FUND
Earned................... $ 16,007 $ 29,752 $ 37,752
Retained................. $ 2,396 $ 2,950 $ 6,564
</TABLE>
FISCAL YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
ASIA PACIFIC GROWTH FUND
Earned.................... $ 83,960 $1,142,055
Retained.................. $ 5,521 $ 67,143
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, FOUR MONTHS ENDED FISCAL YEAR ENDED
1998 1997 OCTOBER 31, 1996 JUNE 30, 1996
---- ---- ---------------- -------------
<S> <C> <C> <C> <C>
EMERGING MARKETS
EQUITY FUND
Earned..................... $ 3,958 $ 10,692 $ 4,109 $ 25,696
Retained.................. $ 257 $ 662 $ 251 $ 1,280
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
October 31, 1998:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GLOBAL EQUITY FUND GLOBAL INCOME FUND GROWTH FUND EQUITY FUND
------------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Class A..................... 0 0 0 0
Class B..................... $ 142,990 $ 126,655 $ 53,939 $ 6,928
Class C..................... $ 3,585 $ 1,128 $ 50,550 $ 270
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins or the
applicable sub-adviser 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 bonds 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 over-the-counter 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. During the fiscal years or periods indicated, the funds paid
the brokerage commissions set forth below:
43
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, TWO MONTHS ENDED FISCAL YEAR ENDED
1998 1997 OCTOBER 31, 1996 AUGUST 31, 1996
---- ---- ---------------- ---------------
<S> <C> <C> <C> <C>
GLOBAL EQUITY FUND............ $2,467,840 $384,903 $118,589 $1,472,329
</TABLE>
43A
<PAGE>
FISCAL YEARS ENDED OCTOBER 31,
------------------------------
1998 1997 1996
---- ---- ----
GLOBAL INCOME FUND............ 0 $ 3,330 $ 0
FISCAL YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
ASIA PACIFIC GROWTH FUND...... $ 246,684 $ 454,243
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, FOUR MONTHS ENDED FISCAL YEAR ENDED
OCTOBER 31, 1996 JUNE 30, 1996
---------------- -------------
1998 1997
---- ----
<S> <C> <C> <C> <C>
EMERGING MARKETS
EQUITY FUND................... $ 102,060 $ 266,325 $ 80,726 $ 264,723
</TABLE>
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 Invista.
Each board has adopted procedures in conformity with Rule 17e-1 under the
Investment Company Act of 1940, as amended, to ensure that all brokerage
commissions paid to PaineWebber or brokerage affiliates of a sub-adviser are
reasonable and fair. Specific provisions in the Advisory Contracts and the
applicable Sub-Advisory Contracts authorize Mitchell Hutchins and the
sub-advisers 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. During the past three fiscal years
or periods, no fund paid brokerage commissions to PaineWebber, its sub-adviser
or their affiliates.
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 affiliates of a sub-adviser, 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 Mitchell Hutchins or the
sub-adviser with research, analysis, advice and similar 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 year ended October 31, 1998, the funds directed
the portfolio transactions indicated below to brokers chosen because they
provide research, analysis, advice and similar services, for which the funds
paid the brokerage commissions indicated below:
44
<PAGE>
<TABLE>
<CAPTION>
FUND AMOUNT OF PORTFOLIO TRANSACTIONS BROKERAGE COMMISSIONS PAID
---- -------------------------------- --------------------------
<S> <C> <C>
Global Equity Fund $ 71,331,409 $ 111,405
Global Income Fund 0 0
Asia Pacific Growth Fund 246,238 3,473
Emerging Markets Equity Fund 650,752 2,277
</TABLE>
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
44A
<PAGE>
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 over-the-counter equity and
bonds 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 Investment Company Act of 1940, as
amended. 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, 1998, the funds owned securities issued by their regular
broker-dealers as follows:
Global Equity Fund had entered into a repurchase agreement transaction
with State Street Bank and Trust Company ($915,000) and with Deutsche Bank
($7,019,000) and owned securities of Morgan Stanley Dean Witter & Co.
($1,579,999)
Global Income Fund had entered into a repurchase agreement transaction
with State Street Bank and Trust Company ($1,144,000).
Asia Pacific Growth Fund had entered into a repurchase agreement
transaction with State Street Bank and Trust Company ($1,261,000).
Emerging Markets Equity Fund had entered into a repurchase agreement
transaction with State Street Bank and Trust Company ($338,000).
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.
45
<PAGE>
The funds' respective portfolio turnover rates for the fiscal periods
shown were:
GLOBAL EQUITY FUND
Fiscal Year ended October 31, 1998 151%
Fiscal Year ended October 31, 1997 86%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1998 93%
Fiscal Year ended October 31, 1997 172%
ASIA PACIFIC GROWTH FUND
Fiscal Year ended October 31, 1998 59%
Fiscal Year ended October 31, 1997 13%
EMERGING MARKETS EQUITY FUND
Fiscal Year ended October 31, 1998 64%
Fiscal Year ended October 31, 1997 87%
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
. Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell
Hutchins may make payments out of its own resources to PaineWebber
and to the variable annuity's sponsor, adviser or distributor in a
total amount not to exceed l% of the amount invested;
. Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee
for program services, provided that the program sponsor has entered
into a written agreement with PaineWebber permitting the sale of
shares at net asset value to that program. For investments made
pursuant to this waiver, Mitchell Hutchins may make a payment to
PaineWebber out of its own resources in an amount not to exceed 1%
of the amount invested. For subsequent investments or exchanges made
to implement a rebalancing feature of such an investment program,
the minimum subsequent investment requirement is also waived;
. Acquire shares in connection with a reorganization pursuant to which
a fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
. Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus
In addition, reduced sales charges on Class A shares are available through
the combined purchase plan or through rights of accumulation described below.
Class A share purchases of $1 million or more are not subject to an initial
sales charge; however, if a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is imposed.
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");
46
<PAGE>
(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 ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge 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, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. 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.
PURCHASES AND SALES OF CLASS Y SHARES THROUGH THE PACE MULTI ADVISOR
PROGRAM. An investor who participates in the PACE Multi Advisor Program is
eligible to purchase Class Y shares. The PACE Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACE Multi Advisor Program is subject
to payment of an advisory fee at the effective maximum annual rate of 1.5% of
assets. Employees of PaineWebber and its affiliates are entitled to a waiver of
this fee. Please contact your PaineWebber Financial Advisor or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi Advisor Program.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K) PLUS
PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
47
<PAGE>
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, "Plan Documents")
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-PWEBBER (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
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. Class Y shares are
not eligible for exchange. 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 Investment Company Act
of 1940, as amended, 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 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.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. 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. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual Fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
. Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
. Class B shares. Minimum value of fund shares is $20,000; minimum monthly,
quarterly, and semi-annual and annual withdrawals of $200, $400, $600 and
$800, respectively.
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<PAGE>
Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this 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 the minimum values specified
above. 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, semi-annual 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. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. 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 PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN[SERVICEMARK];
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT[REGISTERED MARK] (RMA)[REGISTERED MARK]
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.
49
<PAGE>
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
49A
<PAGE>
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. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
. monthly Premier account statements that itemize all account
activity, including investment transactions, checking activity and
Gold MasterCard(R) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities
held in the account;
. comprehensive year-end summary statements that provide information
on account activity for use in tax planning and tax return
preparation;
. automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds-RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money Fund
and RMA New York Municipal Money Fund. AN INVESTMENT IN A MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH A
MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A
MONEY MARKET FUND;
. 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;
. 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;
. free and unlimited electronic funds transfers and a bill payment
service for $6 a month - unlimited fixed and variable payments;
. 24-hour access to account information through toll-free numbers, and
more detailed personal assistance during business hours from the RMA
Service Center;
. account protection up to the net equity securities balance 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 PFPC and not through PaineWebber;
and
. automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of 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
50
<PAGE>
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 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 "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares 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 will
not continue to be met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange 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 based
on sales on the exchange considered by Mitchell Hutchins or the sub-adviser as
the primary market. Securities traded in the over-the-counter market and listed
on the Nasdaq Stock Market ("Nasdaq") are valued at the last trade price on
Nasdaq prior to valuation; other over-the-counter securities normally are valued
at the last bid price available prior to valuation. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the applicable board. It
should be recognized that judgment often plays a greater role in valuing thinly
traded securities, including many 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 current foreign currency exchange rate. Foreign
currency exchange rates are generally determined prior to the close of regular
trading on the New York Stock Exchange. 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 New York Stock Exchange,
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.
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:
n
P(1 + T) = 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.
51
<PAGE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge (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 annual return.
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1998:
Standardized Return* (2.10%) (2.74%) 0.87% 2.86%
Non-Standardized Return 2.53% 1.62% 1.74% 2.86%
Five Years ended October 31, 1998:
Standardized Return* 6.59% N/A 6.76% 7.92%
Non-Standardized Return 7.58% N/A 6.76% 7.92%
Inception** to October 31, 1998:
Standardized Return* 8.81% 5.57% 8.23% 9.40%
Non-Standardized Return 9.53% 6.37% 8.23% 9.40%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------ -------
<S> <C> <C> <C> <C>
Year ended October 31, 1998:
Standardized Return* 5.11% 3.53% 8.26% 9.89%
Non-Standardized Return 9.51% 8.53% 9.01% 9.89%
Five Years ended October 31, 1998:
Standardized Return* 5.50% 5.23% 5.86% 6.69%
Non-Standardized Return 6.37% 5.54% 5.86% 6.69%
Ten Years ended October 31, 1998
Standardized Return N/A 7.89% N/A N/A
Non-Standardized Return N/A 7.89% N/A N/A
Inception** to October 31, 1998:
Standardized Return* 6.95% 9.11% 6.32% 7.82%
Non-Standardized Return 7.54% 9.11% 6.32% 7.82%
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
ASIA PACIFIC GROWTH FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1998:
Standardized Return* (27.29%) (28.22%) (25.20%) N/A
Non-Standardized Return (23.88%) (24.44%) (24.44%) N/A
Inception** to October 31, 1998:
Standardized Return* (33.42%) (33.69%) (31.94%) (21.59%)
Non-Standardized Return (31.48%) (31.98%) (31.94%) (21.59%)
EMERGING MARKETS EQUITY FUND
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Year ended October 31, 1998:
Standardized Return* (33.67%) (34.15%) (31.77%) (30.44%)
Non-Standardized Return (30.56%) (30.69%) (31.08%) (30.44%)
Inception** to October 31, 1998:
Standardized Return* (12.71%) (12.56%) (12.53%) (11.66%)
Non-Standardized Return (11.86%) (11.64%) (12.53%) (11.66%)
</TABLE>
- --------------
* All Standardized Return figures for Class A shares reflect deduction of
the current maximum sales charge of 4.5% (4.0% for Global Income Fund).
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:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Global Equity Fund 11/14/91 08/25/95 05/10/93 05/10/93
Global Income Fund 07/01/91 03/20/87 07/02/92 08/26/91
Asia Pacific Growth Fund 03/25/97 03/25/97 03/25/97 03/13/98
Emerging Markets Equity Fund 01/19/94 12/05/95 01/19/94 01/19/94
</TABLE>
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:
6
[ (a-b ) ]
YIELD = 2[ (--- + 1) - 1 ]
[ (cd ) ]
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.
53
<PAGE>
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 totaling
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, 1998 the yields for
its Class A shares, Class B shares, Class C shares and Class Y shares were
3.41%, 2.63%, 3.05%, and 3.92%, respectively.
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper 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 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 bonds
held by the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term bonds. An investment in any fund
involves greater risks than an investment in either a money market fund or a CD.
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.
54
<PAGE>
<TABLE>
<CAPTION>
YEAR Common Stocks Long-Term Inflation/CP Treasury Bills
<S> <C> <C> <C> <C>
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,039 $11,751 $9,553 $11,028
1929 $20,184 $12,153 $9,572 $11,552
1930 $15,158 $12,719 $8,994 $11,831
1931 $8,588 $12,044 $8,138 $11,957
1932 $7,885 $14,072 $7,300 $12,072
1933 $12,142 $14,062 $7,337 $12,108
1934 $11,967 $15,473 $7,486 $12,128
1935 $17,672 $16,243 $7,710 $12,148
1936 $23,667 $17,465 $7,803 $12,170
1937 $15,376 $17,505 $8,045 $12,208
1938 $20,161 $18,473 $7,822 $12,205
1939 $20,079 $19,570 $7,784 $12,208
1940 $18,115 $20,762 $7,859 $12,208
1941 $16,015 $20,955 $8,623 $12,215
1942 $19,273 $21,630 $9,424 $12,248
1943 $24,265 $22,080 $9,721 $12,291
1944 $29,057 $22,700 $9,926 $12,331
1945 $39,645 $25,136 $10,150 $12,372
1946 $36,446 $25,111 $11,993 $12,415
1947 $38,527 $24,453 $13,074 $12,478
1948 $40,646 $25,284 $13,428 $12,579
1949 $48,283 $26,915 $13,186 $12,717
1950 $63,594 $26,931 $13,950 $12,870
1951 $78,869 $25,873 $14,769 $13,061
1952 $93,357 $26,173 $14,899 $13,278
1953 $92,433 $27,126 $14,991 $13,520
1954 $141,071 $29,076 $14,916 $13,636
1955 $185,594 $28,701 $14,971 $13,850
1956 $197,768 $27,097 $15,399 $14,191
1957 $176,449 $29,118 $15,864 $14,636
1958 $252,957 $27,345 $16,144 $14,862
1959 $283,211 $26,727 $16,386 $15,300
1960 $284,542 $30,410 $16,628 $15,707
1961 $361,055 $30,705 $16,740 $16,042
1962 $329,535 $32,820 $16,944 $16,480
1963 $404,669 $33,271 $17,223 $16,994
1964 $471,359 $34,383 $17,428 $17,596
1965 $530,043 $34,627 $17,763 $18,287
1966 $476,721 $35,891 $18,358 $19,158
1967 $591,038 $32,597 $18,916 $19,964
1968 $656,407 $32,512 $19,809 $21,004
1969 $600,613 $30,863 $21,019 $22,386
1970 $624,697 $34,601 $22,173 $23,846
1971 $714,091 $39,179 $22,918 $24,893
1972 $849,626 $41,408 $23,700 $25,849
1973 $725,071 $40,948 $25,785 $27,640
1974 $533,144 $42,730 $28,931 $29,851
1975 $731,474 $46,661 $30,956 $31,582
1976 $905,565 $54,500 $32,442 $33,193
1977 $840,364 $54,118 $34,648 $34,886
1978 $895,828 $53,469 $37,767 $37,398
1979 $1,060,661 $52,827 $42,790 $41,287
1980 $1,404,315 $50,767 $48,096 $45,911
1981 $1,335,504 $51,732 $52,376 $52,660
1982 $1,621,301 $72,631 $54,419 $58,190
1983 $1,986,094 $73,139 $56,487 $63,310
1984 $2,111,218 $84,476 $58,746 $69,515
1985 $2,791,030 $110,664 $60,979 $74,867
1986 $3,307,371 $137,776 $61,649 $79,509
1987 $3,479,354 $134,056 $64,362 $83,882
1988 $4,063,885 $147,060 $67,194 $89,167
1989 $5,344,009 $173,678 $70,285 $96,657
1990 $5,173,001 $184,446 $74,572 $104,196
1991 $6,750,766 $220,044 $76,884 $110,031
1992 $7,270,575 $237,867 $79,114 $113,882
1993 $7,996,906 $281,159 $81,250 $117,185
1994 $8,101,665 $259,229 $83,443 $121,755
1995 $10,507,050 $313,511 $85,404 $126,856
1996 $13,710,736 $337,286 $88,451 $135,380
1997 $18,274,382 $363,828 $90,067 $142,494
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
55
<PAGE>
- -----------------------
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook(TM), Ibbotson
Associates. Stocks represented by Standard & Poor's (S&P) 500 Index, long-term
government bonds by 20-year U.S. U.S. Treasury bonds, 30-day U.S. Treasury bills
and inflation by the Consumer Price Index. The S&P 500 Index is an unmanaged,
weighted index comprising 500 widely held common stocks varying in composition.
The chart is shown for illustrative purposes only and does not represent any
fund's performance. Return consists of income, capital appreciation (or
depreciation) and currency gains (or losses), and does not guarantee future
results. Certain markets have experienced significant year-to-year fluctuations
and negative returns from time to time.
55A
<PAGE>
Over time, stocks have outperformed all other investments by a wide
margin, offering a solid hedge against inflation. From 1925 to 1998, stocks beat
all other traditional asset classes. A $10,000 investment in the S&P 500 grew to
$23,495,420, significantly more than any other investment.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL RULE FOR CLASS A SHAREHOLDERS. Special tax rules apply when a
shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of the same or another PaineWebber mutual
fund without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of the
original Class A shares would be increased, or any loss would be decreased, by
the amount of the sales charge paid when those shares were bought, and that
amount would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or loss
as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, a 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 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 any fund failed to qualify for treatment as
a RIC for any taxable year, (a) it would be taxed as an ordinary corporation on
the full amount of its taxable income for that year without being able to deduct
the distributions it makes to its shareholders and (b) the shareholders would
treat all those distributions, including distributions of net capital gain
(I.E., the excess of net long-term capital gain over net short-term capital
loss), as taxable dividends (that is, ordinary income) to the extent of the
fund's earnings and profits. In addition, the fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before requalifying for RIC treatment.
OTHER INFORMATION. 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
federal 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.
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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 return on its securities. Tax conventions between certain countries
and the United States, however, 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 (1) would be required to include in gross income, and treat
as paid by him or her, his or her proportionate share of those taxes, (2) would
be required to 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) could 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. A fund will report to its
shareholders shortly after each taxable year their respective shares of foreign
taxes paid and the income from sources within, and taxes paid to, foreign
countries and U.S. possessions if it makes this election. Individuals who have
no more than $300 ($600 for married persons filing jointly) of creditable
foreign taxes included on Forms 1099 and all of whose foreign source income is
"qualified passive income" may elect each year to be exempt from the extremely
complicated foreign tax credit limitation, in which event they would be able to
claim a foreign tax credit without having to file the detailed Form 1116 that
otherwise is required.
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 that stock is a permissible investment. A PFIC is a
foreign corporation--other than a "controlled foreign corporation" (i.e., a
foreign corporation in 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. 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--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 it distributed that income 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--which it may have to distribute 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.
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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 thereunder (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
PFICs).
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.
57A
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If a fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures or forward currency contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures or forward currency contract entered into by a
fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
A fund may acquire (1) zero coupon or other securities issued with
original issue discount ("OID") or (2) Treasury Inflation-Protected 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 OID that
accrues on those securities, and the amount of any principal increases on TIPS
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 OID and other
non-cash income, 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
MASSACHUSETTS BUSINESS TRUSTS. 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 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.
CLASSES OF SHARES. A share of each class of a fund represents an identical
interest in that fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege, if any. The different sales charges and other
expenses applicable to the different classes of shares of the funds will affect
the performance of those classes. Each share of a fund is entitled to
participate equally in dividends, other distributions and the proceeds of any
liquidation of that fund. However, due to the differing expenses of the classes,
dividends and liquidation proceeds on Class A, B, C and Y shares will differ.
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VOTING RIGHTS. Shareholders of each fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Voting rights
are not cumulative and, as a result, the holders of more than 50% of all the
shares of a Trust may elect all of the board members of that Trust. The shares
of a fund will be voted together, except that only the shareholders of a
particular class of a fund may vote on matters affecting only that class, such
as the terms of a Rule 12b-1 Plan as it relates to the class. The shares of each
series of Investment Trust and Managed Trust will be voted separately, except
when an aggregate vote of all the series is required by law.
The funds do not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of a Trust may remove a board member
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a board member at the written request of holders of 10% of the outstanding
shares of a Trust.
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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 PFPC 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.
PRIOR NAMES. 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.
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.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for Asia
Pacific Growth Fund, Emerging Markets Equity Fund and Global Equity Fund and
employs foreign sub-custodians approved by the respective boards in accordance
with applicable requirements under the Investment Company Act of 1940, as
amended, to provide custody of the funds' foreign assets. Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, serves as
custodian for Global Income Fund and employs foreign sub-custodians approved by
the fund's board in accordance with those same requirements to provide custody
of the fund's foreign assets. PFPC Inc., a subsidiary of PNC Bank, N.A., serves
as each fund's transfer and dividend disbursing agent. It is located at 400
Bellevue Parkway, Wilmington, DE 19809.
COMBINED PROSPECTUS. Although each fund is offering only its own shares,
it is possible that a fund might become liable for a misstatement in the
Prospectus about another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.
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. PricewaterhouseCoopers 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 ended
October 31, 1998 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.
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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 a ranking in the
lower end of that 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
obligations 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 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.
A-1
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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.
A-1A
<PAGE>
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.
A-2
<PAGE>
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUNDS AND THEIR
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION
ARE NOT AN OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION WHERE THE FUNDS
OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
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TABLE OF CONTENTS
PAGE
----
The Funds and Their Investment Policies.................................. 2
The Funds' Investments, Related Risks and Limitations.................... 5
Strategies Using Derivative Instruments.................................. 22
Trustees and Officers; Principal Holders of
Securities............................................................ 29
Investment Advisory and Distribution
Arrangements.......................................................... 35
Portfolio Transactions................................................... 43
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services............................. 46
Conversion of Class B Shares............................................. 50
Valuation of Shares...................................................... 51
Performance Information.................................................. 51
Taxes.................................................................... 55
Other Information........................................................ 58
Financial Statements..................................................... 59
Appendix................................................................. A-1
(COPYRIGHT)1999 PaineWebber Incorporated
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
PaineWebber
Asia Pacific
Growth Fund
PaineWebber
Emerging Markets
Equity Fund
--------------------------------------------------
Statement of Additional Information
March 1, 1999
--------------------------------------------------
PAINEWEBBER
