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Rule No. 497
Registration No. 33-11025
33-39659
33-50716
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PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The three funds named above (each a 'Fund' and, collectively, 'Funds') are
series of professionally managed open-end management investment companies
organized as Massachusetts business trusts (each a 'Trust' and, collectively,
'Trusts'). PaineWebber Emerging Markets Equity Fund ('Emerging Markets Equity
Fund'), a diversified series of PaineWebber Investment Trust II ('Investment
Trust II'), seeks long-term capital appreciation by investing primarily in
equity securities of companies in newly industrializing countries. PaineWebber
Global Equity Fund ('Global Equity Fund'), a diversified series of PaineWebber
Investment Trust ('Investment Trust'), seeks long-term growth of capital by
investing primarily in U.S. and foreign equity securities. PaineWebber Global
Income Fund ('Global Income Fund'), a non-diversified series of PaineWebber
Investment Series ('Investment Series'), seeks high current income and,
secondarily, capital appreciation by investing primarily in high quality foreign
and U.S. bonds.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly owned
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. Emerging Markets Management and GE
Investment Management Incorporated ('GE Investment Management') (each a
'Sub-Adviser') serve as investment sub-advisers, respectively, for Emerging
Markets Equity Fund and Global Equity Fund.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated October 31,
1996. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated October 31,
1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's'),
Standard & Poor's, a division of The McGraw Hill Companies ('S&P'), and other
nationally recognized statistical rating organizations ('NRSROs') are private
services that provide ratings of the credit quality of debt obligations. A
description of the ratings assigned to corporate debt obligations by Moody's and
S&P is included in the Appendix to this Statement of Additional Information. The
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.
Global Income Fund is authorized to invest up to 20% of its total assets in
non-investment grade debt securities and Global Equity Fund may invest up to 10%
of its net assets in convertible debt securities rated below investment grade.
Below investment grade debt securities are debt securities that are not rated at
the time of purchase within one of the four highest grades assigned by S&P or
Moody's, comparably rated by another NRSRO or determined by Mitchell Hutchins to
be of comparable quality. Lower rated debt securities generally offer a higher
current yield than that available for investment grade issues; however, they
involve higher risks in that they are especially subject 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
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rates, highly leveraged issuers may experience financial stress which could
adversely affect their ability to make payments of interest and principal and
increase the possibility of default. In addition, such issuers may not have more
traditional methods of financing available to them and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such issuers
is significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for lower rated debt securities has expanded rapidly in recent
years, and its growth generally paralleled a long economic expansion. In the
past, the prices of many lower rated debt securities declined substantially,
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur. The market for lower-rated debt
issues generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. 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 only in securities that are traded on recognized exchanges or in
over-the-counter markets, from time to time foreign securities may be difficult
to liquidate rapidly without significantly depressing the price of such
securities. There may be less publicly available information concerning foreign
issuers of securities held by the Funds than is available concerning U.S.
companies. Transactions in foreign securities may be subject to less efficient
settlement practices. Foreign securities trading practices, including those
involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts.
To the extent that the Funds hold securities of foreign issuers, these
securities may not be registered with the Securities and Exchange Commission
('SEC'), nor may the issuers thereof 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 American
Depository Receipts ('ADRs') and also may purchase securities of foreign issuers
in foreign markets and purchase European Depository Receipts ('EDRs') or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of each Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
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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.
Transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions, although
each Fund will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the United
States.
In certain countries that currently prohibit direct foreign investment in
the securities of their companies, indirect foreign investment in the securities
of companies listed and traded on the stock exchanges in these countries is
permitted through investment funds that have been specifically authorized to
invest directly in the relevant market. The Funds may invest in these investment
funds and registered investment companies subject to the provisions of the
Investment Company Act of 1940 ('1940 Act'). If a Fund invests in an investment
fund, the Fund may bear its proportionate share of the costs incurred by such
investment fund, including investment advisory fees, if any.
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.
FOREIGN SOVEREIGN DEBT. Investment by the Funds in debt securities issued
by foreign governments and their political subdivisions or agencies ('Sovereign
Debt') involves special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and/or interest when due in accordance with the terms of such
debt, and the Funds may have limited legal recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins and the Sub-Advisers manage the
Funds' portfolios in a manner that is intended to minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause
the Funds to suffer a loss of interest or principal on any of its holdings.
FOREIGN CURRENCY TRANSACTIONS. Although the Funds value their assets daily
in U.S. dollars, they do not intend to convert their holdings of foreign
currencies to U.S. dollars on a daily basis. The Funds' foreign currencies
generally will 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, the Funds could suffer a loss of some or all of the amounts
deposited. The Funds may convert foreign currency to U.S. dollars from time to
time. Although foreign exchange dealers generally do not charge a stated
commission or fee for conversion, the prices posted generally include a
'spread,' which is the difference between the prices at which the dealers are
buying and selling foreign currencies.
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U.S. GOVERNMENT SECURITIES. The Funds may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of it agencies or instrumentalities (collectively, 'U.S.
government securities'). Among the U.S. government securities that may be held
by the Funds are instruments that are supported by the full faith and credit of
the United States; instruments that are supported by the right of the issuer to
borrow from the U.S. Treasury; and instruments that are supported solely by the
credit of the instrumentality.
The U.S. government securities in which Global Income Fund may invest
include mortgage-backed securities issued or guaranteed by the Government
National Mortgage Association, the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation, which represent undivided ownership
interests in pools of mortgages. The mortgages backing these securities include
both fixed and adjustable rate mortgages. The U.S. government or the issuing
agency guarantees the payment of the interest on and principal of these
securities. The guarantees do not extend to the securities' market value,
however, which is likely to vary inversely with fluctuations in interest rates,
and the guarantees do not extend to the yield or value of the Fund's shares.
These securities are 'pass-through' instruments through which the holders
receive a share of the interest and principal payments from the mortgages
underlying the securities, net of certain fees. The principal amounts of such
underlying mortgages generally may be prepaid in whole or in part by the
mortgagees at any time without penalty, and the prepayment characteristics of
the underlying mortgages may vary. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. The Fund will reinvest prepaid amounts in other income producing
securities, the yields of which will reflect interest rates prevailing at the
time. Accelerated prepayments adversely affect yields for mortgage-backed
securities purchased by the Fund at a premium and may involve additional risk of
loss of principal because the premium may not have been fully amortized at the
time the obligation is prepaid. The opposite is true for mortgage-backed
securities purchased by the Fund at a discount.
Emerging Markets Equity Fund may invest in exchange rate-related U.S.
government securities. Such securities are indexed to specific foreign currency
exchange rates and generally provide that the interest rate and/or principal
amount will be adjusted upwards or downwards (but not below zero) to reflect
changes in the exchange rate between two currencies while the obligations are
outstanding. While such securities offer the potential for an attractive rate of
return, they also entail the risk of loss of principal.
CONVERTIBLE SECURITIES. Both Global Equity Fund and Global Income Fund are
permitted to invest in convertible securities. A convertible security is a bond,
debenture, note, 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 paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to non-convertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable non-convertible securities. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security. 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.
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
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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 and 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 vlaue on the right to acquire the underlying common stock while holding a
fixed income security.
ADDITIONAL INFORMATION ON MONEY MARKET INVESTMENTS OF EMERGING MARKETS
EQUITY FUND AND GLOBAL EQUITY FUND. Emerging Markets Equity Fund and Global
Equity Fund may invest in the following types of money market instruments in
addition to the U.S. government securities noted above: bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
foreign or domestic banks, domestic savings associations and other banking
institutions having total assets in excess of $500 million); commercial paper
rated no lower than A-1 by S&P or Prime-1 by Moody's, or the equivalent from
another NRSRO, or, if unrated, of an issuer having an outstanding unsecured debt
issue then rated within the three highest rating categories; and repurchase
agreements meeting the conditions described below under 'Repurchase Agreements.'
At no time will either Fund's investments in bank obligations, including time
deposits, exceed 25% of the value of its assets. Global Equity Fund also may
invest in obligations issued or guaranteed by foreign governments or by any of
their political subdivisions, authorities, agencies or instrumentalities that
are rated AAA or AA by S&P, Aaa or Aa by Moody's, or that have received an
equivalent rating from another NRSRO, or, if unrated, deemed by GE Investment
Management to be of equivalent quality.
Emerging Markets Equity Fund and Global Equity Fund each is authorized to
invest in obligations of foreign banks or foreign branches of domestic banks
that are traded in the United States or outside the United States, but that are
denominated in U.S. dollars. These obligations entail risks that are different
from those of investments in obligations of domestic banks, including foreign
economic and political developments outside the United States, foreign
governmental restrictions that may adversely affect payment of principal and
interest on the obligations, foreign exchange controls and foreign withholding
or other taxes on income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to foreign
banks, such as mandatory reserve requirements, loan limitations and accounting,
auditing and financial recordkeeping requirements. In addition, less information
may be publicly available about a foreign branch of a domestic bank than about a
domestic bank.
ILLIQUID SECURITIES. Global Equity Fund and Global Income Fund each may
invest up to 10% of its net assets, and Emerging Markets Equity Fund up to 15%
of its net assets, in illiquid securities. The term 'illiquid securities' for
this purpose means securities that cannot be disposed of within seven days in
the ordinary course of business at approximately the amount at which a Fund has
valued the securities and includes, among other things, purchased
over-the-counter ('OTC') options, repurchase agreements maturing in more than
seven days and restricted securities other than those Mitchell Hutchins or a
Sub-Adviser, as applicable, have determined are liquid pursuant to guidelines
established by each Fund's board of trustees (each sometimes referred to as a
'board'). The assets used as cover for OTC options written by the Funds will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Funds may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act'). However,
to the extent that securities are freely tradeable in the country in which they
are principally traded, they are not considered illiquid securities for purposes
of the Funds' respective percentage limitations, even if they are not freely
tradeable in the United States. 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
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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.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a 'safe harbor' from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or a Sub-Adviser, as applicable, pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how offers are solicited and the mechanics of transfer).
Mitchell Hutchins or a Sub-Adviser monitors the liquidity of restricted
securities in each Fund's portfolio and reports periodically on such decisions
to the applicable board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such securities. If the
value of these securities is less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price, plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price that was paid by a Fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements carry certain risks
not associated with direct investments in securities, including possible
declines in the market value of the underlying securities and delays and costs
to a Fund if the other party to a repurchase agreement becomes insolvent.
The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins or a Sub-Adviser to
present minimal credit risks in accordance with guidelines established by each
board. Mitchell Hutchins or the Sub-Adviser reviews and monitors the
creditworthiness of those institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. Global Income Fund may enter into reverse
repurchase agreements with banks and securities dealers up to an aggregate value
of not more than 10% of the Fund's total assets. Such agreements involve the
sale of securities held by the Fund subject to the Fund's agreement to
repurchase the securities at an agreed-upon date and price reflecting a market
rate of interest. Such agreements are considered to be borrowings and may be
entered into only for temporary or emergency
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purposes. While a reverse repurchase agreement is outstanding, the Fund's
custodian segregates assets to cover the Fund's obligations under the reverse
repurchase agreement. See 'Investment Policies and Restrictions--Segregated
Accounts.'
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend portfolio
securities up to 33 1/3% of its total assets taken at market value to
broker-dealers or institutional investors that Mitchell Hutchins deems
qualified, but only when the borrower maintains with that Fund's custodian bank
acceptable collateral, marked to market daily, in an amount at least equal to
the market value of the securities loaned, plus accrued interest and dividends.
Acceptable collateral is limited to cash, U.S. government securities and
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Fund will
retain authority to terminate any loans at any time. Each Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. Each Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. Each Fund will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when regaining such rights is
considered to be in the Fund's interest.
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 defer realization of gains or losses for tax or other purposes. To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of a Fund, and that Fund is obligated to
replace the securities borrowed at a date in the future. When a Fund sells
short, it will establish a margin account with the broker effecting the short
sale, and will deposit collateral with the broker. In addition, the Fund will
maintain with its custodian, in a segregated account, 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.
The Funds 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 a Fund or a security convertible into or exchangeable for a
security owned by the Fund, or when Mitchell Hutchins or a Sub-Adviser wants to
sell a security that a Fund owns at a current price, but also wishes to defer
recognition of gain or loss for federal income tax purposes. In such case, any
loss in the Fund's long position after the short sale should be reduced by a
gain in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which gains or losses in
the long position are reduced will depend upon the amount of the securities sold
short relative to the amount of the securities 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 to make
future payments to third parties, it will maintain with an approved custodian in
a segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the Fund's obligation or commitment under such
transactions. As described below under 'Hedging Strategies,' segregated accounts
may also be required in connection with certain transactions involving options,
futures contracts and forward currency contracts (and, for Global Income Fund,
certain interest rate protection transactions).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each Fund may purchase securities on a 'when-issued' or delayed delivery basis.
A security purchased on a when-issued or delayed delivery basis is recorded as
an asset on the commitment date and is subject to changes in market value,
generally based upon changes in the level of interest rates. Thus, fluctuation
in the value of the security from the time of the commitment date will affect a
Fund's net asset value. When the Fund agrees to purchase securities on a
when-issued or delayed delivery basis, its custodian segregates assets to cover
the amount of the commitment. See 'Investment Policies and
Restrictions--Segregated Accounts.' The Fund purchases when-issued securities
only with the intention of taking delivery, but may sell the right to acquire
the security prior
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to delivery if Mitchell Hutchins or a Sub-Adviser deems it advantageous to do
so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of the
shares present at a shareholders' meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the foregoing limitations.
Each Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess of 33 1/3% of the Fund's total assets (including
the amount of the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or borrowing, except
that the Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(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, Emerging Markets Equity Fund and Global Equity Fund will not:
(7) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
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NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions, which
apply to each Fund, are non-fundamental and may be changed by the vote of the
Fund's board without shareholder approval.
Each Fund will not:
(1) purchase or retain the securities of any issuer if the officers and
trustees of the Trust and the officers and directors of Mitchell Hutchins (and,
for Emerging Markets Equity Fund and Global Equity Fund, the applicable
Sub-Adviser) each owning beneficially more than 0.5% of the outstanding
securities of the issuer own in the aggregate more than 5% of the securities of
the issuer.
(2) invest more than 10% of its net assets (15% of net assets for Emerging
Markets Equity Fund) in illiquid securities, a term which means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, repurchase agreements maturing in more than seven
days.
(3) purchase any security if as a result the Fund would have more than 5%
of its total assets invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years.
(4) make an investment in warrants, valued at the lower of cost or market,
that exceeds 5% of the value of its net assets, which amount may include
warrants that are not listed on the New York Stock Exchange Inc. ('NYSE') or the
American Stock Exchange, Inc., provided that such warrants, valued at the lower
of cost or market, do not exceed 2% of the Fund's net assets, and further
provided that this restriction does not apply to warrants attached to, or sold
as a unit with, other securities. For purposes of this restriction, the term
'warrants' does not include options on debt securities, bond indices, foreign
currencies or futures contracts.
(5) change its investment policies to permit the Fund to invest more than
35% of its total assets in debt securities rated Ba or lower by Moody's or BB or
lower by S&P, comparably rated by another NRSRO or determined by Mitchell
Hutchins (or the Sub-Adviser) to be of comparable quality, without giving at
least 30 days' advance notice to shareholders.
(6) invest in real estate limited partnerships.
(7) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(8) 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.
(9) 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.
(10) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in such
programs or leases and investments in asset-backed securities supported by
receivables generated from such programs or leases are not subject to this
prohibition.
(11) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not apply
to securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.
In addition, Global Equity Fund will not:
(12) invest in companies for the purpose of exercising control or
management.
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HEDGING STRATEGIES
HEDGING INSTRUMENTS. Mitchell Hutchins and the Sub-Advisers may use a
variety of financial instruments ('Hedging Instruments'), including certain
options, futures contracts (sometimes referred to as 'futures'), options on
futures contracts and forward currency contracts, to attempt to hedge each
Fund's portfolio. Global Income Fund may use these strategies to attempt to
enhance income and also may enter into certain interest rate protection
transactions. A Fund may enter into transactions involving one or more types of
Hedging Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, a Fund's use of these instruments will
place at risk a much smaller portion of its assets. In particular, each Fund may
use the hedging instruments described below.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security or currency underlying the option at a
specified price at any time during the term of the option. The writer of the
call option, who receives the premium, has the obligation, upon exercise of the
option during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract that
gives its purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The writer of
the put option, who receives the premium, has the obligation, upon exercise of
the option during the option term, to buy the underlying security or currency at
the exercise price.
OPTIONS ON SECURITIES INDEXES--A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be
broadly categorized as 'short hedges' and 'long hedges.' A short hedge is a
purchase or sale of a Hedging Instrument intended to
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partially or fully 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 Hedging 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 transactions 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 Hedging 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 Hedging Instrument whose price is expected
to move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, a Fund could exercise the call and thus limit its acquisition cost to the
exercise price plus the premium paid and transactions costs. Alternatively, a
Fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
Hedging 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. Hedging 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. Hedging Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ('CFTC') and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See 'Taxes.'
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the Sub-Advisers expect to discover
additional opportunities in connection with options, futures contracts and other
hedging techniques. These new opportunities may become available as Mitchell
Hutchins or the Sub-Advisers develop new techniques, as regulatory authorities
broaden the range of permitted transactions and as new options, futures
contracts, foreign currency contracts or other techniques are developed.
Mitchell Hutchins or a Sub-Adviser, as applicable, may utilize these
opportunities to the extent that they are consistent with each Fund's investment
objective and permitted by each Fund's 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 HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the ability of
Mitchell Hutchins or the Sub-Advisers, as applicable, to predict movements of
the overall securities and interest rate markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Advisers are experienced in the use of Hedging
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded.
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The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if 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 Hedging Instrument. Moreover, if the
price of the Hedging 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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund was unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
positions expired or matured. These requirements might impair 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 Hedging Instrument prior to expiration or maturity depends on the existence of
a liquid secondary market or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging 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, other options or futures
contracts or (2) cash and liquid securities, with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. Each Fund will comply with SEC guidelines regarding cover for
hedging transactions and will, if the guidelines so require, set aside cash or
liquid securities in a segregated account with its custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, in the case of Emerging Markets Equity Fund and
Global Equity Fund, on equity and debt securities and stock indices and on
foreign currencies, and in the case of Global Income Fund, on debt securities in
which it is authorized to invest and on foreign currencies. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the affected Fund will be
obligated to sell the security at less than its market value. Writing covered
put options serves as a limited long hedge because increases in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the put option
will be exercised and the Fund will be obligated to purchase the security at
more than its market value. The securities or other assets used as cover for OTC
options written by a Fund would be considered illiquid to the extent described
under 'Investment Policies and Restrictions-- Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general
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market conditions. Options normally have expiration dates of up to nine months.
Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Fund and its contra party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Funds will enter into OTC option transactions only with contra parties that
have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that a Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, a Fund might be unable to close out an OTC option position at any
time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by each respective Fund's board
without shareholder vote:
(1) Each Fund may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated
with the premiums on all other options held by 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 that Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on
futures contracts) purchased by a Fund that are held at any time will not
exceed 20% of that Fund's 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
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covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options on securities
or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract 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, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
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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 each 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 that Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by a Fund that are held at any time will not
exceed 20% of that Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a 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 Funds' 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.
The Funds might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Funds may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on another currency or a
basket of currencies, the value of which Mitchell Hutchins or the Sub-Advisers
believes will have a positive correlation to the value of the currency being
hedged. The risk that movements in the price of the Hedging Instrument will not
correlate perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Hedging Instruments, 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
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Funds might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, a Fund may purchase a forward currency contract to lock in
the U.S. dollar price of a security denominated in a foreign currency that the
Fund intends to acquire. Forward currency contract transactions may also serve
as short hedges--for example, a Fund may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
15
<PAGE>
As noted above, each Fund also may seek to hedge against changes in the
value of a particular currency by using forward contracts on another foreign
currency or a basket of currencies, the value of which Mitchell Hutchins or a
Sub-Adviser believes will have a positive correlation to the values of the
currency being hedged. In addition, a Fund may use forward currency contracts to
shift its 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 Hedging Instrument will
not correlate or will correlate unfavorably with the foreign currency being
hedged.
The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When a Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Funds 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.
INTEREST RATE PROTECTION TRANSACTIONS. Global Income Fund may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, floors and collars. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on the
basis of a specified amount of principal (the 'notional principal amount') for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which payments are made
when a designated market interest rate either goes above a designated ceiling
level or goes below a designated floor level on predetermined dates or during a
specified time period.
16
<PAGE>
Global Income Fund expects to enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Fund intends to use
these transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described above
with respect to other hedging strategies.
Global Income 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 the Fund receiving or paying, as the case may be, only the net amount
of the two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, Mitchell
Hutchins believes such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis, and appropriate Fund assets having an aggregate net asset value
at least equal to the accrued excess will be maintained in a segregated account
as described above in 'Investment Policies and Restrictions--Segregated
Accounts.' The Fund also will establish and maintain such segregated accounts
with respect to its total obligations under any interest rate swaps that are not
entered into on a net basis and with respect to any interest rate caps, collars
and floors that are written by the Fund.
Global Income Fund will enter into interest rate protection transactions
only with banks and recognized securities dealers believed by Mitchell Hutchins
to present minimal credit risk in accordance with guidelines established by the
Trust's board of trustees. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, floors and collars are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
17
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutch-
ins (since January 1995) and an executive
vice president and a director of
PaineWebber. Mrs. Alexander is president
and a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Richard Q. Armstrong; 61 Trustee Mr. Armstrong is chairman and principal of
78 West Brother Drive RQA Enterprises (management consulting
Greenwich, CT 06830 firm) (since April 1991 and principal
occupation since March 1995). Mr. Arm-
strong is also a director of Hi Lo Auto-
motive, Inc. He was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and spar-
kling/still waters) (October 1993-March
1995). Mr. Armstrong was a partner of the
New England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 70 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber
Board of Trustees Group Inc. ('PW Group') (holding company of
PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company. Mr.
Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeu-
tics, Inc. Mr. Bewkes is a director or
trustee of 30 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 49 Trustee Mr. Burt is chairman of International Equity
1101 Connecticut Avenue, N.W. Partners (international investments and
Washington, D.C. 20036 consulting firm) (since March 1994) and a
partner of McKinsey & Company (management
consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural
commodities). He was the chief negotiator
in the Strategic Arms Reduction Talks with
the former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a director
or trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary C. Farrell**; 46 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of
the Investment Policy Committee
of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's
Economic Roundtable and is employed as a
regular panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the
Board of Overseers of New York University's
Stern School of Business. Ms. Farrell is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of AMSCO International Inc.
(medical instruments and supplies),
Federated Department Stores, Inc. and New
World Communications Group Incorporated.
Dean Feldberg is a director or trustee of
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
George W. Gowen; 67 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, New York 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director of Columbia Real Estate In-
vestments, Inc. Mr. Gowen is a director or
trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (investment bank) and a co-
Suite 350 chairman and director of CB Commercial
Washington, D.C. 20004 Group Inc. (real estate). From January 1992
to November 1992, he was campaign manager
of Bush-Quayle '92. From 1990 to 1992, he
was vice chairman and, from 1989 to 1990,
he was president of Northwest Airlines
Inc., NWA Inc. (holding company of North-
west Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to
1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he
most recently was an executive vice
president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director
of American Management Systems, Inc.
(management consulting and computer related
services), Automatic Data Processing, Inc.,
Avis, Inc. (passenger car rental), FPL
Group, Inc. (electric services), and
National Education Corporation and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Carl W. Schafer; 60 Trustee Mr. Schafer is president of the Atlantic
P.O. Box 1164 Foundation (charitable foundation sup-
Princeton, NJ 08542 porting mainly oceanographic exploration
and research). He also is a director of
Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Evans
Systems, Inc. (a motor fuels, convenience
store and diversified company), Hidden Lake
Gold Mines Ltd., Electronic Clearing House,
Inc., (financial transactions processing),
Wainoco Oil Corporation and Nutraceutix,
Inc. (biotechnology). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a direc-
tor or trustee of 29 investment companies
for which Mitchell Hutchins or PaineWebber
serves as an investment adviser.
John R. Torell, III; 57 Trustee Mr. Torell is chairman of Torell Management,
767 Fifth Avenue Inc. (financial advisory firm), chairman of
Suite 4605 Telesphere Corporation (electronic provider
New York, NY 10153 of financial information) and a partner of
Zilkha & Company (merchant bank and private
investment company). He is the former
chairman and chief executive officer of
Fortune Bancorp (1990-1991 and 1990-1994,
respectively), the former chairman, presi-
dent and chief executive officer of CalFed,
Inc. (savings association) (1988 to 1989)
and the former president of Manufacturers
Hanover Corp. (bank) (prior to 1988). Mr.
Torell is also a director of American Home
Products Corp., New Colt Inc. (armament
manufacturer) and Volt Information Sciences
Inc. Mr. Torell is a director or trustee of
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
T. Kirkham Barneby; 50 Vice President Mr. Barneby is a managing director and chief
(Investment Trust only) investment officer--quantitative investment
of Mitchell Hutchins. Prior to September
1994, he was a senior vice president at
Vantage Global Management. Prior to June
1993, he was a senior vice president at
Mitchell Hutchins. Mr. Barneby is a vice
president of four investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
<S> <C> <C>
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president and man-
ager--advisory administration of Mitchell
Hutchins. Prior to November 1993, she was
compliance manager of Hyperion Capital
Management, Inc., an investment advisory
firm. Prior to April 1993, Ms. Boyle was a
vice president and manager--legal
administration of Mitchell Hutchins. Ms.
Boyle is a vice president of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president and a se-
Assistant Treasurer nior manager of the mutual fund finance
division of Mitchell Hutchins. Mr. Maher is
a vice president and assistant treasurer of
30 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 49 Vice President (Investment Mr. McCauley is a managing director and chief
Series only) investment officer--fixed income of
Mitchell Hutchins. Prior to December 1994,
he was director of fixed income
investments of IBM Corporation. Mr.
McCauley is a vice president of 19
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice president of Mitchell
Assistant Treasurer Hutchins. Ms. Moran is also a vice presi-
dent and assistant treasurer of 30 invest-
ment companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice presi-
dent and secretary of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and di-
rector of operations and control for Mitch-
ell Hutchins. From March 1991
to September 1993, he was director of the
Mutual Funds Sales Support and Service
Center for Mitchell Hutchins and
PaineWebber. Mr. Polito is vice president
of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 30 investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
division of Mitchell Hutchins. From August
1992 to August 1994, he was a vice
president at BlackRock Financial
Management, Inc. Prior to August 1992, he
was an audit manager with Ernst & Young
LLP. Mr. Schubert is a vice president and
assistant treasurer of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior vice president and
Treasurer the director of the mutual fund finance
division of Mitchell Hutchins. Prior to
1991, he was an audit senior manager with
Ernst & Young LLP. Mr. Sluyters is a vice
president and treasurer of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director and chief
(Investment Trust and investment officer--U.S. equity invest-
Investment Trust II only) ments of Mitchell Hutchins. Prior to March
1995, 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 14
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Stuart Waugh; 40 Vice President (Investment Mr. Waugh is a managing director and a
Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income in-
vestments and currency trading. Mr. Waugh
is also a vice president of four other
investment companies for which Mitchell
Hutchins serves as investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president and as-
Assistant Secretary sociate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is
a vice president and assistant secretary of
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber, and/or PW Group.
Each Trust pays trustees who are not 'interested persons' of the Trust
$1,000 annually for each series and $150 for each board meeting and each
separate meeting of a board committee. Investment Trust II and Investment Series
presently each has one series and thus pays each such trustee $1,000 annually,
plus any additional amounts due for board or committee meetings. Investment
Trust has two series and thus pays each such trustee $2,000 annually, plus any
additional amounts due for board or committee meetings. Messrs. Feldberg and
Torell serve as chairmen of the audit and contract review committees of
individual funds within the PaineWebber fund complex and receive additional
annual compensation, aggregating $15,000 each, from the relevant funds. All
trustees are reimbursed for any expenses incurred in attending meetings.
Trustees and officers own in the aggregate less than 1% of the outstanding
shares of each Fund. Because PaineWebber, Mitchell Hutchins and, as applicable,
a Sub-Adviser perform substantially all the services necessary for the operation
of the Trusts and each Fund, the Trusts require no employees. No officer,
director or employee of Mitchell Hutchins or PaineWebber presently receives any
compensation from the Trusts for acting as a trustee or officer.
24
<PAGE>
The table below includes certain information relating to the compensation
of the current trustees who held office with the Trusts or with other
PaineWebber funds during the fiscal years indicated.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
AGGREGATE AGGREGATE AGGREGATE COMPENSATION
COMPENSATION COMPENSATION COMPENSATION FROM THE
FROM FROM FROM TRUSTS AND
INVESTMENT INVESTMENT INVESTMENT THE FUND
NAME OF PERSON, POSITION TRUST II* TRUST** SERIES*** COMPLEX****
- -------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee......................................... $1,688 $2,625 -- $ 9,000
Richard R. Burt,
Trustee......................................... $1,688 $2,625 -- $ 7,750
Meyer Feldberg,
Trustee......................................... $1,688 $2,625 $7,000 $106,375
George W. Gowen,
Trustee......................................... $1,688 $2,625 $7,000 $ 99,750
Frederic V. Malek,
Trustee......................................... $1,688 $2,625 $7,000 $ 99,750
Carl W. Schafer,
Trustee......................................... $1,688 $2,625 -- $118,175
John R. Torell, III,
Trustee......................................... $1,688 $2,625 -- $ 28,125
</TABLE>
- ------------------
Only independent members of the board are compensated by the Trusts and
identified above; trustees who are 'interested persons,' as defined by the 1940
Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended June 30,
1996.
** Represents fees paid to each trustee during the fiscal year ended August
31, 1996.
*** Represents fees paid to each trustee during the fiscal year ended October
31, 1995.
**** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995; no fund within the fund complex has a pension or
retirement plan.
BENEFICIAL OWNERSHIP OF GREATER THAN 5% OF FUND SHARES
The following shareholder is shown in Emerging Markets Equity Fund's
records as owning more than 5% of its shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF SEPTEMBER 30, 1996
- ------------------------------------ ------------------------------------
<S> <C> <C>
Subaru of New England............... 623,513 (15.9%)
</TABLE>
The following shareholder is shown in Global Equity Fund's records as
owning more than 5% of its shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF SEPTEMBER 30, 1996
- --------------------------------------- ------------------------------------
<S> <C> <C>
Northern Trust Company................. 1,989,815 (6.1%)
</TABLE>
- ------------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 1285 Avenue of the Americas, New York, New York 10019
25
<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
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 trustees and officers who are not interested persons (as defined in
the 1940 Act) of the Trust or Mitchell Hutchins; (6) all expenses incurred in
connection with the trustees' services, including travel expenses; (7) taxes
(including any income or franchise taxes) and governmental fees; (8) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds; (9) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the Trust or Fund for violation of
any law; (10) legal, accounting and auditing expenses, including legal fees of
special counsel for the independent trustees; (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 trustees 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 of trustees 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.
EMERGING MARKETS EQUITY FUND. Mitchell Hutchins acts as the investment
adviser and administrator of Emerging Markets Equity Fund pursuant to an
Advisory Contract with the Trust dated April 13, 1995. Under the Advisory
Contract the Fund pays Mitchell Hutchins an annual fee, computed daily and paid
monthly, at the annual rate of 1.62% of the Fund's average daily net assets up
to and including $100 million and 1.50% of amounts over $100 million. For the
fiscal years ended June 30, 1996 and June 30, 1995 and for the period January
19, 1994 (commencement of operations) to June 30, 1994, the Fund paid (or
accrued) to Mitchell Hutchins and/or Kidder Peabody Asset Management, Inc.
('KPAM') (the Fund's investment adviser prior to February 13, 1995) advisory and
administrative fees of $867,093, $1,261,493 and $658,437, respectively.
For the fiscal years ended June 30, 1995 and June 30, 1996, Mitchell
Hutchins waived part of its management fees and reimbursed Emerging Markets
Equity Fund in the amounts of $81,217 and $538,618, respectively; during these
periods, certain expense limitations were applicable which are no longer in
effect. As of the date of this Statement of Additional Information, Mitchell
Hutchins was voluntarily waiving part of its management fees and making
reimbursements to Emerging Markets Equity Fund so that the Fund's 'Total
Operating Expenses' were as listed in the Expense Table in the Prospectus.
Mitchell Hutchins may discontinue these voluntary waivers/reimbursements at any
time.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with Emerging Markets Management, dated
April 13, 1995 ('Sub-Advisory Contract'), pursuant to which Emerging Markets
Management 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 Emerging Markets Management a
26
<PAGE>
fee in the amount of 1.12% of the Fund's average daily net assets up to and
including $100 million and 0.90% of amounts over $100 million. Emerging Markets
Management bears all expenses incurred by it in connection with its services
under the Sub-Advisory Contract. Under the Sub-Advisory Contract (or a prior
sub-advisory contract between KPAM and Emerging Markets Management) for the
fiscal years ended June 30, 1996, June 30, 1995 and for the period January 19,
1994 (commencement of operations) through June 30, 1994, Mitchell Hutchins
and/or KPAM paid (or accrued) fees of $599,472, $872,143 and $455,216,
respectively, to Emerging Markets Management.
Under the Sub-Advisory Contract, Emerging Markets Management will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust, Emerging Markets Equity Fund, its shareholders or Mitchell Hutchins
in connection with the Sub-Advisory Contract, except any liability to the Trust,
the Fund, its shareholders or Mitchell Hutchins to which Emerging Markets
Management would otherwise be subject by reason of willful misfeasance, bad
faith, 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.
GLOBAL EQUITY FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Equity Fund pursuant to an Advisory Contract dated
August 25, 1995 with the Trust. 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 value 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. For the fiscal years ended
August 31, 1996, August 31, 1995, and August 31, 1994, the Fund paid (or
accrued) to Mitchell Hutchins and/or KPAM (the Fund's investment adviser prior
to February 13, 1995) advisory and administrative fees of $4,990,588, $2,109,091
and $2,339,156, respectively.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with GE Investment Management, dated August
25, 1995 ('Sub-Advisory Contract'), pursuant to which GE Investment Management
determines what securities will be purchased, sold or held by the Fund. Under
the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays GE Investment
Management a fee, computed daily and paid monthly, at the annual rate of 0.31%
of the value of its average daily net assets up to and including $500 million,
0.29% of amounts over $500 million up to and including $1 billion, and 0.265% of
amounts over $1 billion. GE Investment Management bears all expenses incurred by
it in connection with its services under the Sub-Advisory Contract. Under the
Sub-Advisory Contract (or a prior sub-advisory contract between KPAM and GE
Investment Management) for the fiscal year ended August 31, 1996, August 31,
1995 and August 31, 1994, Mitchell Hutchins and/or KPAM paid (or accrued) fees
of $1,808,760, $1,523,282, and $1,637,409, respectively, to GE Investment
Management.
Under the Sub-Advisory Contract, GE Investment Management will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust, Global Equity Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to the Trust,
the Fund, its shareholders or Mitchell Hutchins to which GE Investment
Management would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the Sub-Advisory
Contract.
The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by the board of trustees or by vote of the holders of a majority of
Global Equity Fund's outstanding voting securities on 60 days' notice to GE
Investment Management, or by Global Equity on 60 days' written notice to
Mitchell Hutchins.
GLOBAL INCOME FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Income Fund pursuant to an Advisory Contract with the
Trust dated April 21, 1988. Under the Advisory Contract the Fund pays Mitchell
Hutchins an annual 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, 1995, October 31, 1994 and
October 31, 1993, the Fund paid (or accrued) to Mitchell Hutchins advisory and
administrative fees of $9,229,318, $12,723,592 and $11,643,584, respectively.
27
<PAGE>
Under a service agreement ('Service Agreement') with Global Income Fund
that is reviewed by its board annually, PaineWebber provides certain services to
Global Income Fund not otherwise provided by the Fund's transfer agent. Pursuant
to the Service Agreement, for the fiscal years ended October 31, 1995, October
31, 1994 and October 31, 1993, Global Income Fund paid (or accrued) to
PaineWebber $376,299, $487,859 and $467,885, respectively.
NET ASSETS. The following table shows the approximate net assets as of
September 30, 1996, sorted by category of investment objective, of the
investment companies as to which Mitchell Hutchins serves as adviser or
sub-adviser. An investment company may fall into more than one of the categories
below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- --------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................ $ 5,616.6
Global........................................................................... 2,826.6
Equity/Balanced.................................................................. 3,221.4
Fixed Income (excluding Money Market)............................................ 5,221.2
Taxable Fixed Income........................................................ 3,586.3
Tax-Free Fixed Income....................................................... 1,634.9
Money Market Funds............................................................... 22,177.7
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to codes of ethics that describe 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
the Class A, Class B and Class C shares of each Fund under separate distribution
contracts with each Trust (collectively, 'Distribution Contracts') that require
Mitchell Hutchins to use its best efforts, consistent with its other businesses,
to sell shares of each Fund. Shares of each of the Funds are offered
continuously. Under separate exclusive dealer agreements between Mitchell
Hutchins and PaineWebber relating to the Class A, Class B and Class C shares
(collectively, 'Exclusive Dealer Agreements'), PaineWebber and its correspondent
firms sell the Funds' shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by each Trust in the manner prescribed under Rule 12b-1
under the 1940 Act ('Class A Plan,' 'Class B Plan' and 'Class C Plan,'
collectively, 'Plans'), 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 for each respective Fund. 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 Emerging Markets Equity Fund and Global Equity Fund) and 0.50%
(in the case of Global Income Fund) of the average daily net assets of the Class
C shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to each Fund's board of trustees at least quarterly, and the trustees
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 each board of trustees, including those
trustees who are not 'interested persons' of their respective Funds and who have
no direct or indirect financial interest in the operation of the Plan or any
agreement related to the Plan, acting in person at a meeting called for that
purpose, (3) payments by a Fund under the Plan shall not be materially increased
without the affirmative vote of the holders of a majority of the outstanding
shares of the relevant class of the respective Fund and (4) while the Plan
remains in effect, the selection and nomination of trustees who are not
'interested persons' of a Fund shall be committed to the discretion of the
trustees who are not 'interested persons' of that Fund.
28
<PAGE>
In reporting amounts expended under the Plans to the trustees, 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.
For the fiscal year ended June 30, 1996 (for Emerging Markets Equity Fund),
August 31, 1996 (for Global Equity Fund) and October 31, 1995 (for Global Income
Fund), the Funds paid (or accrued) the following respective fees to Mitchell
Hutchins under the Plans:
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL GLOBAL
EQUITY EQUITY INCOME
FUND FUND FUND
-------- ---------- ----------
<S> <C> <C> <C>
Class A.............................. $ 65,762 $ 828,741 $1,499,377
Class B.............................. $ 2,704 $1,252,635 $5,822,394
Class C.............................. $144,997 $ 732,335 $ 538,004
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each Fund during the fiscal year
ended June 30, 1996 (for Emerging Markets Equity Fund), August 31, 1996 (for
Global Equity Fund) and October 31, 1995 (for Global Income Fund):
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL GLOBAL
EQUITY EQUITY INCOME
FUND FUND FUND
-------- ---------- ----------
<S> <C> <C> <C>
CLASS A
Marketing and advertising....................................... $ 8,682 $1,433,220 $ 335,668
Printing of prospectuses and statement of additional
information................................................... $ 815 $ 122 $ 2,061
Branch network costs allocated and interest expense............. $21,768 $ 591,899 $3,764,453
Service fees paid to PaineWebber Investment Executives.......... $28,468 $ 340,469 $ 674,720
CLASS B
Marketing and advertising....................................... $ 5,667 $ 58,093 $ 203,843
Amortization of commissions..................................... $ 786 $ 716,318 $2,756,777
Printing of prospectuses and statement of additional
information................................................... $ 524 $ 50 $ 1,252
Branch network costs allocated and interest expense............. $ 6,993 $ 430,854 $3,047,478
Service fees paid to PaineWebber investment executives.......... $ 268 $ 128,838 $ 655,020
CLASS C
Marketing and advertising....................................... $16,423 $ 140,994 $ 89,803
Amortization of commissions..................................... $47,127 $ 137,429 $ 158,675
Printing of prospectuses and statement of additional
information................................................... $ 1,572 $ 120 $ 551
Branch network costs allocated and interest expense............. $54,119 $ 815,384 $1,110,149
Service fees paid to PaineWebber investment executives.......... $15,709 $ 75,334 $ 80,701
</TABLE>
29
<PAGE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. 'Branch
network costs allocated and interest expense' consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the Funds' shares, including the PaineWebber retail branch system.
In approving the Funds' overall Flexible Pricing(Service Mark) system of
distribution, each Trust's 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 each respective Fund and
attracting new investors and assets to the Fund to the benefit of the Fund and
its shareholders, (2) facilitate distribution of the Funds' shares and (3)
maintain the competitive position of the Funds in relation to other funds that
have implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, the trustees of each Fund considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a service
fee would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the case,
(3) the advantages to the shareholders of economies of scale resulting from
growth in the Fund's assets and potential continued growth, (4) the services
provided to the Fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan, the trustees of each Fund considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
investment executives and correspondent firms, resulting in greater growth of
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service and distribution-related expenses and
costs. The trustees also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class C Plan, the trustees of each Fund considered all the
features of the distribution system, including (1) the advantage to investors in
having no initial sales charges deducted from the Fund purchase payments and
instead having the entire amount of their purchase payments immediately invested
in Fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief that
the ability of PaineWebber investment executives and correspondent firms to
receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not face
contingent deferred sales charges, would prove attractive to the investment
executives and correspondent firms, resulting in greater growth to the Fund than
might otherwise be the case, (4) the advantages to the shareholders of economies
of scale resulting from growth in the Fund's assets and potential continued
growth, (5) the services provided to the Fund and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
service- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives without the concomitant receipt by Mitchell Hutchins of
initial sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
30
<PAGE>
With respect to each Plan, the trustees 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 trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees which are
calculated based upon a percentage of the average net assets of each Fund, which
would increase if the Plan were successful and the Fund attained and maintained
significant asset levels.
Under the Distribution Contracts for the Class A shares for the fiscal
years 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 END
--------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EMERGING MARKETS EQUITY FUND
Earned....................... $ 25,696 $135,474 N/A N/A
Retained..................... $ 15,319 $ 74,510 N/A N/A
GLOBAL EQUITY FUND
Earned....................... $229,590 $ 38,399 N/A N/A
Retained..................... $137,428 $ 21,289 N/A N/A
GLOBAL INCOME FUND
Earned....................... N/A $ 43,136 $193,492 $560,223
Retained..................... N/A $ 26,258 $ 15,764 $ 11,464
</TABLE>
For the fiscal periods shown, Mitchell Hutchins earned and retained the
following contingent deferred sales charges paid upon certain redemptions of
Class A, Class B and Class C shares.
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL GLOBAL
EQUITY EQUITY INCOME
FUND FUND FUND
---------- ---------- -----------
FISCAL YEAR ENDED
---------------------------------------
JUNE 30, AUGUST 31, OCTOBER 31,
1996 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Class A............. $ 0 $ 0 $ 0
Class B............. $1,233 $606,968 $ 2,395,994
Class C............. $ 45 $ 1,802 $ 0
</TABLE>
31
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each Fund's board, Mitchell Hutchins or
a Sub-Adviser, as applicable, is responsible for the execution of each Fund's
portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks to
obtain the best net results for a Fund, taking into account such factors as the
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved.
While Mitchell Hutchins and the Sub-Adviser generally seek reasonably
competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a 'spread,' which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Funds may invest in securities traded
in the OTC market and will engage primarily in transactions directly with the
dealers who make markets in such securities, unless a better price or execution
could be obtained by using a broker. For the fiscal years ended June 30, 1996,
June 30, 1995 and the period January 19, 1994 (commencement of operations) to
June 30, 1994, Emerging Markets Equity Fund paid $264,723, $531,901 and
$363,528, respectively, in brokerage commissions. For the fiscal years ended
August 31, 1996, August 31, 1995 and August 31, 1994, Global Equity Fund paid
$1,472,329, $850,531 and $780,022, respectively, in brokerage commissions. For
the fiscal years ended October 31, 1995, October 31, 1994 and October 31, 1993,
Global Income Fund did not pay any brokerage commissions.
The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through PaineWebber. Each Fund's board of trustees has adopted
procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all
brokerage commissions paid to PaineWebber are reasonable and fair. Specific
provisions in the Advisory Contracts authorize PaineWebber to effect portfolio
transactions for the 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.
For the fiscal years ended June 30, 1996 and June 30, 1995, Emerging Markets
Equity Fund paid no brokerage commissions to PaineWebber. For its last three
fiscal years, neither Global Equity Fund nor Global Income Fund paid any
brokerage commissions to PaineWebber.
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 PaineWebber 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 Fund's board of trustees, Mitchell Hutchins or a Sub-Adviser may cause a
Fund to purchase and sell portfolio securities from and to dealers or through
brokers who provide that Fund with research, analysis, advice and similar
services. In return for such services, the Funds may pay to those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins or the Sub-Adviser determines in good faith that such commission is
reasonable in terms either of that particular transaction or of the overall
responsibility of Mitchell Hutchins or the Sub-Adviser, as applicable, to that
Fund and its other clients and that the total commissions paid by the Fund will
be reasonable in relation to the benefits to the Fund over the long term. For
the fiscal year ended June 30, 1996, Emerging Markets Management directed none
of Emerging Markets Equity Fund's portfolio transactions to brokers chosen for
research services. For the fiscal year ended August 31, 1996, GE Investment
Management directed $21,439,471 in portfolio transactions to brokers chosen
because they provided research services, for which Global Equity Fund paid
$24,245 in commissions. For the fiscal year ended October 31, 1995, Mitchell
Hutchins directed none of Global Income Fund's portfolio transactions to brokers
chosen for research services.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or the applicable Sub-Adviser seeks best execution. Although
Mitchell Hutchins and the Sub-Adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the Sub-
Advisers will not purchase securities at a higher price or sell securities at a
lower price than would otherwise
32
<PAGE>
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 which could be
purchased for hard dollars. Mitchell Hutchins or a Sub-Adviser may engage in
agency transactions in OTC equity and debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins or the Sub-Adviser receiving multiple quotes from dealers
before executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins or a Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or the 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
Contract 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 is a member of the underwriting or selling group, except
pursuant to procedures adopted by each Fund's board of trustees pursuant to Rule
10f-3 under the 1940 Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the Funds.
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 each Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
The Funds' respective portfolio turnover rates for the preceding two fiscal
years were:
<TABLE>
<S> <C>
EMERGING MARKETS EQUITY FUND
Fiscal Year ended June 30, 1996.................................. 69%
Fiscal Year ended June 30, 1995.................................. 76%
GLOBAL EQUITY FUND
Fiscal Year ended August 31, 1996................................ 33%
Fiscal Year ended August 31, 1995................................ 40%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1995............................... 113%
Fiscal Year ended October 31, 1994............................... 108%
</TABLE>
33
<PAGE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges indicated in the table of
sales charges for Class A shares in the Prospectus. The sales charge payable on
the purchase of Class A shares of the Funds and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A Fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing System
on July 1, 1991 ('CDSC Funds'). The contingent deferred sales charge is waived
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 by officers, directors (trustees) or employees of the CDSC Funds,
Mitchell Hutchins or their affiliates (or their spouses and children under age
21). In addition, the contingent deferred sales charge will be reduced by 50%
with respect to redemptions of Class B shares of CDSC Funds purchased prior to
July 1, 1991 with a net asset value at the time of purchase of at least $1
million. If Class B shares of a CDSC Fund purchased
34
<PAGE>
prior to July 1, 1991 are exchanged for Class B shares of the Funds, any waiver
or reduction of the contingent deferred sales charge that applied to the Class B
Shares of the CDSC Fund will apply to the Class B shares of the Funds acquired
through the exchange.
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. This exchange
privilege is available only in those jurisdictions where the sale of PaineWebber
fund shares to be acquired through such exchange may be legally made.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce any exchange fee and 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, the Funds reserve
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Funds and valued in the same way as they would
be valued for purposes of computing the Funds' net asset value. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. Each Fund has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, under which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for one shareholder. This election is irrevocable unless the
SEC permits its withdrawal.
The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined by
the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3) as
the SEC may otherwise permit. The redemption price may be more or less than the
shareholder's cost, depending on the market value of a Fund's portfolio at the
time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When the
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 low price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the 'Initial Account Balance' (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional 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 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or
semi-annual plans, PaineWebber will arrange for redemption by the Funds of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Funds' systematic withdrawal plan. The payment generally is
mailed approximately five Business Days (defined under 'Valuation of Shares')
after the redemption date. Withdrawal payments should not be considered
dividends, but redemption proceeds, with the tax consequences described under
'Dividends & Taxes' in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends and other distributions, a shareholder's investment
may be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC Inc. ('Transfer Agent').
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan
35
<PAGE>
will not be effective until five days after written instructions with signatures
guaranteed are received by the Transfer Agent. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
investment executives, correspondent firms or the Transfer Agent at
1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in a Fund without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in 'Dividends & Taxes' in the
Prospectus.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICE MARK)
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a 'PW Fund' and, collectively, the
'PW Funds') are available for purchase through the RMA Resource Accumulation
Plan ('Plan') by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ('RMA accountholders'). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under 'Valuation of Shares') after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of 'dollar cost averaging.' By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue
36
<PAGE>
investing through periods of low share prices. However, over time, dollar cost
averaging generally results in a lower average original investment cost than if
an investor invested a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities held
in the account;
o comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
o automatic 'sweep' of uninvested cash into the RMA accountholder's choice
of one of the seven RMA money market funds-RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
Municipal Money Fund, RMA Connecticut Municipal Money Fund, RMA New
Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
money market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by
the U.S. government;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $50 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Funds will automatically convert to Class A shares,
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 of each Fund 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. If the shareholder
acquired Class B shares of each Fund through an exchange of Class B shares of a
CDSC Fund that were acquired prior to July 1, 1991, the shareholder's holding
period for purposes of conversion will be determined based on the date the CDSC
Fund shares were initially issued. For purposes of conversion into Class A,
Class B shares purchased through the reinvestment of dividends and other
37
<PAGE>
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A. The portion
will be determined by the ratio that the shareholder's Class B shares converting
to Class A bears to the shareholder's total Class B shares not acquired through
dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
'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 for the availability of the conversion feature will not be met.
VALUATION OF SHARES
The Funds determine their net asset values per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued
at the last sale price on the day the securities are valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins or the Sub-Adviser as the primary
market. Securities traded in the OTC market and listed on the Nasdaq Stock
Market, Inc. ('Nasdaq') are valued at the last trade price on Nasdaq at 4:00
p.m., Eastern time; other OTC securities are valued at the last bid price
available prior to valuation (other than short-term investments that mature in
60 days or less which are valued as described further below). Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of each Fund's
board. In valuing lower rated corporate debt securities it should be recognized
that judgment often plays a greater role than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. All investments quoted in foreign currency will be
valued daily in U.S. dollars on the basis of the foreign currency exchange rate
prevailing at the time such valuation is determined by the Funds' custodian. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity, unless the board of a Fund
determines that this does not represent fair value.
Foreign currency exchange rates are generally determined prior to the close
of regular trading on the NYSE. Occasionally events affecting the value of
foreign investments and such exchange rates occur between the time at which they
are determined and the close of trading on the NYSE, which events would not be
reflected in a computation of the Funds' 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 each Fund's board
of trustees. 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. This rate under
normal market conditions differs from the prevailing exchange rate in an amount
generally less than one-tenth of one percent due to the costs of converting from
one currency to another.
PERFORMANCE INFORMATION
The 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.
38
<PAGE>
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.
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 table shows performance information for the Class A, Class B
and Class C shares of the Funds for the periods indicated. All returns for
periods of more than one year are expressed as an average return.
EMERGING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended June 30, 1996:
Standardized Return*.................. (1.28)% N/A 1.79%
Non-Standardized Return............... 3.39% N/A 2.79%
Inception** to June 30, 1996:
Standardized Return*.................. (8.48)% 3.87% (7.39)%
Non-Standardized Return............... (6.73)% 8.87% (7.39)%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for each Class of shares is as follows: Class A--January
19, 1994, Class B-- December 5, 1995, and Class C--January 19, 1994. Return
information for Class B shares has not been annualized and reflects results
for the period December 5, 1995 through June 30, 1996.
39
<PAGE>
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended August 31, 1996:
Standardized Return*.................. 3.20% 2.18% 6.18%
Non-Standardized Return............... 8.06% 7.18% 7.18%
Inception** to August 31, 1996:
Standardized Return*.................. 9.65% 2.08% 9.61%
Non-Standardized Return............... 10.71% 6.98% 9.61%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for each Class of shares is as follows: Class A--November
14, 1991, Class B-- August 25, 1995, and Class C--May 10, 1993.
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Year ended April 30, 1996:
Standardized Return*.................. 3.66% 2.16% 6.69%
Non-Standardized Return............... 8.02% 7.16% 7.44%
Five years ended April 30, 1996:
Standardized Return*.................. N/A 5.94% N/A
Non-Standardized Return............... N/A 6.25% N/A
Inception** to April 30, 1996:
Standardized Return*.................. 6.37% 9.41% 5.51%
Non-Standardized Return............... 7.26% 9.41% 5.51%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period.
** The inception date for each Classes of shares is follows: Class A--July 1,
1991, Class B--March 20, 1987, and Class C-- July 2, 1992.
YIELD. Yields used in Global Income Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to a Class of
shares for a 30-day period ('Period'), net of expenses attributable to such
Class, by the average number of shares of such Class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:
a-b 6
YIELD = 2 [( --- + 1) -1]
cd
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.
40
<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 totalling
the interest earned on all debt obligations. For purposes of these calculations,
the maturity of an obligation with one or more call provisions is assumed to be
the next date on which the obligation reasonably can be expected to be called
or, if none, the maturity date. With respect to Class A shares, in calculating
the maximum offering price per share at the end of the Period (variable 'd' in
the above formula) the Fund's current maximum 4% initial sales charge on Class A
shares is included. For the 30-day period ended April 30, 1996, the yields for
its Class A shares, Class B shares and Class C shares were 4.95%, 4.45% and
4.71%, respectively.
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ('Lipper'), CDA Investment
Technologies, Inc. ('CDA'), Wiesenberger Investment Companies Service
('Wiesenberger'), Investment Company Data, Inc. ('ICD') or Morningstar Mutual
Funds ('Morningstar'), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ('S&P 500'), the Dow Jones Industrial Average, the
International Finance Corporation Global Total Return Index, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman
Brothers Government/Corporate Bond Index, other similar Lehman Brothers indices
or components thereof, 30-year and 10-year U.S. Treasury bonds, the Morgan
Stanley Capital International Perspective Indices, the Morgan Stanley Capital
International Energy Sources Index, the Standard & Poor's Oil Composite Index,
the Morgan Stanley Capital International World Index, the Salomon Brothers
Non-U.S. Dollar Index, the Salomon Brothers Non-U.S. World Government Bond
Index, the Salomon Brothers World Government Index, other similar Salomon
Brothers indices or components thereof and changes in the Consumer Price Index
as published by the U.S. Department of Commerce. The Funds also may refer in
such materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Funds and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.
The Funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested in
additional Fund shares, any future income or capital appreciation of a Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the value
of a Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(Registered) Money Markets. In comparing the
Funds' performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Funds are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the Funds generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term debt securities. An
investment in any Fund involves greater risks than an investment in either a
money market fund or a CD.
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<PAGE>
Each Fund may also compare its performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
[CHART]
The chart is shown for illustrative purposes only and does not represent any
Fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investments results. Year-to-year fluctuations in certain markets have been
significant and negative returns have been experienced in certain markets from
time to time. Stocks are measured by the S&P 500, an unmanaged weighted index
comprising 500 widely held common stock and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
- ------------------
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook(Trademark) Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1995, stocks beat all
other traditional asset classes. A $10 investment in the S&P 500 grew to
$10,507, significantly more than any other investment.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ('RIC') under the Internal Revenue Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain 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
42
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(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ('Income
Requirement'); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months--options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ('Short-Short Limitation'); (3)
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of that Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by 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 reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by each Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back as
a taxable distribution.
Dividends and interest received by a Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
(collectively 'foreign taxes') that would reduce the yield on its securities.
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not impose
taxes on capital gains in respect of investments by foreign investors. If more
than 50% of the value of a Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, it will be eligible to, and may,
file an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by him or her, his or her proportionate share of those taxes; (2) treat his or
her share of those taxes and of any dividend paid by the Fund that represents
income from foreign or U.S. possessions sources as his or her own income from
those sources; and (3) either deduct the 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 the Fund's foreign taxes and income from sources
within, and taxes paid to, foreign countries and U.S. possessions if it makes
this election.
Each Fund will be subject to a nondeductible 4% excise tax ('Excise Tax')
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Each Fund may invest in the stock of 'passive foreign investment companies'
('PFICs') if such stock is a permissible investment. A PFIC is a foreign
corporation 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
43
<PAGE>
for the production of, passive income. Under certain circumstances, a Fund will
be subject to federal income tax on a portion of any 'excess distribution'
received on the stock of a PFIC or of any gain from disposition of such stock
(collectively 'PFIC income'), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If a Fund invests in a PFIC and
elects to treat the PFIC as a 'qualified electing fund' ('QEF'), then in lieu of
the foregoing tax and interest obligation, the Fund will be required to include
in income each year its pro rata share of the QEF's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss)--which may have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax--even if those
earnings and gain are not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Funds, would
be entitled to elect to 'mark-to-market' their stock in certain PFICs.
'Marking-to-market,' in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the owner's adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses 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. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, also will be
subject to the Short-Short Limitation if they are held for less than three
months and are not directly related to a Fund's principal business of investing
in securities (or options and futures with respect to securities).
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not qualify for this treatment,
it may be forced to defer the closing out of certain options, futures, and
forward currency contracts and/or foreign currency positions beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
continue to qualify as a RIC.
Global Income Fund may acquire zero coupon U.S. Treasury securities issued
with original issue discount. As a holder of such securities, the Fund must
include in its gross income the portion of the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on them during the year. Because the Fund annually must
distribute substantially all of its investment company taxable income, including
any accrued original issue discount, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Fund's ability to sell other securities, or certain
options, futures, forward currency contracts or foreign currency positions, held
for less than three months that it might wish to sell in the ordinary course of
its portfolio management.
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OTHER INFORMATION
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the
Trust or Fund. 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 trustees or by any officers or
officer by or on behalf of the Trust or the Fund, the trustees or any of them in
connection with the Trust. The Declaration of Trust provides for indemnification
from the Fund's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations, a possibility that Mitchell Hutchins believes is remote and not
material. Upon payment of any liability incurred by a shareholder solely by
reason of being or having been a shareholder, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the Fund.
The trustees intend to conduct the Fund's operations in such a way as to avoid,
as far as possible, ultimate liability of the shareholders for liabilities of
the Fund.
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. New Class B shares were not offered prior to December 5, 1995.
Prior to August 25, 1995, the name of Global Equity Fund was 'Mitchell
Hutchins/Kidder, Peabody Global Equity Fund.' Prior to February 13, 1995, the
name of the Fund was 'Kidder, Peabody Global Equity Fund.' Prior to November 10,
1995, the Fund's Class B shares were known as 'Class E' shares and its Class C
shares were known as 'Class B' shares.
Prior to July 1, 1991, the name of Global Income Fund was 'PaineWebber
Master Global Income Fund.' Prior to November 10, 1995, the Fund's Class C
shares were known as 'Class D' shares.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those borne
by Class A or Class C shares. The higher fee is imposed due to the higher costs
incurred by the transfer agent in tracking shares subject to a contingent
deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Moreover, the tracking and calculations required by the automatic
conversion feature of the Class B shares will cause the transfer agent to incur
additional costs. Although the transfer agency fee will differ on a per account
basis as stated above, the specific extent to which the transfer agency fees
will differ between the Classes as a percentage of net assets is not certain,
because the fee as a percentage of net assets will be affected by the number of
shareholder accounts in each Class and the relative amounts of net assets in
each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the 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 Emerging Markets Equity Fund and Global
Equity Fund. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New
York 10036, serves as independent accountants for Global Income Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for the last fiscal year is a
separate document supplied with this Statement of Additional Information, and
the financial statements, accompanying notes and reports of independent auditors
appearing therein are incorporated herein by this reference. The Semi-Annual
Report to Shareholders for Global Income Fund is a separate document supplied
with this Statement of Additional Information, and the financial statements and
accompanying notes appearing therein are incorporated herein by reference.
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APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as a
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small; Caa. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; Ca. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree; 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
lowest degree of speculation and C the highest. While such debt 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
A-1
<PAGE>
vulnerable to nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitments on the
obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment
on the obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging Strategies............................. 10
Trustees and Officers.......................... 18
Investment Advisory and Distribution
Arrangements................................. 26
Portfolio Transactions......................... 32
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 34
Conversion of Class B Shares................... 37
Valuation of Shares............................ 38
Performance Information........................ 38
Taxes.......................................... 42
Other Information.............................. 45
Financial Statements........................... 45
Appendix....................................... A-1
</TABLE>
(Copyright)1996 PaineWebber Incorporated
PaineWebber
Emerging Markets
Equity Fund
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
Statement of Additional Information
October 31, 1996
PAINEWEBBER
