<PAGE>
As filed with the Securities and Exchange Commission on February 28, 1997
1933 Act: Registration No. 33-11025
1940 Act: Registration No. 811-5259
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 35 [ ]
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1940 [ X ]
Amendment No. 32
PAINEWEBBER INVESTMENT SERIES
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
ROBERT A. WITTIE, Esq.
Kirkpatrick & Lockhart LLP
Second Floor
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On March 1, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] On pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] On pursuant to Rule 485(a)(ii)
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on December 20, 1996.
<PAGE>
PaineWebber Investment Series
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Class A, B, and C shares of:
PaineWebber Global Income Fund
Part A - Prospectus
Part B - Statement of Additional Information
Class Y shares of:
PaineWebber Global Income Fund
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Investment Series
PaineWebber Global Income Fund - Class A, B and C Shares
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.and Caption Prospectus Caption
-------------------------- ------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment Objectives &
Policies; Investment Philosophy & Process; The Funds'
Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Performance Financial Highlights
6. Capital Stock and Other Securities Cover Page; Flexible Pricing; Dividends & Taxes;
General Information
7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares; Other Services;
Determining the Shares' Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
<CAPTION>
Statement of Additional
Part B Item No. and Caption Information Caption
--------------------------- -----------------------
<S> <C> <C>
10. Cover page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Restrictions; Hedging and
Other Strategies Using Derivative Contracts;
Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of
Securities
15. Control Persons and Principal Holders of Trustees and Officers; Principal Holders of
Securities Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Conversion of Class B Shares; Other Information
19. Purchase, Redemption and Pricing of Securities Reduced Sales Charges, Additional Exchange and
Being Offered Redemption Information and Other Services;
Valuation of Shares
20. Tax Status Taxes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Additional
Part B Item No. and Caption Information Caption
--------------------------- -----------------------
<S> <C> <C>
21. Underwriters Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PaineWebber Investment Series
PaineWebber Global Income Fund - Class Y Shares
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.and Caption Prospectus Caption
-------------------------- ------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment Objectives &
Policies; Investment Philosophy & Process; The
Funds' Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Performance Financial Highlights
6. Capital Stock and Other Securities Cover Page; Dividends & Taxes; General Information
7. Purchase of Securities Being Offered How to Buy Shares; Determining the Shares' Net Asset
Value
8. Redemption or Repurchase How to Sell Shares
9. Pending Legal Proceedings Not Applicable
<CAPTION>
Statement of Additional
Part B Item No. and Caption Information Caption
---------------------------- -------------------------
<S> <C> <C>
10. Cover page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Restrictions; Hedging and Other
Strategies Using Derivative Contracts; Portfolio
Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of Securities
15. Control Persons and Principal Holders of Trustees and Officers; Principal Holders of Securities
Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Other Information
19. Purchase, Redemption and Pricing of Valuation of Shares
Securities Being Offered
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution Arrangements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Additional
Part B Item No. and Caption Information Caption
----------------------------- -------------------------
<S> <C> <C>
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
------------------------------
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- MARCH 1, 1997
PaineWebber Global Funds are designed for investors generally seeking
long-term growth by investing mainly in foreign stocks or high current
income by investing mainly in global debt instruments. PaineWebber
Emerging Markets Equity Fund seeks long-term capital appreciation by
investing primarily in equity securities of companies in newly
industrializing countries. PaineWebber Global Equity Fund seeks long-term
growth of capital by investing primarily in U.S. and foreign equity
securities. PaineWebber Global Income Fund seeks high current income and,
secondarily, capital appreciation by investing primarily in high-quality
foreign and U.S. bonds.
This Prospectus concisely sets forth information that a prospective
investor should know about the Funds before investing. Please read it
carefully and retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated March 1, 1997 has been filed
with the Securities and Exchange Commission and is legally part of this
Prospectus. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting an
individual Fund, your investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad
categories, which are presented here. Generally, investors seeking to
maximize return must assume greater risk. The Funds in this Prospectus are
all in the GLOBAL category.
<TABLE>
<S> <C>
/ / MONEY MARKET FUND for income and stability by / / ASSET ALLOCATION FUNDS for high total return by in-
investing in high-quality, short-term investments. vesting in stocks and bonds.
/ / BOND FUNDS for income by investing mainly in bonds. / / STOCK FUNDS for long-term growth by investing mainly
in stocks.
/ / TAX-FREE BOND FUNDS for income exempt from federal / / GLOBAL FUNDS for long-term growth by investing mainly
income tax and, in some cases, state and local income in foreign stocks or high current income by investing
taxes, by investing in municipal bonds. mainly in global debt instruments.
</TABLE>
A complete listing of the PaineWebber Family of Mutual Funds is found on
the back cover of this Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
Prospectus Page 1
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Funds at a Glance................... 3
Expense Table........................... 5
Financial Highlights.................... 8
Investment Objectives & Policies........ 14
Investment Philosophy & Process......... 15
Performance............................. 17
The Funds' Investments.................. 20
Flexible Pricing(Service Mark).......... 24
How to Buy Shares....................... 27
How to Sell Shares...................... 28
Other Services.......................... 29
Management.............................. 30
Determining the Shares' Net Asset
Value................................. 32
Dividends & Taxes....................... 33
General Information..................... 34
</TABLE>
--------------------
Prospectus Page 2
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. When selling shares, investors should be aware that they may get
more or less for their shares than they originally paid for them. As with any
mutual fund, there is no assurance that the Funds will achieve their goals.
EMERGING MARKETS EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of companies in newly industrializing countries.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
Investors in the Fund should be able to assume the special risks of investing in
foreign securities, which include possible adverse political, social and
economic developments abroad and differing characteristics of foreign economies
and markets. These risks are greater with respect to securities of issuers
located in emerging markets, in which the Fund seeks to invest most of its
assets. Most of the foreign securities held by the Fund are denominated in
foreign currencies, and the value of these investments can be adversely affected
by fluctuations in foreign currency values. The Fund may use derivatives, such
as options, futures and forward currency contracts, which may involve additional
risks. Investors may lose money by investing in the Fund; the investment is not
guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $32 million in net assets.
GLOBAL EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of U.S. and foreign companies.
INVESTMENT OBJECTIVE: Long-term growth of capital.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
Investors in the Fund should be able to assume the special risks of investing in
foreign securities, which include possible adverse political, social and
economic developments abroad and differing characteristics of foreign economies
and markets. These risks are greater with respect to securities of issuers
located in emerging markets, in which the Fund may invest. Most of the foreign
securities held by the Fund are denominated in foreign currencies, and the value
of these investments can be adversely affected by fluctuations in foreign
currency values. The Fund may use derivatives, such as options, futures and
forward currency contracts, which may involve additional risks. Investors may
lose money by investing in the Fund; the investment is not guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $561 million in net
assets.
GLOBAL INCOME FUND
GOAL: To provide high current income and, secondarily, capital appreciation by
investing primarily in high-quality foreign and U.S. bonds.
INVESTMENT OBJECTIVE: The primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective.
RISKS: The Fund invests primarily in bonds, which are subject to interest rate
and credit risk. Most of the foreign securities held by the Fund are denominated
in foreign currencies, and the value of these investments can be adversely
affected by fluctuations in foreign currency values. Interest rate risk is the
risk that interest rates will rise and bond prices will fall, lowering the value
of the Fund's investments. Credit risk is the risk that adverse changes in
economic conditions will affect an issuer's ability to pay interest and
principal. Investors in the Fund should be able to assume the special risks of
investing in foreign securities, which include possible adverse political,
social and economic developments abroad and differing characteristics of foreign
economies and markets. These risks are greater with respect to securities of
issuers located in emerging markets, in which the Fund may invest to a limited
degree. Certain investment grade bonds in which the Fund may invest have
speculative characteristics. The Fund may also invest in bonds rated below
investment grade, which are subject to greater risks of default or price
fluctuation than investment grade bonds and are considered predominantly
speculative. The U.S. government securities in which the Fund may invest include
mortgage-backed securities. The Fund may use derivatives, such as options,
futures, forward currency contracts and interest rate protection transactions,
which may involve additional risks. As a non-diversified fund as defined in the
Investment Company Act of 1940 ('1940 Act'), the Fund is subject to greater risk
than funds that have a broader range of investments as explained below.
Investors may lose money by investing in the Fund; the investment is not
guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $843 million in net
assets.
--------------------
Prospectus Page 3
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of Emerging Markets Equity Fund, Global
Equity Fund and Global Income Fund (each a 'Fund' and, collectively, the
'Funds'). Mitchell Hutchins has appointed Schroder Capital Management
International Inc. ('Schroder Capital') as the investment sub-adviser for
Emerging Markets Equity Fund and GE Investment Management Incorporated ('GE
Investment Management') as the investment sub-adviser for Global Equity Fund.
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
WHO SHOULD INVEST
EMERGING MARKETS EQUITY FUND is for investors who want long-term capital
appreciation. The Fund seeks to achieve this by investing primarily in equity
securities of companies in emerging market countries. Over time, foreign stocks
have shown greater growth potential than many other types of securities.
However, because their value tends to fluctuate more than that of U.S. stocks,
investors must be willing to tolerate volatility in the value of the Fund's
investments. These risks are greater with respect to securities of issuers
located in emerging markets. Accordingly, Emerging Markets Equity Fund is
designed for investors who are able to bear the risk that comes with investment
in equity securities of emerging market issuers.
GLOBAL EQUITY FUND is for investors who want long-term growth of capital. The
Fund seeks to achieve this by investing primarily in equity securities of U.S.
and foreign companies. Over time, foreign stocks have shown greater growth
potential than many other types of securities. However, because their value
tends to fluctuate more than that of U.S. stocks, investors must be willing to
tolerate volatility in the value of the Fund's investments. Accordingly, Global
Equity Fund is designed for investors who are able to bear the risk that comes
with investments in foreign equity securities.
GLOBAL INCOME FUND is for investors who want high current income consistent with
prudent investment risk and, secondarily, capital appreciation. The Fund seeks
to achieve this by investing primarily in high-quality debt securities issued or
guaranteed by foreign governments, by the U.S. government, by their respective
agencies or instrumentalities or by supranational organizations, or issued by
foreign or U.S. companies. Investors in the Fund should be willing to assume the
special risks of investing in foreign securities, which include possible adverse
political, social and economic developments abroad and differing characteristics
of foreign economies and markets. Accordingly, Global Income Fund is designed
for investors who are able to bear the risk that comes with investments in
foreign securities.
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% of the public offering price (4% in the case of Global
Income Fund). Although investors pay an initial sales charge when they buy Class
A shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
'contingent deferred sales charge' and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% (0.75% in the case of Global
Income Fund) is charged on shares sold within one year of purchase. Class C
shares never convert to any other class of shares.
--------------------
Prospectus Page 4
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in the Class A, B and C shares of the Funds.
Expenses shown below represent those incurred for the fiscal year ended August
31, 1996, in the case of Global Equity Fund, and the fiscal year ended October
31, 1996, in the case of Global Income Fund. In the case of Emerging Markets
Equity Fund, expenses shown below, which are based on the annualized expenses
for the four months ended October 31, 1996, reflect the current management fee
rate and anticipated fee waivers and expense reimbursements.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
EMERGING MARKETS EQUITY FUND AND GLOBAL EQUITY FUND
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... 4.50% None None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever is
less)..................................................... None 5% 1%
Exchange Fee................................................ None None None
GLOBAL INCOME FUND
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... 4% None None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever is
less)..................................................... None 5% 0.75%
Exchange Fee................................................ None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
EMERGING MARKETS EQUITY FUND
Management Fees (after fee waivers)*........................ 0.70% 0.70% 0.70%
12b-1 Fees.................................................. 0.25 1.00 1.00
Other Expenses (after expense reimbursements)*.............. 1.49 1.49 1.49
------- ------- -------
Total Operating Expenses (after fee waivers and expense
reimbursements)*.......................................... 2.44% 3.19% 3.19%
------- ------- -------
------- ------- -------
GLOBAL EQUITY FUND
Management Fees............................................. 0.85% 0.85% 0.85%
12b-1 Fees.................................................. 0.25 1.00 1.00
Other Expenses.............................................. 0.38 0.40 0.42
------- ------- -------
Total Operating Expenses.................................... 1.48% 2.25% 2.27%
------- ------- -------
------- ------- -------
GLOBAL INCOME FUND
Management Fees............................................. 0.74% 0.74% 0.74%
12b-1 Fees.................................................. 0.25 1.00 0.75
Other Expenses.............................................. 0.28 0.25 0.24
------- ------- -------
Total Operating Expenses.................................... 1.27% 1.99% 1.73%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
* 'Management Fees' and 'Other Expenses' for Emerging Markets Equity Fund are
restated to reflect reductions in the Fund's investment advisory and
administrative fees, approved by shareholders on February 25, 1997, and
offsetting reductions in anticipated fee waivers and expense reimbursements
from Mitchell Hutchins. Using the current management fee rate and without
taking into account anticipated fee waivers and expense reimbursements,
'Management Fees,' 'Other Expenses' and 'Total Operating Expenses' for Class
A, Class B and Class C shares of Emerging Markets Equity Fund would be as
follows, respectively: 1.20%, 1.61% and 3.06% for Class A; 1.20%, 1.61% and
3.81% for Class B; and 1.20%, 1.61% and 3.81% for Class C.
--------------------
Prospectus Page 5
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge. However, if such shares are sold by the shareholder within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale, whichever is
less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If shares are sold by the shareholder within one year after
purchase, a contingent deferred sales charge of 1% (0.75% in the case of Global
Income Fund) of the offering price or the net asset value of the shares at the
time of sale, whichever is less, is imposed.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
12b-1 service fees................. 0.25% 0.25% 0.25%
12b-1 distribution fees............ 0.00 0.75 0.75*
</TABLE>
* 12b-1 distribution fees for Class C shares of Global Income Fund are 0.50%.
For more information, see 'Management' and 'Flexible Pricing(Service Mark).'
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses incurred as shareholders of a Fund. The assumed 5% annual return
shown in the examples is required by regulations of the Securities and Exchange
Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF A
FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class A............................ $69 $118 $169 $ 310
Class B (Assuming sale of all
shares at end of period)......... $82 $128 $187 $ 316
Class B (Assuming no sale of
shares).......................... $32 $ 98 $167 $ 316
Class C (Assuming sale of all
shares at end of period)......... $42 $ 98 $167 $ 349
Class C (Assuming no sale of
shares).......................... $32 $ 98 $167 $ 349
</TABLE>
--------------------
Prospectus Page 6
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class A............................ $59 $ 90 $122 $ 214
Class B (Assuming sale of all
shares at end of period)......... $73 $100 $140 $ 221
Class B (Assuming no sale of
shares).......................... $23 $ 70 $120 $ 221
Class C (Assuming sale of all
shares at end of period)......... $33 $ 71 $122 $ 261
Class C (Assuming no sale of
shares).......................... $23 $ 71 $122 $ 261
GLOBAL INCOME FUND
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class A............................ $52 $ 79 $107 $ 187
Class B (Assuming sale of all
shares at end of period)......... $70 $ 92 $127 $ 196
Class B (Assuming no sale of
shares).......................... $20 $ 62 $107 $ 196
Class C (Assuming sale of all
shares at end of period)......... $25 $ 54 $ 94 $ 204
Class C (Assuming no sale of
shares).......................... $18 $ 54 $ 94 $ 204
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under 'Annual Fund Operating Expenses' remain the
same for the years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% (4% in the case of Global
Income Fund) initial sales charge at the time of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six years.
Ten-year figures assume that Class B shares convert to Class A shares at the
end of the sixth year.
o CLASS C SHARES: Deduction of a 1% (0.75% in the case of Global Income Fund)
contingent deferred sales charge for sales of shares within one year of
purchase.
--------------------
Prospectus Page 7
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
Emerging Markets Equity Fund's Annual Report to Shareholders for the four months
ended October 31, 1996 and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. The financial
statements, accompanying notes and auditors' report are incorporated by
reference into the Statement of Additional Information. The financial statements
and notes, as well as the financial information in the table below relating to
the four months ended October 31, 1996 and the fiscal year ended June 30, 1996,
have been audited by Ernst & Young LLP, independent auditors. The financial
information for the prior years was audited by another independent accounting
firm, whose reports thereon were unqualified. Further information about the
Fund's performance is also included in the Annual Report to Shareholders, which
may be obtained without charge by calling 1-800-647-1568. Schroder Capital was
appointed sub-adviser for Emerging Markets Equity Fund effective February 25,
1997; thus, information for periods prior to that date may not necessarily be
indicative of current or future operations.
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
-----------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE JUNE 30, FOR THE
FOUR MONTHS ENDED ------------------------------------------ PERIOD ENDED
OCTOBER 31, 1996 1996 1995** JUNE 30, 1994+
----------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 10.06 $ 9.73 $ 10.79 $ 12.00
-------- -------- -------- --------
Net investment income (loss)....... (0.13) (0.14) (0.04) 0.04
Net realized and unrealized gains
(losses) from investment and
foreign currency transactions.... (0.47) 0.47 (0.97) (1.25)
-------- -------- -------- --------
Net increase (decrease) from
investment operations............ (0.60) 0.33 (1.01) (1.21)
-------- -------- -------- --------
Dividends from net investment
income........................... -- -- (0.05) --
-------- -------- -------- --------
Net asset value, end of period..... $ 9.46 $ 10.06 $ 9.73 $ 10.79
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return (1)........ (5.96)% 3.39% (9.29)% (10.08)%
-------- -------- -------- --------
-------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's).......................... $14,992 $20,680 $33,043 $ 46,758
Expenses, net of fee waivers, to
average net assets............... 2.44%* 2.44% 2.44% 2.47%*
Expenses, before fee waivers, to
average net assets............... 3.48%* 3.42% 2.54% 2.47%*
Net investment income (loss), net
of fee waivers, to average net
assets........................... (1.42)%* (0.52)% (0.76)% 0.72%*
Net investment income (loss),
before fee waivers, to average
net assets....................... (2.46)%* (1.50)% (0.86)% 0.72%*
Portfolio turnover................. 22% 69% 76% 8%
Average commission rate paid (2)... $0.0024 -- -- --
</TABLE>
- ------------------
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
+ For the period January 19, 1994 (commencement of operations) to June 30,
1994.
++ For the period December 5, 1995 (commencement of offering of shares) to June
30, 1996.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results for each class would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
--------------------
Prospectus Page 8
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
------------------------------------------------------------
CLASS B CLASS C
--------------------------------------- -----------------
FOR THE FOR THE FOR THE
FOUR MONTHS ENDED PERIOD ENDED FOUR MONTHS ENDED
OCTOBER 31, 1996 JUNE 30, 1996++ OCTOBER 31, 1996
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................... $ 9.94 $ 9.13 $ 9.94
-------- ------- --------
Net investment income (loss)....... (0.07) (0.01) (0.22)
Net realized and unrealized gains
(losses) from investment and
foreign currency transactions.... (0.55) 0.82 (0.40)
-------- ------- --------
Net increase (decrease) from
investment operations............ (0.62) 0.81 (0.62)
-------- ------- --------
Dividends from net investment
income........................... -- -- --
-------- ------- --------
Net asset value, end of period..... $ 9.32 $ 9.94 $ 9.32
-------- ------- --------
-------- ------- --------
Total investment return (1)........ (6.24)% 8.87% (6.24)%
-------- ------- --------
-------- ------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's).......................... $ 879 $ 936 $ 7,882
Expenses, net of fee waivers, to
average net assets............... 3.19%* 3.19%* 3.19%*
Expenses, before fee waivers, to
average net assets............... 4.23%* 4.97%* 4.23%*
Net investment income (loss), net
of fee waivers, to average net
assets........................... (2.12)%* (0.21)%* (2.16)%*
Net investment income (loss),
before fee waivers, to average
net assets....................... (3.16)%* (1.99)%* (3.20)%*
Portfolio turnover................. 22% 69% 22%
Average commission rate paid (2)... $0.0024 -- $0.0024
<CAPTION>
EMERGING MARKETS EQUITY FUND
---------------------------------------------------------------
CLASS C
---------------------------------------------------------------
FOR THE YEARS ENDED
JUNE 30, FOR THE
------------------------------------------ PERIOD ENDED
1996 1995** JUNE 30, 1994+
------------------- ------------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................... $ 9.67 $ 10.75 $ 12.00
-------- -------- --------
Net investment income (loss)....... (0.24) (0.17) --
Net realized and unrealized gains
(losses) from investment and
foreign currency transactions.... 0.51 (0.90) (1.25)
-------- -------- --------
Net increase (decrease) from
investment operations............ 0.27 (1.07) (1.25)
-------- -------- --------
Dividends from net investment
income........................... -- (0.01) --
-------- -------- --------
Net asset value, end of period..... $ 9.94 $ 9.67 $ 10.75
-------- -------- --------
-------- -------- --------
Total investment return (1)........ 2.79% (10.01)% (10.42)%
-------- -------- --------
-------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's).......................... $11,561 $18,551 $ 26,721
Expenses, net of fee waivers, to
average
net assets....................... 3.19% 3.19% 3.22%*
Expenses, before fee waivers, to
average
net assets....................... 4.17% 3.29% 3.22%*
Net investment income (loss), net
of fee waivers, to average net
assets........................... (1.28)% (1.50)% (0.03)%*
Net investment income (loss),
before fee waivers, to average
net assets....................... (2.26)% (1.60)% (0.03)%*
Portfolio turnover................. 69% 76% 8%
Average commission rate paid (2)... -- -- --
</TABLE>
--------------------
Prospectus Page 9
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
Global Equity Fund's Annual Report to Shareholders for the two months ended
October 31, 1996 and the report of Ernst & Young LLP, independent auditors,
appearing in the Fund's Annual Report to Shareholders. The financial statements,
accompanying notes and auditors' report are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, as well
as the financial information in the table below relating to the two months ended
October 31, 1996 and to each of the two years in the period ended August 31,
1996, have been audited by Ernst & Young LLP, independent auditors. The
financial information for the prior years was audited by another independent
accounting firm, whose reports thereon were unqualified. Further information
about the Fund's performance is also included in the Annual Report to
Shareholders, which may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
---------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------
FOR THE
FOR THE TWO FOR THE YEARS ENDED AUGUST 31, PERIOD
MONTHS ENDED ------------------------------------------------- NOV. 14, 1991+
OCTOBER 31, 1996 1996 1995** 1994 1993 TO AUG. 31, 1992
---------------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 16.81 $ 16.12 $ 16.98 $ 14.55 $ 12.87 $ 12.00
-------- -------- -------- -------- -------- --------
Net investment income (loss)............... (0.02) 0.02 0.02 0.01 0.03 0.09
Net realized and unrealized gains (losses)
from investment and foreign currency
transactions............................. 0.64 1.24 0.37 2.63 1.89 0.78
-------- -------- -------- -------- -------- --------
Net increase (decrease) from investment
operations............................... 0.62 1.26 0.39 2.64 1.92 0.87
-------- -------- -------- -------- -------- --------
Dividends from net investment income....... -- -- -- -- (0.08) --
Distributions from net realized gains...... -- (0.57) (1.25) (0.21) (0.16) --
-------- -------- -------- -------- -------- --------
Total dividends and distributions.......... 0.00 (0.57) (1.25) (0.21) (0.24) 0.00
-------- -------- -------- -------- -------- --------
Net asset value, end of period............. $ 17.43 $ 16.81 $ 16.12 $ 16.98 $ 14.55 $ 12.87
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total investment return (1)................ 3.69% 8.06% 3.24% 18.23% 15.24% 7.25%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's).......... $307,267 $305,218 $360,652 $185,493 $156,451 $113,070
Expenses to average net assets............. 1.53%* 1.48% 1.71%(2) 1.58% 1.53% 1.68%*
Net investment income (loss) to average net
assets................................... (0.80)%* 0.10% 0.09%(2) 0.07% 0.22% 0.93%*
Portfolio turnover......................... 3% 33% 40% 51% 56% 30%
Average commission rate paid (3)........... $ 0.0069 $ 0.0120 -- -- -- --
</TABLE>
- ------------------
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
+ Commencement of operations
++ Commencement of offering of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.06%, 0.00%
and 0.06% for Class A, Class B and Class C shares, respectively.
(3) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
--------------------
Prospectus Page 10
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
-------------------------------------------------------------------------
CLASS B CLASS C
------------------------------------------------------ ----------------
FOR THE FOR THE
FOR THE TWO YEAR ENDED PERIOD FOR THE TWO
MONTHS ENDED AUGUST 31, AUG. 25, 1995++ MONTHS ENDED
OCTOBER 31, 1996 1996 TO AUG. 31, 1995 OCTOBER 31, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 16.35 $15.82 $15.83 $ 16.35
-------- -------- -------- --------
Net investment income (loss)............... (0.05) (0.12) 0.00 (0.05)
Net realized and unrealized gains (losses)
from investment and foreign currency
transactions............................. 0.63 1.22 (0.01) 0.63
-------- -------- -------- --------
Net increase (decrease) from investment
operations............................... 0.58 1.10 (0.01) 0.58
-------- -------- -------- --------
Dividends from net investment income....... -- -- -- --
Distributions from net realized gains...... -- (0.57) -- --
-------- -------- -------- --------
Total dividends and distributions.......... 0.00 (0.57) 0.00 0.00
-------- -------- -------- --------
Net asset value, end of period............. $ 16.93 $16.35 $15.82 $ 16.93
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return (1)................ 3.55% 7.18% (0.06)% 3.55%
-------- -------- -------- --------
-------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's).......... $113,445 $113,235 $142,880 $ 67,530
Expenses to average net assets............. 2.34%* 2.25% 2.17%*(2) 2.30%*
Net investment income (loss) to average net
assets................................... (1.61)%* (0.68)% (1.92)%*(2) (1.57)%*
Portfolio turnover......................... 3% 33% 40% 3%
Average commission rate paid (3)........... $ 0.0069 $0.0120 -- $ 0.0069
<CAPTION>
GLOBAL EQUITY FUND
-------------------------------------------------------------------------
CLASS C
-------------------------------------------------------------------------
FOR THE YEARS ENDED AUGUST 31, FOR THE PERIOD
------------------------------------------------------ MAY 10, 1993++
1996 1995** 1994 TO AUG. 31, 1993
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 15.82 $ 16.81 $ 14.52 $13.80
-------- -------- -------- --------
Net investment income (loss)............... (0.13) (0.11) (0.07) (0.02)
Net realized and unrealized gains (losses)
from investment and foreign currency
transactions............................. 1.23 0.37 2.57 0.74
-------- -------- -------- --------
Net increase (decrease) from investment
operations............................... 1.10 0.26 2.50 0.72
-------- -------- -------- --------
Dividends from net investment income....... -- -- -- --
Distributions from net realized gains...... (0.57) (1.25) (0.21) --
-------- -------- -------- --------
Total dividends and distributions.......... (0.57) (1.25) (0.21) 0.00
-------- -------- -------- --------
Net asset value, end of period............. $ 16.35 $ 15.82 $ 16.81 $14.52
-------- -------- -------- --------
-------- -------- -------- --------
Total investment return (1)................ 7.18% 2.46% 17.29% 5.22%
-------- -------- -------- --------
-------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's).......... $ 66,585 $83,485 $31,837 $10,807
Expenses to average net assets............. 2.27% 2.48%(2) 2.33% 2.28%*
Net investment income (loss) to average net
assets................................... (0.70)% (0.68)%(2) (0.68)% (0.53)%*
Portfolio turnover......................... 33% 40% 51% 56%
Average commission rate paid (3)........... $ 0.0120 -- -- --
</TABLE>
--------------------
Prospectus Page 11
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B and Class C share for each of the periods shown. This information is
supplemented by the financial statements and accompanying notes appearing in
Global Income Fund's Annual Report to Shareholders for the fiscal year ended
October 31, 1996 and the report of Price Waterhouse LLP, independent
accountants, appearing in the Fund's Annual Report to Shareholders. The
financial statements, accompanying notes and accountants' report are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below insofar as they relate to each of the periods presented in the five
year period ended October 31, 1996, have been audited by Price Waterhouse LLP,
independent accountants. Further information about the Fund's performance is
also included in the Annual Report to Shareholders, which may be obtained
without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
-----------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------
FOR THE
PERIOD
JULY 1,
FOR THE YEARS ENDED OCTOBER 31, 1991+ TO
--------------------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.75 $ 10.40
-------- -------- -------- -------- -------- -----------
Net investment income.......... 0.72@ 0.77@ 0.72 0.59 0.83 0.20
Net realized and unrealized
gains (losses) from investment
and foreign currency
transactions.................. 0.13@ 0.31@ (1.05) 0.68 (0.12) 0.40
-------- -------- -------- -------- -------- -----------
Total increase (decrease) from
investment operations......... 0.85 1.08 (0.33) 1.27 0.71 0.60
-------- -------- -------- -------- -------- -----------
Dividends from net investment
income........................ (0.74) (0.72) (0.33) (0.80) (0.64) (0.23)
Distributions from realized
gains on investments and
foreign currency
transactions.................. -- -- -- (0.14) (0.18) (0.02)
Distributions from paid-in
capital....................... -- -- (0.32) -- -- --
-------- -------- -------- -------- -------- -----------
Total dividends and
distributions................. (0.74) (0.72) (0.65) (0.94) (0.82) (0.25)
-------- -------- -------- -------- -------- -----------
Net asset value, end of
period........................ $ 10.46 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.75
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
Total investment return (1).... 8.60% 11.09% (3.10)% 12.41% 6.70% 5.79%
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $549,932 $663,022 $611,855 $648,853 $107,033 $16,501
Expenses to average net
assets........................ 1.27% 1.24%(2) 1.17% 1.32%** 1.21% 1.35%*
Net investment income to
average net assets............ 6.88% 7.47%(2) 6.94% 6.82%** 7.84% 8.59%*
Portfolio turnover rate........ 126% 113% 108% 90% 92% 53%
<CAPTION>
CLASS B
----------------------------------------------
FOR THE YEARS
ENDED OCTOBER 31,
----------------------------------------------
1996 1995 1994 1993
-------- -------- -------- ----------
<S> <<C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.31 $ 9.96 $ 10.95 $ 10.62
-------- -------- -------- ----------
Net investment income.......... 0.64@ 0.69@ 0.86 0.78
Net realized and unrealized
gains (losses) from investment
and foreign currency
transactions.................. 0.15@ 0.30@ (1.28) 0.40
-------- -------- -------- ----------
Total increase (decrease) from
investment operations......... 0.79 0.99 (0.42) 1.18
-------- -------- -------- ----------
Dividends from net investment
income........................ (0.66) (0.64) (0.29) (0.71)
Distributions from realized
gains on investments and
foreign currency
transactions.................. -- -- -- (0.14)
Distributions from paid-in
capital....................... -- -- (0.28) --
-------- -------- -------- ----------
Total dividends and
distributions................. (0.66) (0.64) (0.57) (0.85)
-------- -------- -------- ----------
Net asset value, end of
period........................ $ 10.44 $ 10.31 $ 9.96 $ 10.95
-------- -------- -------- ----------
-------- -------- -------- ----------
Total investment return (1).... 7.95% 10.24% (3.90)% 11.45%
-------- -------- -------- ----------
-------- -------- -------- ----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $307,577 $484,534 $725,553 $1,188,890
Expenses to average net
assets........................ 1.99% 2.00%(2) 1.94% 2.11%**
Net investment income to
average net assets............ 6.14% 6.71%(2) 6.05% 5.97%**
Portfolio turnover rate........ 126% 113% 108% 90%
</TABLE>
- ------------------
@ Calculated using the average shares outstanding for the year.
* Annualized.
** Includes 0.15% of interest expense related to the reverse repurchase
agreement transactions entered into during the fiscal year
+ Commencement of issuance of shares.
++ Formerly Class D.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
capital gain distributions at net asset value on the payable date, and a
sale at net asset value on the last day of each period reported. The
figures do not include sales charges; results of Class A, Class B and Class
C would be lower if sales charges were included. Total investment return
information for periods of less than one year is not annualized.
(2) These ratios include non-recurring reorganization expenses of 0.04% for
each Class.
--------------------
Prospectus Page 12
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
--------------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------------
FOR THE
PERIOD
MARCH 20,
FOR THE YEARS ENDED OCTOBER 31, 1987+ TO
---------------------------------------------------------------------- OCTOBER 31,
1992 1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.74 $ 11.07 $ 10.08 $ 11.10 $ 10.28 $ 10.00
---------- ---------- ---------- ---------- ---------- -----------
Net investment income.......... 0.94 0.85 1.01 1.01 0.98 0.47
Net realized and unrealized
gains (losses) from investment
and foreign currency
transactions.................. (0.32) (0.09) 0.96 (0.64) 1.15 0.13
---------- ---------- ---------- ---------- ---------- -----------
Total increase (decrease) from
investment operations......... 0.62 0.76 1.97 0.37 2.13 0.60
---------- ---------- ---------- ---------- ---------- -----------
Dividends from net investment
income........................ (0.56) (0.97) (0.98) (0.94) (1.06) (0.32)
Distributions from realized
gains on investments and
foreign currency
transactions.................. (0.18) (0.12) -- (0.45) (0.25) --
Distributions from paid-in
capital....................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Total dividends and
distributions................. (0.74) (1.09) (0.98) (1.39) (1.31) (0.32)
---------- ---------- ---------- ---------- ---------- -----------
Net asset value, end of
period........................ $ 10.62 $ 10.74 $ 11.07 $ 10.08 $ 11.10 $ 10.28
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------
Total investment return (1).... 5.93% 7.39% 20.32% 3.66% 18.29% 6.00%
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $1,542,255 $1,593,814 $1,323,495 $1,085,851 $1,145,460 $ 737,056
Expenses to average net
assets........................ 1.98% 1.94% 1.90% 1.95% 2.05% 2.08%*
Net investment income to
average net assets............ 7.11% 8.09% 9.88% 9.73% 9.13% 8.39%*
Portfolio turnover rate........ 92% 33% 126% 124% 120% 52%
<CAPTION>
GLOBAL INCOME FUND
------------------------------------------------------------
CLASS C++
------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEARS ENDED JULY 2,
OCTOBER 31, 1992+ TO
-------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992
------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.33 $ 9.98 $ 10.96 $ 10.64 $ 10.94
------- ------- ------- -------- -----------
Net investment income.......... 0.67@ 0.71@ 0.70 0.68 0.20
Net realized and unrealized
gains (losses) from investment
and foreign currency
transactions.................. 0.14@ 0.31@ (1.09) 0.52 (0.13)
------- ------- ------- -------- -----------
Total increase (decrease) from
investment operations......... 0.81 1.02 (0.39) 1.20 0.07
------- ------- ------- -------- -----------
Dividends from net investment
income........................ (0.69) (0.67) (0.30) (0.74) (0.21)
Distributions from realized
gains on investments and
foreign currency
transactions.................. -- -- -- (0.14) (0.16)
Distributions from paid-in
capital....................... -- -- (0.29) -- --
------- ------- ------- -------- -----------
Total dividends and
distributions................. (0.69) (0.67) (0.59) (0.88) (0.37)
------- ------- ------- -------- -----------
Net asset value, end of
period........................ $ 10.45 $ 10.33 $ 9.98 $ 10.96 $ 10.64
------- ------- ------- -------- -----------
------- ------- ------- -------- -----------
Total investment return (1).... 8.12% 10.49% (3.56)% 11.64% 0.61%
------- ------- ------- -------- -----------
------- ------- ------- -------- -----------
Ratios/Supplemental Data:
Net assets, end of period
(000's)....................... $50,928 $71,329 $92,480 $135,847 $36,598
Expenses to average net
assets........................ 1.73% 1.75%(2) 1.68% 1.83%** 1.75%*
Net investment income to
average net assets............ 6.40% 6.96%(2) 6.34% 6.17%** 7.02%*
Portfolio turnover rate........ 126% 113% 108% 90% 92%
</TABLE>
--------------------
Prospectus Page 13
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Except where noted, the Funds' other investment policies are not
fundamental and may be changed by their boards.
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through investment in a
diversified portfolio consisting primarily of equity securities of issuers in
emerging markets. 'Emerging markets' are all markets in all countries not
included in the Morgan Stanley Capital International World Index, an index of
major world economies, and Malaysia. Under normal market conditions, the Fund
invests a minimum of 65% of its total assets in equity securities of issuers
located in emerging market countries and maintains investments in at least three
emerging market countries. Issuers are considered to be located in an emerging
market country if: (1) the principal securities trading market for the issuer is
in an emerging market country; (2) the issuer derives 50% or more of its annual
revenue or profit from either goods produced, sales made, investments made or
services performed in emerging market countries; or (3) the issuer is organized
under the laws of an emerging market country.
Schroder Capital attempts to spread the Fund's investments over geographic as
well as economic sectors. Generally, Schroder Capital will not invest more than
35% of the Fund's total assets in any single country. Under no circumstances
will 25% or more of the Fund's total assets be invested in any single industry.
Within each emerging market, the Fund is diversified through investments in a
number of local companies characterized by attractive valuation relative to
expected growth.
There are currently over 60 newly industrializing and developing countries that
have equity markets. A number of these emerging markets are not yet easily
accessible to foreign investors and have unattractive tax barriers or
insufficient liquidity to make significant investments by the Fund feasible or
attractive. However, many of the largest of the emerging market countries have,
in recent years, liberalized access, and more are expected to do so over the
coming few years.
In recent years, many emerging market countries have begun programs of economic
reform: removing import tariffs, dismantling trade barriers, deregulating
foreign investment, privatizing state owned industries, permitting the value of
their currencies to float against the dollar and other major currencies, and
generally reducing the level of state intervention in industry and commerce.
Important intra-regional economic integration also holds the promise of greater
trade and growth. At the same time, significant progress has been made in
restructuring the heavy external debt burden that certain emerging market
countries accumulated during the 1970s and 1980s. While there is no assurance
that these trends will continue, Schroder Capital will seek out attractive
investment opportunities in these countries.
GLOBAL EQUITY FUND
Global Equity Fund's investment objective is long-term growth of capital. The
Fund attempts to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States.
The International Equity Team at GE Investment Management selects equity
securities issued by companies located in developed and developing countries
throughout the world. The Fund normally invests in at least three countries, one
of which is typically the United States. The Fund normally invests at least 65%
of its total assets in equity securities of foreign and U.S. companies.
When the International Equity Team believes it is consistent with the Fund's
investment objective of long-term growth of capital, the Fund may invest up to
35% of its total assets in investment grade bonds issued by corporate or
governmental entities. The bonds in which the Fund invests have maturities no
longer than seven years. When the International Equity Team considers market,
economic, political or currency conditions abroad to be unstable, the Fund may
assume a temporary defensive position by investing all or a significant portion
of its assets in securities of U.S. and Canadian issuers or by holding cash or
short-term money market investments.
Under normal circumstances, at least 80% of the Fund's total assets are invested
in equity securities or bonds of issuers in countries represented in the Morgan
Stanley Capital International World Index. This is
--------------------
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<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
a well-known index that reflects developed and developing markets throughout the
world.
GLOBAL INCOME FUND
Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by investing principally
in high-quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by U.S. or foreign companies.
The Fund's portfolio consists primarily of debt securities rated within one of
the two highest grades assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ('S&P'), Moody's Investors Service, Inc. ('Moody's')
or another nationally recognized statistical rating organization ('NRSRO') or,
if unrated, determined by Mitchell Hutchins to be of comparable quality.
Normally, at least 65% of the Fund's total assets are invested in high-quality
debt securities, denominated in foreign currencies or U.S. dollars, of issuers
located in at least three of the following countries: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Thailand, the United Kingdom and the United States. No more than
40% of the Fund's assets normally are invested in securities of issuers located
in any one country other than the United States. Up to 5% of the Fund's total
assets may be invested in debt securities convertible into equity securities.
The Fund may invest up to 35% of its total assets in debt securities rated below
the two highest grades assigned by an NRSRO. Except as noted below, these
securities must be rated at least BBB by S&P, Baa by Moody's or comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Within this 35% limitation, the Fund may invest up to 20% of
its total assets in sovereign debt securities rated as low as BB by S&P, Ba by
Moody's or comparably rated by another NRSRO or, in the case of such securities
assigned a short-term debt rating, no lower than B by S&P or comparably rated by
another NRSRO or, if not so rated, determined by Mitchell Hutchins to be of
comparable quality. Mitchell Hutchins will purchase such securities for the Fund
only when it concludes that the anticipated return to the Fund on such
investment warrants exposure to the additional level of risk.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
In selecting emerging market equity securities for Emerging Markets Equity Fund,
Schroder Capital combines rigorous, fundamental research with a quantitative
assessment of the economic potential of the various countries in which
investments might be made. Schroder Capital focuses on companies in emerging
market countries where it believes there is likely to be a favorable long-term
business environment and where it believes a company's growth is less likely to
be impeded by adverse macro-economic or political factors. Within those
countries, Schroder Capital selects stocks of companies that, based on its
analysis of fundamental corporate data, it believes have a sustainable
competitive advantage and whose growth potential is undervalued by investors.
Schroder Capital believes that one of its key strengths is its worldwide network
of investment management affiliates and access to its network of local research
offices, many long established, in emerging market countries. Schroder Capital
is a wholly owned indirect subsidiary of Schroders plc, the holding company
parent of an international group of banks and financial services companies
('Schroder Group') with associated companies and investment and representative
offices located around the world. Each year, the Schroder Group researches and
conducts on-site visits with 1200 companies in emerging market countries. Of
those companies, the Schroder Group's investment professionals further develop
extensive management contacts with, and produce independent forecasts of
earnings estimates for, 500 companies. Schroder Capital's analysis includes
small and medium-sized companies, as well as the better-known larger
capitalization companies. Schroder Capital believes that small companies are
analyzed by fewer investors and are less likely than larger companies to be
efficiently priced.
--------------------
Prospectus Page 15
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL EQUITY FUND
In selecting equity securities for Global Equity Fund, the International Equity
Team at GE Investment Management searches for growth companies selling at
reasonable prices, with an emphasis on undervalued medium- to large-size growth
companies with a global presence. The investment process employed by the
International Equity Team involves several steps.
First, the International Equity Team carefully screens a universe of thousands
of global stocks by comparing each company's price-to-earnings ratio with its
long-term growth. This evaluation helps eliminate companies whose stock prices
are too expensive, typically resulting in a list of several hundred stocks.
Next, this smaller group of stocks is rigorously analyzed by the International
Equity Team's experienced investment professionals. This step, which is designed
to determine whether a stock's price reflects its true value and whether the
market may eventually recognize the stock's value, reduces the universe to fewer
stocks.
Finally, the International Equity Team looks for a catalyst (such as new
management, new products or changing industry dynamics) that might cause the
market to realize that a stock is undervalued. This process typically results in
fewer than 100 stocks that the International Equity Team will buy for the Fund's
portfolio.
The strength of the Team's conviction about each company is part of what
determines the size of each holding.
The International Equity Team regularly reviews the equity securities held in
the Fund's portfolio to assess risks, such as stability in the political and
economic conditions of underlying countries, fluctuations in currency rates,
liquidity, changes in company earnings, and other relevant factors.
GLOBAL INCOME FUND
Global Income Fund's investment policies are designed to enable it to capitalize
on unique investment opportunities presented throughout the world and in
international financial markets influenced by the increasing interdependence of
economic cycles and currency exchange rates. Over the past decade, debt
securities offered by certain foreign governments provided higher investment
returns than U.S. government debt securities. Such returns reflect interest
rates and other market conditions prevailing in those countries and the effect
of gains and losses in the denominated currencies, which have had a substantial
impact on investment in foreign debt securities. The importance of global debt
markets is illustrated by a popular index used to assess both U.S. government
and foreign government debt markets, namely the Salomon Brothers World
Government Bond Market Index. As of December 31, 1996, more than 67% of this
index was represented by securities denominated in currencies other than the
U.S. dollar.
The Global Fixed Income Management Team at Mitchell Hutchins relies on
fundamental economic strength, credit quality and currency and interest rate
trends as the principal determinants of the various country, geographic and
industry sector weightings within the Fund's portfolio. In addition, certain of
the Fund's assets are invested in the debt securities of certain U.S.
governmental and corporate issuers. The Management Team believes that over time
investment in a composite of foreign fixed income markets and in the U.S.
government and corporate bond markets is less risky than a portfolio comprised
exclusively of foreign securities and provides investors with the potential to
earn a higher return than a portfolio invested exclusively in U.S. debt
securities.
--------------------
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<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns shown in the charts. Returns would be lower if sales
charges were deducted. Total returns both before and after deducting the maximum
sales charges are shown below in the tables that follow the performance charts.
Past results are not a guarantee of future results.
EMERGING MARKETS EQUITY FUND
[BAR GRAPH]
Class A Class B Class C
1/19/94 - 12/31/94 -12.58% -13.71%
1995 -11.20% 0.55% -11.87%
1996 4.86% 4.14% 4.03%
As Class A and Class C shares commenced operations on January 19, 1994, the 1994
return represents the period from January 19, 1994 through December 31, 1994.
The inception date for the Class B shares was December 5, 1995; thus the 1995
return represents the period from December 5, 1995 to December 31, 1995.
Schroder Capital was appointed sub-adviser for Emerging Markets Equity Fund
effective February 25, 1997; thus, while past performance is never a guarantee
of future results, information for periods prior to that date may be less
indicative of current or future operations than would otherwise be the case.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS A CLASS B* CLASS C
-------- -------- --------
<S> <C> <C> <C>
Inception Date..................... 1/19/94 12/5/95 1/19/94
ONE YEAR
Before deducting maximum sales
charges....................... (1.25)% N/A (1.89)%
After deducting maximum sales
charges....................... (5.68)% N/A (2.89)%
LIFE
Before deducting maximum sales
charges....................... (7.99)% (2.08)% (8.67)%
After deducting maximum sales
charges....................... (9.52)% (2.92)% (8.67)%
</TABLE>
- ------------------
* Return information for Class B shares has not been annualized and reflects
results for the period December 5, 1995 through October 31, 1996.
--------------------
Prospectus Page 17
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL EQUITY FUND
[BAR GRAPH]
Class A Class B Class C
11/14/91 - 12/31/91 2.42%
1992 3.26%
1993 30.77% 17.39%
1994 -2.53% -3.12%
1995 13.54% 1.29% 12.76%
1996 14.80% 13.91% 13.91%
As Class A shares commenced operations on November 14, 1991, the 1991 return
represents the period from November 14, 1991 through December 31, 1991. As the
inception date of Class B shares was August 25, 1995, the 1995 return for Class
B shares represents the period from August 25, 1995 through December 31, 1995.
The inception date of Class C shares was May 10, 1993; thus, the 1993 return for
Class C shares represents the period from May 10, 1993 through December 31,
1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Inception Date..................... 11/14/91 8/25/95 5/10/93
ONE YEAR
Before deducting maximum sales
charges....................... 14.17% 13.28% 13.28%
After deducting maximum sales
charges....................... 9.01% 8.28% 12.28%
LIFE
Before deducting maximum sales
charges....................... 11.14% 9.13% 10.23%
After deducting maximum sales
charges....................... 10.11% 5.80% 10.23%
</TABLE>
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Prospectus Page 18
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL INCOME FUND
[BAR GRAPH]
Class A Class B Class C
3-20/87 -12/31/87 17.58%
1988 12.15%
1989 5.44%
1990 17.72%
1991 11.11% 10.75%
1992 1.22% 0.38% 0.10%
1993 14.16% 13.36% 13.64%
1994 -3.89% -4.77% -4.43%
1995 13.20% 12.39% 12.54%
1996 7.13% 6.34% 6.70%
As Class A shares commenced operations on July 1, 1991, the 1991 return for
Class A shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class B shares was March 20, 1987; thus, the 1987
return represents the period from March 20, 1987 through December 31, 1987. The
inception date of Class C shares was July 2, 1992; thus, the 1992 return for
Class C shares represents the period from July 2, 1992 through December 31,
1992.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS A CLASS B CLASS C
-------- -------- --------
Inception Date..................... 7/1/91 3/20/87 7/2/92
<S> <C> <C> <C>
ONE YEAR
Before deducting maximum sales
charges....................... 8.60% 7.95% 8.12%
After deducting maximum sales
charges....................... 4.27% 2.95% 7.37%
FIVE YEARS
Before deducting maximum sales
charges....................... 6.98% 6.18% N/A
After deducting maximum sales
charges....................... 6.11% 5.86% N/A
LIFE
Before deducting maximum sales
charges....................... 7.66% 9.52% 6.13%
After deducting maximum sales
charges....................... 6.84% 9.52% 6.13%
</TABLE>
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in a Fund as a steady compound annual
rate of return. Actual year-by-year returns fluctuate and may be higher or lower
than standardized return. Standardized returns for Class A shares of the Funds
reflect deduction of the Funds' maximum initial sales charge of 4.5% (4% in the
case of Global Income Fund) at the time of purchase, and standardized returns
for the Class B and Class C shares of the Funds reflect deduction of the
applicable contingent deferred sales charge imposed on the sale of shares held
for the period. One-, five-and ten-year periods will be shown, unless the Fund
or Class has been in existence for a shorter period. If so, returns will be
shown for the period since inception,
--------------------
Prospectus Page 19
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
known as 'Life.' Total return calculations assume reinvestment of dividends and
other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report, which may be obtained without charge by
contacting the Fund, your PaineWebber investment executive or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed-income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock.
BONDS (including notes and debentures) are used by corporations and governments
to borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at maturity. Bonds have
varying degrees of investment risk and varying levels of sensitivity to changes
in interest rates.
RISKS
Following is a discussion of the risks that are common to each Fund:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a Fund may experience a
substantial or complete loss on an individual equity investment.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bond prices will fall,
lowering the value of the Fund's bond investments. Credit risk is the risk that
adverse changes in economic conditions can affect an issuer's ability to pay
principal and interest. In addition, there is a risk that bonds will be
downgraded by rating agencies. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the volatility of the
security's value or its liquidity. Rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than the rating indicates.
Debt securities rated below investment grade generally offer a higher current
yield than that available for higher grade issues, but 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 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.
FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in
--------------------
Prospectus Page 20
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
foreign economic or monetary policies, exchange control regulations and
regulations involving prohibitions on the repatriation of foreign currencies.
Investments in foreign countries could be affected by other factors not present
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended clearance and
settlement periods.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies
located in emerging markets involves additional risks. These countries typically
have economic and political systems that are relatively less mature, and can be
expected to be less stable, than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners in those
countries, and there is a risk of government expropriation or nationalization of
private property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets may also result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of a Fund's foreign investments. A Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation or other political or economic
developments inside and outside the United States.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or
index. These instruments include options, futures contracts, forward currency
contracts, interest rate protection contracts and similar instruments that may
be used in hedging and related strategies. There is limited consensus as to what
constitutes a 'derivative' security. The market value of derivative instruments
and securities sometimes is more volatile than that of
other investments, and each type of derivative instrument may pose its own
special risks. Mitchell Hutchins and the sub-advisers take these risks into
account in their management of the Funds.
COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, the sub-advisers and
Mitchell Hutchins, subject to the supervision of the respective boards of
trustees, monitor and evaluate the creditworthiness of the parties with which
each Fund does business.
In addition to these general risks, investments in each Fund are subject to
special risk considerations:
EMERGING MARKETS EQUITY FUND
INVESTING IN NON-CAPITALIST COUNTRIES. Emerging Markets Equity Fund may invest
in emerging markets that are formerly communist countries of Eastern
Europe, the Commonwealth of Independent States (formerly the Soviet Union) and
the People's Republic of China (collectively, 'Non-Capitalist Countries'). Upon
the accession to power of communist regimes approximately 50 to 80 years ago,
the governments of a number of Non-Capitalist Countries expropriated a large
amount of property. The claims of many property owners against those governments
were never finally settled. There can be no assurance that the Fund's
investments in Non-Capitalist Countries, if any, would not also be expropriated,
nationalized or otherwise confiscated, in which case the Fund could lose its
entire investment in the Non-Capitalist Country involved. In addition, any
change in the leadership or policies of Non-Capitalist Countries may halt the
expansion of or reverse the liberalization of foreign investment policies now
occurring.
GLOBAL EQUITY FUND
BONDS. The bonds in which Global Equity Fund may invest must be rated investment
grade except as otherwise noted below. Investment grade quality means that the
securities are rated within the four highest categories by S&P or Moody's or
comparably rated by another NRSRO. Securities in the fourth highest category
(BBB by S&P or Baa by Moody's) are investment grade, but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for such securities to
--------------------
Prospectus Page 21
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
make principal and interest payments than is the case for higher-rated
securities. The Fund may invest in unrated securities if GE Investment
Management deems them to be of comparable quality. The Fund may invest up to 10%
of its net assets in convertible securities rated below investment grade.
GLOBAL INCOME FUND
U.S. AND FOREIGN GOVERNMENT SECURITIES. The U.S. government securities in which
the Fund may invest include direct obligations of the U.S. government (such as
Treasury bills, notes and bonds) and obligations issued or guaranteed by U.S.
government agencies and instrumentalities. The Fund is authorized to invest in
mortgage-backed securities issued or guaranteed by the Government National
Mortgage Association ('Ginnie Mae'), Fannie Mae (formerly, the Federal National
Mortgage Association) or the Federal Home Loan Mortgage Corporation ('Freddie
Mac'), but does not presently expect to invest more than 10% of its total assets
in such securities.
The Fund may invest in 'zero coupon' Treasury securities, which are Treasury
bills, notes and bonds that have been stripped of their unmatured interest
coupons, and receipts or certificates representing interest in such stripped
debt obligations and coupons. A zero coupon security pays no cash interest to
its holder prior to maturity. Accordingly, these securities usually are issued
and traded at a deep discount from their face or par value and are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities that make current income payments.
Federal tax law requires that the holder of a zero coupon security include in
gross income each year the original issue discount that accrues on the security
for the year, even though the holder receives no interest payment on the
security during the year. For additional discussion of the tax treatment of zero
coupon Treasury securities, see 'Taxes' in the Statement of Additional
Information.
The foreign government securities in which the Fund may invest generally consist
of obligations supported by national, state or provincial governments or similar
political subdivisions. Investments in foreign government debt securities
involve special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to pay
interest or repay principal when due in accordance with the terms of such debt,
and the Fund may have limited legal recourse in the event of default. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance.
BONDS; LOWER-RATED BONDS. Global Income Fund is permitted to invest up to 35% of
its total assets in securities rated below the two highest grades assigned by an
NRSRO. Except as noted below, these securities must be rated at least BBB by S&P
or Baa by Moody's. These securities are investment grade, but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for such securities to make principal and interest payments than is the case for
higher-rated securities. Within this 35% limitation, the Fund may invest up to
20% of its total assets in sovereign debt securities rated as low as BB by S&P,
Ba by Moody's or comparably rated by another NRSRO or, in the case of such
securities assigned a short-term debt rating, no lower than B by S&P or
comparably rated by another NRSRO. These securities, commonly referred to as
'junk bonds,' are deemed by those NRSROs to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal and may
involve major risk exposure to adverse conditions. Short-term debt rated B by
S&P is regarded by the rating agency as having only an adequate capacity for
timely payment. The Fund is also permitted to purchase debt securities that are
not rated by an NRSRO but that Mitchell Hutchins determines to be of comparable
quality to that of rated securities in which the Fund may invest. Such
securities are included in the computation of any percentage limitations
applicable to the comparably rated securities. In the event that, due to a
downgrade of one or more debt securities, an amount in excess of 20% of the
Fund's total assets is held in securities rated below investment grade and
comparably unrated securities, Mitchell Hutchins will engage in an orderly
disposition of such securities to the extent necessary to ensure that the Fund's
holdings of such securities do not exceed 20% of the Fund's total assets.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are bonds backed by
direct or indirect pools of underlying mortgage loans that are secured by real
property. The U.S. government mortgage-backed securities in which Global Income
Fund may invest are issued or guaranteed as to principal and interest (but not
as to market value) by Ginnie Mae, Fannie Mae and Freddie Mac. Mortgage-backed
securities may be composed of one or more classes and may be structured either
as pass-through securities or collateralized debt obligations.
A major difference between mortgage-backed securities and traditional bonds is
that interest and principal payments are made more frequently (usually monthly)
and that principal may be repaid at any time. When
--------------------
Prospectus Page 22
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
interest rates go down and homeowners refinance their mortgages, mortgage-backed
securities may be paid off more quickly than investors expect. When interest
rates rise, mortgage-backed securities may be paid off more slowly than
originally expected. Changes in the rate or 'speed' of these prepayments can
cause the value of mortgage-backed securities to fluctuate rapidly. Because of
prepayments, mortgage-backed securities may not benefit as much as other bonds
from declining interest rates, and Global Income Fund may have to reinvest
prepayments in bonds with lower interest rates than the original investment,
thus adversely affecting its yield. Actual prepayment experience may cause the
yield of a mortgage-backed security to differ from what was assumed when the
Fund purchased the security.
NON-DIVERSIFIED STATUS. The Fund is 'non-diversified,' as that term is defined
in the 1940 Act, but it intends to continue to qualify as a 'regulated
investment company' for federal income tax purposes. See 'Dividends & Taxes.'
This means, in general, that more than 5% of the total assets of the Fund may be
invested in securities of one issuer (including a foreign government), but only
if, at the close of each quarter of the Fund's taxable year, the aggregate
amount of such holdings does not exceed 50% of the value of its total assets and
no more than 25% of the value of its total assets is invested in the securities
of a single issuer. To the extent that the Fund's portfolio at times may include
the securities of a smaller number of issuers than if it were 'diversified' (as
defined in the 1940 Act), the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, in that changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
total return and the price of Fund shares.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use
derivative contracts, such as options (both exchange traded and over-the-
counter), futures contracts and forward currency contracts, in strategies
intended to reduce the overall risk of its investments ('hedge') or, in the case
of Global Income Fund, to enhance income or realize gains. Use of these
derivative contracts solely to enhance income or realize gains may be considered
a form of speculation. Global Income Fund also may use interest rate swaps and
similar contracts to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against an increase in the price of
securities that the Fund anticipates purchasing at a later date. New financial
products and risk management techniques continue to be developed, and they may
be used by any Fund if consistent with its investment objective and policies.
The Statement of Additional Information contains further information on these
derivative contracts and related hedging strategies.
The Funds might not use any of these derivative contracts or hedging strategies,
and there can be no assurance that using them will succeed. If Schroder Capital,
GE Investment Management or Mitchell Hutchins, as applicable, is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, a Fund may have lower net income and a net loss on the
investment. Each of these strategies involves certain risks, which include:
o the fact that the skills needed to implement a hedging strategy are different
from those needed to select securities for the Funds;
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and price
movements of the securities or currencies being hedged;
o possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
'cover' or to segregate securities; and
o the possibility that a Fund is unable to close out or liquidate its hedged
position.
REPURCHASE AGREEMENTS. Each Fund may use 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, usually no more than seven days after purchase, 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.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including a possible decline in the market value of the
underlying securities and delays and costs to the Fund if the other party to the
repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins or a sub-adviser to present minimum credit risks in accordance
with guidelines established by the Fund's board.
REVERSE REPURCHASE AGREEMENTS. Global Income Fund may enter into reverse
repurchase agreements with banks and broker-dealers up to an aggregate value
--------------------
Prospectus Page 23
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
of not more than 10% of its total assets. Such agreements involve the sale of
securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and may
be entered into only for temporary or emergency purposes. The Fund will not
purchase portfolio securities while borrowings (including reverse repurchase
agreements) in excess of 5% of the value of its total assets are outstanding.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES.
Each Fund may purchase securities on a 'when-issued' or delayed-delivery basis.
In when-issued or delayed-delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed-delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. When-issued and delayed-delivery securities will not exceed 10% of
Global Equity Fund's net assets.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets. Lending securities enables a Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
PORTFOLIO TURNOVER. Each Fund's portfolio turn-over rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins or a
sub-adviser deems portfolio changes appropriate. A higher turnover rate (100% or
more) for a Fund will involve correspondingly greater transaction costs, which
will be borne directly by the Fund, and may increase the potential for
short-term capital gains.
DEFENSIVE POSITIONS. When Mitchell Hutchins or the sub-adviser, as applicable,
believes that unusual market or economic circumstances warrant a defensive
posture, each Fund may temporarily commit all or any portion of its assets to
cash or investment grade money market instruments of U.S. or foreign issuers,
including repurchase agreements.
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, including certain cover for over-the-counter
options and securities whose disposition is restricted under the federal
securities laws. The Funds do not consider securities that are eligible for
resale pursuant to SEC Rule 144A to be illiquid securities if Mitchell Hutchins
or the sub-adviser, as applicable, has determined such securities to be liquid,
based upon the trading markets for the securities under procedures approved by
the Funds' boards.
OTHER INFORMATION. Each Fund may borrow money for temporary or emergency
purposes in the following amounts of total assets: Emerging Markets Equity
Fund--33 1/3%, Global Equity Fund--20%, and Global Income Fund--10%. Each Fund
may sell securities short 'against the box' to defer realization of gains or
losses for tax or other purposes. When a security is sold against the box, the
seller owns the security. In addition, each Fund may invest up to 10% of its
total assets in the securities of other investment companies. To the extent a
Fund invests in other investment companies, the Fund's shareholders incur
duplicative fees and expenses, including investment advisory fees. Each Fund may
invest up to 35% of its total assets in cash or investment grade money market
instruments of U.S. or foreign issuers for liquidity purposes or pending
investment in other securities. Subject to this 35% limitation, Global Income
Fund may acquire these securities as an investment.
- --------------------------------------------------------------------------------
FLEXIBLE PRICING(SM)
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus three classes of shares that differ in
terms of sales charges and expenses. An investor can select the class that is
best suited to his or her investment needs, based upon the holding period and
the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price or, in the case of
Global Income Fund, 4% of the public offering price) next calculated after
PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer agent
('Transfer Agent'), receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares. Class A
shares sales charges are calculated as follows:
--------------------
Prospectus Page 24
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
EMERGING MARKETS EQUITY FUND AND GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF DISCOUNT TO
------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED OF OFFERING PRICE
- ----------------------------------- -------- ---------- -----------------
<S> <C> <C> <C>
Less than $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF DISCOUNT TO
------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE
AMOUNT OF PURCHASE PRICE INVESTED OF OFFERING PRICE
- ----------------------------------- -------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000................. 4.00% 4.17% 3.75%
$100,000 to $249,999............... 3.00 3.09 2.75
$250,000 to $499,999............... 2.25 2.30 2.00
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
- ------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may not withdraw annually more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mutual
fund may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously owned
shares to qualify for a reduced sales charge. To determine the sales charge
reduction in either case, please refer to the charts above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
o their spouses, parents or children under age 21;
o their Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o any company controlled by the investor;
o trusts created by the investor;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group of investors for the benefit of the investors'
children; or
o accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
o is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
o is the spouse, parent or child of any of the above, or advisory clients of
Mitchell Hutchins;
o buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC and
o the investor was the investment executive's client at the competing
brokerage firm;
o within 90 days of buying Class A shares in a Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a contingent
deferred sales charge when selling them or held
--------------------
Prospectus Page 25
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
those shares until the contingent deferred sales charge was waived; and
o the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;
o is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
o is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or
section 403(b) of the Internal Revenue Code. (This waiver is subject to
minimum requirements, with respect to the number of employees and investment
amount, established by Mitchell Hutchins. Currently, a plan must have 100 or
more eligible employees or the amount invested or to be invested in a Fund or
any other PaineWebber mutual fund must total at least $1 million during the
subsequent 13-month period);
o acquires Class A shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for program
services, provided that the program sponsor has entered into a written
agreement with PaineWebber permitting the sale of Class A shares at net asset
value to that program. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested. For subsequent investments or
exchanges made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also waived;
o acquires Class A shares in connection with a reorganization pursuant to which
a Fund acquires substantially all of the assets and liabilities of another
investment company in exchange for shares of the Fund.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or the Fund if they seek any of these waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
'contingent deferred sales charge.' The amount of the charge depends on how long
the investor owned the shares. The sales charge is calculated by multiplying the
offering price (net asset value at the time of purchase) or the net asset value
of the shares at the time of sale by the shareholder, whichever is less, by the
percentage shown on the following table. Investors who own shares for more than
six years do not have to pay a sales charge when selling those shares.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- ----------------------------------- -------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED
SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
o First, Class B shares owned through reinvested dividends and capital gain
distributions; and
o Second, Class B shares held in the portfolio the longest.
--------------------
Prospectus Page 26
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
o sales of shares under the Fund's 'Systematic Withdrawal Plan' (investors may
not withdraw annually more than 12% of the value of the Fund account under the
Plan);
o a distribution from an IRA, a self-employed individual retirement plan ('Keogh
Plan') or a custodial account under Section 403(b) of the Internal Revenue
Code (after the investor reaches age 59 1/2);
o a tax-free return of an excess IRA contribution;
o a tax-qualified retirement plan distribution following retirement; or
o Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
An investor must provide satisfactory information to PaineWebber or the Fund if
the investor seeks any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Class C shares never convert to any other class of
shares.
A contingent deferred sales charge of 1% (0.75% in the case of Global Income
Fund) of the offering price (net asset value at the time of purchase) or the net
asset value of the shares at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase date.
Other PaineWebber mutual funds may impose a different contingent deferred sales
charge on Class C shares sold within one year of the purchase date. A sale of
Class C shares acquired through an exchange and held less than one year will be
subject to the same contingent deferred sales charge that would have been
imposed on the Class C shares of the PaineWebber mutual fund originally
purchased. Class C shares representing reinvestment of any dividends or capital
gain distributions will not be subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan also will not be subject to this charge. However,
investors may not withdraw more than 12% of the value of the Fund account under
the Plan in the first year after purchase.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Prices are calculated for the Fund's Class A, Class B and Class C shares once
each Business Day, at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time). A 'Business Day' is any day,
Monday through Friday, on which the New York Stock Exchange is open for
business. Shares are purchased at the next share price calculated after the
purchase order is received.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.
--------------------
Prospectus Page 27
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent by completing an account application which
may be obtained by calling 1-800-647-1568. The application and check must be
mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box 8950, Wilmington,
DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
o mail an application with a check; or
o open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account................. $1,000
To add to an account............... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
o employees of PaineWebber or its affiliates; or
o participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Fund shares for the
same class of other PaineWebber mutual fund shares. For classes of shares where
no initial sales charge is imposed, a contingent deferred sales charge may apply
if the investor sells the shares acquired through the exchange.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
o Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
o Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a 'letter of instruction' to the Transfer Agent. The letter of
instruction must include:
o the investor's name and address;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Fund will use
the purchase date of the initial investment to determine any contingent deferred
sales charge due when the acquired shares are sold. Fund shares may be exchanged
only after the settlement date has passed and payment for the shares has been
made. The exchange privilege is available only in those jurisdictions where the
sale of the fund shares to be acquired is authorized. This exchange privilege
may be modified or terminated at any time and, when required by SEC rules, upon
60 days' notice. See the back cover of this prospectus for a listing of
other PaineWebber mutual funds.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class they
are selling. If they do
--------------------
Prospectus Page 28
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
not, the Fund will assume they are first selling their Class A shares, then
Class C, and last, Class B.
If a shareholder wants to sell shares which were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the case
of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Fund's Transfer Agent, may sell shares by writing a
'letter of instruction,' as detailed in 'How to Exchange Shares.'
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all Fund shares in any shareholder
account with a net asset value of less than $500. If the Fund elects to do so,
it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. The Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
- --------------------------------------------------------------------------------
OTHER SERVICES
- --------------------------------------------------------------------------------
Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Fund will deduct $50 or more each month
from the investor's bank account to invest directly in the Fund. In addition to
providing a convenient and disciplined manner of investing, participation in the
Automatic Investment Plan enables the investor to use the technique of 'dollar
cost averaging.'
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and December)
withdrawals from their PaineWebber Mutual Fund accounts. Minimum balances and
withdrawals vary according to the class of shares:
o CLASS A AND CLASS C SHARES. Minimum value of Fund shares is $5,000; minimum
withdrawals of $100.
o CLASS B SHARES. Minimum value of Fund shares is $20,000; minimum monthly,
quarterly and semi-annual withdrawals of $200, $400 and $600, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may not withdraw more than 12% of
the value of the Fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be moved
to an account with the Transfer Agent. However, if the other firm has entered
into a selected dealer agreement with Mitchell Hutchins relating to the Fund,
the shareholder may be able to hold Fund shares in an account with the other
firm.
--------------------
Prospectus Page 29
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees). Mitchell Hutchins has appointed the investment
sub-adviser, Schroder Capital, to be responsible for day-to-day management of
the Fund's investments.
Schroder Group companies have invested internationally for over 50 years.
Schroder Capital has developed an expertise in emerging markets investments and
has 39 investment professionals located in 12 offices in emerging market
countries around the world. John A. Troiano, with the assistance of an emerging
markets investment committee, has been primarily responsible for the day-to-day
management of Emerging Markets Equity Fund since Schroder Capital was appointed
sub-adviser on February 25, 1997. Mr. Troiano has been a managing director of
Schroder Capital since November 1995, and has been employed by various Schroder
Group companies in the portfolio management area since 1988. He is currently
chairman of Schroder Capital's emerging markets investment committee.
GLOBAL EQUITY FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees). Mitchell Hutchins has appointed the investment
sub-adviser, GE Investment Management, to be responsible for day-to-day
management of the Fund's investments.
Ralph R. Layman is the head of the International Equity Team at GE Investment
Management and serves as portfolio manager of the Fund, primarily responsible
for the day-to-day management of the Fund's portfolio. Mr. Layman has served in
this capacity since the Fund's inception in 1991. He is a Chartered Financial
Analyst and an executive vice president and senior investment manager of GE
Investment Management.
From 1989 to 1991, Mr. Layman served as executive vice president, partner and
portfolio manager of Northern Capital Management Co. Prior to 1989 when he
joined Northern, he was vice president and portfolio manager of Templeton
Investment Counsel, Inc., and vice president of the Templeton Emerging Markets
Fund.
Directly assisting Mr. Layman are Michael J. Solecki, vice president of
international equities at GE Investments, and the rest of the International
Equity Team. Mr. Solecki is a Chartered Financial Analyst and has been with GE
Investment Management for six years. From 1992 to 1995, Mr. Solecki was a senior
European analyst at GE Investment Management's London, England office. Prior to
1992, he was an international analyst with GE Investment Management. The
International Equity Team is comprised of eleven analysts, seven of whom manage
portfolios.
GLOBAL INCOME FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees).
Stuart Waugh and William King are primarily responsible for the day-to-day
portfolio management of the Fund. Mr. Waugh has been involved with the Fund
since its inception, first as an analyst and then as portfolio manager since
1993. Mr. Waugh is a vice president of PaineWebber Investment Series and a
managing director of global fixed income investments of Mitchell Hutchins. Mr.
Waugh has been employed by Mitchell Hutchins as a portfolio manager for more
than the last five years. Mr. King joined Mitchell Hutchins in November 1995.
Previously, he was at IBM Corporation where he was responsible for the
management of IBM Pension Fund's global bond portfolio. Both Mr. Waugh and Mr.
King are Chartered Financial Analysts.
Other members of Mitchell Hutchins' international fixed income group provide
input on market outlook, interest rate forecasts and other considerations
pertaining to global fixed income investments.
* * * *
Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
--------------------
Prospectus Page 30
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
Personnel of Mitchell Hutchins and each sub-adviser may engage in securities
transactions for their own accounts pursuant to each firm's code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On January 31, 1997, Mitchell Hutchins was adviser or
sub-adviser of 30 investment companies with 65 separate portfolios and aggregate
assets of approximately $32.9 billion.
ABOUT THE SUB-ADVISERS
Schroder Capital, the investment sub-adviser to Emerging Markets Equity Fund, is
located at 787 Seventh Avenue, New York, New York 10019. It is a wholly owned
indirect subsidiary of Schroders plc. Schroders plc, which is listed on the
London Stock Exchange, is the holding company parent of an international group
of banks and financial services companies (referred to as the 'Schroder Group'),
with associated companies and investment and representative offices located in
18 countries worldwide. As of September 30, 1996, the investment management
subsidiaries of the Schroder Group had approximately $130 billion in assets
under management, and Schroder Capital, together with its United Kingdom
affiliate Schroder Capital Management International Limited, had over $20
billion, including $2.8 billion in emerging market investments under management
as of that date.
GE Investment Management, the investment sub-adviser to Global Equity Fund, is
located at 3003 Summer Street, Stamford, Connecticut 06905 and is a subsidiary
of General Electric Company. Together with its affiliate, General Electric
Investment Corporation (GE Investment Management and General Electric Investment
Corporation are collectively referred to as 'GE Investments'), GE Investment
Management is one of the largest independent investment managers in the United
States. GE Investments and its predecessors have been managing mutual fund
assets since 1935 and, as of January 31, 1997, had in excess of $ billion in
total assets under management.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. Emerging
Markets Equity Fund is obligated to pay investment advisory and administrative
fees to Mitchell Hutchins at an annual rate of 1.20% of the Fund's average daily
net assets. However, after giving effect to anticipated fee waivers, the
effective annual rate at which such fees will actually be paid by the Fund from
February 25, 1997 through the end of the current fiscal year is expected to be
0.70%. Under the advisory contract that was in effect between the Fund and
Mitchell Hutchins prior to that date, the annual rate at which the Fund was
obligated to pay Mitchell Hutchins for its services was 1.62% of the Fund's
average daily net assets. After giving effect to fee waivers, for the fiscal
year ended June 30, 1996, as well as for the subsequent four month fiscal period
ended October 31, 1996, the Fund actually paid such fees to Mitchell Hutchins at
an annual rate of 1.12%.
For the fiscal year ended August 31, 1996, as well as for the subsequent
two-month fiscal period ended October 31, 1996, Global Equity Fund paid advisory
fees to Mitchell Hutchins at the annual rate of 0.85% of its average daily net
assets.
For the fiscal year ended October 31, 1996, Global Income Fund paid advisory
fees to Mitchell Hutchins at the effective annual rate of 0.74% of its average
daily net assets.
With respect to Emerging Markets Equity Fund, Mitchell Hutchins (not the Fund)
pays Schroder Capital a fee for investment sub-advisory services at the annual
rate of 0.70% of the Fund's average daily net assets. During the fiscal year
ended June 30, 1996, as well as for the subsequent four month fiscal period
ended October 31, 1996, Mitchell Hutchins paid the Fund's previous sub-adviser,
Emerging Markets Management, sub-advisory fees at an annual rate of 1.12% of the
Fund's average daily net assets. With respect to Global Equity Fund, Mitchell
Hutchins (not the Fund) pays GE Investment Management a fee for investment
sub-advisory services at the annual rate of 0.31% of the Fund's average daily
net assets.
Global Income Fund pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for services not provided by the
Transfer Agent.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
distribution plans for Class A, Class B and Class C shares
--------------------
Prospectus Page 31
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
('Class A Plan,' 'Class B Plan' and 'Class C Plan,' collectively, 'Plans'), each
Fund pays Mitchell Hutchins:
o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
o Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B and Class C shares (0.50% for Class C shares of Global
Income Fund).
Under the Plans, Mitchell Hutchins primarily uses the service fees to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25% of
the aggregate investment amounts maintained in each Fund by PaineWebber clients.
PaineWebber then compensates its investment executives for shareholder servicing
that they perform and offsets its own expenses in servicing and maintaining
shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
o Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
o Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are sold, as well as on an ongoing basis. Mitchell Hutchins receives no special
compensation from any of the Funds or investors at the time of sale of Class B
or C shares.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for each class of shares
('Distribution Contracts') specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the service or distribution fees it receives, the Funds will not be
obligated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or accrued
through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Funds. Annually, the board of each Fund
reviews the Plans and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.
- --------------------------------------------------------------------------------
DETERMINING THE SHARES'
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of each Fund's board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates. It should be recognized that
judgment plays a greater role in valuing lower-rated debt securities in which a
Fund may invest, because there is less reliable, objective data available.
--------------------
Prospectus Page 32
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Emerging Markets Equity Fund and Global Equity Fund each pays an annual dividend
from its net investment income and net realized short-term capital gains, if
any. Each of these Funds distributes any net realized gain from foreign currency
transactions with its dividend. Global Income Fund declares monthly dividends
from its net investment income, which may be accompanied by distributions of net
realized short-term capital gains and foreign currency gains. Although Global
Income Fund will not, in any month, distribute more than the amount of such
income and gains then available for distribution, capital losses and/or foreign
currency losses realized later in the same fiscal year may convert a portion of
such a distribution to a nontaxable return of capital. Each Fund also
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, which
distribution in the case of Global Income Fund, is accompanied by any
undistributed net realized short-term capital gains and foreign currency gains.
The Funds may make additional distributions, if necessary, to avoid a 4% excise
tax on certain undistributed income and capital gains.
Dividends and other distributions paid on each class of shares of each Fund are
calculated at the same time and in the same manner. Dividends on Class B and
Class C shares of a Fund are expected to be lower than those on its Class A
shares because Class B and Class C shares have higher expenses resulting from
their distribution fees. Dividends on each class might be affected differently
by the allocation of other class-specific expenses. See 'General Information.'
The Funds' dividends and other distributions are paid in additional Fund shares
of the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to them by check or credited to their PaineWebber accounts,
should contact their investment executives at PaineWebber or one of its
correspondent firms or complete the appropriate section of the account
application.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code so that it will not have to pay federal
income tax on the part of its investment company taxable income (generally
consisting of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions) and net capital gain that it
distributes to its shareholders.
Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as ordinary
income. Distributions of each Fund's net capital gain (whether paid in cash or
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Shareholders who are
not subject to tax on their income generally will not be required to pay tax on
distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of dividends and capital gain distributions paid (or deemed paid)
for that year, their share of any foreign taxes paid by the Fund that year and
any portion of those dividends that qualifies for special treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and capital gain distributions payable to such shareholders who otherwise are
subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares (which normally takes into account any initial
sales charge paid on Class A shares). An exchange of any Fund's shares for
shares
--------------------
Prospectus Page 33
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
of another PaineWebber mutual fund generally will have similar tax consequences.
In addition, if a Fund's shares are bought within 30 days before or after
selling other shares of the Fund (regardless of class) at a loss, all or a
portion of that loss will not be deductible and will increase the basis of the
newly purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
No gain or loss will be recognized by a shareholder as a result of a conversion
from Class B shares into Class A shares.
* * * *
Because the foregoing only summarizes some of the important tax considerations
affecting the Funds and their shareholders, please see the further discussion in
the Statement of Additional Information. Prospective shareholders are urged to
consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund is a diversified series of PaineWebber Investment
Trust II, an open-end management investment company that was formed on August
10, 1992 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value of $0.001 per share.
GLOBAL EQUITY FUND
Global Equity Fund is a diversified series of PaineWebber Investment Trust
('Investment Trust'), an open-end management investment company that was formed
on March 28, 1991 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value of $0.001 per share.
Shares of one other series have been authorized.
GLOBAL INCOME FUND
Global Income Fund is a non-diversified series of PaineWebber Investment Series,
an open-end management investment company that was formed on
December 22, 1986 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, with a par value of $0.001 per
share.
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. Each class represents an identical interest in
the respective Fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege. The different sales charges and other
expenses applicable to the different classes of shares of the Funds will affect
the performance of those classes.
Each share of each Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends on Class B and Class C shares
are likely to be lower than for Class A shares, and dividends on Class A, Class
B and Class C shares are likely to be lower than for Class Y shares, which bear
the lowest expenses. Also, in the case of Global Income Fund, Class B shares
bear higher expenses, and therefore are likely to have lower dividends, than
Class C Shares.
--------------------
Prospectus Page 34
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
Class Y shares, which are offered only to limited groups of investors, are
subject to neither an initial or contingent deferred sales charge nor ongoing
service or distribution fees. More information concerning Class Y shares may be
obtained from an investment executive at PaineWebber or one of its correspondent
firms or by calling toll-free 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
might become liable for a misstatement in this Prospectus about another Fund.
The board of each Fund has considered this factor in approving the use of a
single, combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of any Fund (or
Investment Trust, which has more than one series) may elect all of the board
members of that Fund or of Investment Trust. The shares of a Fund will be voted
together except that only the shareholders of a particular class of a Fund may
vote on matters affecting only that class, such as the terms of a Plan as it
relates to the class. The shares of each series of Investment Trust will be
voted separately, except when an aggregate vote of all the securities is
required by law.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
Investment Trust or a Fund, as applicable, may remove a board member through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. A meeting will be called to vote on the removal of a board
member at the written request of holders of 10% of the outstanding shares of
Investment Trust or a Fund.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
Emerging Markets Equity Fund and Global Equity Fund and employs foreign
sub-custodians to provide custody of the Funds' foreign assets. Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, serves as
custodian for Global Income Fund and employs foreign sub-custodians to provide
custody of the Fund's foreign assets. PFPC Inc., a subsidiary of PNC Bank, N.A.,
serves as each Fund's transfer and dividend disbursing agent. It is located at
400 Bellevue Parkway, Wilmington, DE 19809.
--------------------
Prospectus Page 35
<PAGE>
------------------------------
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
PROSPECTUS -- MARCH 1, 1997
<TABLE>
<S> <C>
/ / PAINEWEBBER BOND FUNDS / / PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
/ / PAINEWEBBER TAX-FREE BOND FUNDS / / PAINEWEBBER GLOBAL FUNDS
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
/ / PAINEWEBBER ASSET / / PAINEWEBBER MONEY MARKET FUND
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund
</TABLE>
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.
(Copyright) 1997 PaineWebber Incorporated
--------------------
<PAGE>
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. Schroder Capital Management International
Inc. ('Schroder Capital') 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 relates
only to the Funds' Class A, B and C shares. It should be read only in
conjunction with the Funds' current Prospectus for those shares, dated March 1,
1997. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated March 1, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's'),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ('S&P'), and
other nationally recognized statistical rating organizations ('NRSROs') are
private services that provide ratings of the credit quality of debt obligations.
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
<PAGE>
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for 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 a Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of 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 ('OTC'), from time to time foreign securities may be
difficult to liquidate rapidly without significantly depressing the price of
such securities. There may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Transactions in foreign securities may be subject to less
efficient settlement practices. Foreign securities trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts.
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 depository
receipts, including American Depository Receipts ('ADRs'), European Depository
Receipts ('EDRs') and Global Depository Receipts ('GDRs'), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. EDRs are similar to ADRs, but 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. GDRs are similar to EDRs and are designed for use
in several international markets. For purposes of each Fund's investment
policies, ADRs, EDRs and GDRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR, EDR or GDR representing
ownership of common stock will be treated as common stock.
2
<PAGE>
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.
From time to time, investments in other investment companies may be the
most effective available means by which the Funds may invest in securities of
issuers in certain countries. Investment in such investment companies may
involve the payment of management expenses and, in connection with some
purchases, sales loads, and payment of substantial premiums above the value of
such companies' portfolio securities. At the same time, a Fund would continue to
pay its own management fees and other expenses. The Funds may invest in these
investment funds and in registered investment companies subject to the
provisions of the Investment Company Act of 1940 ('1940 Act'). Such investment
funds or investment companies may be 'passive foreign investment companies' (as
described in 'Taxes' below) and may result in special federal income tax
consequences.
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
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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.
U.S. GOVERNMENT SECURITIES. The Funds may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of it agencies or instrumentalities (collectively, 'U.S.
government securities'). Among the U.S. government securities that may be held
by the Funds are securities that are supported by the full faith and credit of
the United States; securities that are supported by the right of the issuer to
borrow from the U.S. Treasury; and securities 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. Each Fund is 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
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rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value 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 value on
the right to acquire the underlying common stock while holding a fixed income
security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obigations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which Global
Income Fund may invest include mortgage-backed securities issued or guaranteed
as to the payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ('Ginnie Mae'), Fannie Mae (formerly,
the Federal National Mortgage Association) or the Federal Home Loan Mortgage
Corporation ('Freddie Mac').
Ginnie Mae Certificates--Ginnie Mae guarantees certain mortgage
pass-through certificates ('Ginnie Mae certificates') that are issued by private
issuers, generally originators of and investors in mortgage loans, including
savings associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively, 'Private Mortgage Lenders') and that
represent ownership interests in individual pools of residential mortgage loans.
These securities are designed to provide monthly payments of interest and
principal to the investor. Timely payment of interest and principal is backed by
the full faith and credit of the U.S. government. Each mortgagor's monthly
payments to his lending institution on his residential mortgage are 'passed
through' to certificateholders such as Global Income Fund. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. Lending institutions that originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.
Fannie Mae Certificates--Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as 'conventional mortgage loans' or 'conventional loans')
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ('Fannie Mae
certificates'), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates--Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ('PCs') and guaranteed mortgage certificates
('GMCs'). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
Collateralized Mortgage Obligations and Multi-Class Mortgage
Pass-Throughs--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called 'Mortgage Assets'). Payments of principal of, and interest on, the
Mortgage Assets
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(and in the case of CMOs, any reinvestment income thereon) provide the funds to
pay debt service on the CMOs or to make scheduled distributions on the
multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any
principal-only or 'PO' class) on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an 'inverse IO,' on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
ARM and Floating Rate Mortgage-Backed Securities--ARM mortgage-backed
securities are mortgage-backed securities that represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of mortgage loans bearing variable or adjustable rates of interest (such
mortgage loans are referred to as 'ARMs'). Floating rate mortgage-backed
securities are classes of mortgage-backed securities that have been structured
to represent the right to receive interest payments at rates that fluctuate in
accordance with an index but that generally are supported by pools comprised of
fixed-rate mortgage loans. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities.
Types of Credit Enhancement--To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. Global Income Fund will
not pay any additional fees for such credit enhancement, although the existence
of credit enhancement may increase the price of a security. Credit enhancements
do not provide
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protection against changes in the market value of the security. Examples of
credit enhancement arising out of the structure of the transaction include
'senior-subordinated securities' (multiple class securities with one or more
classes subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of 'spread
accounts' or 'reserve funds' (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and 'over-collateralization' (where the scheduled payments on, or
the principal amount of, the underlying assets exceed that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit enhancement provided for each issue generally is based on historical
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely affect
the return on an investment in such a security.
Special Characteristics of Mortgage-Backed Securities--The yield
characteristics of mortgage-backed securities differ from those of traditiona1
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other obligations
generally may be prepaid at any time. Prepayments on a pool of mortgage loans
are influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions.
Generally, however, prepayments on fixed-rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of rising
interest rates. Mortgage-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of Global Income Fund.
Additional Information on ARM and Floating Rate Mortgage-Backed
Securities--Global Income Fund may invest in adjustable rate mortgage ('ARM')
and floating rate mortgage-backed securities. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes in
a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities. As a result, during periods of rising interest rates, ARMs generally
do not decrease in value as much as fixed rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much as
fixed rate securities. ARM mortgage-backed securities represent
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a right to receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of ARMs. ARMs generally specify that the borrower's
mortgage interest rate may not be adjusted above a specified lifetime maximum
rate or, in some cases, below a minimum lifetime rate. In addition, certain ARMs
specify for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. ARMs also may limit changes in
the maximum amount by which the borrower's monthly payment may adjust for any
single adjustment period. In the event that a monthly payment is not sufficient
to pay the interest accruing on the ARM, any such excess interest is added to
the mortgage loan ('negative amortization'), which is repaid through future
payments. If the monthly payment exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment that would have been
necessary to amortize the oustanding principal balance over the remaining term
of the loan, the excess reduces the principal balance of the ARM. Borrowers
under ARMs experiencing negative amortization may take longer to build up their
equity in the underlying property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
'lock-in' at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ('COFI'), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. F]oating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
ADDITIONAL INFORMATION ON MONEY MARKET INVESTMENTS OF EMERGING MARKETS
EQUITY FUND AND GLOBAL EQUITY FUND. While each Fund may invest in money market
investments, Emerging Markets Equity Fund and Global Equity Fund are subject to
additional limitations on the type or quality of money market investments in
which they invest. 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
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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 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 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
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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 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 or upon demand and at a price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, the Fund's custodian
segregates assets to cover the Fund's obligations under the reverse repurchase
agreement. See 'Investment Policies and Restrictions--Segregated Accounts.'
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with that Fund's custodian in an
amount, marked to market daily, at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral is
limited to cash, U.S. government securities and irrevocable letters of credit
that meet certain guidelines established by Mitchell Hutchins. 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 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, 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
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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 and Other Strategies Using
Derivatives Contracts,' 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 a 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.' A Fund purchases when-issued securities only
with the intention of taking delivery, but may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or a Sub-Adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of the
Fund's shares present at a shareholders' meeting if more than 50% of the
outstanding Fund 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,
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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.
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) 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.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of reorganization, consolidation, or merger.
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HEDGING AND OTHER STRATEGIES USING DERIVATIVES CONTRACTS
HEDGING INSTRUMENTS. Mitchell Hutchins and the Sub-Advisers may use a
variety of derivatives contracts ('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 also may use these derivatives contracts to
attempt to enhance income or realize gains and may hedge by entering into
certain swaps or other interest rate protection transactions. A Fund may enter
into transactions involving one or more types of these derivatives contracts
under which the full value of its portfolio is at risk. Under normal
circumstances, however, a Fund's use of these derivatives contracts 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 and
the Commodity Futures Trading Commission ('CFTC'). 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
derivatives contracts and 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 derivatives
contracts and techniques are developed. Mitchell Hutchins or a Sub-Adviser, as
applicable, may utilize these opportunities for a Fund to the extent that they
are consistent with the Fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. The Funds'
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF 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.
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.
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(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 market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
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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 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.
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No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations that are fully guaranteed as to principal and
interest by the United States, in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call option on
a futures contract, in accordance with applicable exchange rules. Unlike margin
in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to a Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by 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
17
<PAGE>
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.
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
18
<PAGE>
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.
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.
19
<PAGE>
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 its
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.
20
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 50 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 29 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 28
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 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
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 50 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 28 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of
the Investment Policy Committee
of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's
Economic Roundtable and is 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a
director or trustee of 28 investment
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>
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 Invest-
ments, Inc. Mr. Gowen is a director or
trustee of 28 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (investment bank). From January
Suite 350 1992 to November 1992, he was campaign
Washington, D.C. 20004 manager of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and, from 1989
to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.). Prior
to 1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he most
recently was an executive vice president and
president of Marriott Hotels and Resorts. Mr.
Malek is also a director of American
Management Systems, Inc. (management
consulting and computer related services),
Automatic Data Processing, Inc., CB
Commercial Group, Inc. (real estate
services), Choice Hotels International (hotel
and hotel franchising), FPL Group, Inc.
(electric services), Integra, Inc.
(bio-medical), Manor Care, Inc. (health
care), National Education Corporation and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Carl W. Schafer; 61 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. (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 28 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 managing
director of Zilkha & Company (merchant
banking and private investment company). He
is the former chairman and chief executive
officer of Fortune Bancorp (1990 to 1994),
the former chairman, president and chief
executive officer of CalFed, Inc. (savings
association) (1988 to 1989) and former
president of Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr. Torell is 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
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 five investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president of Mitch-
ell 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 29 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
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 50 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 29 invest-
ment companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
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 28 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 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 29 investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice 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 29 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. Mr. Sluyters
is a vice president and treasurer of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
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 13
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Stuart Waugh; 41 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 five other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president 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
28 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.
Investment Trust II and Investment Series each pays trustees who are not
'interested persons' of the Trust $1,000 annually for each series. 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 presently has two series and pays each such
trustee $1,000 annually for Global Equity Fund and an additional $1,500 annually
for its second series. Therefore, Investment Trust pays each Trustee $2,500
annually, plus any additional amounts due for board or committee meetings. Each
Trust pays an additional $150 for each board meeting and each separate meeting
of a board committee. 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.
27
<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 $ 744 $59,873
Richard R. Burt,
Trustee......................................... $1,688 $2,625 $ 594 $51,173
Meyer Feldberg,
Trustee......................................... $1,688 $2,625 $4,361 $96,181
George W. Gowen,
Trustee......................................... $1,688 $2,625 $4,361 $92,431
Frederic V. Malek,
Trustee......................................... $1,688 $2,625 $4,361 $92,431
Carl W. Schafer,
Trustee......................................... $1,688 $2,625 $ 744 $62,307
John R. Torell, III,
Trustee......................................... $1,688 $2,625 $ 744 $60,123
</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. For the four-months ended October 31, 1996, each of the above named
trustees received fees of $758, except for Mr. Schafer, who received fees
of $900.
** Represents fees paid to each trustee during the fiscal year ended August
31, 1996. For the two-months ended October 31, 1996, each of the above
named trustees received fees of $550, except for Mr. Burt, who received
fees of $400.
*** Represents fees paid to each trustee during the fiscal year ended October
31, 1996.
**** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are 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 JANUARY 31, 1997
- ----------------------------------------------------------------------- ------------------------------------
<S> <C> <C>
Subaru of New England.................................................. 623,514 19.56%
E. Boch................................................................ 167,939 5.27%
</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 JANUARY 31, 1997
- ----------------------------------------------------------------------- ------------------------------------
<S> <C> <C>
Northern Trust Company (FBO PaineWebber 401(k) Plan)................... 2,084,436 6.50%
</TABLE>
- ------------------
* The shareholder(s) listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, New York 10019
28
<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 applicable 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 applicable 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 Investors Trust II dated February 25, 1997. Under the
Advisory Contract the Fund pays Mitchell Hutchins an annual fee, computed daily
and paid monthly, at the annual rate of 1.20% of the Fund's average daily net
assets. During the four months ended October 31, 1996, the fiscal years ended
June 30, 1996 and June 30, 1995 and the period January 19, 1994 (commencement of
operations) to June 30, 1994, the Fund paid (or accrued) to Mitchell Hutchins,
under a prior contract, and/or Kidder Peabody Asset Management, Inc. ('KPAM')
(the Fund's investment adviser prior to February 13, 1995) advisory and
administrative fees of $220,071, $867,093, $1,261,493 and $658,437,
respectively.
During the four months ended October 31, 1996 and for the fiscal years
ended June 30, 1996 and June 30, 1995, Mitchell Hutchins waived part of its
management fees and reimbursed Emerging Markets Equity Fund in the amounts of
$142,160, $538,618 and $81,217, respectively; during these periods, certain
expense limitations were applicable which are no longer in effect. As of the
date of this Statement of Additional Information, Mitchell Hutchins was
voluntarily waiving part of its management fees and 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 Schroder Capital, dated February 25,
1997 ('Schroder Contract'), pursuant to which Schroder Capital determines what
securities will be purchased, sold or held by Emerging Markets Equity Fund.
Under the Schroder Contract, Mitchell Hutchins (not the Fund) pays Schroder
Capital a fee in the amount of 0.70% of the Fund's average
29
<PAGE>
daily net assets. Schroder Capital bears all expenses incurred by it in
connection with its services under the Schroder Contract, but is not responsible
for any expenses incurred by the Trust, Fund or Mitchell Hutchins, including
custody fees. Under sub-advisory contracts with the Fund's former sub-adviser,
Emerging Markets Management, for the four months ended October 31, 1996 and the
fiscal years ended June 30, 1996, and 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 $152,148, $599,472, $872,143 and $455,216,
respectively, to Emerging Markets Management.
Under the Schroder Contract, Schroder Capital 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 Schroder Contract, except any liability to the Trust, the
Fund, its shareholders or Mitchell Hutchins to which Schroder Capital would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Schroder Contract.
The Schroder Contract terminates automatically upon the 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 the
Fund's outstanding securities on 60 days' notice to Schroder Capital, or by
Schroder Capital on 60 days' written notice to Mitchell Hutchins.
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 Investment 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. During the two
months ended October 31, 1996 and 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 $794,518, $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 ('GEIM Contract'), pursuant to which GE Investment Management
determines what securities will be purchased, sold or held by the Fund. Under
the GEIM 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 GEIM Contract. Under the GEIM
Contract (or a prior sub-advisory contract between KPAM and GE Investment
Management) for the two months ended October 31, 1996 and the fiscal years ended
August 31, 1996, August 31, 1995 and August 31, 1994, Mitchell Hutchins and/or
KPAM paid (or accrued) fees of $287,688, $1,808,760, $1,523,282 and $1,637,409,
respectively, to GE Investment Management.
Under the GEIM 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
GEIM 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 GEIM Contract.
The GEIM 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 the
Fund's outstanding voting securities on 60 days' notice to GE Investment
Management, or by GE Investment Management 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
Investment Series 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, 1996, October
31, 1995 and October 31, 1994, the Fund paid
30
<PAGE>
(or accrued) to Mitchell Hutchins advisory and administrative fees of
$7,812,766, $9,229,318 and $12,723,592, respectively.
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, 1996, October
31, 1995 and October 31, 1994, Global Income Fund paid (or accrued) to
PaineWebber $305,944, $376,299 and $487,859, respectively.
NET ASSETS. The following table shows the approximate net assets as of
January 31, 1997, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- --------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................ $ 5,745.3
Global........................................................................... 2,923.0
Equity/Balanced.................................................................. 3,566.1
Fixed Income (excluding Money Market)............................................ 5,102.2
Taxable Fixed Income........................................................ 3,503.4
Tax-Free Fixed Income....................................................... 1,598.8
Money Market Funds............................................................... 24,251.8
</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 Fund 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 (each, respectively, a 'Class A Plan,' 'Class B Plan' and
'Class C Plan,' and collectively, 'Plans'), each Fund pays Mitchell Hutchins a
service fee, accrued daily and payable monthly, at the annual rate of 0.25% of
the average daily net assets of each Class of shares 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
31
<PAGE>
'interested persons' of a Fund shall be committed to the discretion of the
trustees who are not 'interested persons' of that Fund.
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 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.
During the fiscal periods shown, 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
----------------------------------- ------------------------------------- -----------------
FOUR MONTHS FISCAL YEAR TWO MONTHS FISCAL YEAR FISCAL YEAR
ENDED OCTOBER 31, ENDED JUNE 30, ENDED OCTOBER 31, ENDED AUGUST 31, ENDED OCTOBER 31,
1996 1996 1996 1996 1996
----------------- -------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A........ $14,960 $ 65,762 $ 131,568 $ 828,741 $ 1,466,720
Class B........ $ 3,097 $ 2,704 $ 191,642 $1,252,635 $ 4,022,741
Class C........ $32,379 $144,997 $ 113,306 $ 732,335 $ 438,497
</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
periods shown:
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL GLOBAL
EQUITY EQUITY INCOME
FUND FUND FUND
-------------------------------- ---------------------------------- ----------------
FOUR MONTHS FISCAL YEAR TWO MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, 1996 JUNE 30, 1996 OCTOBER 31, 1996 AUGUST 31, 1996 OCTOBER 31, 1996
---------------- ------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
CLASS A
Marketing and advertising...... $ 3,273 $ 8,682 $ 35,952 $ 1,433,220 $ 164,442
Printing of prospectuses and
statement of additional
information.................. $ 1,830 $ 815 $ 2,245 $ 122 $ 884
Branch network costs allocated
and interest expense......... $ 3,415 $ 21,768 $129,023 $ 591,899 $ 908,066
Service fees paid to
PaineWebber Investment
Executives................... $ 5,535 $ 28,468 $ 48,680 $ 340,469 $ 574,789
CLASS B
Marketing and advertising...... $ 3,664 $ 5,667 $ 3,819 $ 58,093 $ 183,171
Amortization of commissions.... $ 998 $ 786 $ 78,747 $ 716,318 $1,358,400
Printing of prospectuses and
statement of additional
information.................. $ 107 $ 524 $ 817 $ 50 $ 984
Branch network costs allocated
and interest expense......... $ 2,528 $ 6,993 $ 15,666 $ 430,854 $1,286,216
Service fees paid to
PaineWebber investment
executives................... $ 286 $ 268 $ 17,727 $ 128,838 $ 395,661
CLASS C
Marketing and advertising...... $ 25,495 $ 16,423 $ 12,684 $ 140,994 $ 76,669
Amortization of commissions.... $ 8,985 $ 47,127 $ 31,443 $ 137,429 $ 118,627
Printing of prospectuses and
statement of additional
information.................. $ 963 $ 1,572 $ 484 $ 120 $ 412
Branch network costs allocated
and interest expense......... $ 17,724 $ 54,119 $ 44,478 $ 815,384 $ 508,368
Service fees paid to
PaineWebber investment
executives................... $ 2,996 $ 15,709 $ 10,481 $ 75,334 $ 57,434
</TABLE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. 'Branch
network costs
32
<PAGE>
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.
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
33
<PAGE>
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>
FOUR MONTHS FISCAL YEARS ENDED JUNE 30,
ENDED OCTOBER 31, --------------------------------
1996 1996 1995 1994
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
EMERGING MARKETS EQUITY FUND
Earned................................................... $ 4,109 $ 25,696 $ 28,289 N/A
Retained................................................. $ 251 $ 1,280 $ 225 N/A
<CAPTION>
TWO MONTHS FISCAL YEARS ENDED AUGUST 31,
ENDED OCTOBER 31, --------------------------------
1996 1996 1995 1994
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
GLOBAL EQUITY FUND
Earned................................................... $ 22,360 $229,590 $130,094 N/A
Retained................................................. $ 1,366 $ 10,949 $ 3,353 N/A
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
GLOBAL INCOME FUND
Earned................................................... $ 37,752 $ 43,136 $193,492
Retained................................................. $ 6,564 $ 12,003 $ 11,573
</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
---------------------------------- ------------------------------------ ----------------
FOUR MONTHS FISCAL YEAR TWO MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, 1996 JUNE 30, 1996 OCTOBER 31, 1996 AUGUST 31, 1996 OCTOBER 31, 1996
---------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Class A............... $ 0 $ 0 $ 0 $ 0 $ 0
Class B............... $ 143 $1,233 $ 53,862 $606,968 $ 974,178
Class C............... $ 5 $ 45 $ 258 $ 1,802 $ 1,459
</TABLE>
34
<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 four months ended October 31, 1996,
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 $80,726, $264,723, $531,901 and $363,528, respectively, in brokerage
commissions. For the two months ended October 31, 1996 and the fiscal years
ended August 31, 1996, August 31, 1995 and August 31, 1994, Global Equity Fund
paid $118,589, $1,472,329, $850,531 and $780,022, respectively, in brokerage
commissions. For the fiscal years ended October 31, 1996, October 31, 1995 and
October 31, 1994, 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.
Global Income Fund paid no brokerage commissions to PaineWebber during its last
three fiscal years. Neither Emerging Markets Equity Fund nor Global Equity Fund
paid brokerage commissions to PaineWebber during the period February 13, 1994
(the date Mitchell Hutchins was appointed investment adviser) to October 31,
1996.
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 four months ended October 31, 1996 and 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
two months ended October 31, 1996 and the fiscal year ended August 31, 1996, GE
Investment Management directed $6,130,174 and $21,439,471, respectively, in
portfolio transactions to brokers chosen because they provided research
services, for which Global Equity Fund paid $2,539 and $24,245, respectively,
in commissions. For the fiscal year ended October 31, 1996, 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-
35
<PAGE>
Advisers will not purchase securities at a higher price or sell securities at a
lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins and the
Sub-Advisers will not enter into any explicit soft dollar arrangements relating
to principal transactions and will not receive in principal transactions the
types of services 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
Contracts or the Sub-Advisers under the Schroder and GEIM 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 fiscal periods shown
were:
<TABLE>
<S> <C>
EMERGING MARKETS EQUITY FUND
Four Months ended October 31, 1996.......................................................................... 22%
Fiscal Year ended June 30, 1996............................................................................. 69%
Fiscal Year ended June 30, 1995............................................................................. 76%
GLOBAL EQUITY FUND
Two Months ended October 31, 1996........................................................................... 3%
Fiscal Year ended August 31, 1996........................................................................... 33%
Fiscal Year ended August 31, 1995........................................................................... 40%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1996.......................................................................... 126%
Fiscal Year ended October 31, 1995.......................................................................... 113%
</TABLE>
36
<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
37
<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, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash. Each Fund has elected, however, to be governed by
Rule 18f-1 under the 1940 Act, under which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90-day period for one shareholder. This election is irrevocable unless the
SEC permits its withdrawal.
The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ('NYSE') is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a Fund's portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure a profit or protect against loss in declining markets.
Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of 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 payments specified by
participants in the Funds' systematic withdrawal plan. The payments generally
are mailed approximately five Business Days (defined under 'Valuation of
Shares') after the redemption date. Withdrawal payments should not be considered
dividends, but redemption proceeds, with the tax consequences described under
'Dividends & Taxes' in the Prospectus. If periodic withdrawals continually
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
38
<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
39
<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 six RMA money market funds-RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New York
Municipal Money Fund. Each money market fund attempts to maintain a
stable price per share of $1.00, although there can be no assurance that
it will be able to do so. Investments in the money market funds are not
insured or guaranteed by the U.S. government;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $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 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 a shareholder acquired Class B
shares of any 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 to Class A shares, Class B
shares purchased through the reinvestment of dividends and other distributions
paid in respect of Class B shares will be held in a separate sub-account. Each
time any Class B
40
<PAGE>
shares in the shareholder's regular account (other than those in the
sub-account) convert to Class A shares, a pro rata portion of the Class B shares
in the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares converting to
Class A shares bears to the shareholder's total Class B shares not acquired
through dividends and other distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
'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 ('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 the computation of a Fund's net asset value on that day. If events
materially affecting the value of such investments or currency exchange rates
occur during such time period, the investments will be valued at their fair
value as determined in good faith by or under the direction of 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.
41
<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:
<TABLE>
<C> <S>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge (4.0% for Global Income Fund) is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B or Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.
The Funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). The Funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following 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>
Year ended October 31, 1996:
Standardized Return*.................. (5.68)% N/A (2.89)%
Non-Standardized Return............... (1.25)% N/A (1.89)%
Inception** to October 31, 1996:
Standardized Return*.................. (9.52)% (2.92 )% (8.67)%
Non-Standardized Return............... (7.99)% (2.08 )% (8.67)%
</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 October 31, 1996.
42
<PAGE>
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Year ended October 31, 1996:
Standardized Return*.................. 9.01 % 8.28 % 12.28 %
Non-Standardized Return............... 14.17 % 13.28 % 13.28 %
Inception** to October 31, 1996:
Standardized Return*.................. 10.11 % 5.80 % 10.23 %
Non-Standardized Return............... 11.14 % 9.13 % 10.23 %
</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 October 31, 1996:
Standardized Return*.................. 4.27% 2.95% 7.37%
Non-Standardized Return............... 8.60% 7.95% 8.12%
Five years ended October 31, 1996:
Standardized Return*.................. 6.11% 5.86% N/A
Non-Standardized Return............... 6.98% 6.18% N/A
Inception** to October 31, 1996:
Standardized Return*.................. 6.84% 9.52% 6.13%
Non-Standardized Return............... 7.66% 9.52% 6.13%
</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 Class 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
YIELD = 2 [( --- +1 ) 6 -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.
43
<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 October 31, 1996, the yields for
its Class A shares, Class B shares and Class C shares were 5.43%, 4.94% and
5.20%, 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.
44
<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.
[LINE GRAPH]
Common Stocks $10,507
Long-Term Gov't Bonds $314
Treasury Bills $127
Inflation/CPI $85
The chart is shown for illustrative purposes only and does not represent any
Fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investment results. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in certain markets from
time to time. Stocks are measured by the S&P 500, an unmanaged weighted index
comprising 500 widely held common stock and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
- ------------------
Source: 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 gains and net gains from certain foreign currency transactions)
('Distribution Requirement') and must meet several additional requirements. For
each Fund these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income
45
<PAGE>
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ('Income
Requirement'); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months--options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ('Short-Short Limitation'); (3)
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back as
a taxable distribution.
Dividends and interest received 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 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
46
<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, 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.
47
<PAGE>
OTHER INFORMATION
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the Fund
or its Trust. However, each Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust or the Fund and requires that
notice of such disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the 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. Each Declaration of Trust provides for
indemnification from the relevant Fund's property for all losses and expenses of
any shareholder held personally liable for the obligations of the Fund. Thus,
the risk of a shareholder'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 would be entitled to reimbursement from the general assets of the
relevant Fund. The trustees intend to conduct each Fund's operations in such a
way as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
Prior to November 1, 1995, the name of Emerging Markets Equity Fund was
'Mitchell Hutchins/Kidder Peabody Emerging Markets Equity Fund.' Prior to
February 13, 1995, the name of the Fund was 'Kidder, Peabody Emerging Markets
Equity Fund.' Prior to November 10, 1995, the Fund's Class C shares were called
'Class B' shares. 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 November 10, 1995, Global Income 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.
48
<PAGE>
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 payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; BA. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; CAA. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; CA. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through 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. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
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
A-1
<PAGE>
willingness to meet its financial commitment on the obligation; CCC. An
obligation rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial 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.
R. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Other Strategies Using Derivatives
Contracts.................................... 13
Trustees and Officers; Principal Holders of
Securities................................... 21
Investment Advisory and Distribution
Arrangements................................. 29
Portfolio Transactions......................... 35
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 37
Conversion of Class B Shares................... 40
Valuation of Shares............................ 41
Performance Information........................ 41
Taxes.......................................... 45
Other Information.............................. 48
Financial Statements........................... 48
Appendix....................................... A-1
</TABLE>
(Copyright)1997 PaineWebber Incorporated
PaineWebber
Emerging Markets
Equity Fund
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
Statement of Additional Information
March 1, 1997
PAINEWEBBER
<PAGE>
------------------------------
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
CLASS Y SHARES
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- MARCH 1, 1997
PaineWebber Global Funds are designed for investors generally seeking
long-term growth by investing mainly in foreign stocks or high current
income by investing mainly in global debt instruments. PaineWebber
Emerging Markets Equity Fund seeks long-term capital appreciation by
investing primarily in equity securities of companies in newly
industrializing countries. PaineWebber Global Equity Fund seeks long-term
growth of capital by investing primarily in U.S. and foreign equity
securities. PaineWebber Global Income Fund seeks high current income and,
secondarily, capital appreciation by investing primarily in high-quality
foreign and U.S. bonds.
This Prospectus concisely sets forth information that a prospective
investor should know about the Funds before investing. Please read it
carefully and retain a copy of this Prospectus for future reference.
The Class Y shares described in this Prospectus are currently offered for
sale only to limited groups of investors, which include, for the Class Y
shares of Global Equity Fund and Global Income Fund, the trustee of the
PaineWebber Savings Investment Plan ('PW SIP'). See 'How to Buy Shares.'
Participants in the PW SIP can make further inquiries by contacting the
PaineWebber Incorporated Benefits Department, 10th Floor, 1000 Harbor
Boulevard, Weehawken, New Jersey 10187 or by calling 1-201-902-4444.
A Statement of Additional Information dated March 1, 1997 has been filed
with the Securities and Exchange Commission and is legally part of this
Prospectus. The Statement of Additional Information can be obtained
without charge, and further inquiries can be made, by contacting an
individual Fund, your investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad
categories, which are presented here. Generally, investors seeking to
maximize return must assume greater risk. The Funds in this Prospectus are
all in the GLOBAL category.
<TABLE>
<S> <C>
/ / MONEY MARKET FUND for income and / / ASSET ALLOCATION FUNDS for high
stability by investing in total return by investing in stocks
high-quality, short-term and bonds.
investments.
/ / BOND FUNDS for income by investing / / STOCK FUNDS for long-term growth
mainly in bonds. by investing mainly in stocks.
/ / TAX-FREE BOND FUNDS for income / / GLOBAL FUNDS for long-term growth
exempt from federal income tax by investing mainly in foreign stocks
and, in some cases, state and lo- or high current income by
cal income taxes, by investing in investing mainly in global debt
municipal bonds. instruments.
</TABLE>
A complete listing of the PaineWebber Family of Mutual Funds is found on
the back cover of this Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
Prospectus Page 1
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income
Fund
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Funds at a Glance................... 3
Expense Table........................... 5
Financial Highlights.................... 6
Investment Objectives & Policies........ 9
Investment Philosophy & Process......... 10
Performance............................. 12
The Funds' Investments.................. 15
How to Buy Shares....................... 19
How to Sell Shares...................... 20
Management.............................. 21
Determining the Shares' Net Asset
Value................................. 23
Dividends & Taxes....................... 23
General Information..................... 24
</TABLE>
--------------------
Prospectus Page 2
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
these Funds are to finance college educations, plan for retirement or diversify
a portfolio. When selling shares, investors should be aware that they may get
more or less for their shares than they originally paid for them. As with any
mutual fund, there is no assurance that the Funds will achieve their goals.
EMERGING MARKETS EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of companies in newly industrializing countries.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they have also shown greater volatility. Because
the Fund invests primarily in equity securities, its price will rise and fall.
Investors in the Fund should be able to assume the special risks of investing in
foreign securities, which include possible adverse political, social and
economic developments abroad and differing characteristics of foreign economies
and markets. These risks are greater with respect to securities of issuers
located in emerging markets, in which the Fund seeks to invest most of its
assets. Most of the foreign securities held by the Fund are denominated in
foreign currencies, and the value of these investments can be adversely affected
by fluctuations in foreign currency values. The Fund may use derivatives, such
as options, futures and forward currency contracts, which may involve additional
risks. Investors may lose money by investing in the Fund; the investment is not
guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $32 million in net assets.
GLOBAL EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of U.S. and foreign companies.
INVESTMENT OBJECTIVE: Long-term growth of capital.
RISKS: Equity securities historically have shown greater growth potential than
other types of securities, but they
have also shown greater volatility. Because the Fund invests primarily in equity
securities, its price will rise and fall. Investors in the Fund should be able
to assume the special risks of investing in foreign securities, which include
possible adverse political, social and economic developments abroad and
differing characteristics of foreign economies and markets. These risks are
greater with respect to securities of issuers located in emerging markets, in
which the Fund may invest. Most of the foreign securities held by the Fund are
denominated in foreign currencies, and the value of these investments can be
adversely affected by fluctuations in foreign currency values. The Fund may use
derivatives, such as options, futures and forward currency contracts, which may
involve additional risks. Investors may lose money by investing in the Fund; the
investment is not guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $561 million in net
assets.
GLOBAL INCOME FUND
GOAL: To provide high current income and, secondarily, capital appreciation by
investing primarily in high-quality foreign and U.S. bonds.
INVESTMENT OBJECTIVE: The primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective.
RISKS: The Fund invests primarily in bonds, which are subject to interest rate
and credit risk. Most of the foreign securities held by the Fund are denominated
in foreign currencies, and the value of these investments thus can be adversely
affected by fluctuations in foreign currency values. Interest rate risk is the
risk that interest rates will rise and bond prices will fall, lowering the value
of the Fund's investments. Credit risk is the risk that adverse changes in
economic conditions will affect an issuer's ability to pay interest and
principal. Investors in the Fund should be able to assume the special risks of
investing in foreign securities, which include possible adverse political,
social and economic developments abroad and differing characteristics of foreign
economies and markets. These risks are greater with respect to securities of
issuers located in emerging markets, in which the Fund may invest to a limited
degree. Certain investment grade bonds in which the Fund may invest have
speculative characteristics. The Fund may also invest in bonds rated below
investment grade, which are subject to greater risks of default or price
fluctuation than investment grade bonds and are considered predominantly
speculative. The U.S. government securities in which the Fund may invest include
mortgage-backed securities.
--------------------
Prospectus Page 3
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
The Fund may use derivatives, such as options, futures, forward currency
contracts and interest rate protection transactions, which may involve
additional risks. As a non-diversified fund as defined in the Investment Company
Act of 1940 ('1940 Act'), the Fund is subject to greater risk than funds that
have a broader range of investments as explained below. Investors may lose money
by investing in the Fund; the investment is not guaranteed.
SIZE: On January 31, 1997, the Fund had approximately $843 million in net
assets.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of Emerging Markets Equity Fund, Global
Equity Fund and Global Income Fund (each a 'Fund' and, collectively, the
'Funds'). Mitchell Hutchins has appointed Schroder Capital Management
International, Inc. ('Schroder Capital') as the investment sub-adviser for
Emerging Markets Equity Fund and GE Investment Management Incorporated ('GE
Investment Management') as the investment sub-adviser for Global Equity Fund.
WHO SHOULD INVEST
EMERGING MARKETS EQUITY FUND is for investors who want long-term capital
appreciation. The Fund seeks to achieve this by investing primarily in equity
securities of companies in emerging market countries. Over time, foreign stocks
have shown greater growth potential than many other types of securities.
However, because their value tends to fluctuate more than that of U.S. stocks,
investors must be willing to tolerate volatility in the value of the Fund's
investments. These risks are greater with respect to securities of issuers
located in emerging markets. Accordingly, Emerging Markets Equity Fund is
designed for investors who are able to bear the risk that comes with investment
in equity securities of emerging market issuers.
GLOBAL EQUITY FUND is for investors who want long-term growth of capital. The
Fund seeks to achieve this by investing primarily in equity securities of U.S.
and foreign companies. Over time, foreign stocks have shown greater growth
potential than many other types of securities. However, because their value
tends to fluctuate more than that of U.S. stocks, investors must be willing to
tolerate volatility in the value of the Fund's investments. Accordingly, Global
Equity Fund is designed for investors who are able to bear the risk that comes
with investments in foreign equity securities.
GLOBAL INCOME FUND is for investors who want high current income consistent with
prudent investment risk and, secondarily, capital appreciation. The Fund seeks
to achieve this by investing primarily in high-quality debt securities issued or
guaranteed by foreign governments, by the U.S. government, by their respective
agencies or instrumentalities or by supranational organizations, or issued by
foreign or U.S. companies. Investors in the Fund should be willing to assume the
special risks of investing in foreign securities, which include possible adverse
political, social and economic developments abroad and differing characteristics
of foreign economies and markets. Accordingly, Global Income Fund is designed
for investors who are able to bear the risk that comes with investments in
foreign securities.
HOW TO PURCHASE CLASS Y SHARES
Eligible investors may purchase Class Y shares of the Funds as follows:
The price is the net asset value next calculated after PaineWebber's New York
City headquarters or the Transfer Agent receives the purchase order.
Investors do not pay an initial sales charge when they buy Class Y shares. As a
result, 100% of their purchase is immediately invested. Investors also do not
pay a redemption fee or contingent deferred sales charge when they sell Class Y
shares.
--------------------
Prospectus Page 4
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in Class Y shares of the Funds. Expenses
shown below represent those incurred for the fiscal year ended August 31, 1996,
in the case of Global Equity Fund, and the fiscal year ended October 31, 1996,
in the case of Global Income Fund. In the case of Emerging Markets Equity Fund,
expenses shown below, which are based on the annualized expenses for the four
months ended October 31, 1996, reflect the current management fee rate and
anticipated fee waivers and expense reimbursements.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS Y
-------
<S> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)........................................... None
Sales Charge on Reinvested Dividends (as a % of offering
price).................................................... None
Exchange Fee................................................ None
</TABLE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (1)(2) (as a % of average net
assets)
EMERGING MARKETS EQUITY FUND
Management Fees (after fee waivers)*........................ 0.70%
12b-1 Fees.................................................. 0.00
Other Expenses (after expense reimbursements)*.............. 1.49
-------
Total Operating Expenses (after fee waivers and expense
reimbursements)*.......................................... 2.19%
-------
-------
GLOBAL EQUITY FUND
Management Fees............................................. 0.85%
12b-1 Fees.................................................. 0.00
Other Expenses.............................................. 0.32
-------
Total Operating Expenses.................................... 1.17%
-------
-------
GLOBAL INCOME FUND
Management Fees............................................. 0.74%
12b-1 Fees.................................................. 0.00
Other Expenses.............................................. 0.22
-------
Total Operating Expenses.................................... 0.96%
-------
-------
</TABLE>
- ------------------
(1) Class Y shares may be purchased by participants in the INSIGHT Investment
Advisory Program ('INSIGHT') sponsored by PaineWebber, when purchased
through that program. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through
INSIGHT (generally charged quarterly in advance), which may be charged to
the INSIGHT participant's PaineWebber account. This account charge is not
included in the table because non-INSIGHT participants are permitted to
purchase Class Y shares of the Funds.
(2) See 'Management' for additional information.
* 'Management Fees' and 'Other Expenses' for Emerging Markets Equity Fund are
restated to reflect reductions in the Fund's investment advisory and
administrative fees, approved by shareholders on February 25, 1997, and
offsetting reductions in anticipated fee waivers and expense reimbursements
from Mitchell Hutchins. Using the current management fee rate and without
taking into account anticipated fee waivers and expense reimbursements,
'Management Fees,' 'Other Expenses' and 'Total Operating Expenses' for Class
Y shares of Emerging Markets Equity Fund would be 1.20%, 1.61% and 2.81%,
respectively.
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various
costs and expenses incurred as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund, assuming a 5% annual return, reinvestment of all
dividends and distributions and percentage amounts listed under 'Annual Fund
Operating Expenses' remain the same for the years shown:
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class Y............................ $22 $ 69 $117 $ 252
<CAPTION>
GLOBAL EQUITY FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class Y............................ $12 $ 37 $64 $ 142
<CAPTION>
GLOBAL INCOME FUND
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class Y............................ $10 $ 31 $53 $ 118
</TABLE>
--------------------
Prospectus Page 5
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in Emerging Markets Equity
Fund's Annual Report to Shareholders for the four months ended October 31, 1996
and the report of Ernst & Young LLP, independent auditors, appearing in the
Fund's Annual Report to Shareholders. The financial statements, accompanying
notes and auditors' report are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the table below relating to the four months ended
October 31, 1996 and the fiscal year ended June 30, 1996, have been audited by
Ernst & Young LLP, independent auditors. The financial information for the prior
years was audited by another independent accounting firm, whose reports thereon
were unqualified. Further information about the Fund's performance is also
included in the Annual Report to Shareholders, which may be obtained without
charge by calling 1-800-647-1568. Schroder Capital was appointed sub-adviser for
Emerging Markets Equity Fund effective February 25, 1997; thus, the information
for periods prior to that date may not necessarily be indicative of current or
future operations.
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
------------------------------------------------------------
CLASS Y
------------------------------------------------------------
FOR THE FOUR FOR THE YEARS ENDED JUNE 30,
MONTHS ENDED ------------------------------------------------------------
OCTOBER 31, 1996 1996 1995**
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period.... $ 10.11 $ 9.75 $ 10.80
----------------- ---------- ----------
Net investment income (loss)............ (0.05) (0.01) 0.01
Net realized and unrealized gains
(losses) from investment and foreign
currency transactions................. (0.55) 0.37 (0.99)
----------------- ---------- ----------
Net increase (decrease) from investment
operations............................ (0.60) 0.36 (0.98)
----------------- ---------- ----------
Dividends from net investment income.... -- -- (0.07)
----------------- ---------- ----------
Net asset value, end of period.......... $ 9.51 $ 10.11 $ 9.75
----------------- ---------- ----------
----------------- ---------- ----------
Total investment return (1)............. (5.93)% 3.69% (9.03)%
----------------- ---------- ----------
----------------- ---------- ----------
Ratios/Supplemental Data:
Net assets, end of period (000's)....... $11,375 $ 12,979 $ 12,332
Expenses, net of fee waivers, to average
net assets............................ 2.19%* 2.19% 2.19%
Expenses, before fee waivers, to average
net assets............................ 3.23%* 3.29% 2.29%
Net investment income (loss), net of fee
waivers, to average net assets........ (1.13)%* (0.15)% (0.51)%
Net investment income (loss), before fee
waivers, to average net assets........ (2.17)%* (1.25)% (0.61)%
Portfolio turnover...................... 22% 69% 76%
Average commission rate paid (2)........ $0.0024 -- --
<CAPTION>
FOR THE PERIOD
ENDED
JUNE 30, 1994+
---------------
<S> <C>
Net asset value, beginning of period.... $ 12.00
---------------
Net investment income (loss)............ 0.05
Net realized and unrealized gains
(losses) from investment and foreign
currency transactions................. (1.25)
---------------
Net increase (decrease) from investment
operations............................ (1.20)
---------------
Dividends from net investment income.... --
---------------
Net asset value, end of period.......... $ 10.80
---------------
---------------
Total investment return (1)............. (10.00)%
---------------
---------------
Ratios/Supplemental Data:
Net assets, end of period (000's)....... $15,435
Expenses, net of fee waivers, to average
net assets............................ 2.22%*
Expenses, before fee waivers, to average
net assets............................ 2.22%*
Net investment income (loss), net of fee
waivers, to average net assets........ 0.97%*
Net investment income (loss), before fee
waivers, to average net assets........ 0.97%*
Portfolio turnover...................... 8%
Average commission rate paid (2)........ --
</TABLE>
- ------------------
+ For the period January 19, 1994 (commencement of operations) to June 30,
1994.
* Annualized.
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. Total investment returns for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
--------------------
Prospectus Page 6
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in Global Equity Fund's
Annual Report to Shareholders for the two months ended October 31, 1996, and the
report of Ernst & Young LLP, independent auditors, appearing in the Fund's
Annual Report to Shareholders. The financial statements, accompanying notes and
auditors' report are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the financial
information in the table below relating to the two months ended October 31, 1996
and to each of the two years in the period ended August 31, 1996, have been
audited by Ernst & Young LLP, independent auditors. The financial information
for the prior years was audited by another independent accounting firm, whose
reports thereon were unqualified. Further information about the Fund's
performance is also included in the Annual Report to Shareholders, which may be
obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
------------------------------------------------------
CLASS Y
------------------------------------------------------
FOR THE TWO FOR THE YEARS ENDED AUGUST 31, FOR THE PERIOD
MONTHS ENDED -------------------------------- MAY 10, 1993+
OCTOBER 31, 1996 1996 1995** 1994 TO AUGUST 31, 1993
------------------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 16.97 $ 16.22 $ 17.03 $ 14.56 $ 13.80
------------------- -------- -------- -------- ------------------
Net investment income................... (0.01) 0.07 0.07 0.05 0.02
Net realized and unrealized gains from
investment and foreign currency
transactions.......................... 0.64 1.25 0.37 2.63 0.74
------------------- -------- -------- -------- ------------------
Net increase from investment
operations............................ 0.63 1.32 0.44 2.68 0.76
------------------- -------- -------- -------- ------------------
Dividends from net investment income.... -- -- -- -- --
Distributions from net realized gains... -- (0.57) (1.25) (0.21) --
------------------- -------- -------- -------- ------------------
Total dividends and distributions....... 0.00 (0.57) (1.25) (0.21) 0.00
------------------- -------- -------- -------- ------------------
Net asset value, end of period.......... $ 17.60 $ 16.97 $ 16.22 $ 17.03 $ 14.56
------------------- -------- -------- -------- ------------------
------------------- -------- -------- -------- ------------------
Total investment return (1)............. 3.71% 8.39% 3.54% 18.49% 5.51%
------------------- -------- -------- -------- ------------------
------------------- -------- -------- -------- ------------------
Ratios/Supplemental Data:
Net assets, end of period (000's)....... $ 63,225 $ 61,736 $ 57,150 $ 28,390 $ 19,098
Expenses to average net assets.......... 1.18%* 1.17% 1.46%(2) 1.33% 1.28%*
Net investment income to average net
assets................................ (0.45)%* 0.46% 0.36%(2) 0.32% 0.47%*
Portfolio turnover...................... 3% 33% 40% 51% 56%
Average commission rate paid (3)........ $ 0.0069 $ 0.0120 -- -- --
</TABLE>
- ------------------
* Annualized
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
+ Commencement of offering of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale
at net asset value on the last day of each period reported. Total
investment returns for periods of less than one year have not been
annualized.
(2) These ratios include non-recurring reorganization expenses of 0.06%.
(3) Effective for fiscal years beginning on or after September 1, 1995, the
fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
--------------------
Prospectus Page 7
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL INCOME FUND
The following table provides investors with data and ratios for one Class Y
share for each of the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in Global Income Fund's
Annual Report to Shareholders for the fiscal year ended October 31, 1996 and the
report of Price Waterhouse LLP, independent accountants, appearing in the Fund's
Annual Report to Shareholders. The financial statements, accompanying notes and
accountants' report are incorporated by reference into the Statement of
Additional Information. The financial statements and notes, as well as the
financial information in the table below, have been audited by Price Waterhouse
LLP, independent accountants. Further information about the Fund's performance
is also included in the Annual Report to Shareholders, which may be obtained
without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
------------------------------------------------------------------
CLASS Y
------------------------------------------------------------------
FOR THE
PERIOD
AUGUST 26,
FOR THE YEARS ENDED OCTOBER 31, 1991+ TO
--------------------------------------------------- OCTOBER 31,
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.76 $ 10.53
------- ------- ------- ------- ------- -----------
Net investment income................... 0.75@ 0.78@ 0.75 0.71 0.81 0.17
Net realized and unrealized gains
(losses) from investment and foreign
currency transactions................. 0.17@ 0.32@ (1.06) 0.58 (0.08) 0.32
------- ------- ------- ------- ------- -----------
Total increase/(decrease) from
investment operations................. 0.92 1.10 (0.31) 1.29 0.73 0.49
------- ------- ------- ------- ------- -----------
Dividends from net investment income.... (0.78) (0.74) (0.34) (0.82) (0.67) (0.24)
Distributions from realized gains on
investments and foreign currency
transactions.......................... -- -- -- (0.14) (0.18) (0.02)
Distributions from paid in capital...... -- -- (0.33) -- -- --
------- ------- ------- ------- ------- -----------
Total dividends and distributions....... (0.78) (0.74) (0.67) (0.96) (0.85) (0.26)
------- ------- ------- ------- ------- -----------
Net asset value, end of period.......... $ 10.49 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.76
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
Total investment return (1)............. 9.25% 11.39% (2.86)% 12.60% 6.98% 4.63%
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
Ratios/Supplemental Data:
Net assets, end of period (000's)..... $13,077 $16,613 $12,975 $12,043 $ 7,252 $ 2,565
Expenses to average net assets........ 0.96% 0.95%(2) 0.88% 1.06%** 0.94% 1.09%*
Net investment income to average net
assets............................. 7.19% 7.77%(2) 7.23% 7.00%** 8.15% 8.79%*
Portfolio turnover rate............... 126% 113% 108% 90% 92% 53%
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Annualized
** Includes 0.15% of interest expense related to the reverse repurchase
agreement transactions entered into during the fiscal year
+ Commencement of issuance of shares
@ Calculated using the average shares outstanding for the year
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable date, and a sale at net
asset value on the last day of each period reported. Total investment return
information for periods of less than one year is not annualized.
(2) These ratios include non-recurring reorganization expenses of 0.04%.
</TABLE>
--------------------
Prospectus Page 8
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Except where noted, the Funds' other investment policies are not
fundamental and may be changed by their boards.
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through investment in a
diversified portfolio consisting primarily of equity securities of issuers in
emerging markets. 'Emerging markets' are all markets in all countries not
included in the Morgan Stanley Capital International World Index, an index of
major world economies, and Malaysia. Under normal market conditions, the Fund
invests a minimum of 65% of its total assets in equity securities of issuers
located in emerging market countries and maintains investments in at least three
emerging market countries. Issuers are considered to be located in an emerging
market country if: (1) the principal securities trading market for the issuer is
in an emerging market country; (2) the issuer derives 50% or more of its annual
revenue or profit from either goods produced, sales made, investments made or
services performed in emerging market countries; or (3) the issuer is organized
under the laws of an emerging market country.
Schroder Capital attempts to spread the Fund's investments over geographic as
well as economic sectors. Generally, Schroder Capital will not invest more than
35% of the Fund's total assets in any single country. Under no circumstances
will 25% or more of the Fund's total assets be invested in any single industry.
Within each emerging market, the Fund is diversified through investments in a
number of local companies characterized by attractive valuation relative to
expected growth.
There are currently over 60 newly industrializing and developing countries that
have equity markets. A number of these emerging markets are not yet easily
accessible to foreign investors and have unattractive tax barriers or
insufficient liquidity to make significant investments by the Fund feasible or
attractive. However, many of the largest of the emerging market countries have,
in recent years, liberalized access, and more are expected to do so over the
coming few years.
In recent years, many emerging market countries have begun programs of economic
reform: removing import tariffs, dismantling trade barriers, deregulating
foreign investment, privatizing state owned industries, permitting the values of
their currencies to float against the dollar and other major currencies, and
generally reducing the level of state intervention in industry and commerce.
Important intra-regional economic integration also holds the promise of greater
trade and growth. At the same time, significant progress has been made in
restructuring the heavy external debt burden that certain emerging market
countries accumulated during the 1970s and 1980s. While there is no assurance
that these trends will continue, Schroder Capital will seek out attractive
investment opportunities in these countries.
GLOBAL EQUITY FUND
Global Equity Fund's investment objective is long-term growth of capital. The
Fund attempts to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States.
The International Equity Team at GE Investment Management selects equity
securities issued by companies located in developed and developing countries
throughout the world. The Fund normally invests in at least three countries, one
of which is typically the United States. The Fund normally invests at least 65%
of its total assets in equity securities of foreign and U.S. companies.
When the International Equity Team believes it is consistent with the Fund's
investment objective of long-term growth of capital, the Fund may invest up to
35% of its total assets in investment grade bonds issued by corporate or
governmental entities. The bonds in which the Fund invests have maturities no
longer than seven years. When the International Equity Team considers market,
economic, political or currency conditions abroad to be unstable, the Fund may
assume a temporary defensive position by investing all or a significant portion
of its assets in securities of U.S. and Canadian issuers or by holding cash or
short-term money market investments.
Under normal circumstances, at least 80% of the Fund's total assets are invested
in equity securities or bonds of issuers in countries represented in the Morgan
Stanley Capital International World Index. This is
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
a well-known index that reflects developed and developing markets throughout the
world.
GLOBAL INCOME FUND
Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by investing principally
in high-quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by U.S. or foreign companies.
The Fund's portfolio consists primarily of debt securities rated within one of
the two highest grades assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ('S&P'), Moody's Investors Service, Inc. ('Moody's')
or another nationally recognized statistical rating organization ('NRSRO') or,
if unrated, determined by Mitchell Hutchins to be of comparable quality.
Normally, at least 65% of the Fund's total assets are invested in high-quality
debt securities, denominated in foreign currencies or U.S. dollars, of issuers
located in at least three of the following countries: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Thailand, the United Kingdom and the United States. No more than
40% of the Fund's assets normally are invested in securities of issuers located
in any one country other than the United States. Up to 5% of the Fund's total
assets may be invested in debt securities convertible into equity securities.
The Fund may invest up to 35% of its total assets in debt securities rated below
the two highest grades assigned by an NRSRO. Except as noted below, these
securities must be rated at least BBB by S&P, Baa by Moody's or comparably rated
by another NRSRO or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Within this 35% limitation, the Fund may invest up to 20% of
its total assets in sovereign debt securities rated as low as BB by S&P, Ba by
Moody's or comparably rated by another NRSRO or, in the case of such securities
assigned a short-term debt rating, no lower than B by S&P or comparably rated by
another NRSRO or, if not so rated, determined by Mitchell Hutchins to be of
comparable quality. Mitchell Hutchins will purchase such securities for the Fund
only when it concludes that the anticipated return to the Fund on such
investment warrants exposure to the additional level of risk.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
In selecting emerging market equity securities for Emerging Markets Equity Fund,
Schroder Capital combines rigorous, fundamental research with a quantitative
assessment of the economic potential of the various countries in which
investments might be made. Schroder Capital focuses on companies in emerging
market countries where it believes there is likely to be a favorable long-term
business environment and where it believes a company's growth is less likely to
be impeded by adverse macro-economic or political factors. Within those
countries, Schroder Capital selects stocks of companies that, based on its
analysis of fundamental corporate data, it believes have a sustainable
competitive advantage and whose growth potential is undervalued by investors.
Schroder Capital believes that one of its key strengths is its worldwide network
of investment managament affiliates and access to its network of local research
offices, many long established, located in emerging market countries. Schroder
Capital is a wholly owned indirect subsidiary of Schroders plc, the holding
company parent of an international group of banks and financial services
companies ('Schroder Group') with associated companies and investment and
representative offices located around the world. Each year, the Schroder Group
researches and conducts on-site visits with 1200 companies in emerging market
countries. Of those companies, the Schroder Group's investment professionals
further develop extensive management contacts with, and produce independent
forecasts of earnings estimates for 500 companies. Schroder Capital's analysis
includes small and medium-sized companies, as well as the better-known larger
capitalization companies. Schroder Capital believes that small companies are
analyzed by fewer investors and are less likely than larger companies to be
efficiently priced.
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL EQUITY FUND
In selecting equity securities for Global Equity Fund, the International Equity
Team at GE Investment Management searches for growth companies selling at
reasonable prices, with an emphasis on undervalued medium- to large-size growth
companies with a global presence. The investment process employed by the
International Equity Team involves several steps.
First, the International Equity Team carefully screens a universe of thousands
of global stocks by comparing each company's price-to-earnings ratio with its
long-term growth. This evaluation helps eliminate companies whose stock prices
are too expensive, typically resulting in a list of several hundred stocks.
Next, this smaller group of stocks is rigorously analyzed by the International
Equity Team's experienced investment professionals. This step, which is designed
to determine whether a stock's price reflects its true value and whether the
market may eventually recognize the stock's value, reduces the universe to fewer
stocks.
Finally, the International Equity Team looks for a catalyst (such as new
management, new products or changing industry dynamics) that might cause the
market to realize that a stock is undervalued. This process typically results in
fewer than 100 stocks that the International Equity Team will buy for the Fund's
portfolio.
The strength of the Team's conviction about each company is part of what
determines the size of each holding.
The International Equity Team regularly reviews the equity securities held in
the Fund's portfolio to assess risks, such as stability in the political and
economic conditions of underlying countries, fluctuations in currency rates,
liquidity, changes in company earnings, and other relevant factors.
GLOBAL INCOME FUND
Global Income Fund's investment policies are designed to enable it to capitalize
on unique investment opportunities presented throughout the world and
in international financial markets influenced by the increasing interdependence
of economic cycles and currency exchange rates. Over the past decade, debt
securities offered by certain foreign governments provided higher investment
returns than U.S. government debt securities. Such returns reflect interest
rates and other market conditions prevailing in those countries and the effect
of gains and losses in the denominated currencies, which have had a substantial
impact on investment in foreign debt securities. The importance of global debt
markets is illustrated by a popular index used to assess both U.S. government
and foreign government debt markets, namely the Salomon Brothers World
Government Bond Market Index. As of December 31, 1996, more than 67% of this
index was represented by securities denominated in currencies other than the
U.S. dollar.
The Global Fixed Income Management Team at Mitchell Hutchins relies on
fundamental economic strength, credit quality and currency and interest rate
trends as the principal determinants of the various country, geographic and
industry sector weightings within the Fund's portfolio. In addition, certain of
the Fund's assets are invested in the debt securities of certain U.S.
governmental and corporate issuers. The Management Team believes that over time
investment in a composite of foreign fixed income markets and in the U.S.
government and corporate bond markets is less risky than a portfolio comprised
exclusively of foreign securities and provides investors with the potential to
earn a higher return than a portfolio invested exclusively in U.S. debt
securities.
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the total returns for Class Y shares of the Funds. Past
results are not a guarantee of future results.
EMERGING MARKETS EQUITY FUND
[BAR GRAPH]
1/19/94 - 12/31/94 -12.33%
1995 -10.29%
1996 5.05%
As Class Y shares commenced operations on January 19, 1994, the 1994 return
represents the period from January 19, 1994 through December 31, 1994. Schroder
Capital was appointed as the sub-adviser for Emerging Markets Equity Fund
effective February 25, 1997; thus, while past performance is never a guarantee
of future results, information for periods prior to that date may be less
indicative of current or future operations than would otherwise be the case.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS Y
--------
<S> <C>
Inception Date..................... 1/19/94
One Year........................... (1.04)%
Life............................... (7.76)%
</TABLE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL EQUITY FUND
[BAR GRAPH]
5/10/93 - 12/31/93 18.19%
1994 -2.16%
1995 13.90%
1996 15.12%
As Class Y shares commenced operations on May 10, 1993, the 1993 return
represents the period from May 10, 1993 through December 31, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS Y
--------
<S> <C>
Inception Date..................... 5/10/93
One Year........................... 14.54%
Life............................... 11.38%
</TABLE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL INCOME FUND
[BAR GRAPH]
8/26/91 - 12/31/91 9.83%
1992 1.51%
1993 14.54%
1994 -3.74%
1995 13.53%
1996 7.54%
As Class Y shares commenced operations on August 26, 1991, the 1991 return for
Class Y shares represents the period from August 26, 1991 through December 31,
1991.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1996
CLASS Y
--------
<S> <C>
Inception Date..................... 8/26/91
One Year........................... 9.25%
Five Years......................... 7.31%
Life............................... 7.98%
</TABLE>
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in a Fund as a steady compound annual
rate of return. Actual year-by-year returns fluctuate and may be higher or lower
than standardized return. One-, five- and ten-year periods will be shown, unless
the Fund or Class has been in existence for a shorter period. If so, returns
will be shown for the period since inception, known as 'Life.' Total return
calculations assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report, which may be obtained without charge by
contacting the Fund, your PaineWebber investment executive or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568.
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed-income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock.
BONDS (including notes and debentures) are used by corporations and governments
to borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at maturity. Bonds have
varying degrees of investment risk and varying levels of sensitivity to changes
in interest rates.
RISKS
Following is a discussion of the risks that are common to each Fund:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a Fund may experience a
substantial or complete loss on an individual equity investment.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bond prices will fall,
lowering the value of the Fund's bond investments. Credit risk is the risk that
adverse changes in economic conditions can affect an issuer's ability to pay
principal and interest. In addition, there is a risk that bonds will be
downgraded by rating agencies. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the volatility of the
security's value or its liquidity. Rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than the rating
indicates.
Debt securities rated below investment grade generally offer a higher current
yield than that available for higher grade issues, but 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 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.
FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies
located in emerging markets involves additional risks. These countries typically
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
have economic and political systems that are relatively less mature, and can be
expected to be less stable, than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners in those
countries, and there is a risk of government expropriation or nationalization of
private property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets may also result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of a Fund's foreign investments. A Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation or other political or economic
developments inside and outside the United States.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts, forward currency contracts, interest rate
protection contracts and similar instruments that may be used in hedging and
related strategies. There is limited consensus as to what constitutes a
'derivative' security. The market value of derivative instruments and securities
sometimes is more volatile than that of other investments, and each type of
derivative instrument may pose its own special risks. Mitchell Hutchins and the
sub-advisers take these risks into account in the management of the Funds.
COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, the sub-advisers and
Mitchell Hutchins, subject to the supervision of the respective boards of
trustees, monitor and evaluate the creditworthiness of the parties with which
each Fund does business.
In addition to these general risks, investments in each Fund are subject to
special risk considerations:
EMERGING MARKETS EQUITY FUND
INVESTING IN NON-CAPITALIST COUNTRIES. Emerging Markets Equity Fund may invest
in emerging markets that are formerly communist countries of Eastern Europe, the
Commonwealth of Independent States (formerly the Soviet Union) and the People's
Republic of China (collectively, 'Non-Capitalist Countries'). Upon the accession
to power of communist regimes approximately 50 to 80 years ago, the governments
of a number of Non-Capitalist Countries expropriated a large amount of property.
The claims of many property owners against those governments were never finally
settled. There can be no assurance that the Fund's investments in Non-Capitalist
Countries, if any, would not also be expropriated, nationalized or otherwise
confiscated, in which case the Fund could lose its entire investment in the
Non-Capitalist Country involved. In addition, any change in the leadership or
policies of Non-Capitalist Countries may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring.
GLOBAL EQUITY FUND
BONDS. The bonds in which Global Equity Fund may invest must be rated investment
grade except as otherwise noted below. Investment grade quality means that the
securities are rated within the four highest categories by S&P or Moody's or
comparably rated by another NRSRO. Securities in the fourth highest category
(BBB by S&P or Baa by Moody's) are investment grade, but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for such securities to make principal and interest payments than is the case for
higher-rated securities. The Fund may invest in unrated securities if GE
Investment Management deems them to be of comparable quality. The Fund may
invest up to 10% of its net assets in convertible securities rated below
investment grade.
GLOBAL INCOME FUND
U.S. AND FOREIGN GOVERNMENT SECURITIES. The U.S. government securities in which
the Fund may invest include direct obligations of the U.S. government (such as
Treasury bills, notes and bonds) and obligations issued or guaranteed by U.S.
government agencies and instrumentalities. The Fund is authorized to invest in
mortgage-backed securities issued or guaranteed by the Government National
Mortgage Association ('Ginnie Mae'), Fannie Mae (formerly, the Federal National
Mortgage Association) or the Federal Home Loan Mortgage Corporation ('Freddie
Mac'), but does not presently expect to invest more than 10% of its total assets
in such securities.
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
The Fund may invest in 'zero coupon' Treasury securities, which are Treasury
bills, notes and bonds that have been stripped of their unmatured interest
coupons, and receipts or certificates representing interest in such stripped
debt obligations and coupons. A zero coupon security pays no cash interest to
its holder prior to maturity. Accordingly, these securities usually are issued
and traded at a deep discount from their face or par value and are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities that make current income payments.
Federal tax law requires that the holder of a zero coupon security include in
gross income each year the original issue discount that accrues on the security
for the year, even though the holder receives no interest payment on the
security during the year. For additional discussion of the tax treatment of zero
coupon Treasury securities, see 'Taxes' in the Statement of Additional
Information.
The foreign government securities in which the Fund may invest generally consist
of obligations supported by national, state or provincial governments or similar
political subdivisions. Investments in foreign government debt securities
involve special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to pay
interest or repay principal when due in accordance with the terms of such debt,
and the Fund may have limited legal recourse in the event of default. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance.
BONDS; LOWER-RATED BONDS. Global Income Fund is permitted to invest up to 35% of
its total assets in securities rated below the two highest grades assigned by an
NRSRO. Except as noted below, these securities must be rated at least BBB by S&P
or Baa by Moody's. These securities are investment grade, but Moody's considers
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for such securities to make principal and interest payments than is the case for
higher-rated securities. Within this 35% limitation, the Fund may invest up to
20% of its total assets in sovereign debt securities rated as low as BB by S&P,
Ba by Moody's or comparably rated by another NRSRO or, in the case of such
securities assigned a short-term debt rating, no lower than B by S&P or
comparably rated by another NRSRO. These securities, commonly referred to as
'junk bonds,' are deemed by those NRSROs to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal and may
involve major risk exposure to adverse conditions. Short-term debt rated B by
S&P is regarded by the rating agency as having only an adequate capacity for
timely payment. The Fund is also permitted to purchase debt securities that are
not rated by an NRSRO but that Mitchell Hutchins determines to be of comparable
quality to that of rated securities in which the Fund may invest. Such
securities are included in the computation of any percentage limitations
applicable to the comparably rated securities. In the event that, due to a
downgrade of one or more debt securities, an amount in excess of 20% of the
Fund's total assets is held in securities rated below investment grade and
comparably unrated securities, Mitchell Hutchins will engage in an orderly
disposition of such securities to the extent necessary to ensure that the Fund's
holdings of such securities do not exceed 20% of the Fund's total assets.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are bonds backed by
direct or indirect pools of underlying mortgage loans that are secured by real
property. The U.S. government mortgage-backed securities in which Global Income
Fund may invest are issued or guaranteed as to principal and interest (but not
as to market value) by Ginnie Mae, Fannie Mae and Freddie Mac. Mortgage-backed
securities may be composed of one or more classes and may be structured either
as pass-through securities or collateralized debt obligations.
A major difference between mortgage-backed securities and traditional bonds is
that interest and principal payments are made more frequently (usually monthly)
and that principal may be repaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or 'speed' of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly. Because of prepayments, mortgage-backed
securities may not benefit as much as other bonds from declining interest rates,
and Global Income Fund may have to reinvest prepayments in bonds with lower
interest rates than the original investment, thus adversely affecting its yield.
Actual prepayment experience may cause the yield of a mortgage-backed security
to differ from what was assumed when the Fund purchased the security.
NON-DIVERSIFIED STATUS. The Fund is 'non-diversified,' as that term is defined
in the 1940 Act, but it intends to continue to qualify as a 'regulated
investment company' for federal income tax purposes. See 'Dividends and Taxes.'
This means, in general, that
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
more than 5% of the total assets of the Fund may be invested in securities of
one issuer (including a foreign government), but only if, at the close of each
quarter of the Fund's taxable year, the aggregate amount of such holdings does
not exceed 50% of the value of its total assets and no more than 25% of the
value of its total assets is invested in the securities of a single issuer. To
the extent that the Fund's portfolio at times may include the securities of a
smaller number of issuers than if it were 'diversified' (as defined in the 1940
Act), the Fund will at such times be subject to greater risk with respect to its
portfolio securities than an investment company that invests in a broader range
of securities, in that changes in the financial condition or market assessment
of a single issuer may cause greater fluctuation in the Fund's total return and
the price of Fund shares.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Fund may use
derivative contracts, such as options (both exchange traded and over-the-
counter), futures contracts and forward currency contracts, in strategies
intended to reduce the overall risk of its investments ('hedge') or, in the case
of Global lncome Fund, to enhance income or realize gains. Use of these
derivative contracts solely to enhance income or realize gains may be considered
a form of speculation. Global Income Fund also may use interest rate swaps and
similar contracts to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against an increase in the price of
securities that the Fund anticipates purchasing at a later date. New financial
products and risk management techniques continue to be developed, and they may
be used by any Fund if consistent with its investment objective and policies.
The Statement of Additional Information contains further information on these
derivative contracts and related hedging strategies.
The Funds might not use any of these derivative contracts or hedging strategies,
and there can be no assurance that using them will succeed. If Schroder Capital,
GE Investment Management or Mitchell Hutchins, as applicable, is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, a Fund may have lower net income and a net loss on the
investment. Each of these strategies involves certain risks, which include:
o the fact that the skills needed to implement a hedging strategy are different
from those needed to select securities for the Funds;
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and price
movements of the securities or currencies being hedged;
o possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
'cover' or to segregate securities; and
o the possibility that a Fund is unable to close out or liquidate its hedged
position.
REPURCHASE AGREEMENTS. Each Fund may use 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, usually no more than seven days after purchase, 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.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including a possible decline in the market value of the
underlying securities and delays and costs to the Fund if the other party to the
repurchase agreement becomes insolvent. Each Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins or a sub-adviser to present minimum credit risks in accordance
with guidelines established by the Fund's board.
REVERSE REPURCHASE AGREEMENTS. Global Income Fund may enter into reverse
repurchase agreements with banks and broker-dealers up to an aggregate value of
not more than 10% of its total assets. Such agreements involve the sale of
securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and may
be entered into only for temporary or emergency purposes. The Fund will not
purchase portfolio securities while borrowings (including reverse repurchase
agreements) in excess of 5% of the value of its total assets are outstanding.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase securities
on a 'when-issued' or delayed-delivery basis. In when-issued or delayed-delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but the Fund would not pay for such securities or start earning
interest on them until they are delivered. However, when the Fund purchases
securities on a when-issued or delayed-delivery basis, it immediately assumes
--------------------
Prospectus Page 18
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
the risks of ownership, including the risk of price fluctuation. When-issued and
delayed-delivery securities will not exceed 10% of Global Equity Fund's net
assets.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets. Lending securities enables a Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
PORTFOLIO TURNOVER. Each Fund's portfolio turnover rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins or a
sub-adviser deems portfolio changes appropriate. A higher turnover rate (100% or
more) for a Fund will involve correspondingly greater transaction costs, which
will be borne directly by the Fund, and may increase the potential for
short-term capital gains.
DEFENSIVE POSITIONS. When Mitchell Hutchins or the sub-adviser, as applicable,
believes that unusual market or economic circumstances warrant a defensive
posture, each Fund may temporarily commit all or any portion of its assets to
cash or investment grade money market instruments of U.S. or foreign issuers,
including repurchase agreements.
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, including certain cover for over-the-counter
options and securities whose disposition is restricted under the federal
securities laws. The Funds do not consider securities that are eligible for
resale pursuant to SEC Rule 144A to be illiquid securities if Mitchell Hutchins
or the sub-adviser, as applicable, has determined such securities to be liquid,
based upon the trading markets for the securities under procedures approved by
the Funds' boards.
OTHER INFORMATION. Each Fund may borrow money for temporary or emergency
purposes in the following amounts of total assets: Emerging Markets Equity
Fund--33 1/3%, Global Equity Fund--20%, and Global Income Fund--10%. Each Fund
may sell securities short 'against the box' to defer realization of gains or
losses for tax or other purposes. When a security is sold against the box, the
seller owns the security. In addition, each Fund may invest up to 10% of its
total assets in the securities of other investment companies. To the extent a
Fund invests in other investment companies, the Fund's shareholders incur
duplicative fees and expenses, including investment advisory fees. Each Fund may
invest up to 35% of its total assets in cash or investment grade money market
instruments of U.S. or foreign issuers for liquidity purposes or pending
investment in other securities. Subject to this 35% limitation, Global Income
Fund may acquire these securities as an investment.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Class Y shares are sold to eligible investors at the net asset value next
determined after the purchase order is received at PaineWebber's New York City
headquarters or, with respect to Global Equity Fund and Global Income Fund, for
purchases by the trustee of the PW SIP, by PFPC Inc., the Funds' transfer agent
('Transfer Agent'). No initial or contingent deferred sales charge is imposed,
nor are Class Y shares subject to rule 12b-1 distribution or service fees. The
Funds and Mitchell Hutchins reserve the right to reject any purchase order and
to suspend the offering of Class Y shares for a period of time. Mitchell
Hutchins, the distributor for each Fund's Class Y shares, has appointed
PaineWebber to serve as the exclusive dealer for each Fund's Class Y shares.
The following investors are eligible to buy Class Y shares of Global Equity Fund
and Global Income Fund:
o a participant in INSIGHT when Class Y shares are purchased through that
program;
o an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible PricingSM System;
o an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either
5,000 or more eligible employees or
$50 million or more in assets; and
o an investment company advised by PaineWebber or an affiliate of PaineWebber.
INSIGHT
An investor who purchases $50,000 or more of shares of the mutual funds that are
available to INSIGHT participants (which include the PaineWebber mutual
--------------------
Prospectus Page 19
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
funds in the Flexible Pricing(Service Mark) System and certain other specified
mutual funds) may take part in INSIGHT, a total portfolio asset allocation
program sponsored by PaineWebber, and thus become eligible to purchase Class Y
shares. INSIGHT offers comprehensive investment services, including a
personalized asset allocation investment strategy using an appropriate
combination of funds, monitoring of investment performance and comprehensive
quarterly reports that cover market trends, portfolio summaries and personalized
account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.5% of assets held through the program (generally
charged quarterly in advance), which covers all INSIGHT investment advisory
services and program administration fees. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber
correspondent firm or call 1-800-647-1568 for more information concerning mutual
funds that are available to INSIGHT participants or for other INSIGHT program
information.
PURCHASES BY THE TRUSTEE
OF THE PW SIP
The Class Y shares of Global Equity Fund and Global Income Fund also are offered
for sale to the trustee of the PW SIP, a defined contribution plan sponsored by
Paine Webber Group Inc. ('PW Group'). The trustee of the PW SIP purchases and
redeems these Class Y shares to implement the investment choices of individual
plan participants with respect to their PW SIP contributions. Individual plan
participants should consult the Plan Information Statement and Summary Plan
Description of the PW SIP (collectively the 'Plan Documents') for a description
of the procedures and limitations applicable to making and changing investment
choices.
Copies of the Plan Documents are available from the PaineWebber Incorporated
Benefits Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, NJ 07087
(telephone 1-201-902-4444).
As described in the Plan Documents, the average net asset value per share at
which Class Y shares of Global Equity Fund and Global Income Fund are purchased
or redeemed by the trustee of the PW SIP for the accounts of individual
participants might be more or less than the net asset value per share prevailing
at the time that such participants made their investment choices or made their
contributions to the PW SIP.
ACQUISITION OF CLASS Y SHARES BY OTHERS
Each Fund is authorized to offer Class Y shares to certain other investment
advisory programs that are sponsored by PaineWebber and that may invest in
PaineWebber mutual funds. At present, however, INSIGHT participants are the only
purchasers in this category.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price as next calculated after the order is received and accepted. Share prices
are normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Funds' Transfer Agent, may sell shares by writing a
'letter of instruction.' The letter of instruction must include:
o the investor's name and address;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature by an eligible institution,
such as a commercial bank, trust company or stock exchange member.
The letter of instruction must be mailed to PFPC Inc., Attn: PaineWebber Mutual
Funds, P.O. Box 8950, Wilmington, DE 19899.
If a shareholder wants to sell shares that were purchased recently, the Fund may
delay payment until it
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Prospectus Page 20
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
verifies that good payment was received. In the case of purchases by check, this
can take up to 15 days.
Because each Fund incurs fixed costs in maintaining shareholder accounts, each
Fund reserves the right to purchase back all Fund shares in any shareholder
account having a net asset value of less than $500. If the Fund elects to do so,
it will notify the shareholder of the opportunity to increase the amount
invested to $500 or more within 60 days of the notice. The Fund will not
purchase back accounts that fall below $500 solely due to a reduction in net
asset value per share.
SALES BY PARTICIPANTS IN PW SIP
The trustee of the PW SIP sells Class Y shares of Global Equity Fund and Global
Income Fund to implement the investment choices of individual plan participants
with respect to their PW SIP contributions, as described in the Plan Documents
referenced under 'How to Buy Shares' above. The price at which Class Y shares
are sold by the trustee of the PW SIP might be more or less than the price per
share at the time the participants made their investment choices.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees). Mitchell Hutchins has appointed the investment
sub-adviser, Schroder Capital, to be responsible for day-to-day management of
the Fund's investments.
Schroder Group companies have invested internationally for over 50 years.
Schroder Capital has developed an expertise in emerging markets investments and
has 39 investment professionals located in 12 offices in emerging market
countries around the world. John A. Troiano, with the assistance of an emerging
markets investment committee, has been primarily responsible for the day-to-day
management of Emerging Markets Equity Fund. Since Schroder Capital was appointed
sub-adviser on February 25, 1997. Mr. Troiano has been a managing director of
Schroder Capital since November 1995, and has been employed by various Schroder
Group companies in the portfolio management area since 1988. He is currently
chairman of Schroder Capital's emerging markets investments committee.
GLOBAL EQUITY FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees). Mitchell Hutchins has appointed the investment
sub-adviser, GE Investment Management, to be responsible for day-to-day
management of the Fund's investments.
Ralph R. Layman is the head of the International Equity Team at GE Investment
Management and serves as portfolio manager of the Fund, primarily responsible
for the day-to-day management of the Fund's portfolio. Mr. Layman has served in
this capacity since the Fund's inception in 1991. He is a Chartered Financial
Analyst and an executive vice president and senior investment manager of GE
Investment Management.
From 1989 to 1991, Mr. Layman served as executive vice president, partner and
portfolio manager of Northern Capital Management Co. Prior to 1989 when he
joined Northern, he was vice president and portfolio manager of Templeton
Investment Counsel, Inc., and vice president of the Templeton Emerging Markets
Fund.
Directly assisting Mr. Layman are Michael J. Solecki, vice president of
international equities at GE Investments, and the rest of the International
Equity Team. Mr. Solecki is a Chartered Financial Analyst and has been with GE
Investment Management for six years. From 1992 to 1995, Mr. Solecki was a senior
European analyst at GE Investment Management's London, England office. Prior to
1992, he was an international analyst with GE Investment Management. The
International Equity Team is comprised of eleven analysts, seven of whom manage
portfolios.
GLOBAL INCOME FUND
The Fund is governed by a board of trustees, which oversees the Fund's
operations. It has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board of trustees).
Stuart Waugh and William King are primarily responsible for the day-to-day
portfolio management of the
--------------------
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<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
Fund. Mr. Waugh has been involved with the Fund since its inception, first as an
analyst and then as portfolio manager since 1993. Mr. Waugh is a vice president
of PaineWebber Investment Series and a managing director of global fixed income
investments of Mitchell Hutchins. Mr. Waugh has been employed by Mitchell
Hutchins as a portfolio manager for more than the last five years. Mr. King
joined Mitchell Hutchins in November 1995. Previously, he was at IBM Corporation
where he was responsible for the management of IBM Pension Fund's global bond
portfolio. Both Mr. Waugh and Mr. King are Chartered Financial Analysts.
Other members of Mitchell Hutchins' international fixed income group provide
input on market outlook, interest rate forecasts and other considerations
pertaining to global fixed income investments.
* * * *
Each board has determined that brokerage transactions for the Fund may be
conducted through PaineWebber or its affiliates in accordance with procedures
adopted by the board.
Personnel of Mitchell Hutchins and each sub-adviser may engage in securities
transactions for their own accounts pursuant to each firm's code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On January 31, 1997, Mitchell Hutchins was adviser or
sub-adviser of 30 investment companies with 65 separate portfolios and aggregate
assets of approximately $32.9 billion.
ABOUT THE SUB-ADVISERS
Schroder Capital, the investment sub-adviser to Emerging Markets Equity Fund, is
located at 787 Seventh Avenue, New York, New York 10019. It is a wholly owned
indirect subsidiary of Schroders plc. Schroders plc, which is listed on the
London Stock Exchange, is the holding company parent of an international group
of banks and financial services companies (referred to as the 'Schroder Group'),
with associated companies and branch and representative offices located in 18
countries worldwide. As of September 30, 1996, the investment management
subsidiaries of the Schroder Group had approximately $130 billion in assets
under management, and Schroder Capital, together with its United Kingdom
affiliate Schroder Capital Management International Limited, had over $20
billion, including $2.8 billion in emerging market investments under management
as of that date.
GE Investment Management, the investment sub-adviser to Global Equity Fund, is
located at 3003 Summer Street, Stamford, Connecticut 06905 and is a subsidiary
of General Electric Company. Together with its affiliate, General Electric
Investment Corporation (GE Investment Management and General Electric Investment
Corporation are collectively referred to as 'GE Investments'), GE Investment
Management is one of the largest independent investment managers in the United
States. GE Investments and its predecessors have been managing mutual fund
assets since 1935 and, as of September 30, 1996, had in excess of $56 billion in
total assets under management.
MANAGEMENT FEES & OTHER EXPENSES
Each Fund pays Mitchell Hutchins a monthly fee for its services. Emerging
Markets Equity Fund is obligated to pay investment advisory and administrative
fees to Mitchell Hutchins at an annual rate of 1.20% of the Fund's average daily
net assets. However, after giving effect to anticipated fee waivers, the
effective annual rate at which such fees will actually be paid by the Fund from
February 25, 1997 through the end of the current fiscal year is expected to be
0.70%. Under the advisory contract that was in effect between the Fund and
Mitchell Hutchins prior to that date, the annual rate at which the Fund was
obligated to pay Mitchell Hutchins for its services was 1.62% of the Fund's
average daily net assets. After giving effect to fee waivers, for the fiscal
year ended June 30, 1996, as well as for the subsequent four month fiscal period
ended October 31, 1996, the Fund actually paid such fees to Mitchell Hutchins at
an annual rate of 1.12%.
For the fiscal year ended August 31, 1996 as well as for the subsequent
two-month fiscal period ended October 31, 1996, Global Equity Fund paid advisory
fees to Mitchell Hutchins at the annual rate of 0.85% of its average daily net
assets.
For the fiscal year ended October 31, 1996, Global Income Fund paid advisory
fees to Mitchell Hutchins at the effective annual rate of 0.74% of its average
daily net assets.
With respect to Emerging Markets Equity Fund, Mitchell Hutchins (not the Fund)
pays Schroder Capital a fee for investment sub-advisory services at the annual
rate of 0.70% of the Fund's average daily net assets. During the fiscal year
ended June 30, 1996, as well as the fiscal period ended October 31, 1996,
--------------------
Prospectus Page 22
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
Mitchell Hutchins paid the Fund's previous sub-adviser, Emerging Markets
Management, sub-advisory fees at an annual rate of 1.12% of the Fund's average
daily net assets. With respect to Global Equity Fund, Mitchell Hutchins (not the
Fund) pays GE Investment Management a fee for sub-investment advisory services
at the annual rate of 0.31% of the Fund's average daily net assets.
Global Income Fund pays PaineWebber an annual fee of $4.00 per active
shareholder account held at PaineWebber for services not provided by the
Transfer Agent.
- --------------------------------------------------------------------------------
DETERMINING THE SHARES'
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of each Fund's board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates. It should be recognized that
judgment plays a greater role in valuing lower-rated debt securities in which a
Fund may invest, because there is less reliable, objective data available.
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Emerging Markets Equity Fund and Global Equity Fund each pays an annual dividend
from its net investment income and net realized short-term capital gains, if
any. Each of these Funds distributes any net realized gain from foreign currency
transactions with its dividend. Global Income Fund declares monthly dividends
from its net investment income, which may be accompanied by distributions of net
realized short-term capital gains and foreign currency gains. Although Global
Income Fund will not, in any month, distribute more than the amount of such
income and gains then available for distribution, capital losses and/or foreign
currency losses realized later in the same fiscal year may convert a portion of
such a distribution to a nontaxable return of capital. Each Fund also
distributes annually substantially all of its net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, which
distribution, in the case of Global Income Fund, is accompanied by any
undistributed net realized short-term capital gains and foreign currency gains.
The Funds may make additional distributions, if necessary, to avoid a 4% excise
tax on certain undistributed income and capital gains.
Dividends and other distributions paid on Class Y shares of each Fund are
calculated at the same time and in the same manner as dividends and other
distributions on the other classes of the Fund's shares.
The Funds' dividends and other distributions on Class Y shares are paid in
additional Class Y shares of the same class at net asset value, unless the
shareholder has requested cash payments. Shareholders who wish to receive
dividends and other distributions in cash, either mailed to them by check or
credited to
--------------------
Prospectus Page 23
<PAGE>
------------------------------
PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
their PaineWebber accounts, should contact their investment executives at
PaineWebber or one of its correspondent firms or complete the appropriate
section of the account application. For PW SIP participants, the Fund's Class Y
dividends and other distributions are paid in additional Class Y shares at net
asset value unless the Transfer Agent is instructed otherwise.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code so that it will not have to pay federal
income tax on the part of its investment company taxable income (generally
consisting of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions) and net capital gain that it
distributes to its shareholders.
Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as ordinary
income. Distributions of each Fund's net capital gain (whether paid in cash or
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Shareholders who are
not subject to tax on their income generally will not be required to pay tax on
distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of dividends and capital gain distributions paid (or deemed paid)
for that year, their share of any foreign taxes paid by the Fund that year and
any portion of those dividends that qualifies for special treatment.
WITHHOLDING REQUIREMENTS
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from dividends
and capital gain distributions payable to such shareholders who otherwise are
subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares. In addition, if a Fund's shares are bought within
30 days before or after selling other shares of the Fund (regardless of class)
at a loss, all or a portion of that loss will not be deductible and will
increase the basis of the newly purchased shares.
Qualified profit-sharing plans such as the PW SIP generally pay no federal
income tax. Individual participants in the PW SIP should consult the plan
documents and their own advisers for information on the tax consequences
associated with participating in the PW SIP.
* * * *
Because the foregoing only summarizes some of the important tax considerations
affecting the Funds and their shareholders, please see the further discussion in
the Statement of Additional Information. Prospective shareholders are urged to
consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund is a diversified series of PaineWebber Investment
Trust II, an open-end management investment company that was formed on August
10, 1992 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value of $0.001 per share.
GLOBAL EQUITY FUND
Global Equity Fund is a diversified series of PaineWebber Investment Trust
('Investment Trust'), an open-end management investment company that was formed
on March 28, 1991 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value of $0.001 per share.
Shares of one other series have been authorized.
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Prospectus Page 24
<PAGE>
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PaineWebber Emerging Markets Equity Fund Global Equity Fund Global Income Fund
GLOBAL INCOME FUND
Global Income Fund is a non-diversified series of PaineWebber Investment Series,
an open-end management investment company that was formed on December 22, 1986
as a business trust under the laws of the Commonwealth of Massachusetts. The
trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series, with a par value of $0.001 per share.
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. Each class represents an identical interest in
the respective Fund's investment portfolio and has the same rights, privileges
and preferences. However, each class may differ with respect to sales charges,
if any, distribution and/or service fees, if any, other expenses allocable
exclusively to each class, voting rights on matters exclusively affecting that
class, and its exchange privilege. The different sales charges and other
expenses applicable to the different classes of shares of the Funds will affect
the performance of those classes.
Each share of each Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends on the other classes are likely
to be lower than for Class Y shares, which bear the lowest expenses.
More information concerning Class A, Class B and Class C shares of the Funds may
be obtained from an investment executive at PaineWebber or one of its
correspondent firms or by calling toll-free 1-800-647-1568.
Although each Fund is offering only its own shares, it is possible that a Fund
might become liable for a misstatement in this Prospectus about another Fund.
The board of each Fund has considered this factor in approving the use of a
single, combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of any Fund (or
Investment Trust which has more than one series) may elect all of the board
members of that Fund or of Investment Trust. The shares of a Fund will be voted
together except that only the shareholders of a particular class of a Fund may
vote on matters affecting only that class, such as the terms of a Plan as it
relates to the class. The shares of each series of Investment Trust will be
voted separately, except when an aggregate vote of all the securities is
required by law.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
Investment Trust or a Fund, as applicable, may remove a board member through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. A meeting will be called to vote on the removal of a board
member at the written request of holders of 10% of the outstanding shares of
Investment Trust or a Fund.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
Emerging Markets Equity Fund and Global Equity Fund and employs foreign
sub-custodians to provide custody of the Funds' foreign assets. Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, serves as
custodian for Global Income Fund and employs foreign sub-custodians to provide
custody of the Fund's foreign assets. PFPC Inc., a subsidiary of PNC Bank, N.A.,
serves as each Fund's transfer and dividend disbursing agent. It is located at
400 Bellevue Parkway, Wilmington, DE 19809.
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Prospectus Page 25
<PAGE>
------------------------------
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
CLASS Y SHARES
PROSPECTUS -- MARCH 1, 1997
<TABLE>
<S> <C>
/ / PAINEWEBBER BOND FUNDS / / PAINEWEBBER STOCK FUNDS
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
/ / PAINEWEBBER TAX-FREE BOND FUNDS / / PAINEWEBBER GLOBAL FUNDS
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
/ / PAINEWEBBER ASSET / / PAINEWEBBER MONEY MARKET FUND
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund
</TABLE>
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.
(Copyright) 1997 PaineWebber Incorporated
--------------------
<PAGE>
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
CLASS Y SHARES
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. Schroder Capital Management International,
Inc. ('Schroder Capital') 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 relates
only to the Funds' Class Y shares. It should be read only in conjunction with
the Funds' current Prospectus for those shares, dated March 1, 1997. A copy of
the Prospectus may be obtained by calling any PaineWebber investment executive
or correspondent firm or by calling toll-free 1-800-647-1568. This Statement of
Additional Information is dated March 1, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's'),
Standard & Poor's, a division of The McGraw-Hill Companies Inc. ('S&P') and
other nationally recognized statistical rating organizations ('NRSROs') are
private services that provide ratings of the credit quality of debt obligations.
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 covertible 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
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industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for 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 a Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of 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 ('OTC'), from time to time foreign securities may be
difficult to liquidate rapidly without significantly depressing the price of
such securities. There may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Transactions in foreign securities may be subject to less
efficient settlement practices. Foreign securities trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts.
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 depository
receipts, including American Depository Receipts ('ADRs'), European Depository
Receipts ('EDRs') and Global Depository Receipts ('GDRs'), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. EDRs are similar to ADRs, but 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. GDRs are similar to EDRs and are designed for use
in several international financial markets. For purposes of each Fund's
investment policies, ADRs, EDRs and GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR or
GDR representing ownership of common stock will be treated as common stock.
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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.
From time to time, investments in other investment companies may be the
most effective available means by which the Funds may invest in securities of
issuers in certain countries. Investment in such investment companies may
involve the payment of management expenses and, in connection with some
purchases, sales loads, and payment of substantial premiums above the value of
such companies' portfolio securities. At the same time, a Fund would continue to
pay its own management fees and other expenses. The Funds may invest in these
investment funds and in registered investment companies subject to the
provisions of the Investment Company Act of 1940 ('1940 Act'). Such investment
funds or investment companies may be 'passive foreign investment companies' (as
described in 'Taxes' below) and may result in special federal income tax
consequences.
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
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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.
U.S. GOVERNMENT SECURITIES. The Funds may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of it agencies or instrumentalities (collectively, 'U.S.
government securities'). Among the U.S. government securities that may be held
by the Funds are securities that are supported by the full faith and credit of
the United States; securities that are supported by the right of the issuer to
borrow from the U.S. Treasury; and securities 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. Each Fund is 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
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credit standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value 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 value on the right to acquire
the underlying common stock while holding a fixed income security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participants in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. The U.S. government mortgage-backed securities in which Global
Income Fund may invest include mortgage-backed securities issued or guaranteed
as to the payment of principal and interest (but not as to market value) by the
Government National Mortgage Association ('Ginnie Mae'), Fannie Mae (formerly,
the Federal National Mortgage Association) or the Federal Home Loan Mortgage
Corporation ('Freddie Mac').
Ginne Mae Certificates--Ginnie Mae guarantee certain mortgage pass-through
certificates ('Ginnie Mae certificates') that are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities (collectively, 'Private Mortgage Lenders') and that represent
ownership interests in individual pools of residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal to
the investor. Timely payment of interest and principal is backed by the full
faith and credit of the U.S. government. Each mortgagor's monthly payments to
his lending institution on his residential mortgage are 'passed through' to
certificateholders such as Global Income Fund. Mortgage pools consist of whole
mortgage loans or participations in loans. The terms and characteristics of the
mortgage instruments are generally uniform within a pool but may vary among
pools. Lending institutions that originate mortgages for the pools are subject
to certain standards, including credit and other underwriting criteria for
individual mortgages included in the pools.
Fannie Mae Certificates--Fannie Mae facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes
referred to as 'conventional mortgage loans' or 'conventional loans') through
its mortgage purchase and mortgage-backed securities sales activities. Fannie
Mae issues guaranteed mortgage pass-through certificates ('Fannie Mae
certificates'), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates--Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ('PCs') and guaranteed mortgage certificates
('GMCs'). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
Collateralized Mortgage Obligations and Multi-Class Mortgage
Pass-Throughs--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called 'Mortgage Assets'). Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
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In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only or 'PO' class) on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO clases are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an 'inverse IO,' on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
ARM and Floating Rate Mortgage-Backed Securities--ARM mortgage-backed
securities are mortgage-backed securities that represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of mortgage loans bearing variable or adjustable rates of interest (such
mortgage loans are referred to as 'ARMs'). Floating rate mortgage-backed
securities are classes of mortgage-backed securities that have been structured
to represent the right to receive interest payments at rates that fluctuate in
accordance with an index but that generally are supported by pools comprised of
fixed-rate mortgage loans. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities.
Types of Credit Enhancement--To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories; (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of asets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. Global Income Fund will
not pay any addition fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security. Credit enhancements do
not provide protection against changes in the market value of the security.
Examples of credit enhancement arising out of the structure of the transaction
include 'senior-subordinated securities' (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the
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result that defaults on the underlying assets are borne first by the holders of
the subordinated class), creation of 'spread accounts' or 'reserve funds' (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
'over-collateralization' (where the scheduled payments on, or the principal
amounts of, the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees). The degree of credit
enhancement provided for each issue generally is based on historical information
regarding the level of credit risk asociated with the underlying assets.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES--The yield
characteristics of mortgage-backed securities differ from those of traditional
debt securities. Among the majority differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other obligations
generally may be prepaid at any time. Prepayments on a pool of mortgage loans
are influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions.
Generally, however, prepayments on fixed-rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of rising
interest rates. Mortgage-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed-income
securities from declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yeld of Global Income Fund.
ADDITIONAL INFORMATION ON ARM AND FLOATING RATE MORTGAGE-BACKED
SECURITIES--Global Income Fund may invest in adjustable rate mortgage ('ARM')
and floating rate mortgage-backed securities. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes in
a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities. As a result, during periods of rising interest rates, ARMs generally
do not decrease in value as much as fixed rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much as
fixed rate securities. ARM mortgage-backed securities represent a right to
receive interest payments at a rate that is adjusted to reflect the interest
earned on a pool of ARMs. ARMs genrally specify that the borrower's mortgage
interest rate may not be adjusted above a specified lifetime maximum rate or, in
some cases, below a minimum lifetime rate. In addition, certain ARMs specify
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for limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may limit changes in the
maximum amount by which the borrower's monthly payment may adjust for any single
adjustment period. In the event that a monthly payment is not sufficient to pay
the interest accuring on the ARM, any such excess interest is added to the
mortgage loan ('negative amortization'), which is repaid through future
payments. If the monthly payment exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment that would have been
necessary to amortize the outstanding principal balance over the remaining term
of the loan, the excess reduces the principal balance of the ARM. Borrowers
under ARMs experiencing negative amortization may take longer to build up their
equity in the underlying property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
'lock-in' at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of payments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity. Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ('COFI'), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
ADDITIONAL INFORMATION ON MONEY MARKET INVESTMENTS OF EMERGING MARKETS
EQUITY FUND AND GLOBAL EQUITY FUND. While each Fund may invest in money market
instruments, Emerging Markets Equity Fund and Global Equity Fund are subject to
additional limitations on the type or quality of money market investments in
which they invest. 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.
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Foreign branches of domestic banks are not necessarily subject to the same or
similiar 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 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 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.
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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 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 or upon demand and at a price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, the Fund's custodian
segregates assets to cover the Fund's obligations under the reverse repurchase
agreement. See 'Investment Policies and Restrictions-Segregated Accounts.'
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with that Fund's custodian in an
amount, marked to market daily, at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral is
limited to cash, U.S. government securities and irrevocable letters of credit
that meet certain guidelines established by Mitchell Hutchins. 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 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, 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
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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 and Other Strategies Using
Derivatives Contracts,' 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 a 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.' A Fund purchases when-issued securities only
with the intention of taking delivery, but may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or a Sub-Adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of the
Fund's shares present at a shareholders' meeting if more than 50% of the
outstanding Fund 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.
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(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.
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) 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.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of reorganization, consolidation, or merger.
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HEDGING AND OTHER STRATEGIES USING DERIVATIVES CONTRACTS
HEDGING INSTRUMENTS. Mitchell Hutchins and the Sub-Advisers may use a
variety of derivatives contracts ('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 also may use these derivatives contracts to
attempt to enhance income or realize gain and may hedge by entering into certain
swaps or other interest rate protection transactions. A Fund may enter into
transactions involving one or more types of these derivatives contracts under
which the full value of its portfolio is at risk. Under normal circumstances,
however, a Fund's use of these derivatives contracts 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.
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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 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 and
the Commodity Futures Trading Commission ('CFTC'). 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
derivatives contracts and 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 derivatives
contracts and techniques are developed. Mitchell Hutchins or a Sub-Adviser, as
applicable, may utilize these opportunities for a Fund to the extent that they
are consistent with the Fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. The Funds'
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF 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
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unrelated to the value of the investments being hedged, such as speculative or
other pressures on the markets in which Hedging Instruments are traded.
The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if 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.'
15
<PAGE>
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Fund and its contra party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Funds will enter into OTC option transactions only with contra parties that
have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
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
16
<PAGE>
covered put and call options, on futures in which it is allowed to invest. The
purchase of futures or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options on securities or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations that are fully guaranteed as to principal and
interest by the United States, in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call option on
a futures contract, in accordance with applicable exchange rules. Unlike margin
in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to a Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no 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.
17
<PAGE>
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.
18
<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.
19
<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 its
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.
20
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 50 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 29 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
E. Garrett Bewkes, Jr.**; 70 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber
the Board of Trustees Group Inc. ('PW Group') (holding company of
PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company. Mr.
Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeu-
tics, Inc. Mr. Bewkes 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
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 50 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 28 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Mary C. Farrell**; 47 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of the
Investment Policy Committee of PaineWebber.
Ms. Farrell joined PaineWebber in 1982.
She is a member of the Financial Women's
Association and Women's Economic
Roundtable and is 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 28 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of Man-
Columbia University agement of the Graduate School of Busi-
101 Uris Hall ness, Columbia University. Prior to 1989,
New York, New York 10027 he was president of the Illinois Institute
of Technology. Dean Feldberg is also a di-
rector of K-III Communications Corpora-
tion, Federated Department Stores, Inc. and
Revlon, Inc. Dean Feldberg is a director or
trustee of 28 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
George W. Gowen; 67 Trustee Mr. Gowen is a partner in the law 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 28 investment 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>
Frederic V. Malek; 60 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (investment bank). From January
Suite 350 1992 to November 1992, he was campaign
Washington, D.C. 20004 manager of Bush-Quayle '92. From 1990 to
1992, he was vice chairman and, from 1989
to 1990, he was president of Northwest
Airlines Inc., NWA Inc. (holding company of
Northwest Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.). Prior
to 1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he
most recently was an executive vice
president and president of Marriott Hotels
and Resorts. Mr. Malek is also a director
of American Management Systems, Inc.
(management consulting and computer related
services), Automatic Data Processing, Inc.,
CB Commercial Group, Inc. (real estate ser-
vices), Choice Hotel International (hotel
and hotel franchising), FPL Group, Inc.
(electric services), Integra, Inc. (bio-
medical), Manor Care, Inc. (health care),
National Education Corporation and
Northwest Airlines Inc. Mr. Malek is a
director or trustee of 28 investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Carl W. Schafer; 61 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. (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 28 investment companies
for which Mitchell Hutchins or PaineWebber
serves as an investment adviser.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
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 managing
director of Zilkha & Company (merchant
banking and private investment company). He
is the former chairman and chief executive
officer of Fortune Bancorp (1990 to 1994),
the former chairman, president 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 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 28 investment
companies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
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 five investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Teresa M. Boyle; 38 Vice President Ms. Boyle is a first vice president of Mitch-
ell 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 29 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
Assistant Treasurer senior manager of the mutual fund finance
division of Mitchell Hutchins. Mr. Maher is
a vice president and assistant treasurer of
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Dennis McCauley; 50 Vice President Mr. McCauley is a managing director and chief
(Investment 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 a vice president and
assistant treasurer of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Dianne E. O'Donnell; 44 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice presi-
dent and secretary of 28 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
Mitchell Hutchins. From March 1991
to September 1993, he was director of the
Mutual Funds Sales Support and Service
Center for Mitchell Hutchins and
PaineWebber. Mr. Polito is vice president
of 29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 29 investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 34 Vice President and Mr. Schubert is a first vice president and
Assistant Treasurer a senior manager of the mutual fund fi-
nance 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 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
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. Mr. Sluyters
is a vice president and treasurer of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Mark A. Tincher; 41 Vice President Mr. Tincher is a managing director and chief
investment officer--U.S. equity in-
vestments 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 13 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Stuart Waugh; 41 Vice President Mr. Waugh is a managing director and a
(Investment Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income in-
vestments and currency trading. Mr. Waugh
is a vice president of five other
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Keith A. Weller; 35 Vice President and Mr. Weller is a first vice president 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
28 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.
Investment Trust II and Investment Series each pays trustees who are not
'interested persons' of the Trust $1,000 annually for each series. 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 presently has two series and pays each such
trustee $1,000 annually for Global Equity Fund and an additional $1,500 annually
for its second series. Therefore, Investment Trust pays each trustee $2,500
annually, plus any additional amounts due for board or committee meetings. Each
Trust pays an additional $150 for each board meeting and each separate meeting
of a board committee. 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.
26
<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 TRUST 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 $ 744 $59,873
Richard R. Burt,
Trustee......................................... $1,688 $2,625 $ 594 $51,173
Meyer Feldberg,
Trustee......................................... $1,688 $2,625 $4,361 $96,181
George W. Gowen,
Trustee......................................... $1,688 $2,625 $4,361 $92,431
Frederic V. Malek,
Trustee......................................... $1,688 $2,625 $4,361 $92,431
Carl W. Schafer,
Trustee......................................... $1,688 $2,625 $ 744 $62,307
John R. Torell, III,
Trustee......................................... $1,688 $2,625 $ 744 $60,123
</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. For the four months ended October 31, 1996, each of the above named
trustees received fees of $758, except for Mr. Schafer, who received fees
of $900.
** Represents fees paid to each trustee during the fiscal year ended August
31, 1996. For the two months ended October 31, 1996, each of the above
named trustees received fees of $550, except for Mr. Burt who received fees
of $400.
*** Represents fees paid to each trustee during the fiscal year ended October
31, 1996.
**** Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholders are 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 JANUARY 31, 1997
- --------------------------- --------------------------------------------
<S> <C>
Subaru of New England...... 623,514 19.56%
E. Boch.................... 167,939 5.27%
</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 JANUARY 31, 1997
- ----------------------------------------------------------------- --------------------------------------------
<S> <C>
Northern Trust Company (FBO PaineWebber 401(k) Plan)............. 2,084,436 6.50%
</TABLE>
- ------------------
* The shareholder(s) listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, New York 10019
27
<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 applicable 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 applicable 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 Investment Trust II dated February 25, 1997. Under the
Advisory Contract the Fund pays Mitchell Hutchins an annual fee, computed daily
and paid monthly, at the annual rate of 1.20% of the Fund's average daily net
assets. During the four months ended October 31, 1996, the fiscal years ended
June 30, 1996 and June 30, 1995 and the period January 19, 1994 (commencement of
operations) to June 30, 1994, the Fund paid (or accrued) to Mitchell Hutchins,
under a prior contract, and/or Kidder Peabody Asset Management, Inc. ('KPAM')
(the Fund's investment adviser prior to February 13, 1995) advisory and
administrative fees of $220,071, $867,093, $1,261,493 and $658,437,
respectively.
During the four months ended October 31, 1996 and for the fiscal years
ended June 30, 1996 and June 30, 1995, Mitchell Hutchins waived part of its
management fees and reimbursed Emerging Markets Equity Fund in the amounts of
$142,160, $538,618 and $81,217, respectively; during these periods, certain
expense limitations were applicable which are no longer in effect. As of the
date of this Statement of Additional Information, Mitchell Hutchins was
voluntarily waiving part of its management fees and 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.
28
<PAGE>
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with Schroder Capital, dated February 25,
1997 ('Schroder Contract'), pursuant to which Schroder Capital determines what
securities will be purchased, sold or held by Emerging Markets Equity Fund.
Under the Schroder Contract, Mitchell Hutchins (not the Fund) pays Schroder
Capital a fee in the amount of 0.70% of the Fund's average daily net assets.
Schroder Capital bears all expenses incurred by it in connection with its
services under the Schroder Contract, but is not responsible for any expenses
incurred by the Trust, Fund or Mitchell Hutchins, including custody fees. Under
sub-advisory contracts with the Fund's former sub-advisor, Emerging Markets
Management, for the four months ended October 31, 1996 and 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 $152,148, $599,472, $872,143 and $455,216,
respectively, to Emerging Markets Management.
Under the Schroder Contract, Schroder Capital 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 Schroder Contract, except any liability to the Trust, the
Fund, its shareholders or Mitchell Hutchins to which Schroder Capital would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Schroder Contract.
The Schroder Contract terminates automatically upon the 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 the
Fund's outstanding securities on 60 days' notice to Schroder Capital, or by
Schroder Capital on 60 days' written notice to Mitchell Hutchins.
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 Investment 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. During the two
months ended October 31, 1996 and 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 $794,518, $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 ('GEIM Contract'), pursuant to which GE Investment Management
determines what securities will be purchased, sold or held by the Fund. Under
the GEIM 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 GEIM Contract. Under the GEIM
Contract (or a prior sub-advisory contract between KPAM and GE Investment
Management) for the two months ended October 31, 1996 and fiscal years ended
August 31, 1996, August 31, 1995 and August 31, 1994, Mitchell Hutchins and/or
KPAM paid (or accrued) fees of $287,688, $1,808,760, $1,523,282 and $1,637,409,
respectively, to GE Investment Management.
Under the GEIM 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
GEIM 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 GEIM Contract.
The GEIM 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
29
<PAGE>
majority of the Fund's outstanding voting securities on 60 days' notice to GE
Investment Management, or by GE Investment Management 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
Investment Series 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, 1996, October
31, 1995 and October 31, 1994, the Fund paid (or accrued) to Mitchell Hutchins
advisory and administrative fees of $7,812,766, $9,229,318 and $12,723,592,
respectively.
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, 1996, October
31, 1995 and October 31, 1994, Global Income Fund paid (or accrued) to
PaineWebber $305,944, $376,299 and $487,859, respectively.
NET ASSETS. The following table shows the approximate net assets as of
January 31, 1997, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- ------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................ $5,745.3
Global........................................... 2,923.0
Equity/Balanced.................................. 3,566.1
Fixed Income (excluding Money Market)............ 5,102.2
Taxable Fixed Income........................ 3,503.4
Tax-Free Fixed Income....................... 1,598.8
Money Market Funds............................... 24,251.8
</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 Y 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 Fund are offered continuously. Under separate
exclusive dealer agreements between Mitchell Hutchins and PaineWebber relating
to the Class Y shares (collectively, 'Exclusive Dealer Agreements'), PaineWebber
and its correspondent firms sell the Funds' shares.
30
<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 four months ended October 31, 1996,
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
$80,726, $264,723, $531,901 and $363,528, respectively, in brokerage
commissions. For the two months ended October 31, 1996 and the fiscal years
ended August 31, 1996, August 31, 1995 and August 31, 1994, Global Equity Fund
paid $18,589, $1,472,329, $850,531 and $780,022, respectively, in brokerage
commissions. For the fiscal years ended October 31, 1996, October 31, 1995 and
October 31, 1994, 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.
Global Income Fund paid no brokerage commissions to PaineWebber during its last
three fiscal years. Neither Emerging Markets Equity Fund nor Global Equity Fund
paid brokerage commissions to PaineWebber during the period February 13, 1994
(the date Mitchell Hutchins was appointed investment advisor) to October 31,
1996.
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 four months ended October 31, 1996 and 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 two
months ended October 31, 1996 and the fiscal year ended August 31, 1996, GE
Investment Management directed $ and $21,439,471, respectively, in
portfolio transactions to brokers chosen because they provided research
services, for which Global Equity Fund paid $ and $24,245, respectively,
in commissions. For the fiscal year ended October 31, 1996, Mitchell Hutchins
directed none of Global Income Fund's portfolio transactions to brokers chosen
for research service.
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-Advisers 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
31
<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
Contracts or the Sub-Advisers under the Schroder and GEIM 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 fiscal periods shown
were:
<TABLE>
<S> <C>
EMERGING MARKETS EQUITY FUND
Four Months ended October 31, 1996......... 22%
Fiscal Year ended June 30, 1996............ 69%
Fiscal Year ended June 30, 1995............ 76%
GLOBAL EQUITY FUND
Two Months ended October 31, 1996.......... 3%
Fiscal Year ended August 31, 1996.......... 33%
Fiscal Year ended August 31, 1995.......... 40%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1996......... 126%
Fiscal Year ended October 31, 1995......... 113%
</TABLE>
32
<PAGE>
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 ('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 trustees 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 the computation of a Fund's net asset value on that day. If events
materially affecting the value of such investments or currency exchange rates
occur during such time period, the investments will be valued at their fair
value as determined in good faith by or under the direction of 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.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
('Standardized Return') used in each Fund's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<C> <S>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase Class Y shares
T = average annual total return of Class Y shares
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. Each Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula
33
<PAGE>
set forth above ('Non-Standardized Return'). A Fund calculates Non-Standardized
Return for specific 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. All dividends and other distributions are assumed to have been reinvested
at net asset value.
The following tables show the return on an investment in Class Y shares of
the Funds for the periods indicated. All returns for periods of more than one
year are expressed as an average annual return. (Class Y shares do not impose an
initial or contingent deferred sales charge; therefore, the peformance
information also represents a quotation of Non-Standardized Return for the
periods shown.)
EMERGING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Year ended October 31, 1996:........................... (1.04)%
Inception* to October 31, 1996:........................ (7.76)%
</TABLE>
- ------------------
* The inception date for Class Y shares of Emerging Markets Equity Fund was
January 19, 1994.
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Year ended October 31, 1996:.......................... 14.54%
Inception* to October 31, 1996........................ 11.38%
</TABLE>
- ------------------
* The inception date for Class Y shares of Global Equity Fund was May 10, 1993.
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
CLASS Y
-------
<S> <C>
Year ended October 31, 1996:........................... 9.25%
Five years ended October 31, 1996...................... 7.31%
Inception* to October 31, 1996:........................ 7.98%
</TABLE>
- ------------------
* The inception date for Class Y shares of Global Income Fund was August 26,
1991.
YIELD. Yields used in Global Income Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to Class Y 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 net asset value per share 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
Class Y shares
b = expenses accrued for the Period attributable to Class
Y shares (net of reimbursements)
c = the average daily number of Class Y shares outstanding
during the Period that were entitled to receive
dividends
d = the net asset value per share on the last day of the
Period.
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
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<PAGE>
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. For the
30-day period ended October 31, 1996, the yield for the Class Y shares of Global
Income Fund was 6.00%.
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 of the Funds involves greater risks than an investment in
either a money market fund or a CD.
35
<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.
[LINE GRAPH]
Common Stocks $10,507
Long-Term Gov't Bonds $314
Treasury Bills $127
Inflation/CPI $85
The chart is shown for illustrative purposes only and does not represent any
Fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investment results. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in certain markets from
time to time. Stocks are measured by the S&P 500, an unmanaged weighted index
comprising 500 widely held common stock and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
- ------------------
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook(Trademark) Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
36
<PAGE>
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 gains and net gains from certain foreign currency transactions)
('Distribution Requirement') and must meet several additional requirements. For
each Fund these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ('Income Requirement');
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following, that
were held for less than three months--options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or options,
futures or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) ('Short-Short Limitation'); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back as
a taxable distribution.
Dividends and interest received 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
37
<PAGE>
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 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 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, 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.
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<PAGE>
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.
OTHER INFORMATION
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the Fund
or its Trust. However, each Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust or the Fund and requires that
notice of such disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the 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 relevant Fund's property for all losses and expenses of any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder'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 would be entitled to reimbursement from the general assets of the
relevant Fund. The trustees intend to conduct each Fund's operations in such a
way as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
Prior to November 1, 1995, the name of Emerging Markets Equity Fund was
'Mitchell Hutchins/Kidder Peabody Emerging Markets Equity Fund.' Prior to
February 13, 1995, the name of the Fund was 'Kidder, Peabody Emerging Markets
Equity Fund.' Prior to November 10, 1995, the Fund's Class Y shares were called
'Class C' shares.
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 Y shares were known as 'Class C' shares.
Prior to November 10, 1995, Global Income Fund's Class Y shares were known
as 'Class C' shares.
ADDITIONAL REDEMPTION INFORMATION. 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 the Funds are obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Funds 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
39
<PAGE>
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.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses to the specific classes of the Fund's shares to which those
expenses are attributable.
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.
40
<PAGE>
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.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Other Strategies Using Derivatives
Contracts.................................... 13
Trustees and Officers; Principal Holders of
Securities................................... 21
Investment Advisory and Distribution
Arrangements................................. 28
Portfolio Transactions......................... 31
Valuation of Shares............................ 33
Performance Information........................ 33
Taxes.......................................... 37
Other Information.............................. 39
Financial Statements........................... 40
Appendix....................................... A-1
</TABLE>
(Copyright)1997 PaineWebber Incorporated
PaineWebber
Emerging Markets
Equity Fund
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
Class Y Shares
Statement of Additional Information
March 1, 1997
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: (filed herewith)
PaineWebber Global Income Fund
Included in Part A of this Registration Statement:
Financial Highlights for one Class A share of the Fund for each of the
five years in the period ended October 31, 1996 and for the period July
1, 1991 (commencement of offering) to October 31, 1991.
Financial Highlights for one Class B share of the Fund for each of the
nine years in the period ended October 31, 1996 and for the period
March 20, 1987 (commencement of operations) to October 31, 1987.
Financial Highlights for one Class C share of the Fund for each of the
four years in the period ended October 31, 1996 and for the period July
2, 1992 (commencement of operations) to October 31, 1992.
Financial Highlights for one Class Y share of the Fund for each of the
five years in the period ended October 31, 1996 and for the period
August 26, 1991 (commencement of offering) to October 31, 1991.
Included in Part B of this Registration Statement through incorporation by
reference from the Registrant's Annual Report to Shareholders filed with the SEC
through EDGAR on January 6, 1997, Accession No. 0000950130-97-000026
Portfolio of Investments at October 31, 1996.
Statement of Assets and Liabilities at October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statement of Changes in Net Assets for each of the two years in the
period ended October 31, 1996.
Notes to Financial Statements.
Financial Highlights for one Class A, Class B and Class Y share of the
Fund for each of the five years in the period ended October 31, 1996.
Financial Highlights for one Class C share of the Fund for each of the
four years in the period ended October 31, 1996 and for the period July
2, 1992 (commencement of offering) to October 31, 1992.
Report of Independent Accountants dated December 23, 1996.
(b) Exhibits:
(1) (a) Declaration of Trust 1/
(b) Amendment effective January 28, 1988 to Declaration of Trust
4/
(c) Amendment effective March 15, 1989 to Declaration of Trust 5/
(d) Amendment effective November 27, 1989 to Declaration of Trust
6/
(e) Amendment effective October 15, 1990 to Declaration of Trust
7/
(f) Amendment effective October 24, 1990 to Declaration of Trust
7/
(g) Amendment effective April 25, 1991 to Declaration of Trust 10/
(h) Amendment effective May 1, 1991 to Declaration of Trust 10/
(i) Amendment effective July 1, 1991 to Declaration of Trust 10/
(j) Amendment effective September 24, 1991 to Declaration of Trust
12/
(k) Amendment effective October 30, 1991 to Declaration of Trust
13/
(l) Amendment effective November 18, 1991 to Declaration of Trust
13/
(m) Amendment effective June 30, 1992 to Declaration of Trust 17/
C-1
<PAGE>
(n) Amendment effective July 30, 1993 to Declaration of Trust 19/
(o) Amendment effective November 17, 1993 to Declaration of Trust
19/
(p) Amendments effective November 10 and November 29, 1995 to
Declaration of Trust 22/
(2) (a) By-Laws 1/
(b) Amendment dated March 19, 1991 to By-Laws 9/
(c) Amendment dated Sept. 28, 1994 to By-Laws 20/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 21/
(5) (a) Investment Advisory and Administration Contract 4/
(6) (a) Distribution Contract with respect to Class A shares 19/
(b) Distribution Contract with respect to Class B shares 19/
(c) Distribution Contract with respect to Class C shares 22/
(d) Distribution Contract with respect to Class Y shares 22/
(e) Exclusive Dealer Agreement with respect to Class A shares 19/
(f) Exclusive Dealer Agreement with respect to Class B shares 19/
(g) Exclusive Dealer Agreement with respect to Class C shares 22/
(h) Exclusive Dealer Agreement with respect to Class Y shares 22/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement with respect to PaineWebber Global Income Fund 3/
(9) (a) Transfer Agency Agreement 7/
(b) Service Contract 5/
(10) (a) Opinion and consent of counsel regarding Class A, B, and Y
shares 9/
(b) Opinion and consent of Counsel regarding Class C shares 16/
(11) Other opinions, appraisals, rulings and consents: Accountants' Consent
(filed herewith)
(12) Financial statements omitted from Part B - none
(13) Letter of investment intent 2/
(14) Prototype Retirement Plan 14/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares 13/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares 13/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares 17/
(16) (a) Schedules for Computation of Total Return Quotations for
Class B shares 8/
(b) Schedules for Computation of Total Return Quotations for Class
A and Class Y shares 15/
(c) Schedules for Computation of Yield Quotations for Class A,
Class B and Class Y shares 15/
(d) Schedules for Computation of Total Return Quotations for Class
C shares 18/
(e) Schedule for Computation of Yield Quotations for Class C
shares 18/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 23/
- ----------
1/ Incorporated by reference from Registration Statement on Form N-1A,
File No. 33-11025, filed December 22, 1986.
2/ Incorporated by reference from Pre-Effective Amendment No. 2, File No.
33-11025, filed March 20, 1987.
3/ Incorporated by reference from Post-Effective Amendment No. 1, File No.
33-11025, filed July 20, 1987.
4/ Incorporated by reference from Post-Effective Amendment No. 3, File No.
33-11025, filed April 29, 1988.
C-2
<PAGE>
5/ Incorporated by reference from Post-Effective Amendment No. 6, File No.
33-11025, filed November 30, 1989.
6/ Incorporated by reference from Post-Effective Amendment No. 8, File No.
33-11025, filed February 28, 1990.
7/ Incorporated by reference from Post-Effective Amendment No. 11, File
No. 33-11025, filed October 24, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 13, File
No. 33-11025, filed March 1, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 15, File
No. 33-11025, filed May 2, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 16, File
No. 33-11025, filed July 31, 1991.
11/ Incorporated by reference from Post-Effective Amendment No. 17, File
No. 33-11025, filed August 26, 1991.
12/ Incorporated by reference from Post-Effective Amendment No. 18, File
No. 33-11025, filed September 24, 1991.
13/ Incorporated by reference from Post-Effective Amendment No. 19, File
No. 33-11025, filed February 14, 1992.
14/ Incorporated by reference from Post-Effective Amendment No. 20 to the
registration statement of PaineWebber Managed Investments Trust, SEC
File No. 2-91362, filed April 1, 1992.
15/ Incorporated by reference from Post-Effective Amendment No. 20, File
No. 33-11025, filed February 28, 1992
16/ Incorporated by reference from Post-Effective Amendment No. 21, File
No. 33-11025, filed April 30, 1992.
17/ Incorporated by reference from Post-Effective Amendment No. 23, File
No. 33-11025, filed December 31, 1992.
18/ Incorporated by reference from Post-Effective Amendment No. 24, File
No. 33-11025, filed March 1, 1993.
19/ Incorporated by reference from Post-Effective Amendment No.25, filed
March 1, 1994.
20/ Incorporated by reference from Post-Effective Amendment No. 27, File
No. 33-11025, filed December 30, 1994.
21/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28,
1988, March 15, 1989, November 27, 1989, October 15, 1990, October 24,
1990, April 21, 1991, May 1, 1991, July 1, 1991, September 24, 1991,
October 30, 1991, November 18, 1991, June 30, 1992, November 17, 1993
and November 10 and 29, 1995, and from Articles II, VII and X of
Registrant's By-Laws, as amended March 19, 1991 and September 28, 1994.
22/ Incorporated by reference from Post-Effective Amendment No.31, File No.
33-11025, filed February 26, 1996.
C-3
<PAGE>
23/ Incorporated by reference from Post-Effective Amendment No. 33, File
No. 33-11025, filed August 29, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders as of
Title of Class February 14, 1997
<S> <C>
Shares of beneficial interest
($.001 par value)
PaineWebber Global Income Fund
- Class A shares 40,311
- Class B shares 15,104
- Class C shares 2,896
- Class Y shares 240
</TABLE>
Item 27. Indemnification
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article X, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 2 of "Indemnification" in Article X
also provides that the Registrant may maintain insurance policies covering such
rights of indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration
of Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with or having
a claim against the Registrant or a particular series; and that, provided they
have exercised reasonable care and have acted under the reasonable belief that
their actions are in the best interest of the Registrant, the trustees and
officers shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of Article XI and to
Article X, trustees shall not be liable for errors of judgment or mistakes of
fact or law, for any act or omission in accordance with advice of counsel or
other experts, or for failing to follow such advice, with respect to the meaning
and operation of the Declaration of Trust.
Article IX of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Registrant, or is or was serving at the request of the
Registrant as a trustee, officer or employee of a corporation, partnership,
joint venture, trust
C-4
<PAGE>
or other enterprise against any liability asserted against him and incurred by
him in any such capacity or arising out of his status as such, whether or not
the Registrant would have the power to indemnify him against such liability to
the Registrant or its shareholders, provided that the Registrant may not
purchase or maintain insurance that protects any such person against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Section 9 of the Investment Advisory and Administration Contract
("Contract") provides that Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") shall not be liable for any error of judgment or mistake of law or
for any loss suffered by any series of the Registrant in connection with the
matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the trustees
shall not be liable for any obligations of any series or the Registrant under
the Contract and that Mitchell Hutchins shall look only to the assets and
property of the Registrant or appropriate series in settlement of such right or
claim and not to the assets and property of the trustees.
Section 9 of each Distribution Contract provides that the Registrant
will indemnify Mitchell Hutchins and its officers, directors and controlling
persons against all liabilities arising from any alleged untrue statement of
material fact in the Registration Statement or from any alleged omission to
state in the Registration Statement a material fact required to be stated in it
or necessary to make the statements in it, in light of the circumstances under
which they were made, not misleading, except insofar as liability arises from
untrue statements or omissions made in reliance upon and in conformity with
information furnished by Mitchell Hutchins to the Registrant for use in the
Registration Statement; and provided that this indemnity agreement shall not
protect any such persons against liabilities arising by reason of their bad
faith, gross negligence or willful misfeasance; and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public policy
as expressed in the Securities Act of 1933. Section 9 of each Distribution
Contract also provides that Mitchell Hutchins agrees to indemnify, defend and
hold the Registrant, its officers and trustees free and harmless of any claims
arising out of any alleged untrue statement or any alleged omission of material
fact contained in information furnished by Mitchell Hutchins for use in the
Registration Statement or arising out of an agreement between Mitchell Hutchins
and any retail dealer, or arising out of supplementary literature or advertising
used by Mitchell Hutchins in connection with each Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of the relevant Distribution Contract, with respect to
PaineWebber Incorporated ("PaineWebber").
Section 6 of the Service Contract provides that PaineWebber shall be
indemnified and held harmless by the Registrant against all liabilities, except
those arising out of bad faith, gross negligence, willful misfeasance or
reckless disregard of its duties under the Service Contract.
Section 10 of each Distribution Contract and Section 7 of the Service
Contract contain provisions similar to Section 10 of the Investment Advisory and
Administration Contract, applicable to Mitchell Hutchins and PaineWebber,
respectively.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant
C-5
<PAGE>
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Registrant by
such trustee, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV as filed
with the Securities and Exchange Commission (registration number 801-13219) and
is incorporated herein by reference.
Item 29. Principal Underwriters
a) Mitchell Hutchins serves as principal underwriter and/or
investment adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND, INC.
GLOBAL SMALL CAP FUND, INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal
underwriter. PaineWebber acts as exclusive dealer of the Registrant's shares.
The directors and officers of Mitchell Hutchins, their principal business
addresses, and their positions and offices with Mitchell Hutchins are identified
in its Form ADV as filed with the Securities and Exchange Commission
(registration number 801-13219). The directors and officers of PaineWebber,
their principal business addresses, and their positions and offices with
PaineWebber are identified in its Form ADV as filed with the Securities and
Exchange Commission (registration number 801-7163). The foregoing information is
hereby incorporated herein by reference. The
C-6
<PAGE>
information set forth below is furnished for those directors and officers of
Mitchell Hutchins or PaineWebber who also serve as trustees or officers of the
Registrant. Unless otherwise indicated, the principal address of each is 1285
Avenue of the Americas, New York, New York 10019.
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices With
--------------------- --------------------------
Name With Registrant Underwriter or Exclusive Dealer
---- --------------- -------------------------------
<S> <C> <C>
Margo N. Alexander President President and Chief Executive Officer and a
Director of Mitchell Hutchins; Director and
Executive Vice President of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment Strategist
and Member of Investment Policy Committee of
PaineWebber
Teresa M. Boyle Vice President First Vice President and Manager - Advisory
Administration of Mitchell Hutchins
Dennis McCauley Vice President Managing Director and Chief Investment Officer -
Fixed Income of Mitchell Hutchins
C. William Maher Vice President and Assistant First Vice President and a Senior Manager of the
Treasurer Mutual Fund Finance Division of Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins
Treasurer
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General Counsel
of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of Operations
and Control of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of Mitchell
Hutchins
Paul H. Schubert Vice President and Assistant First Vice President and a Senior Manger of the
Treasurer Mutual Fund Finance Division of Mitchell Hutchins
Julian F. Sluyters Vice President and Treasurer Senior Vice President and Director of the Mutual
Fund Finance Division of Mitchell Hutchins
Stuart Waugh Vice President Managing Director and Portfolio Manager of
Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
</TABLE>
C) None
C-7
<PAGE>
Item 30. Location of Accounts and Records
The books and other documents required by paragraphs b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's Portfolio Manager, Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's transfer agent and custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 26th day of February, 1997.
PAINEWEBBER INVESTMENT SERIES
By: /s/ Dianne E. O'Donnell
--------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee February 26, 1997
- ----------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman February 26, 1997
- ----------------------------- of the Board of Trustees
E. Garrett Bewkes,Jr. *
/s/ Richard Q. Armstrong Trustee February 26, 1997
- -----------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee February 26, 1997
- -----------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee February 26, 1997
- -----------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee February 26, 1997
- -----------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee February 26, 1997
- -----------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee February 26, 1997
- -----------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee February 26, 1997
- -----------------------------
Carl W. Schafer *
/s/ John R. Torell III Trustee February 26, 1997
- -----------------------------
John R. Torell III *
/s/ Julian F. Sluyters Vice President and Treasurer February 26, 1997
- ----------------------------- (Chief Financial and Accounting
Julian F. Sluyters Officer)
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to power of attorney dated
May 21, 1996 and incorporated by reference from Post-Effective Amendment
No. 30 to the registration statement of PaineWebber Managed Municipal
Trust, SEC File No. 2-89016, filed June 27, 1996.
<PAGE>
PAINEWEBBER INVESTMENT SERIES
EXHIBIT INDEX
Exhibit
Number
(1) (a) Declaration of Trust 1/
(b) Amendment effective January 28, 1988 to Declaration of Trust
4/
(c) Amendment effective March 15, 1989 to Declaration of Trust 5/
(d) Amendment effective November 27, 1989 to Declaration of Trust
6/
(e) Amendment effective October 15, 1990 to Declaration of Trust
7/
(f) Amendment effective October 24, 1990 to Declaration of Trust
7/
(g) Amendment effective April 25, 1991 to Declaration of Trust 10/
(h) Amendment effective May 1, 1991 to Declaration of Trust 10/
(i) Amendment effective July 1, 1991 to Declaration of Trust 10/
(j) Amendment effective September 24, 1991 to Declaration of Trust
12/
(k) Amendment effective October 30, 1991 to Declaration of Trust
13/
(l) Amendment effective November 18, 1991 to Declaration of Trust
13/
(m) Amendment effective June 30, 1992 to Declaration of Trust 17/
(n) Amendment effective July 30, 1993 to Declaration of Trust 19/
(o) Amendment effective November 17, 1993 to Declaration of Trust
19/
(p) Amendments effective November 10 and November 29, 1995 to
Declaration of Trust 22/
(2) (a) By-Laws 1/
(b) Amendment dated March 19, 1991 to By-Laws 9/
(c) Amendment dated Sept. 28, 1994 to By-Laws 20/
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 21/
(5) (a) Investment Advisory and Administration Contract 4/
(6) (a) Distribution Contract with respect to Class A shares 19/
(b) Distribution Contract with respect to Class B shares 19/
(c) Distribution Contract with respect to Class C shares 22/
(d) Distribution Contract with respect to Class Y shares 22/
(e) Exclusive Dealer Agreement with respect to Class A shares 19/
(f) Exclusive Dealer Agreement with respect to Class B shares 19/
(g) Exclusive Dealer Agreement with respect to Class C shares 22/
(h) Exclusive Dealer Agreement with respect to Class Y shares 22/
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement with respect to PaineWebber Global Income Fund 3/
(9) (a) Transfer Agency Agreement 7/
(b) Service Contract 5/
(10) (a) Opinion and consent of counsel regarding Class A, B, and Y
shares 9/
(b) Opinion and consent of Counsel regarding Class C shares 16/
(11) Other opinions, appraisals, rulings and consents:
Accountants' Consent (filed herewith)
(12) Financial statements omitted from Part B - none
(13) Letter of investment intent 2/
(14) Prototype Retirement Plan 14/
(15) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A shares 13/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B shares 13/
<PAGE>
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C shares 17/
(16) (a) Schedules for Computation of Total Return Quotations for Class
B shares 8/
(b) Schedules for Computation of Total Return Quotations for Class
A and Class Y shares 15/
(c) Schedules for Computation of Yield Quotations for Class A,
Class B and Class Y shares 15/
(d) Schedules for Computation of Total Return Quotations for Class
C shares 18/
(e) Schedule for Computation of Yield Quotations for Class C
shares 18/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 23/
- ----------
1/ Incorporated by reference from Registration Statement on Form N-1A,
File No. 33-11025, filed December 22, 1986.
2/ Incorporated by reference from Pre-Effective Amendment No. 2, File No.
33-11025, filed March 20, 1987.
3/ Incorporated by reference from Post-Effective Amendment No. 1, File No.
33-11025, filed July 20, 1987.
4/ Incorporated by reference from Post-Effective Amendment No. 3, File No.
33-11025, filed April 29, 1988.
5/ Incorporated by reference from Post-Effective Amendment No. 6, File No.
33-11025, filed November 30, 1989.
6/ Incorporated by reference from Post-Effective Amendment No. 8, File No.
33-11025, filed February 28, 1990.
7/ Incorporated by reference from Post-Effective Amendment No. 11, File
No. 33-11025, filed October 24, 1990.
8/ Incorporated by reference from Post-Effective Amendment No. 13, File
No. 33-11025, filed March 1, 1991.
9/ Incorporated by reference from Post-Effective Amendment No. 15, File
No. 33-11025, filed May 2, 1991.
10/ Incorporated by reference from Post-Effective Amendment No. 16, File
No. 33-11025, filed July 31, 1991.
11/ Incorporated by reference from Post-Effective Amendment No. 17, File
No. 33-11025, filed August 26, 1991.
12/ Incorporated by reference from Post-Effective Amendment No. 18, File
No. 33-11025, filed September 24, 1991.
13/ Incorporated by reference from Post-Effective Amendment No. 19, File
No. 33-11025, filed February 14, 1992.
14/ Incorporated by reference from Post-Effective Amendment No. 20 to the
registration statement of PaineWebber Managed Investments Trust, SEC
File No. 2-91362, filed April 1, 1992.
15/ Incorporated by reference from Post-Effective Amendment No. 20, File
No. 33-11025, filed February 28, 1992
<PAGE>
16/ Incorporated by reference from Post-Effective Amendment No. 21, File
No. 33-11025, filed April 30, 1992.
17/ Incorporated by reference from Post-Effective Amendment No. 23, File
No. 33-11025, filed December 31, 1992.
18/ Incorporated by reference from Post-Effective Amendment No. 24, File
No. 33-11025, filed March 1, 1993.
19/ Incorporated by reference from Post-Effective Amendment No.25, filed
March 1, 1994.
20/ Incorporated by reference from Post-Effective Amendment No. 27, File
No. 33-11025, filed December 30, 1994.
21/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Declaration of Trust, as amended effective January 28,
1988, March 15, 1989, November 27, 1989, October 15, 1990, October 24,
1990, April 21, 1991, May 1, 1991, July 1, 1991, September 24, 1991,
October 30, 1991, November 18, 1991, June 30, 1992, November 17, 1993
and November 10 and 29, 1995, and from Articles II, VII and X of
Registrant's By-Laws, as amended March 19, 1991 and September 28, 1994.
22/ Incorporated by reference from Post-Effective Amendment No.31, File No.
33-11025, filed February 26, 1996.
23/ Incorporated by reference from Post-Effective Amendment No. 33, File
No. 33-11025, filed August 29, 1996.
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A (the Registration
Statement) of our report dated December 23, 1996, relating to the financial
statements and financial highlights appearing in the October 31, 1996 Annual
Report to Shareholders of PaineWebber Global Income Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the reference to us under the headings Financial Highlights in the Prospectuses
and Independent Accountants in the Statements of Additional Information.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 27, 1997
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