PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above are series of professionally managed
open-end management investment companies (each a "Trust"). PaineWebber Global
Equity Fund is a diversified series of PaineWebber Investment Trust ("Investment
Trust"). PaineWebber Global Income Fund is a non-diversified series of
PaineWebber Investment Series ("Investment Series"). PaineWebber Asia Pacific
Growth Fund is a diversified series of PaineWebber Managed Investments Trust
("Managed Trust"). PaineWebber Emerging Markets Equity Fund is a diversified
series of PaineWebber Investment Trust II ("Investment Trust II").
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares. Invista Capital Management,
LLC ("Invista") serves as sub-adviser for the foreign investments of Global
Equity Fund. Schroder Investment Management North America Inc. ("SIMNA") serves
as sub-adviser for Asia Pacific Growth Fund and Emerging Markets Equity Fund.
Portions of each fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Reports accompany this SAI. You may obtain an additional copy of a fund's Annual
Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the funds' current Prospectus, dated March 1, 2000. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
March 1, 2000.
TABLE OF CONTENTS
PAGE
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The Funds and Their Investment Policies................................ 2
The Funds' Investments, Related Risks and Limitations.................. 6
Strategies Using Derivative Instruments................................ 27
Organization; Trustees and Officers; Principal Holders and Management
Ownership of Securities.............................................. 36
Investment Advisory, Administration and Distribution Arrangements...... 44
Portfolio Transactions................................................. 53
Reduced Sales Charges, Additional Exchange and Redemption Information
and Other Services................................................... 55
Conversion of Class B Shares........................................... 61
Valuation of Shares.................................................... 61
Performance Information................................................ 62
Taxes.................................................................. 66
Other Information...................................................... 70
Financial Statements................................................... 72
Appendix............................................................... A-1
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THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
PAINEWEBBER GLOBAL EQUITY FUND'S investment objective is long-term
growth of capital. The fund invests primarily in equity securities issued by
companies in developed foreign countries, as well as in the United States. Under
normal circumstances, the fund invests at least 80% of its total assets in
securities of issuers in the United States and countries represented in the
Morgan Stanley Capital International ("MSCI") Europe, Australia and Far East
Index ("EAFE Index"). The EAFE Index is a well known index that reflects most
major equity markets outside the United States. The fund may invest up to 20% of
its total assets in securities of issuers located in other countries (for
example, Canada and emerging markets).
Global Equity Fund normally invests in at least three countries, one of
which is typically the United States. The fund considers an issuer to be located
in the country in which the issuer (a) is organized, (b) derives at least 50% of
its revenues or profits from goods produced or sold, investments made or
services performed, (c) has at least 50% of its assets situated or (d) has the
principal trading market for its securities. The fund normally invests at least
65% of its total assets in equity securities of foreign and U.S. companies. As
part of the U.S. portion of its portfolio, the fund may invest up to 10% of its
total assets in U.S. dollar-denominated equity securities or bonds of foreign
issuers that are traded on recognized U.S. exchanges or in the U.S.
over-the-counter market.
When Mitchell Hutchins or Invista believes it is consistent with Global
Equity Fund's investment objective, the fund may invest up to 35% of its total
assets in investment grade bonds that are issued by corporate or governmental
entities and that have maturities no longer than seven years. The fund may
invest up to 10% of its net assets in convertible securities rated below
investment grade. When Mitchell Hutchins or Invista considers market, economic,
political or currency conditions abroad to be unstable, the fund may assume a
temporary defensive position by investing all or a significant portion of its
assets in securities of U.S. and Canadian issuers or by holding cash or
short-term money market instruments. The fund may invest up to 35% of its total
assets in cash or investment grade money market instruments for liquidity
purposes, pending investment in other securities or to reinvest cash collateral
from securities lending.
Mitchell Hutchins reevaluates the allocation of the fund's assets
between U.S. and foreign securities monthly and does not expect to reallocate
the fund's assets to reflect relatively minor changes (that is, less than 5%) in
the asset allocation model employed. When Mitchell Hutchins determines that a
reallocation of the fund's assets is appropriate, the fund may effect the
reallocation by using cash available from the purchase of fund shares or by
selectively selling securities in a region to meet share redemption requests in
addition to buying or selling portfolio securities specifically to implement a
reallocation. The fund also may use futures contracts and forward currency
contracts to adjust its exposure to U.S. and foreign stock markets. Mitchell
Hutchins determines the extent to which the fund uses futures contracts and
forward currency contracts for this purpose and is responsible for implementing
these transactions.
Mitchell Hutchins uses its proprietary Factor Valuation Model to
identify possible U.S. investments for the fund. While Mitchell Hutchins tends
to favor stocks that rank high in all categories considered by the Factor
Valuation Model, the fund may invest in companies that rank high in only a few
categories. Mitchell Hutchins or Invista may sell a portfolio security for a
number of reasons, such as the company's reporting lower earnings than expected,
the company's stock price reaching the target price set by research analysts or
a decline in the company's ranking by the Factor Valuation Model.
Global Equity Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis, but these securities may not exceed 10% of its net assets. The
fund may lend its portfolio securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3% of its total assets. The fund
may borrow money from banks or through reverse repurchase agreements for
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temporary or emergency purposes but not in excess of 20% of its total assets.
The fund may invest in the securities of other investment companies and may sell
short "against the box."
PAINEWEBBER GLOBAL INCOME FUND'S primary investment objective is high
current income consistent with prudent investment risk; capital appreciation is
a secondary objective. The fund invests principally in high-quality bonds issued
or guaranteed by foreign governments, the U.S. government, their respective
agencies or instrumentalities or supranational organizations or issued by U.S.
or foreign companies.
Global Income Fund's portfolio consists primarily of bonds rated within
one of the two highest grades assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's")
or another nationally or internationally recognized statistical rating
organization ("rating agency") or, if unrated, determined by Mitchell Hutchins
to be of comparable quality. Normally, at least 65% of the fund's total assets
consists of high-quality bonds (and receivables from the sale of such bonds)
denominated in foreign currencies or U.S. dollars of issuers located in at least
three of the following countries: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong SAR, Ireland, Italy, Japan, the Netherlands,
New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United
Kingdom and the United States. No more than 40% of the fund's total assets is
normally invested in securities of issuers located in any one country other than
the United States. At least 65% of the fund's total assets normally is invested
in income-producing securities, a term that may include zero coupon securities
and other bonds sold with a discount. Up to 5% of the fund's total assets may be
invested in bonds convertible to equity securities.
Global Income Fund may invest up to 35% of its total assets in bonds
rated below the two highest grades assigned by a rating agency. Except as noted
below, these securities must be investment grade (that is, rated at least BBB by
S&P, Baa by Moody's or comparably rated by another rating agency or, if unrated,
determined by Mitchell Hutchins to be of comparable quality). Within this 35%
limitation, the fund may invest up to 20% of its total assets in bonds that are
below investment grade. These bonds may be rated as low as D by S&P, C by
Moody's or comparably rated by another rating agency or, in the case of bonds
assigned a short-term debt rating, as low as D by S&P or comparably rated by
another rating agency or, if not so rated, determined by Mitchell Hutchins to be
of comparable quality. Bonds rated D by S&P are in payment default or the rating
is assigned upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. Bonds rated C by Moody's
are in the lowest rated class and can be regarded as having extremely poor
prospects of attaining any real investment standing. Mitchell Hutchins will
purchase these securities for the fund only when it concludes that the
anticipated return to the fund on the investment warrants exposure to the
additional level of risk. Lower-rated bonds are often issued by businesses and
governments in emerging markets. Because the fund may also invest in emerging
market bonds that are investment grade, the fund's total investment in emerging
market bonds may exceed 20% of its total assets.
If, due to a downgrade of one or more bonds, an amount in excess of 20%
of Global Income Fund's total assets is held in securities rated below
investment grade and comparable unrated securities, Mitchell Hutchins will
engage in an orderly disposition of such securities to the extent necessary to
ensure that the fund's holdings of these securities do not exceed 20% of its
total assets.
Global Income Fund may invest up to 35% of its total assets in
mortgage-backed securities of U.S. or foreign issuers that are rated in one of
the two highest rating categories by S&P, Moody's or another rating agency or,
if unrated, determined by Mitchell Hutchins to be of comparable quality. Up to
20% of the fund's total assets may be invested in bonds that are not paying
current income. The fund may purchase these bonds if Mitchell Hutchins believes
that they have a potential for capital appreciation. The fund also may invest in
secured and unsecured fixed or floating rate loans in the form of participations
and assignments.
Global Income Fund may invest up to 35% of its total assets in cash or
investment grade money market instruments as part of its ordinary investment
activities. The fund's investment of cash collateral from securities lending in
these money market instruments is not subject to this 35% limitation, and there
is no limitation on the fund's investments in short-term bonds denominated in
foreign currencies.
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Global Income Fund may invest up to 10% of its net assets in illiquid
securities. The fund may purchase securities on a when-issued or delayed
delivery basis. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 10% of its
total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
PAINEWEBBER ASIA PACIFIC GROWTH FUND'S investment objective is
long-term capital appreciation. The fund seeks to achieve its objective by
investing primarily in equity securities of companies in the Asia Pacific
Region, except Japan. The fund considers the "Asia Pacific Region" to be the
region located south of the former Soviet Union, east of Afghanistan and Iran
and west of the International Date Line, but excluding Japan. The Asia Pacific
Region countries that currently have established securities markets and that
SIMNA normally considers for investments by the fund include Australia, China,
Hong Kong SAR, India, Indonesia, Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand. The fund
may also invest in other Asia Pacific Region countries whose markets become
sufficiently established. Except under unusual conditions, the fund invests in a
minimum of three, and generally in more, Asia Pacific Region countries. The fund
invests across a broad spectrum of industries, including trade, finance, real
estate, transportation, communications, energy, construction, manufacturing,
services, food processing and others. The mix of industries and countries
changes over time as investment opportunities change.
Asia Pacific Growth Fund defines Asia Pacific Region companies as
companies:
o that are organized under the laws of countries in the Asia Pacific
Region that now or in the future permit foreign investors to
participate in their stock markets,
o that regardless of where organized, and as determined by SIMNA,
either (1) derive at least 50% of their revenues from goods produced
or sold, investments made or services performed in Asia Pacific
Region countries or (2) maintain at least 50% of their assets in
Asia Pacific Region countries, or
o for which the principal trading market is an exchange or
over-the-counter market in the Asia Pacific Region.
Each year, SIMNA and its affiliates (a large worldwide group of asset
management companies under common ownership with SIMNA) research and conduct
on-site visits with approximately 1,200 companies in Asia Pacific Region
countries. Of those companies, SIMNA and its affiliates further develop
extensive management contacts with, and produce independent forecasts of
earnings estimates for, approximately 550 companies. SIMNA's analysis involves
researching companies across the full capitalization spectrum.
Asia Pacific Growth Fund's investments have included securities issued
by Malaysian companies, and the fund may invest in Malaysian companies in the
future. As of the date of this SAI, restrictions imposed by the Malaysian
government may impose an exit levy on capital gains.
Under normal market conditions, Asia Pacific Growth Fund invests at
least 65% of its total assets in equity securities of Asia Pacific Region
companies. Most of the equity securities purchased by the fund are expected to
be traded on a foreign stock exchange or in a foreign over-the-counter market.
When SIMNA believes it is consistent with the fund's investment objective, the
fund may invest up to 10% of its total assets in convertible and non-convertible
bonds (which may be below investment grade) that are issued or guaranteed by
Asia Pacific Region issuers, including obligations of sovereign governmental
issuers.
Asia Pacific Growth Fund may invest up to 35% of its total assets in
cash or investment grade money market instruments for liquidity purposes,
pending investment in other securities or to reinvest cash collateral from
securities lending. Asia Pacific Growth Fund may invest up to 15% of its net
assets in illiquid securities. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. The fund may borrow money from banks or through reverse
repurchase agreements for temporary or emergency purposes but not in excess of
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33 1/3% of its total assets. The fund may invest in the securities of other
investment companies and may sell short "against the box."
PAINEWEBBER EMERGING MARKETS EQUITY FUND'S investment objective is
long-term capital appreciation. The fund invests in a diversified portfolio
consisting primarily of equity securities of issuers in emerging markets.
"Emerging markets" are considered by SIMNA to be the markets in all the
countries not included in the Morgan Stanley Capital International ("MSCI")
World Index, an index of major world economies. SIMNA may at times determine,
based on its own analysis, that an economy included in the MSCI World Index
should nonetheless be considered an emerging market country, in which case that
country would constitute an emerging market country for purposes of the fund's
investments. Under normal market conditions, the fund invests at least 65% of
its total assets in equity securities of issuers located in emerging market
countries and maintains investments in at least three emerging market countries.
The fund considers issuers to be located in an emerging market country if
o the principal securities trading market for the issuer is in an
emerging market country,
o 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
o the issuer is organized under the laws of an emerging market
country.
Generally, SIMNA will invest no more than 35% of Emerging Markets
Equity Fund's total assets in any single country. The fund also does not invest
25% or more of its total assets in any single industry. The fund diversifies its
investments within each emerging market by investing in a number of local
companies that SIMNA believes are characterized by attractive valuation relative
to expected growth. SIMNA attempts to spread the fund's investments over
geographic as well as economic sectors.
There are currently over 60 newly industrializing and developing
countries with equity markets. A number of these emerging markets are not yet
easily accessible to foreign investors and have unattractive tax barriers or
insufficient liquidity to make significant investments by the fund feasible or
attractive. However, many of the largest of the emerging market countries have
liberalized access in recent years, and more are expected to do so in the
future.
Emerging Markets Equity Fund's investments have included securities
issued by Malaysian companies, and the fund may invest in Malaysian companies in
the future. As of the date of this SAI, restrictions imposed by the Malaysian
government may impose an exit levy on capital gains.
SIMNA believes that one of its key strengths is the worldwide network
of local research offices, many long established, in emerging market countries,
that is maintained by SIMNA and its affiliates. Each year, these companies
research and conduct on-site visits with approximately 1,400 companies in
emerging market countries. Of those companies, SIMNA and its affiliates further
develop extensive management contacts with, and produce independent forecasts of
earnings estimates for, approximately 800 companies.
SIMNA's analysis involves researching companies across the full capitalization
spectrum.
Emerging Markets Equity Fund may invest up to 35% of its total assets
in cash or investment grade money market instruments for liquidity purposes,
pending investment in other securities or to reinvest cash collateral from
securities lending. The fund may invest up to 15% of its net assets in illiquid
securities. The fund may lend its portfolio securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of its
total assets. The fund may borrow money from banks or through reverse repurchase
agreements for temporary or emergency purposes but not in excess of 33 1/3% of
its total assets. The fund may invest in the securities of other investment
companies and may sell short "against the box."
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THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the SAI, the funds have
established no policy limitations on their ability to use the investments or
techniques discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depositary receipts. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds 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. Some preferred stock also may be converted into or
exchanged for common stock. Depositary receipts typically are issued by banks or
trust companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment. While this is possible with
bonds, it is less likely.
BONDS. Bonds are fixed or variable rate debt obligations, including
bills, notes, debentures, money market instruments, and similar instruments and
securities. Mortgage- and asset-backed securities are types of bonds, and
certain types of income-producing, non-convertible preferred stocks may be
treated as bonds for investment purposes. Bonds generally are used by
corporations and governments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and normally must repay the amount
borrowed on or before maturity. Many preferred stocks and some bonds are
"perpetual" in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and that, as a result, bond
prices will fall, lowering the value of a fund's investments in bonds. In
general, bonds having longer durations are more sensitive to interest rate
changes than are bonds with shorter durations. Credit risk is the risk that an
issuer may be unable or unwilling to pay interest and/or principal on the bond.
Credit risk can be affected by many factors, including adverse changes in the
issuer's own financial condition or in economic conditions.
CREDIT RATINGS; NON-INVESTMENT GRADE BONDS. Moody's, S&P and other
rating agencies are private services that provide ratings of the credit quality
of debt obligations and certain other securities. A description of the ratings
assigned to corporate bonds by Moody's and S&P is included in the Appendix to
this SAI. The process by which Moody's and S&P determine ratings for
mortgage-backed securities includes consideration of the likelihood of the
receipt by security holders of all distributions, the nature of the underlying
assets, the credit quality of the guarantor, if any, and the structural, legal
and tax aspects associated with these securities. Not even the highest such
rating represents an assessment of the likelihood that principal prepayments
will be made by obligors on the underlying assets or the degree to which such
prepayments may differ from that originally anticipated, nor do such ratings
address the possibility that investors may suffer a lower than anticipated yield
or that investors in such securities may fail to recoup fully their initial
investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and interest
payments, but they do not evaluate the volatility of a debt security's value or
its liquidity and do not guarantee the performance of the issuer. Rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies may
downgrade the rating of a bond. The funds may use these ratings in determining
whether to purchase, sell or hold a security. It should be emphasized, however,
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that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or a sub-adviser will analyze interest rate trends and developments
that may affect individual issuers, including factors such as liquidity,
profitability and asset quality. The yields on bonds are dependent on a variety
of factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of bonds, both within a particular classification and between
classifications. An issuer's obligations under its bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's or S&P, comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins or a sub-adviser to be of comparable
quality. Moody's considers bonds rated Baa (its lowest investment grade rating)
to have speculative characteristics. This means that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher rated bonds.
Non-investment grade bonds (commonly known as "junk bonds" and
sometimes referred to as "high yield" bonds) are rated Ba or lower by Moody's,
BB or lower by S&P, comparably rated by another rating agency or, if unrated,
determined by Mitchell Hutchins or a sub-adviser to be of comparable quality. A
fund's investments in non-investment grade bonds entail greater risk than its
investments in higher rated bonds. Non-investment grade bonds are considered
predominantly speculative with respect to the issuer's ability to pay interest
and repay principal and may involve significant risk exposure to adverse
conditions. Non-investment grade bonds generally offer a higher current yield
than that available for investment grade issues; however, they involve greater
risks, in that they are especially sensitive to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuations in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of interest and
principal and increase the possibility of default. In addition, such issuers may
not have more traditional methods of financing available to them and may be
unable to repay debt at maturity by refinancing. The risk of loss due to default
by such issuers is significantly greater because such securities frequently are
unsecured by collateral and will not receive payment until more senior claims
are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, has expanded rapidly in recent years, which has been a period of
generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent years
by volatility in emerging market securities, particularly in Asia. In the past,
many lower rated bonds experienced substantial price declines reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated bonds rose dramatically.
However, such higher yields did not reflect the value of the income stream that
holders of such securities expected, but rather the risk that holders of such
securities could lose a substantial portion of their value as a result of the
issuers' financial restructurings or defaults. There can be no assurance that
such declines will not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit a fund's ability
to sell such securities at fair value in response to changes in the economy or
financial markets. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may also decrease the values and liquidity of
non-investment grade securities, especially in a thinly traded market.
INVESTING IN FOREIGN SECURITIES. Investing in foreign securities may
involve more risks than investing in U.S. securities. The value of foreign
securities is subject to economic and political developments in the countries
where the issuers operate and to changes in foreign currency values. Investments
in foreign securities involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between the
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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. In those European countries that have begun using the Euro as a common
currency unit, individual national economies may be adversely affected by the
inability of national governments to use monetary policy to address their own
economic or political concerns.
Securities of many foreign companies may be less liquid and their
prices more volatile than securities of comparable U.S. companies. From time to
time foreign securities may be difficult to liquidate rapidly without
significantly depressing the price of such securities. Foreign markets have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when some of a fund's
assets are uninvested and no return is earned thereon. The inability of a fund
to make intended security purchases due to settlement problems could cause the
fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the fund due to subsequent declines in the value of such portfolio security or,
if the fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. 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.
The costs of investing outside the United States frequently are higher
than those attributable to investing in the United States. This is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing frequently
are higher than those attributable to domestic investing. Costs associated with
the exchange of currencies also make foreign investing more expensive than
domestic investing.
Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the funds than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
The funds may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each fund's investment policies, depositary receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depositary receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
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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.
Although each fund will endeavor to achieve the best net results in effecting
its portfolio transactions, transactions on foreign exchanges are usually
subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions. There is generally less government supervision
and regulation of exchanges and brokers in foreign countries than in the United
States.
Investment income on certain foreign securities in which the funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the funds would be subject. In addition, substantial limitations may
exist in certain countries with respect to the funds' ability to repatriate
investment capital or the proceeds of sales of securities.
FOREIGN SOVEREIGN DEBT. Sovereign debt includes bonds that are issued
by foreign governments or their agencies, instrumentalities or political
subdivisions or by foreign central banks. Sovereign debt also may be issued by
quasi-governmental entities that are owned by foreign governments but are not
backed by their full faith and credit or general taxing powers. Investment in
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 sovereign debt
holdings.
BRADY BONDS -- Brady Bonds are sovereign bonds issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the International Monetary Fund ("IMF"). The Brady Plan framework, as it
has developed, contemplates the exchange of commercial bank debt for newly
issued Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and the IMF support the restructuring by providing funds pursuant to
loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
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Brady Bonds have been issued only in recent years, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, a fund will
purchase Brady Bonds in which the price and yield to the investor reflect market
conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent until the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. Interest payments on Brady Bonds may be wholly uncollateralized
or may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments, with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components:
(1) the collateralized repayment of principal, if any, at final maturity, (2)
the collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A fund may purchase Brady Bonds with no or limited
collateralization and will be relying for payment of interest and (except in the
case of principal collateralized Brady Bonds) repayment of principal primarily
on the willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds.
STRUCTURED FOREIGN INVESTMENTS. This term generally refers to interests
in U.S. and foreign entities organized and operated solely for the purpose of
securitizing or restructuring the investment characteristics of foreign
securities. This type of securitization or restructuring usually involves the
deposit with or purchase by a U.S. or foreign entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities backed by,
or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
foreign investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
foreign investments is often dependent on the extent of the cash flow on the
underlying instruments.
Structured foreign investments frequently involve no credit
enhancement. Accordingly, their credit risk generally will be equivalent to that
of the underlying instruments. In addition, classes of structured foreign
investments may be subordinated to the right of payment of another class.
Subordinated structured foreign investments typically have higher yields and
present greater risks that unsubordinated structured foreign investments.
Structured foreign investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
foreign investments.
SPECIAL CONSIDERATIONS RELATING TO EMERGING MARKET INVESTMENTS. The
special risks of investing in foreign securities are heightened in emerging
markets. For example, many of the currencies of Asia Pacific Region countries
have experienced significant devaluations relative to the U.S. dollar in recent
years, and major adjustments have been made periodically in various emerging
market currencies. Emerging market countries typically have economic and
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political systems that are less fully developed and can be expected to be less
stable than those of developed countries. Emerging market countries may have
policies that restrict investment by foreigners, and there is a higher risk of
government expropriation or nationalization of private property. The possibility
of low or nonexistent trading volume in the securities of companies in emerging
markets also may result in a lack of liquidity and in price volatility. Issuers
in emerging markets typically are subject to a greater degree of change in
earnings and business prospects than are companies in more developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
If, because of restrictions on repatriation or conversion, a fund were
unable to distribute substantially all of its net investment income and capital
gains within applicable time periods, the fund could be subject to federal
income and excise taxes that would not otherwise be incurred and could cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Internal Revenue Code. If it did cease to qualify for that
treatment, it would become subject to federal income tax on all of its income
and net gains. See "Taxes -- Qualification as a Regulated Investment Company,"
below.
DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS.
Most of the securities markets of emerging market countries have substantially
less volume than the New York Stock Exchange, and equity securities of most
companies in emerging market countries are less liquid and more volatile than
equity securities of U.S. companies of comparable size. Some of the stock
exchanges in emerging market countries are in the earliest stages of their
development. As a result, security settlements may in some instances be subject
to delays and related administrative uncertainties. Many companies traded on
securities markets in emerging market countries are smaller, newer and less
seasoned than companies whose securities are traded on securities markets in the
United States. Investments in smaller companies involve greater risk than is
customarily associated with investing in larger companies. Smaller companies may
have limited product lines, markets or financial or managerial resources and may
be more susceptible to losses and risks of bankruptcy. Additionally,
market-making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of
such markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that an emerging market country experiences rapid
increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in that country may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.
GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to a fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to a fund than to local market
participants. Brokers in other countries may not be as well capitalized as those
in the United States, so that they are more susceptible to financial failure in
times of market, political or economic stress. In addition, existing laws and
regulations are often inconsistently applied. As legal systems in some of the
emerging market countries develop, foreign investors may be adversely affected
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by new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
FINANCIAL INFORMATION AND LEGAL STANDARDS. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries
may be subject to a greater degree of social, political and economic instability
than is the case in the United States. Any change in the leadership or policies
of these countries may halt the expansion of foreign investment or reverse any
liberalization of foreign investment policies now occurring. Such instability
may result from, among other things, the following: (1) authoritarian
governments or military involvement in political and economic decision making,
and changes in government through extra-constitutional means; (2) popular unrest
associated with demands for improved political, economic and social conditions;
(3) internal insurgencies; (4) hostile relations with neighboring countries; and
(5) ethnic, religious and racial disaffection. Such social, political and
economic instability could significantly disrupt the financial markets in those
countries and elsewhere and could adversely affect the value of a fund's assets.
In addition, there could be asset expropriations or confiscatory levels of
taxation that could affect a fund.
The economies of many emerging markets are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these countries. In addition, the economies of
some countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international price of such
commodities.
Emerging markets include formerly communist countries of Eastern
Europe, Russia and the other countries that once formed the Soviet Union, and
China. Upon the accession to power of communist regimes approximately 50 to 80
years ago, the governments of a number of these countries seized a large amount
of property. The claims of many property owners against those governments were
never finally settled. There can be no guarantee that a fund's investments in
these countries, if any, would not also be seized or otherwise taken away, in
which case the fund could lose its entire investment in the country involved.
Few of the Asia Pacific Region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military coups, while others have periodically demonstrated repressive
police state characteristics. In several Asia Pacific Region countries, the
leadership ability of the government has suffered as a result of corruption
scandals. Disparities of wealth, among other factors, have also led to social
unrest in some of the Asia Pacific Region countries, accompanied, in certain
cases, by violence and labor unrest. Ethnic, religious and racial disaffection
have created social, economic and political problems. Such problems also have
occurred in other emerging markets throughout the world. As in some other
regions, several Asia Pacific Region countries have or in the past have had
hostile relationships with neighboring nations or have experienced internal
insurgency.
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The funds may invest in Hong Kong, which reverted to Chinese
administration on July 1, 1997. Although China has committed by treaty to
preserve the economic and social freedoms enjoyed in Hong Kong for 50 years
after regaining control, business confidence and market and business performance
in Hong Kong could be significantly affected by adverse political developments.
A fund's investments in Hong Kong may be subject to the same or similar risks as
an investment in China.
CURRENCY-LINKED INVESTMENTS. The principal amount of securities that
are indexed to specific foreign currency exchange rates may be adjusted up or
down (but not below zero) at maturity to reflect changes in the exchange rate
between two currencies. A fund may experience loss of principal due to these
adjustments.
FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in
foreign exchange rates may reduce the U.S. dollar value of a fund's foreign
investments. If the value of a foreign currency rises against the value of the
U.S. dollar, the value of a fund's investments that are denominated in, or
linked to, that currency will increase. Conversely, if the value of a foreign
currency declines against the value of the U.S. dollar, the value of those fund
investments will decrease. These changes may have a significant impact on the
value of fund shares. In some instances, a fund may use derivative strategies to
hedge against changes in foreign currency value. (See "Strategies Using
Derivative Instruments," below.) However, opportunities to hedge against
currency risk may not exist in certain markets, particularly with respect to
emerging market currencies, and even when appropriate hedging opportunities are
available, a fund may choose not to hedge against currency risk.
Generally, currency exchange rates are determined by supply and demand
in the foreign exchange markets and the relative merits of investments in
different countries. In the case of those European countries that use the Euro
as a common currency unit, the relative merits of investments in the common
market in which they participate, rather than the merits of investments in the
individual country, will be a determinant of currency exchange rates. Currency
exchange rates also can be affected by the intervention of the U.S. and foreign
governments or central banks, the imposition of currency controls, speculation,
devaluation or other political or economic developments inside and outside the
United States.
Each fund values its assets daily in U.S. dollars and does not intend
to convert its holdings of foreign currencies to U.S. dollars on a daily basis.
From time to time a fund's foreign currencies may be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks. These accounts
bear interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, a fund could suffer a loss of some or all
of the amounts deposited. Each fund may convert foreign currency to U.S. dollars
from time to time.
The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a fund at one rate, while offering a lesser rate of exchange should
a fund desire immediately to resell that currency to the dealer. Each fund
conducts its currency exchange transactions either on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
entering into forward, futures or options contracts to purchase or sell foreign
currencies.
Starting in mid-1997, some Asia Pacific Region countries began to
experience currency devaluations that resulted in high interest rate levels and
sharp reductions in economic activity. Emerging markets outside the Asia Pacific
Region, such as Latin American countries or Russia and other former members of
the Soviet Union, also may be susceptible to diminished prospects for corporate
earnings growth and political, social or economic instability as a result of
currency crises or related events.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Among
other things, these limitations currently restrict a fund's aggregate
investments in other investment companies to no more than 10% of its total
assets. A fund's investments in certain private investment vehicles are not
subject to this restriction. The shares of other investment companies are
subject to the management fees and other expenses of those companies, and the
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purchase of shares of some investment companies requires the payment of sales
loads and (in the case of closed-end investment companies) sometimes 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 expenses with
respect to all its investments, including shares of other investment companies.
Each fund may invest in the shares of other investment companies when, in the
judgment of its investment adviser, the potential benefits of the investment
outweigh the payment of any management fees and expenses and, where applicable,
premium or sales load.
From time to time, investments in other investment companies may be the
most effective available means for a fund to invest a portion of its assets. In
some cases, investment in another investment company may be the most practical
way for a fund to invest in securities of issuers in certain countries. These
investments may include World Equity Benchmark SharesSM (commonly known as
"WEBS"), which are exchange-traded shares of series of an investment company
that are designed to replicate the composition and performance of publicly
traded issuers in particular foreign countries. A fund's investment in another
investment company is subject to the risks of that investment company's
underlying portfolio securities. Shares of exchange-traded investment companies
also can trade at substantial discounts below the value of the companies'
portfolio securities.
U.S. GOVERNMENT SECURITIES include direct obligations of the U.S.
Treasury (such as Treasury bills, notes or bonds) and obligations issued or
guaranteed as to principal and interest (but not as to market value) by the U.S.
government, its agencies or its instrumentalities. U.S. government securities
include mortgage-backed securities issued or guaranteed by government agencies
or government-sponsored enterprises. Other U.S. government securities may be
backed by the full faith and credit of the U.S. government or supported
primarily or solely by the creditworthiness of the government-related issuer or,
in the case of mortgage-backed securities, by pools of assets.
U.S. government securities also include separately traded principal and
interest components of securities issued or guaranteed by the U.S. Treasury,
which are traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS programs, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury.
Treasury inflation-protected securities ("TIPS") (also known as
"inflation-indexed securities") are Treasury bonds on which the principal value
is adjusted daily in accordance with changes in the Consumer Price Index.
Interest on TIPS is payable semi-annually on the adjusted principal value. The
principal value of TIPS would decline during periods of deflation, but the
principal amount payable at maturity would not be less than the original par
amount. If inflation is lower than expected while a fund holds TIPS, the fund
may earn less on the TIPS than it would on conventional Treasury bonds. Any
increase in the principal value of TIPS is taxable in the year the increase
occurs, even though holders do not receive cash representing the increase at
that time. See "Taxes -- Other Information," below.
ZERO COUPON AND OTHER OID SECURITIES. Zero coupon securities are
securities on which no periodic interest payments are made and are sold at a
deep discount from their face value. The buyer of these securities receives a
rate of return by the gradual appreciation of the security, which results from
the fact that it will be paid at face value on a specified maturity date. There
are many types of zero coupon securities. Some are issued in zero coupon form,
including Treasury bills, notes and bonds that have been stripped of (separated
from) their unmatured interest coupons (unmatured interest payments) and
receipts or certificates representing interests in such stripped debt
obligations and coupons. Others are created by brokerage firms that strip the
coupons from interest-paying bonds and sell the principal and the coupons
separately.
Other securities that are sold with original issue discount (I.E., the
difference between the issue price and the stated redemption price at maturity)
("OID") may provide for some interest to be paid prior to maturity. These OID
securities usually trade at a discount from their face value.
Zero coupon securities are generally more sensitive to changes in
interest rates than debt obligations of comparable maturities that make current
interest payments. This means that when interest rates fall, the value of zero
coupon securities rises more rapidly than securities paying interest on a
current basis. However, when interest rates rise, their value falls more
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dramatically. Other OID securities also are subject to greater fluctuations in
market value in response to changing interest rates than bonds of comparable
maturities that make current distributions of interest in cash.
Federal tax law requires that the holder of a zero coupon security or
other OID security include in gross income each year the OID that accrues on the
security for the year, even though the holder receives no interest payment on
the security during the year. Accordingly, to continue to qualify as a regulated
investment company and avoid imposition of federal income and excise taxes (see
"Taxes," below), a fund may be required to distribute as dividends amounts that
are greater than the total amount of cash it actually receives. These
distributions would have to be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. A fund would not
be able to purchase additional securities with cash used to make these
distributions, and its current income and the value of its shares may ultimately
be reduced as a result.
CONVERTIBLE SECURITIES. A convertible security is a bond, preferred
stock or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest or dividends until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (1) have higher yields
than common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock because
they have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a fund is called for redemption,
the fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct
or indirect interests in pools of underlying mortgage loans that are secured by
real property. U.S. government mortgage-backed securities are issued or
guaranteed as to the payment of principal and interest (but not as to market
value) by Ginnie Mae (also known as the Government National Mortgage
Association), Fannie Mae (also known as the Federal National Mortgage
Association), Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation) or other government sponsored enterprises. Other domestic
mortgage-backed securities are sponsored or issued by private entities,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose entities (collectively, "Private Mortgage Lenders"). Payments of
principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement. Foreign mortgage-backed
securities may be issued by mortgage banks and other private or governmental
entities outside the United States and are supported by interests in foreign
real estate.
Mortgage-backed securities may be composed of one or more classes and
may be structured either as pass-through securities or collateralized debt
obligations. Multiple-class mortgage-backed securities are referred to herein as
"CMOs." Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk and evaluating them requires special knowledge.
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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.
Mortgage-backed securities also may decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the fund purchased
the security. Prepayments at a slower rate than expected may lengthen the
effective life and reduce the value of a mortgage-backed security.
CMO classes may be specially structured in a manner that provides any
of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are
structured in a manner that makes them extremely sensitive to changes in
prepayment rates. Interest only ("IO") and principal only ("PO") classes are
examples of this. IOs are entitled to receive all or a portion of the interest,
but none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO experience
greater than anticipated principal prepayments, then the total amount of
interest payments allocable to the IO class, and therefore the yield to
investors, generally will be reduced. In some instances, an investor in an IO
may fail to recoup all of his or her initial investment, even if the security is
government issued or guaranteed or is rated AAA or the equivalent. Conversely,
PO classes are entitled to receive all or a portion of the principal payments,
but none of the interest, from the underlying mortgage assets. PO classes are
purchased at substantial discounts from par, and the yield to investors will be
reduced if principal payments are slower than expected. Some IOs and POs, as
well as other CMO classes, are structured to have special protections against
the effects of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayment rates and thus will not
protect investors in all circumstances. Inverse floating rate CMO classes also
may be extremely volatile. These classes pay interest at a rate that decreases
when a specified index of market rates increases and vice versa.
The market for privately issued mortgage-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Foreign mortgage-backed securities markets are substantially smaller than U.S.
markets but have been established in several countries, including Germany,
Denmark, Sweden, Canada and Australia, and may be developed elsewhere. Foreign
mortgage-backed securities generally are structured differently than domestic
mortgage-backed securities, but they normally present substantially similar
investment risks as well as the other risks normally associated with foreign
securities.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities in which a fund may invest, including IO and PO
classes of mortgage-backed securities, can be extremely volatile and these
securities may become illiquid. Mitchell Hutchins or a sub-adviser, as
applicable, seeks to manage the funds' investments in mortgage-backed securities
so that the volatility of the fund's portfolio, taken as a whole, is consistent
with the fund's investment objective. Management of portfolio duration is an
important part of this. However, computing the duration of mortgage-backed
securities is complex. See, "The Funds' Investments, Related Risks and
Limitations -- Duration." If a fund's investment adviser does not compute the
duration of mortgage-backed securities correctly, the value of its portfolio may
be either more or less sensitive to changes in market interest rates than
intended. In addition, if market interest rates or other factors that affect the
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volatility of securities held by the fund change in ways that Mitchell Hutchins
or a sub-adviser does not anticipate, a fund's ability to meet its investment
objective may be reduced.
More information concerning these mortgage-backed securities and the
related risks of investments therein is set forth below. New types of
mortgage-backed securities are developed and marketed from time to time and,
consistent with their investment limitations, the funds expect to invest in
those new types of mortgage-backed securities that Mitchell Hutchins or the
sub-advisers believe may assist the funds in achieving their investment
objectives. Similarly, the funds may invest in mortgage-backed securities issued
by new or existing governmental or private issuers other than those identified
herein. The funds also may invest in foreign mortgage-backed securities, which
may be structured differently than domestic mortgage-backed securities.
GINNIE MAE CERTIFICATES -- Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificateholders. Mortgage pools consist of
whole mortgage loans or participations in loans. The terms and characteristics
of the mortgage instruments are generally uniform within a pool but may vary
among pools. Lending institutions that originate mortgages for the pools are
subject to certain standards, including credit and other underwriting criteria
for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES -- Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional loans")
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES -- Freddie Mac also facilitates a national
secondary market for conventional residential and U.S. government-insured
mortgage loans through its mortgage purchase and mortgage-backed securities
sales activities. Freddie Mac issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Freddie Mac generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities issued
by Private Mortgage Lenders are structured similarly to CMOs issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed
securities may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by a
government agency or instrumentality, but they generally are supported by pools
of conventional (I.E., non-government guaranteed or insured) mortgage loans.
Since such mortgage-backed securities normally are not guaranteed by an entity
having the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they
normally are structured with one or more types of credit enhancement. See "The
Funds' Investments, Related Risks and Limitations -- Types of Credit
Enhancement." These credit enhancements do not protect investors from changes in
market value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS -- CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (collectively, "Mortgage Assets").
CMOs may be issued by Private Mortgage Lenders or by government entities such as
Fannie Mae or Freddie Mac. Multi-class mortgage pass-through securities are
interests in trusts that are comprised of Mortgage Assets and that have multiple
classes similar to those in CMOs. Unless the context indicates otherwise,
references herein to CMOs include multi-class mortgage pass-through securities.
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Payments of principal of, and interest on, the Mortgage Assets (and in the case
of CMOs, any reinvestment income thereon) provide the funds to pay debt services
on the CMOs or to make scheduled distributions on the multi-class mortgage
pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrued on all classes of a CMO (other
than any PO class) on a monthly, quarterly or semi-annual basis. The principal
and interest on the Mortgage Assets may be allocated among the several classes
of a CMO in many ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates so that no payment of principal will be made on any class of the CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. In some CMO structures, all or a portion of the interest
attributable to one or more of the CMO classes may be added to the principal
amounts attributable to such classes, rather than passed through to
certificateholders on a current basis, until other classes of the CMO are paid
in full.
Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of the
change in a specified interest rate index, so as to pay at a rate that will be
attractive in certain interest rate environments but not in others. For example,
an inverse floating rate CMO class pays interest at a rate that increases as a
specified interest rate index decreases but decreases as that index increases.
For other CMO classes, the yield may move in the same direction as market
interest rates-- I.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so more rapidly or to a greater degree. The market
value of such securities generally is more volatile than that of a fixed rate
obligation. Such interest rate formulas may be combined with other CMO
characteristics. For example, a CMO class may be an inverse IO class, on which
the holders are entitled to receive no payments of principal and are entitled to
receive interest at a rate that will vary inversely with a specified index or a
multiple thereof.
TYPES OF CREDIT ENHANCEMENT -- To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities may
contain elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) loss protection. Loss protection
relates to 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. Loss protection ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor, from third parties, through various
means of structuring the transaction or through a combination of such
approaches. A fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security. Examples of credit enhancement arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of "spread accounts" or "reserve funds" (where cash or
investments, sometimes funded from a portion of the payments on the underlying
assets, are held in reserve against future losses) and "over-collateralization"
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any
servicing or other fees). The degree of credit enhancement provided for each
issue generally is based on historical information regarding the level of credit
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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 traditional
bonds. Among the major differences are that interest and principal payments may
be made more frequently, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans generally may be prepaid at any
time. Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed-income securities from declining interest
rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a fund's yield.
ADJUSTABLE RATE MORTGAGE AND FLOATING RATE MORTGAGE-BACKED SECURITIES
- -- Adjustable rate mortgage ("ARM") securities (sometimes referred to as "ARMs")
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. Floating rate
mortgage-backed securities are classes of mortgage-backed securities that have
been structured to represent the right to receive interest payments at rates
that fluctuate in accordance with an index but that generally are supported by
pools comprised of fixed-rate mortgage loans. Because the interest rates on ARM
and floating rate mortgage-backed securities are reset in response to changes in
a specified market index, the values of such securities tend to be less
sensitive to interest rate fluctuations than the values of fixed-rate
securities. As a result, during periods of rising interest rates, ARMs generally
do not decrease in value as much as fixed rate securities. Conversely, during
periods of declining rates, ARMs generally do not increase in value as much as
fixed rate securities. ARMs represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARM loans.
These mortgage loans 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 ARM loans specify
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. These mortgage loans also may limit changes in
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the maximum amount by which the borrower's monthly payment may adjust for any
single adjustment period. In the event that a monthly payment is not sufficient
to pay the interest accruing on the ARM, any such excess interest is added to
the mortgage loan ("negative amortization"), which is repaid through future
payments. If the monthly payment exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment that would have been
necessary to amortize the outstanding principal balance over the remaining term
of the loan, the excess reduces the principal balance of the ARM. Borrowers
under these mortgage loans experiencing negative amortization may take longer to
build up their equity in the underlying property and may be more likely to
default.
ARM loans 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 ARM loans might decrease. The rate of prepayments
with respect to ARM loans has fluctuated in recent years.
The rates of interest payable on certain ARM loans, and therefore on
certain ARM 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 securities supported by ARM loans 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
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
securities, interest rate adjustments on floating rate mortgage-backed
securities may be based on indices that lag behind market interest rates.
Interest rates on floating rate mortgage-backed securities generally are
adjusted monthly. Floating rate mortgage-backed securities are subject to
lifetime interest rate caps, but they generally are not subject to limitations
on monthly or other periodic changes in interest rates or monthly payments.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global Income Fund may invest in
secured or unsecured fixed or floating rate loans ("Loans") arranged through
private negotiations between a borrowing corporation, government or other entity
and one or more financial institutions ("Lenders"). The fund's investments in
Loans may be in the form of participations ("Participations") in Loans or
assignments ("Assignments") of all or a portion of Loans from third parties.
Participations typically result in the fund's having a contractual relationship
only with the Lender, not with the borrower. The fund has the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
fund generally has no direct right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the fund assumes the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the selling Lender,
the fund may be treated as a general creditor of that Lender and may not benefit
from any set-off between the Lender and the borrower. The fund will acquire
Participations only if Mitchell Hutchins determines that the selling Lender is
creditworthy.
When Global Income Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. In an Assignment, the fund is
entitled to receive payments directly from the borrower and, therefore, does not
depend on the selling bank to pass these payments onto the fund. However,
because Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
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Assignments and Participations are generally not registered under the
Securities Act of 1933, as amended ("Securities Act"), and thus may be subject
to the fund's limitation on investment in illiquid securities. Because there may
be no liquid market for such securities, the fund anticipates that such
securities may be sold only to a limited number of institutional investors. The
lack of a liquid secondary market could have an adverse impact on the value of
such securities and on the fund's ability to dispose of particular Assignments
or Participations when necessary to meet the fund's liquidity needs or in
response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower.
TEMPORARY AND DEFENSIVE INVESTMENTS; MONEY MARKET INVESTMENTS. Each
fund may invest in money market investments for temporary or defensive purposes,
to reinvest cash collateral from its securities lending activities or as part of
its normal investment program. Such investments include, among other things, (1)
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, (2) debt obligations of banks, savings and loan institutions,
insurance companies and mortgage bankers, (3) commercial paper and notes,
including those with variable and floating rates of interest, (4) debt
obligations of foreign branches of U.S. banks, U.S. branches of foreign banks
and foreign branches of foreign banks, (5) debt obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities, including obligations of supranational entities,
(6) bonds issued by foreign issuers, (7) repurchase agreements and (8)
securities of other investment companies that invest exclusively in money market
instruments and similar private investment vehicles.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
ILLIQUID SECURITIES. The term "illiquid securities" for purposes of the
Prospectus and SAI means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which a fund
has valued the securities and includes, among other things, purchased
over-the-counter options, repurchase agreements maturing in more than seven days
and restricted securities other than those Mitchell Hutchins or the applicable
sub-adviser has determined are liquid pursuant to guidelines established by each
fund's board. The assets used as cover for over-the-counter options written by a
fund will be considered illiquid unless the over-the-counter options are sold to
qualified dealers that agree that the fund may repurchase any over-the-counter
options it writes at a maximum price to be calculated by a formula set forth in
the option agreements. The cover for an over-the-counter option written subject
to this procedure would be considered illiquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Under current SEC guidelines, IO and PO classes of mortgage-backed
securities generally are considered illiquid. However, interest only and
principal only classes of fixed-rate mortgage-backed securities issued by the
U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if Mitchell Hutchins or a sub-adviser has determined that
they are liquid pursuant to guidelines established by the applicable board. A
fund may not be able to readily liquidate its investments in illiquid securities
and may have to sell other investments if necessary to raise cash to meet its
obligations. The lack of a liquid secondary market for illiquid securities may
make it more difficult for a fund to assign a value to those securities for
purposes of valuing its portfolio and calculating its net asset value.
Restricted securities are not registered under the Securities Act and
may be sold only in privately negotiated or other exempted transactions or after
a Securities Act registration statement has become effective. Where registration
is required, a fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time a fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a fund might obtain a less favorable price than
prevailed when it decided to sell.
Not all restricted securities are illiquid. To the extent that foreign
securities are freely tradeable in the country in which they are principally
traded, they generally are not considered illiquid, even if they are restricted
in the United States. A large institutional market has developed for many U.S.
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and foreign securities that are not registered under the Securities Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of the securities, and
the fund might be unable to dispose of them promptly or at favorable prices.
Each board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins or a sub-adviser pursuant to
guidelines approved by the board. Mitchell Hutchins or the sub-adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (E.G., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins or the sub-adviser monitors the liquidity of restricted
securities in each fund's portfolio and reports periodically on such decisions
to the applicable board.
Mitchell Hutchins and (where applicable) the fund's sub-adviser monitor
each fund's overall holdings of illiquid securities. If a fund's holdings of
illiquid securities exceeds its limitation on investments in illiquid securities
for any reason (such as a particular security becoming illiquid, changes in
relative market values of liquid and illiquid portfolio securities or
shareholder redemptions), Mitchell Hutchins and the sub-adviser will consider
what action would be in the best interest of the fund and its shareholders.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
a fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. A fund maintains custody of the underlying obligations
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian or sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Repurchase agreements involving
obligations other than U.S. government securities (such as commercial paper and
corporate bonds) may be subject to special risks and may not have the benefit of
certain protections in the event of the counterparty's insolvency. If the seller
or guarantor becomes insolvent, the fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Each fund intends to
enter into repurchase agreements only with counterparties in transactions
believed by Mitchell Hutchins or a sub-adviser to present minimum credit risks.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by a 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 with banks or securities dealers or
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their affiliates. While a reverse repurchase agreement is outstanding, a fund
will maintain, in a segregated account with its custodian, cash or liquid
securities, marked to market daily, in an amount at least equal to its
obligations under the reverse repurchase agreement. See "The Funds' Investments,
Related Risks and Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when that fund seeks
to repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or trustee or receiver may
receive an extension of time to determine whether to enforce that fund's
obligation to repurchase the securities, and the fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
DURATION. Duration is a measure of the expected life of a bond on a
present value basis. Duration incorporates the bond's yield, coupon interest
payments, final maturity and call features into one measure and is one of the
fundamental tools used by Mitchell Hutchins or the applicable sub-adviser in
portfolio selection and yield curve positioning for a fund's bond investments.
Duration was developed as a more precise alternative to the concept "term to
maturity." Traditionally, a bond's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until the scheduled final payment on the bond,
taking no account of the pattern of payments prior to maturity.
Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, expected to be made, and weights them by the
present values of the cash to be received at each future point in time. For any
bond with interest payments occurring prior to the payment of principal,
duration is always less than maturity. For example, depending on its coupon and
the level of market yields, a Treasury note with a remaining maturity of five
years might have a duration of 4.5 years. For mortgage-backed and other
securities that are subject to prepayments, put or call features or adjustable
coupons, the difference between the remaining stated maturity and the duration
is likely to be much greater.
Duration allows Mitchell Hutchins or the applicable sub-adviser to make
certain predictions as to the effect that changes in the level of interest rates
will have on the value of a fund's portfolio of bonds. For example, when the
level of interest rates increases by 1%, a bond having a positive duration of
three years generally will decrease by approximately 3%. Thus, if Mitchell
Hutchins calculates the duration of a fund's portfolio of bonds as three years,
it normally would expect the portfolio to change in value by approximately 3%
for every 1% change in the level of interest rates. However, various factors,
such as changes in anticipated prepayment rates, qualitative considerations and
market supply and demand, can cause particular securities to respond somewhat
differently to changes in interest rates than indicated in the above example.
Moreover, in the case of mortgage-backed and other complex securities, duration
calculations are estimates and are not precise. This is particularly true during
periods of market volatility. Accordingly, the net asset value of a fund's
portfolio of bonds may vary in relation to interest rates by a greater or lesser
percentage than indicated by the above example.
Futures, options and options on futures have durations that, in
general, are closely related to the duration of the securities that underlie
them. Holding long futures or call option positions will lengthen portfolio
duration by approximately the same amount as would holding an equivalent amount
of the underlying securities. Short futures or put options have durations
roughly equal to the negative duration of the securities that underlie these
positions, and have the effect of reducing portfolio duration by approximately
the same amount as would selling an equivalent amount of the underlying
securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a bond. For example,
floating and variable rate bonds often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
or the applicable sub-adviser will use more sophisticated analytical techniques
that incorporate the economic life of a security into the determination of its
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duration and, therefore, its interest rate exposure.
LENDING OF PORTFOLIO SECURITIES. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments, including other investment
companies. A fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed 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 of its loans at any time. Each fund may pay
reasonable fees in connection with a loan and may pay the borrower or placing
broker a negotiated portion of the interest earned on the reinvestment of cash
held as collateral. A fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. Each fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the fund's interest.
Pursuant to procedures adopted by the boards governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." Each fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a fund, and that fund is
obligated to replace the securities borrowed at a date in the future. When a
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the fund
maintains, in a segregated account with its custodian, the securities that could
be used to cover the short sale. Each fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales "against the box."
A fund might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or a sub-adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the fund or a security convertible into or exchangeable for a
security owned by the fund. In such case, any loss in the fund's long position
after the short sale should be reduced by a corresponding gain in the short
position. Conversely, any gain in the long position after the short sale should
be reduced by a corresponding loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of the securities a fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
delayed delivery, I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield.
When-issued securities include TBA ("to be announced") securities. TBA
securities are usually mortgage-backed securities that are purchased on a
forward commitment basis with an approximate principal amount and no defined
maturity date. The actual principal amount and maturity date are determined upon
settlement when the specific mortgage pools are assigned. A fund generally would
not pay for such securities or start earning interest on them until they are
received. However, when a fund undertakes a when-issued or delayed-delivery
obligation, it immediately assumes the risks of ownership, including the risks
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of price fluctuation. Failure of the issuer to deliver a security purchased by a
fund on a when-issued or delayed-delivery basis may result in the fund's
incurring or missing an opportunity to make an alternative investment. Depending
on market conditions, a fund's when-issued and delayed-delivery purchase
commitments could cause its net asset value per share to be more volatile,
because such securities may increase the amount by which the fund's total
assets, including the value of when-issued and delayed-delivery securities held
by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations -- Segregated Accounts." A fund purchases when-issued securities
only with the intention of taking delivery but may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or the applicable sub-adviser
deems it advantageous to do so, which may result in a gain or loss to the fund.
SEGREGATED ACCOUNTS. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the fund's obligation or commitment under such
transactions. As described below under "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options, futures, forward currency contracts or
swaps.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations. With regard to the borrowings
limitation in fundamental limitation (2), each fund will comply with the
applicable restrictions of Section 18 of the Investment Company Act.
Each fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act, 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.
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The following interpretation applies to, but is not a part of, this
fundamental restriction: The fund's investments in master notes and similar
instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
In addition, Global Equity Fund, Asia Pacific Growth Fund and Emerging
Markets Equity Fund each will not:
(7) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval. If a percentage restriction is adhered to at the time of
an investment or transaction, later changes in percentage resulting from a
change in values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
Each fund will not:
(1) invest more than 10% of its net assets (15% of net assets for Asia
Pacific Growth Fund and Emerging Markets Equity Fund) in illiquid securities;
(2) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding;
(3) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments;
(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments; or
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(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger (and
except that a fund will not purchase securities of registered open-end
investment companies or registered unit investment trusts in reliance on
Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act).
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins and
the sub-advisers may use a variety of financial instruments ("Derivative
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures"), options on futures contracts, forward currency contracts and
swaps. A fund may enter into transactions involving one or more types of
Derivative Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, each fund's use of these instruments will
place at risk a much smaller portion of its assets. In particular, each fund may
use the Derivative Instruments described below.
A fund might not use any derivative instruments or strategies, and
there can be no assurance that using any strategy will succeed. If a sub-adviser
or Mitchell Hutchins, as applicable, is incorrect in its judgment on market
values, interest rates or other economic factors in using a derivative
instrument or strategy, a fund may have lower net income and a net loss on the
investment.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES -- A call option is a
short-term contract pursuant to which the purchaser of the option, in return for
a premium, has the right to buy the security or currency underlying the option
at a specified price at any time during the term of the option or at specified
times or at the expiration of the option, depending on the type of option
involved. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term or at specified times or at the expiration of the option,
depending on the type of option involved. The writer of the put option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to buy the underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDICES -- A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS -- A securities index futures
contract is a bilateral agreement pursuant to which one party agrees to accept,
and the other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the securities index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, contracts are closed out prior to the expiration
date of the contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS -- Interest rate
and foreign currency futures contracts are bilateral agreements pursuant to
which one party agrees to make, and the other party agrees to accept, delivery
of a specified type of debt security or currency at a specified future time and
at a specified price. Although such futures contracts by their terms call for
actual delivery or acceptance of bonds or currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are
similar to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the term of the
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option or at specified times or at the expiration of the option, depending on
the type of option involved. Upon exercise of the option, the delivery of the
futures position to the holder of the option will be accompanied by delivery of
the accumulated balance that represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the future. The writer of an
option, upon exercise, will assume a short position in the case of a call and a
long position in the case of a put.
FORWARD CURRENCY CONTRACTS -- A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. A fund
may use Derivative Instruments to attempt to hedge its portfolio and also to
attempt to enhance income or return or realize gains and to manage the duration
of its bond portfolio. A fund may use Derivative Instruments to maintain
exposure to stocks or bonds while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses), to facilitate trading or to adjust
its exposure to different asset classes. For example, Global Equity Fund may use
Derivative Instruments to adjust its exposure to U.S. and foreign equity markets
in connection with a reallocation or rebalancing of the fund's assets. A fund
also may use Derivative Instruments on currencies, including forward currency
contracts, to hedge against price changes of securities that a fund owns or
intends to acquire that are attributable to changes in the value of the
currencies in which the securities are denominated. A fund may also use
Derivative Instruments on currencies to shift exposure from one currency to
another or to attempt to realize gains from favorable changes in exchange rates.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in a fund's portfolio. Thus, in a short hedge a fund takes
a position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security. Short hedges on Derivative Instruments on currencies can
be used in a similar manner.
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Derivative Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. For example, a fund might purchase a call option on a
security it intends to purchase or on the currency in which the security is
denominated in order to hedge against an increase in the cost of the security.
If the price of the security or currency increased above the exercise price of
the call, a fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively, a
fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
A fund may purchase and write (sell) straddles on securities or indices
of securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when Mitchell Hutchins or a sub-adviser
believes it likely that the prices of the securities will be more volatile
during the term of the option than the option pricing implies. A short straddle
is a combination of a call and a put written on the same security where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a short straddle when Mitchell Hutchins or a sub-adviser
believes it unlikely that the prices of the securities will be as volatile
during the term of the option as the option pricing implies.
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Derivative Instruments on securities or currencies generally are used
to hedge against price movements in one or more particular securities positions
that a fund owns or intends to acquire. Derivative Instruments on stock indices,
in contrast, generally are used to hedge against price movements in broad equity
market sectors in which a fund has invested or expects to invest. Derivative
Instruments on bonds may be used to hedge either individual securities or broad
fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Gain strategies may
include using Derivative Instruments to increase or decrease a fund's exposure
to different asset classes without buying or selling the underlying instruments.
A fund also may use derivatives to simulate full investment by the fund while
maintaining a cash balance for fund management purposes (such as to provide
liquidity to meet anticipated shareholder sales of fund shares and for fund
operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and
in the Prospectus, Mitchell Hutchins and the sub-advisers may discover
additional opportunities in connection with Derivative Instruments and with
hedging, income and gain strategies. These new opportunities may become
available as regulatory authorities broaden the range of permitted transactions
and as new Derivative Instruments and techniques are developed. Mitchell
Hutchins or a sub-adviser may use 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 Prospectus
or SAI will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of Mitchell Hutchins or a sub-adviser to predict movements of the
overall securities, interest rate or currency exchange markets, which requires
different skills than predicting changes in the prices of individual securities.
While Mitchell Hutchins and the sub-advisers are experienced in the use of
Derivative Instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because Mitchell Hutchins or a sub-adviser projected a decline in the
price of a security in that fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if the
price of the Derivative Instrument declined by more than the increase in the
price of the security, that fund could suffer a loss. In either such case, the
fund would have been in a better position had it not hedged at all.
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(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(I.E., Derivative Instruments other than purchased options). If the fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the funds to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of a fund's assets to cover positions or to segregated accounts could impede
portfolio management or the fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The funds may purchase put and call options, and write (sell)
covered put or call options on securities in which they invest and related
indices and on foreign currencies. The purchase of call options may serve as a
long hedge, and the purchase of put options may serve as a short hedge. In
addition, a fund may also use options to attempt to realize gains by increasing
or reducing its exposure to an asset class without purchasing or selling the
underlying securities. Writing covered put or call options can enable a fund to
enhance income by reason of the premiums paid by the purchasers of such options.
Writing covered call options serves as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates to
a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the affected fund will be obligated to
sell the security at less than its market value. Writing covered put options
serves as a limited long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security depreciates to a price lower than the exercise
price of the put option, it can be expected that the put option will be
exercised and the fund will be obligated to purchase the security at more than
its market value. The securities or other assets used as cover for
over-the-counter options written by a fund would be considered illiquid to the
extent described under "The Funds' Investments, Related Risks and Limitations --
Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, the over-the-counter debt options or foreign
currency options used by the funds are European-style options. This means that
the option is only exercisable immediately prior to its expiration. This is in
contrast to American-style options, which are exercisable at any time prior to
the expiration date of the option. There are also other types of options
exercisable on certain specified dates before expiration. 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
30
<PAGE>
sale transaction. Closing transactions permit a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The funds may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on bonds and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the funds will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the funds, there is no assurance that a fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, a fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.
If a fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the fund could cause material losses because the fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by
the following guidelines, which can be changed by each fund's board without
shareholder vote:
(1) A fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums on
all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of securities underlying put options written by
a fund, determined as of the date the put options are written, will not exceed
50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
FUTURES. The funds may purchase and sell securities index futures
contracts, interest rate futures contracts and foreign currency futures
contracts. A fund may also purchase put and call options, and write covered put
and call options, on futures in which it is allowed to invest. The purchase of
futures or call options thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can serve as a short hedge.
Writing covered call options on futures contracts can serve as a limited short
hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options on securities or indices. In addition, Global Equity Fund and Global
31
<PAGE>
Income Fund may purchase or sell futures contracts or purchase options thereon
to increase or reduce its exposure to an asset class without purchasing or
selling the underlying securities either as a hedge or to enhance return or
realize gains.
Futures strategies also can be used to manage the average duration of
Global Income Fund's portfolio. If Mitchell Hutchins wishes to shorten the
average duration of this fund's portfolio, the fund may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the fund's
portfolio, the fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
A fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to a fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each fund's obligations to or from a futures
broker. When a fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no 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.
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<PAGE>
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of
futures and related options is governed by the following guidelines, which can
be changed by a fund's board without shareholder vote:
(1) The aggregate initial margin and premiums on futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), excluding the amount by which options are "in-the-money,"
may not exceed 5% of a fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and securities indices and options on futures
contracts) purchased by a fund that are held at any time will not exceed 20% of
its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by 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 fund's securities are
denominated. Such currency hedges can protect against price movements in a
security a fund owns or intends to acquire that are attributable to changes in
the value of the currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that are attributable
to other causes.
A fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins or a sub-adviser believes will have a positive
correlation to the value of the currency being hedged. In addition, a fund may
use forward currency contracts to shift exposure to foreign currency
fluctuations from one country to another. For example, if a fund owned
securities denominated in a foreign currency and Mitchell Hutchins or the
sub-adviser believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as "cross
hedging." Use of a different foreign currency magnifies the risk that movements
in the price of the Derivative Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The value of Derivative Instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
33
<PAGE>
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, the funds might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. A fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long hedges
- -- for example, a fund may purchase a forward currency contract to lock in the
U.S. dollar price of a security denominated in a foreign currency that the fund
intends to acquire. Forward currency contract transactions may also serve as
short hedges -- for example, a fund may sell a forward currency contract to lock
in the U.S. dollar equivalent of the proceeds from the anticipated sale of a
security denominated in a foreign currency. A fund may use forward currency
contracts to realize gains from favorable changes in exchange rates.
The cost to a fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity
of the contract. Failure by the counterparty to do so would result in the loss
of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that a fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, a fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, a fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. Each fund may
enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
fund to deliver an amount of foreign currency in excess of the value of the
position being hedged by such contracts or (2) the fund segregates with its
custodian cash or liquid securities in an amount not less than the value of its
total assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily.
SWAP TRANSACTIONS. Swap transactions include swaps, caps, floors and
collars relating to interest rates, currencies, securities or other instruments.
Interest rate swaps involve an agreement between two parties to exchange
payments that are based, for example, on variable and fixed rates of interest
and that are calculated on the basis of a specified amount of principal (the
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<PAGE>
"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. Currency swaps, caps,
floors and collars are similar to interest rate swaps, caps, floors and collars
but they are based on currency exchange rates rather than interest rates. Equity
swaps or other swaps relating to securities or other instruments are also
similar, but they are based on changes in the value of the underlying securities
or instruments. For example, an equity swap might involve an exchange of the
value of a particular security or securities index in a certain notional amount
for the value of another security or index or for the value of interest on that
notional amount at a specified fixed or variable rate.
A fund may enter into interest rate swap transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. A fund may use interest rate swaps, caps, floors and
collars as a hedge on either an asset-based or liability-based basis, depending
on whether it is hedging its assets or liabilities. Interest rate swap
transactions are subject to risks comparable to those described above with
respect to other derivatives strategies.
A fund will usually enter into interest rate swaps on a net basis,
I.E., the two payment streams are netted out, with a fund receiving or paying,
as the case may be, only the net amount of the two payments. Because segregated
accounts will be established with respect to these transactions, Mitchell
Hutchins and the sub-adviser (if applicable) believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to a fund's borrowing restrictions. The net amount of the excess, if
any, of a fund's obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis, and appropriate fund assets having
an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account as described above in "The Funds'
Investments, Related Risks and Limitations -- Segregated Accounts." A fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps, floors and collars that are written by the fund.
A fund will enter into interest rate swap transactions only with banks
or recognized securities dealers or their affiliates believed by Mitchell
Hutchins or the sub-adviser to present minimal credit risk in accordance with
guidelines established by the fund's board. If there is a default by the other
party to such a transaction, a fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
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<PAGE>
ORGANIZATION; TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS AND MANAGEMENT
OWNERSHIP OF SECURITIES
Each Trust was formed as a business trust under the laws of the
Commonwealth of Massachusetts. Investment Trust was formed on March 28, 1991 and
has two operating series. Managed Investments Trust was formed on November 21,
1986 and has eight operating series. Investment Series was formed on December
22, 1986 and Investment Trust II was formed on August 10, 1992; each of these
Trusts has one operating series.
Each Trust is governed by a board of trustees, which is authorized to
establish additional series and to issue an unlimited number of shares of
beneficial interest of each existing or future series, par value $0.001 per
share. The board of each Trust oversees its operations.
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is Chairman (since March 1999),
chief executive officer and a director of
Mitchell Hutchins (since January 1995), and an
executive vice president and director of
PaineWebber (since March 1984). Mrs. Alexander
is president and director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of
R.Q.A. Enterprises R.Q.A. Enterprises (management consulting firm)
One Old Church Road (since April 1991 and principal occupation
Unit #6 since March 1995). Mr. Armstrong was chairman
Greenwich, CT 06830 of the board, chief executive officer and
co-owner of Adirondack Beverages (producer and
distributor of soft drinks and sparkling/still
waters) (October 1993-March 1995). He was a
partner of The New England Consulting Group
(management consulting firm) (December
1992-September 1993). He was managing director
of LVMH U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Louis Vuitton
Moet Hennessey Corporation) (1987-1991) and
chairman of its wine and spirits subsidiary,
Schieffelin & Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 30
investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
36
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**+; 73 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber Group
Board of Trustees Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW Group.
Prior to 1988, he was chairman of the board,
president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation. Mr.
Bewkes is a director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP Advisors, LLP
1275 Pennsylvania Ave, N.W. (international investments and consulting firm)
Washington, DC 20004 (since March 1994), a partner of McKinsey &
Company (management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing) and Homestake Mining Corp. (gold
mining), vice chairman of Anchor Gaming
(provides technology to gaming and wagering
industry) (since July 1999) and chairman of
Weirton Steel Corp. (makes and finishes steel
products) (since April 1996). 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 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mary C. Farrell**+; 50 Trustee Ms. Farrell is a managing director, senior
(Investment Series, investment strategist and member of the
Investment Trust and Investment Policy Committee of PaineWebber.
Investment Trust II only) Ms. Farrell joined PaineWebber in 1982. She is
a member of the Financial Women's Association
and Women's Economic Roundtable and appears as
a regular panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the Board
of Overseers of New York University's Stern
School of Business. Ms. Farrell is a director
or trustee of 29 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
37
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of Business,
101 Uris Hall Columbia University. Prior to 1989, he was
New York, NY 10027 president of the Illinois Institute of
Technology. Dean Feldberg is also a director
of Primedia Inc. (publishing), Federated
Department Stores, Inc. (operator of department
stores) and Revlon, Inc. (cosmetics). Dean
Feldberg is a director or trustee of 33
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, NY 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director or
trustee of 33 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman of Thayer
Suite 350 Hotel Investors II and Lodging Opportunities
Washington, DC 20004 Fund (hotel investment partnerships). From
January 1992 to November 1992, he was campaign
manager of Bush-Quayle '92. From 1990 to 1992,
he was vice chairman and, from 1989 to 1990, he
was president of Northwest Airlines Inc. and
NWA Inc. (holding company of Northwest Airlines
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 Aegis
Communications, Inc. (tele-services), American
Management Systems, Inc. (management consulting
and computer related services), Automatic Data
Processing, Inc., (computing services), CB
Richard Ellis, Inc. (real estate services), FPL
Group, Inc. (electric services), Global
Vacation Group (packaged vacations), HCR/Manor
Care, Inc. (health care), SAGA Systems, Inc.
(software company) and Northwest Airlines Inc.
Mr. Malek is a director or trustee of 30
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
38
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and
research). He is a director of Labor Ready,
Inc. (temporary employment), Roadway Express,
Inc. (trucking), The Guardian Group of Mutual
Funds, the Harding, Loevner Funds, E.I.I.
Realty Trust (investment company), Evans
Systems, Inc. (motor fuels, convenience store
and diversified company), Electronic Clearing
House, Inc. (financial transactions
processing), Frontier Oil Corporation and
Nutraceutix, Inc. (biotechnology company).
Prior to January 1993, he was chairman of the
Investment Advisory Committee of the Howard
Hughes Medical Institute. Mr. Schafer is a
director or trustee of 30 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March 1999).
Mr. Storms was president of Prudential
Investments (1996-1999). Prior to joining
Prudential he was a managing director at
Fidelity Investments. Mr. Storms is a director
or trustee of 30 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief
(Investment Trust and investment officer--quantitative investments of
Managed Trust only) Mitchell Hutchins. Mr. Barneby is a vice
president of seven investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Julieanna Berry*; 36 Vice President Ms. Berry is a first vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins. Ms.
Berry is a vice president of two investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Tom Disbrow**; 34 Vice President and Mr. Disbrow is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. Prior to
November 1999, he was a vice president of
Zweig/Glaser Advisers. Mr. Disbrow is a vice
president and assistant treasurer of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
39
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
James F. Keegan*; 39 Vice President Mr. Keegan is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins. Prior
to March 1996, he was director of fixed income
strategy and research of Merrion Group, L.P.
Mr. Keegan is a vice president of six
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services
practice of Ernst & Young LLP. Mr. Lee is a
vice president and assistant treasurer of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. From August
1996 through March 1999, he was the manager of
the mutual fund internal control group of
Salomon Smith Barney. Prior to August 1996, he
was an associate and assistant treasurer for
BlackRock Financial Management L.P. Mr. Mahoney
is a vice president and assistant treasurer of
31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Dennis McCauley*; 53 Vice President Mr. McCauley is a managing director and chief
(Managed Trust and investment officer--fixed income of Mitchell
Investment Series only) Hutchins. Mr. McCauley is a vice president of
22 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 31 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
Dianne E. O'Donnell**; 47 Vice President and Secretary Ms. O'Donnell is a senior vice president and
deputy general counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice president and secretary
of 30 investment companies and a vice president
and assistant secretary of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
40
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
Emil Polito*; 39 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Victoria E. Schonfeld**; 49 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins and (since
July 1995) a senior vice president of
PaineWebber. Ms. Schonfeld is a vice president
of 30 investment companies and a vice president
and secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Paul H. Schubert**; 37 Vice President and Treasurer Mr. Schubert is a senior vice president and
director of the mutual fund finance department
of Mitchell Hutchins. Mr. Schubert is a vice
president and treasurer of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins. Mr.
Singh is a vice president of four investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Barney A. Taglialatela**; 39 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department
of Mitchell Hutchins. Mr. Taglialatela is a
vice president and assistant treasurer of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mark A. Tincher*; 44 Vice President Mr. Tincher is a managing director and chief
(Investment Trust, investment officer--equities of Mitchell
Investment Trust II and Hutchins. Prior to March 1995, he was a vice
Managed Trust only) president and directed the U.S. funds
management and equity research areas of Chase
Manhattan Private Bank. Mr. Tincher is a vice
president of 12 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Stuart Waugh*; 44 Vice President Mr. Waugh is a managing director and a
(Investment Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income investments
and currency trading. Mr. Waugh is a vice
president of five investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
41
<PAGE>
NAME AND ADDRESS; AGE POSITION WITH EACH TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
--------------------- ------------------------ -----------------------------------------
<S> <C> <C>
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell Hutchins.
Prior to May 1995, he was an attorney in private
practice. Mr. Weller is a vice president and
assistant secretary of 30 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment
adviser.
- -------------
* This person's business address is 51 West 52nd Street, New York, New York 10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York, New York 10019.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested persons" of each fund as defined in the
Investment Company Act by virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
</TABLE>
Board members are compensated as follows:
o MANAGED TRUST has eight operating series and pays each board member
who is not an "interested person" of the Trust $1,000 annually for
each series. Therefore, Managed Trust pays each such board member
$8,000 annually, plus any additional amounts due for board or
committee meetings.
o INVESTMENT TRUST II AND INVESTMENT SERIES each has only one series
and pays board members who are not "interested persons" of the Trust
$1,000 annually for that series, plus any additional amounts due for
board or committee meetings.
o INVESTMENT TRUST has two series and pays each board member who is
not an "interested person" of the Trust $1,000 annually for Global
Equity Fund and an additional $1,500 annually for its second series.
Therefore, Investment Trust pays each such board member $2,500
annually, plus any additional amounts due for board or committee
meetings.
Each Trust pays up to $150 per series for each board meeting and each
separate meeting of a board committee. Each chairman of the audit and contract
review committees of individual funds within the PaineWebber fund complex
receives additional compensation, aggregating $15,000 annually, from the
relevant funds. All board members are reimbursed for any expenses incurred in
attending meetings. Because PaineWebber, Mitchell Hutchins and, as applicable,
the sub-advisers 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 a Trust for acting as a board member or officer.
42
<PAGE>
The table below includes certain information relating to the
compensation by each Trust of its current board members and the compensation of
those board members from all PaineWebber funds during the periods indicated:
<TABLE>
<CAPTION>
COMPENSATION TABLE+
AGGREGATE AGGREGATE AGGREGATE AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION FROM THE TRUSTS
FROM MANAGED FROM INVESTMENT FROM INVESTMENT FROM INVESTMENT AND THE FUND
NAME OF PERSON, POSITION TRUST* SERIES* TRUST* TRUST II* COMPLEX**
------------------------ ------------ --------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee.................... $ 12,030 $ 1,780 $ 4,060 $ 1,780 $104,650
Richard R. Burt,
Trustee.................... 11,850 1,750 4,000 1,750 102,850
Meyer Feldberg,
Trustee.................... 12,030 2,432 5,364 2,432 119,650
George W. Gowen,
Trustee.................... 14,711 1,780 4,060 1,780 119,650
Frederic V. Malek,
Trustee.................... 12,030 1,780 4,060 1,780 104,650
Carl W. Schafer,
Trustee.................... 12,030 1,780 4,060 1,780 104,650
</TABLE>
- --------------------
+ Only independent board members are compensated by the PaineWebber funds and
identified above; board members who are "interested persons," as defined by
the Investment Company Act, do not receive compensation from the funds.
* Represents fees paid to each board member from the Trust indicated for the
fiscal year ended October 31, 1999.
** Represents total compensation paid during the calendar year ended December
31, 1999, to each board member by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or one
of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or retirement
plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of February 1, 2000, trustees and officers owned in the aggregate
less than 1% of the outstanding shares of any class of each Trust.
As of February 1, 2000, the following shareholders were shown in the
funds' records as owning 5% or more of any class of a fund's shares:
PERCENTAGE OF SHARES
BENEFICIALLY OWNED AS OF
NAME AND ADDRESS* FEBRUARY 1, 2000
----------------- ------------------------
GLOBAL EQUITY FUND
------------------
Northern Trust Company as Trustee 47.83% of
FBO PaineWebber 401K Plan Class Y shares
Subaru of New England 33.92% of
Global Account Class Y shares
Ernest J. Boch 6.64% of
Global Account Class Y shares
43
<PAGE>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED AS OF
NAME AND ADDRESS* FEBRUARY 1, 2000
----------------- ------------------------
GLOBAL INCOME FUND
------------------
John M. Freese, Administrator 11.24% of
Estate of Dorothy M. Freese Class C shares
John Markham Freese, Executor 5.22% of
Estate of M. Lloyd Freese Class C shares
Northern Trust Company as Trustee 64.64% of
FBO PaineWebber 401K Plan Class Y shares
ASIA PACIFIC GROWTH FUND
------------------------
The Fletcher Jones Foundation 12.47% of
Class A shares
Jerry M. Zeigler 15.32% of
Class Y shares
PaineWebber CDN FBO 11.08%
Luis Alejandro Sanchez Class Y shares
PaineWebber CDN FBO 7.87%
Nathan Weigt Class Y shares
William H. Morby 6.12% of
Class Y shares
Roi M. Thibault
(PACE) 6.11% of
Class Y shares
Cathy B. Teague 5.61% of
Class Y shares
Vicki Thomas 5.11% of
Class Y shares
EMERGING MARKETS EQUITY FUND
----------------------------
Ramesh Singh 8.37% of
Class A shares
Barry Seeman
Ruth Seeman 30.46% of
Joint Owners Class B shares
Thomas A. Wertheim 5.93% of
Class C shares
PaineWebber CDN FBO 5.87% of
Jack Wade Class C shares
PaineWebber CDN FBO 7.11% of
J. Darwin King Class Y shares
Charles Chard 6.20% of
Class Y shares
- -----------------------
* The shareholders listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 51 West 52nd Street, New York, NY 10019-6114.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY AND ADMINISTRATION 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 (expressed as a
percentage of the fund's average daily net assets), computed daily and paid
monthly, at the annual rates indicated below.
44
<PAGE>
Under the terms of the Advisory Contracts, each fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of a Trust not readily identifiable as belonging to a
specific series of the Trust are allocated among series by or under the
direction of the Trust's board in such manner as the board deems fair and
equitable. Expenses borne by each fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as defined
in the Investment Company Act the applicable Trust or Mitchell Hutchins; (6) all
expenses incurred in connection with the board members' services, including
travel expenses; (7) taxes (including any income or franchise taxes) and
governmental fees; (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds; (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
applicable Trust or fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for the independent
board members; (11) charges of custodians, transfer agents and other agents;
(12) costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the fund; (15) fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; (16) costs of mailing and tabulating
proxies and costs of meetings of shareholders, the board and any committees
thereof; (17) the cost of investment company literature and other publications
provided to board members and officers; and (18) costs of mailing, stationery
and communications equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for
any error of judgment or mistake of law or for any loss suffered by a fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the fund's board or by vote of the holders of a majority of the fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to the fund.
GLOBAL EQUITY FUND. Under the current Advisory Contract, the fund pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.85% of the fund's average daily net assets up to and including $500 million,
0.83% of amounts over $500 million and up to and including $1 billion, and
0.805% of amounts over $1 billion. For the fiscal years ended October 31, 1999,
October 31, 1998, and October 31, 1997, the fund paid (or accrued) to Mitchell
Hutchins advisory and administrative fees of $3,254,321, $3,918,629 and
$4,689,662, respectively. For the fiscal year ended October 31, 1999, Mitchell
Hutchins voluntarily waived $4,310 of its fee under the Advisory Contract in
connection with the fund's investment of cash collateral from securities lending
in a private investment vehicle managed by Mitchell Hutchins.
The Advisory Contract authorizes Mitchell Hutchins to retain one or
more sub-advisers but does not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a separate contract with Invista ("Sub-Advisory
Contract"), pursuant to which Invista serves as investment sub-adviser for the
foreign investments of Global Equity Fund. (Mitchell Hutchins allocates the
fund's investments between U.S. and foreign investments and is responsible for
the day-to-day management of the fund's U.S. investments.) Under the
Sub-Advisory Contract, Mitchell Hutchins (not the fund) is obligated to pay
Invista at the annual rate of 0.40% of the fund's average daily net assets
allocated to its management up to and including $100 million. This fee drops to
0.29% of the fund's average daily net assets allocated to Invista's management
in excess of $100 million up to and including $300 million and to 0.26% of such
assets in excess of $300 million. For the fiscal year ended October 31, 1999 and
for the period October 1 through October 31, 1998, Mitchell Hutchins paid or
accrued sub-advisory fees to Invista of $761,740 and $95,901, respectively.
Invista is an indirect wholly owned subsidiary of Principal Life Insurance
Company. Prior to October 1, 1998, GE Investment Management Incorporated
("GEIM") (a wholly owned subsidiary of General Electric Company) served as
investment sub-adviser for all the fund's assets pursuant to a sub-advisory
contract with Mitchell Hutchins. Under that sub-advisory contract, Mitchell
Hutchins paid or accrued sub-advisory fees to GEIM for the period November 1,
45
<PAGE>
1997 to September 30, 1998 and the fiscal year ended October 31, 1997, of
$1,332,538 and $1,695,840, respectively.
Under the Sub-Advisory Contract, Invista will not be liable for any
error of judgment or mistake of law or for any loss suffered by Investment
Trust, Global Equity Fund, its shareholders or Mitchell Hutchins in connection
with the Sub-Advisory Contract, except any liability to Investment Trust, the
fund, its shareholders or Mitchell Hutchins to which Invista would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment
or the termination of the Advisory Contract and is terminable at any time
without penalty by Investment Trust's board or by vote of the holders of a
majority of the fund's outstanding voting securities on 60 days' notice to
Invista and Mitchell Hutchins, or by Invista or Mitchell Hutchins on 120 days'
written notice to Investment Trust.
GLOBAL INCOME FUND. Under the current Advisory Contract, the fund pays
Mitchell Hutchins a fee, computed daily and paid monthly, at the annual rate of
0.75% of the value of its average daily net assets up to and including $500
million, 0.725% of amounts in excess of $500 million and up to $1 billion, 0.70%
of amounts in excess of $1 billion and up to $1.5 billion, 0.675% of amounts in
excess of $1.5 billion and up to $2.0 billion, and 0.65% of amounts over $2
billion. For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, the fund paid (or accrued) to Mitchell Hutchins advisory and
administrative fees of $3,144,895, $4,031,933 and $5,683,381, respectively. For
the fiscal year ended October 31, 1999, Mitchell Hutchins voluntarily waived
$16,266 of its fee under the Advisory Contract in connection with the fund's
investment of cash collateral from securities lending in a private investment
vehicle managed by Mitchell Hutchins.
ASIA PACIFIC GROWTH FUND. Under the current Advisory Contract, the fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 1.20% of the fund's average daily net assets up to and including $100
million and at an annual rate of 1.10% of its average daily net assets in excess
of $100 million. For the fiscal years ended October 31, 1999 and October 31,
1998 and the period March 25, 1997 (commencement of operations) through October
31, 1997, the fund paid (or accrued) to Mitchell Hutchins advisory and
administrative fees of $423,124, $477,960 and $533,412, respectively. For the
fiscal year ended October 31, 1999, Mitchell Hutchins voluntarily waived $327 of
its fee under the Advisory Contract in connection with the fund's investment of
cash collateral from securities lending in a private investment vehicle managed
by Mitchell Hutchins.
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 SIMNA, ("Sub-Advisory
Contract"), pursuant to which SIMNA determines what securities will be
purchased, sold or held by Asia Pacific Growth Fund. Under the current
Sub-Advisory Contract, Mitchell Hutchins (not the fund) pays SIMNA a fee,
computed daily and paid monthly, at an annual rate of 0.65% of the fund's
average daily net assets up to and including $100 million and at an annual rate
of 0.55% of the fund's average daily net assets in excess of $100 million. SIMNA
bears all expenses incurred by it in connection with its services under the
Sub-Advisory Contract. For the fiscal years ended October 31, 1999 and October
31, 1998 and the period March 25, 1997 (commencement of operations) through
October 31, 1997, Mitchell Hutchins (not the fund) paid (or accrued) to SIMNA
sub-advisory fees of $229,371, $258,895 and $284,106, respectively.
SIMNA is a wholly owned subsidiary of Schroder U.S. Holdings Inc.,
which engages through its subsidiary firms in the investment banking, asset
management and securities businesses. Affiliates of Schroder U.S. Holdings Inc.
(or their predecessors) have been investment managers since 1927. Schroder U.S.
Holdings Inc. is an indirect wholly owned U.S. subsidiary of Schroders plc, a
publicly owned holding company organized under the laws of England. Schroders
plc and its affiliates currently engage in worldwide investment banking and
investment management businesses. In January 2000, Schroders plc agreed to sell
its worldwide banking business to Salomon Smith Barney. The transaction, which
is expected to be completed by May 2000, is subject to regulatory approvals and
satisfaction of closing conditions. Schroders plc will retain its asset
management business.
46
<PAGE>
Under the Sub-Advisory Contract, SIMNA will not be liable for any error
of judgment or mistake of law or for any loss suffered by Managed Trust, Asia
Pacific Growth Fund, its shareholders or Mitchell Hutchins in connection with
the Sub-Advisory Contract, except any liability to Managed Trust, the fund, its
shareholders or Mitchell Hutchins to which SIMNA would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment
or the termination of the Advisory Contract and is terminable at any time
without penalty by Managed Trust's board or by vote of the holders of a majority
of the fund's outstanding voting securities on 60 days' notice to SIMNA, or by
SIMNA on 120 days' written notice to Mitchell Hutchins. The Sub-Advisory
Contract may also be terminated by Mitchell Hutchins (1) upon material breach by
SIMNA of its representations and warranties, which breach shall not have been
cured within a 20-day period after notice of such breach; (2) if the sub-adviser
becomes unable to discharge its duties and obligations under the Sub-Advisory
Contract or (3) on 120 days' notice to SIMNA.
EMERGING MARKETS EQUITY FUND. Under the current Advisory Contract, the
fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 1.20% of the fund's average daily net assets. For the fiscal
years ended October 31, 1999, October 31, 1998 and October 31, 1997, the fund
paid (or accrued) to Mitchell Hutchins advisory and administrative fees of
$101,195, $161,312 and $438,676, respectively. For the fiscal year ended October
31, 1999, Mitchell Hutchins voluntarily waived $17 of its fee under the Advisory
Contract in connection with the fund's investment of cash collateral from
securities lending in a private investment vehicle managed by Mitchell Hutchins.
During the fiscal years ended October 31, 1998 and October 31, 1997,
Mitchell Hutchins waived part of its management fees and reimbursed Emerging
Markets Equity Fund in the aggregate amounts of $170,652 and $180,568,
respectively. During these periods, certain expense limitations were applicable
that are no longer in effect. During the 1999 fiscal year, the fund and Mitchell
Hutchins entered into an expense reimbursement agreement under which Mitchell
Hutchins agreed to reimburse the fund to the extent the fund's expenses during
that fiscal year otherwise would exceed specified expense caps. Under that
agreement, Mitchell Hutchins reimbursed the fund in the aggregate amount of
$99,354. The fund and Mitchell Hutchins have entered into a new expense
reimbursement agreement, under which Mitchell Hutchins has agreed to reimburse
the fund to the extent that the fund's expenses through March 1, 2001 otherwise
would exceed the expense caps described in the Prospectus.
The Advisory Contract authorizes Mitchell Hutchins to retain one or
more sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell
Hutchins has entered into a separate contract with SIMNA ("Sub-Advisory
Contract"), pursuant to which SIMNA determines what securities will be
purchased, sold or held by Emerging Markets Equity Fund. Under the Sub-Advisory
Contract, Mitchell Hutchins (not the fund) pays SIMNA a fee, computed daily and
paid monthly, at an annual rate of 0.70% of the fund's average daily net assets.
SIMNA bears all expenses incurred by it in connection with its services under
the Sub-Advisory Contract. For the fiscal years ended October 31, 1999, October
31, 1998 and the period February 25, 1997 to October 31, 1997, Mitchell Hutchins
(not the fund) paid (or accrued) to SIMNA $59,031, $94,096 and $161,715,
respectively, in sub-advisory fees.
SIMNA is a wholly owned subsidiary of Schroder U.S. Holdings Inc.,
which engages through its subsidiary firms in the investment banking, asset
management and securities businesses. Affiliates of Schroder U.S. Holdings Inc.
(or their predecessors) have been investment managers since 1927. Schroder U.S.
Holdings Inc. is an indirect wholly owned U.S. subsidiary of Schroders plc, a
publicly owned holding company organized under the laws of England. Schroders
plc and its affiliates currently engage in worldwide investment banking and
investment management businesses. In January 2000, Schroders plc agreed to sell
its worldwide banking business to Salomon Smith Barney. The transaction, which
is expected to be completed by May 2000, is subject to regulatory approvals and
satisfaction of closing conditions. Schroders plc will retain its asset
management business.
Under the Sub-Advisory Contract, SIMNA will not be liable for any error
of judgment or mistake of law or for any loss suffered by Investment Trust II,
Emerging Markets Equity Fund, its shareholders or Mitchell Hutchins in
47
<PAGE>
connection with the Sub-Advisory Contract, except any liability to Investment
Trust II, the fund, its shareholders or Mitchell Hutchins to which SIMNA would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon the assignment
or the termination of the Advisory Contract and is terminable at any time
without penalty by Investment Trust II's board or by vote of the holders of a
majority of the fund's outstanding securities on 60 days' notice to SIMNA, or by
SIMNA on 60 days' written notice to Mitchell Hutchins. The Sub-Advisory Contract
may also be terminated by Mitchell Hutchins (1) upon material breach by SIMNA of
its representations and warranties, which breach shall not have been cured
within a 20-day period after notice of such breach; (2) if the sub-adviser
becomes unable to discharge its duties and obligations under the Sub-Advisory
Contract or (3) on 120 days' notice to SIMNA.
TRANSFER AGENCY-RELATED SERVICES. PFPC (not the funds) pays PaineWebber
for certain transfer agency-related services that PFPC has delegated to
PaineWebber. Prior to August 1, 1997, under an agreement between the applicable
Trust and PaineWebber, PaineWebber provided those services directly to Global
Income Fund and Asia Pacific Growth Fund. Under these agreements, Global Income
Fund paid (or accrued) $189,131 to PaineWebber during the period November 1,
1996 to July 31, 1997, and Asia Pacific Growth Fund paid (or accrued) $9,958 to
PaineWebber during the period March 25, 1997 (commencement of operations) to
July 31, 1997. There were no similar service agreements in effect for Global
Equity Fund or Emerging Markets Equity Fund.
SECURITIES LENDING. During the fiscal years ended October 31, 1999,
October 31, 1998 and October 31, 1997, the funds paid (or accrued) the following
fees to PaineWebber for its services as securities lending agent:
<TABLE>
<CAPTION>
FUND FISCAL YEAR ENDED OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Global Equity Fund............................. $50,792 $42,839 $14,324
Global Income Fund............................. 35,084 49,982 26,057
Asia Pacific Growth Fund....................... 6,955 25,777 14,324
Emerging Markets Equity Fund*.................. 301 2,235 6,225
--------
* The 1997 fiscal period is from March 27, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
NET ASSETS. The following table shows the approximate net assets as of
January 31, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ----------
Domestic (excluding Money Market)............... $9,890.5
Global........................................... 4,777.3
Equity/Balanced.................................. 10,074.1
Fixed Income (excluding Money Market)............ 4,593.7
Taxable Fixed Income......................... 3,171.5
Tax-Free Fixed Income........................ 1,422.2
Money Market Funds............................... 38,247.0
PERSONAL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber 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
48
<PAGE>
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients. Personnel of each sub-adviser may also invest in
securities for their own accounts pursuant to comparable codes of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with
each Trust (collectively, "Distribution Contracts"). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable fund. Shares of each fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the funds
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell each fund's shares. Mitchell Hutchins is located at 51 West 52nd
Street, New York, New York 10019-6114 and PaineWebber is located at 1285 Avenue
of the Americas, New York, New York 10019.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by each Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"), each
fund pays Mitchell Hutchins a service fee, accrued daily and payable monthly, at
the annual rate of 0.25% of the average daily net assets of each class of
shares. Under the Class B Plan, each fund pays Mitchell Hutchins a distribution
fee, accrued daily and payable monthly, at the annual rate of 0.75% of the
average daily net assets of the Class B shares. Under the Class C Plan, each
fund pays Mitchell Hutchins a distribution fee, accrued daily and payable
monthly, at the annual rate of 0.75% (0.50% in the case of Global Income Fund)
of the average daily net assets of the Class C shares. There is no distribution
plan with respect to the funds' Class Y shares, and the funds pay no service or
distribution fees with respect to their Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B
and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
each fund by PaineWebber clients. PaineWebber then compensates its Financial
Advisors for shareholder servicing that they perform and offsets its own
expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
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 Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.
The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that each fund must pay service and distribution fees
to Mitchell Hutchins for its service- and distribution-related 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
49
<PAGE>
Hutchins' sole responsibility and not that of the funds. Annually, the board of
each fund reviews the Plans and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually and any material amendment thereto
is approved by the applicable board, including those board members who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan,
acting in person at a meeting called for that purpose, (3) payments by a fund
under the Plan shall not be materially increased without the affirmative vote of
the holders of a majority of the outstanding shares of the relevant class of the
fund and (4) while the Plan remains in effect, the selection and nomination of
board members who are not "interested persons" of the Trust shall be committed
to the discretion of the board members who are not "interested persons" of that
Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of a
fund's shares to such class based on the ratio of sales of shares of such class
to the sales of all three classes of shares. The fees paid by one class of a
fund's shares will not be used to subsidize the sale of any other class of fund
shares.
The funds paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Plans during the fiscal year ended October
31, 1999:
<TABLE>
<CAPTION>
GLOBAL EQUITY ASIA PACIFIC EMERGING MARKETS
FUND GLOBAL INCOME FUND GROWTH FUND EQUITY FUND*
---- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Class A................................ $614,556 $905,780 $33,043 $11,746
Class B................................ 432,119 221,111 138,262 4,765
Class C................................ 387,973 186,104 80,943 23,923
- ---------------
* These figures are net of waivers by Mitchell Hutchins of service and distribution fees in the amount of $ 4,246 for
Class A shares, $1,420 for Class B shares and $6,639 for Class C shares.
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber, incurred the following shareholder
service-related and distribution-related expenses with respect to each fund during the fiscal year ended October 31,
1999:
GLOBAL GLOBAL ASIA PACIFIC EMERGING MARKETS
EQUITY FUND INCOME FUND GROWTH FUND EQUITY FUND
----------- ----------- ----------- -----------
CLASS A
<S> <C> <C> <C> <C>
Marketing and advertising............... $ 564,577 $ 377,154 $ 142,694 $ 77,043
Amortization of commissions............. 0 0 0 0
Printing of prospectuses and SAIs....... 1,147 1,431 82 42
Branch network costs allocated and
interest expense...................... 1,097,707 1,561,833 53,031 32,597
Service fees paid to PaineWebber
Financial Advisors.................... 180,210 350,725 12,887 3,663
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C> <C> <C>
Marketing and advertising............... $ 99,310 $ 21,483 $ 149,299 $ 7,819
Amortization of commissions............. 150,073 103,431 37,279 1,682
Printing of prospectuses and SAIs....... 134 81 84 4
Branch network costs allocated and
interest expense...................... 201,206 97,096 63,733 3,632
Service fees paid to PaineWebber
Financial Advisors.................... 34,247 21,365 13,481 358
CLASS C
Marketing and advertising............... $ 89,172 $ 25,752 $ 87,409 $ 39,225
Amortization of commissions............. 113,842 48,036 23,675 5,817
Printing of prospectuses and SAIs....... 160 98 57 18
Branch network costs allocated and
interest expense...................... 174,543 107,072 32,737 16,666
Service fees paid to PaineWebber
Financial Advisors.................... 29,114 24,018 7,892 1,776
</TABLE>
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing the funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the funds' shares, including the PaineWebber retail branch system.
In approving each fund's overall Flexible PricingSM system of
distribution, the applicable board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, each board considered all the features
of the distribution system, including (1) the conditions under which initial
sales charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee would
be attractive to PaineWebber Financial Advisors and correspondent firms,
resulting in greater growth of the fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the fund's assets and potential continued growth, (4) the services provided
to the fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board of each fund considered all
the features of the distribution system, including (1) the conditions under
which contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
Financial Advisors and correspondent firms, resulting in greater growth of the
fund than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in the fund's assets and potential
continued growth, (5) the services provided to the fund and its shareholders by
Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service- and distribution-related expenses and costs. The board
members also recognized that Mitchell Hutchins' willingness to compensate
PaineWebber and its Financial Advisors, without the concomitant receipt by
51
<PAGE>
Mitchell Hutchins of initial sales charges, was conditioned upon its expectation
of being compensated under the Class B Plan.
In approving the Class C Plan, each board considered all the features
of the distribution system, including (1) the advantage to investors in having
no initial sales charges deducted from fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber Financial Advisors and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, except within one
year after purchase, was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of each fund, which
fees would increase if the Plan were successful and the funds attained and
maintained significant asset levels.
Under the Distribution Contract between each Trust and Mitchell
Hutchins for the Class A shares for the fiscal years (or periods) set forth
below, Mitchell Hutchins earned the following approximate amounts of sales
charges and retained the following approximate amounts, net of concessions to
PaineWebber as exclusive dealer.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
GLOBAL EQUITY FUND
Earned..................................... $36,468 $60,698 $229,590
Retained................................... 3,334 4,130 10,949
GLOBAL INCOME FUND
Earned..................................... 17,409 16,007 29,752
Retained................................... 1,949 2,396 2,950
ASIA PACIFIC GROWTH FUND *
Earned..................................... 47,513 83,960 1,142,055
Retained................................... 3,138 5,521 67,143
EMERGING MARKETS EQUITY FUND
Earned..................................... 4,138 3,958 10,692
Retained................................... 272 257 662
- --------
* The 1997 fiscal period is from March 27, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
52
<PAGE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year ended
October 31, 1999:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GLOBAL EQUITY FUND GLOBAL INCOME FUND GROWTH FUND EQUITY FUND
------------------ ------------------ ------------ ----------------
<S> <C> <C> <C> <C>
Class A................ $ 0 $ 0 $ 0 $ 0
Class B................ 85,748 33,705 84,742 2,192
Class C................ 2,425 329 9,399 308
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins or the
applicable sub-adviser is responsible for the execution of each fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins or the sub-adviser seeks to obtain the
best net results for a fund, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved. While
Mitchell Hutchins and the sub-advisers generally seek reasonably competitive
commission rates, payment of the lowest commission is not necessarily consistent
with obtaining the best net results. Prices paid to dealers in principal
transactions, through which most bonds and some equity securities are traded,
generally include a "spread," which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at the
time. The funds may invest in securities traded in the over-the-counter market
and will engage primarily in transactions directly with the dealers who make
markets in such securities, unless a better price or execution could be obtained
by using a broker. During the fiscal years or periods indicated, the funds paid
the brokerage commissions set forth below:
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Global Equity Fund........... $1,158,049 $2,467,840 $384,903
Global Income Fund........... 0 0 3,330
Asia Pacific Growth Fund *... 207,382 246,684 454,243
Emerging Markets Equity Fund. 53,824 102,060 266,325
- --------
* The 1997 fiscal period is from March 27, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
The funds have no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber, or brokerage affiliates of SIMNA or Invista. Each board
has adopted procedures in conformity with Rule 17e-1 under the Investment
Company Act to ensure that all brokerage commissions paid to PaineWebber or
brokerage affiliates of a sub-adviser are reasonable and fair. Specific
provisions in the Advisory Contracts and the applicable Sub-Advisory Contracts
authorize Mitchell Hutchins and the sub-advisers and any of their affiliates
that is a member of a national securities exchange to effect portfolio
transactions for the applicable funds on such exchange and to retain
compensation in connection with such transactions. Any such transactions will be
effected and related compensation paid only in accordance with applicable SEC
regulations.
During the fiscal year ended October 31, 1999 Global Equity Fund paid
$15,409 in brokerage commissions to PaineWebber, which represented 1.3% of the
total brokerage commissions paid by the fund and 1.19% of the total dollar
amount of transactions involving the payment of brokerage commissions. During
that fiscal year, Global Equity Fund paid no brokerage commissions to Mitchell
Hutchins or to any of its other affiliates or to its sub-adviser or any of its
affiliates, and Global Income Fund, Asia Pacific Growth Fund and Emerging
Markets Equity Fund paid no brokerage commissions to Mitchell Hutchins, a
sub-adviser or any of their affiliates. During the fiscal years or periods ended
53
<PAGE>
October 31, 1997 and October 31, 1998 no fund paid brokerage commissions to
PaineWebber, the fund's sub-adviser or any of their affiliates.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute their transactions
in futures contracts, including procedures permitting the use of Mitchell
Hutchins and its affiliates or affiliates of a sub-adviser, are similar to those
in effect with respect to brokerage transactions in securities.
In selecting brokers, Mitchell Hutchins or a sub-adviser will consider
the full range and quality of a broker's services. Consistent with the interests
of the funds and subject to the review of each board, Mitchell Hutchins or a
sub-adviser may cause a fund to purchase and sell portfolio securities through
brokers who provide Mitchell Hutchins or the sub-adviser with brokerage or
research services. The funds may pay 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.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
For the fiscal year ended October 31, 1999, the funds directed the
portfolio transactions indicated below to brokers chosen because they provide
research, analysis, advice and similar services, for which the funds paid the
brokerage commissions indicated below:
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO
FUND TRANSACTIONS BROKERAGE COMMISSIONS PAID
---- ------------ --------------------------
<S> <C> <C>
Global Equity Fund................... $ 122,061,134 $ 247,532
Global Income Fund................... 0 0
Asia Pacific Growth Fund............. 328,841 1,274
Emerging Markets Equity Fund......... 146,379 818
</TABLE>
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the applicable sub-adviser seeks best execution. Although
Mitchell Hutchins or a sub-adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the
sub-adviser 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. Mitchell Hutchins or a sub-adviser
may engage in agency transactions in over-the-counter 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.
Research services and information received from brokers or dealers
are supplemental to Mitchell Hutchins' or a sub-adviser's own research efforts
and, when utilized, are subject to internal analysis before being incorporated
into their investment processes. Information and research services furnished by
brokers or dealers through which or with which the funds effect securities
transactions may be used by Mitchell Hutchins or a sub-adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or a sub-adviser by brokers or dealers in connection with other funds
or accounts that either of them advises may be used in advising the funds.
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<PAGE>
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 a fund is
concerned, or upon its ability to complete its entire order, in other cases it
is believed that coordination and the ability to participate in volume
transactions will be beneficial to the fund.
The funds will not purchase securities that are offered in
underwritings in which PaineWebber or an affiliate of a sub-adviser is a member
of the underwriting or selling group, except pursuant to procedures adopted by
each board pursuant to Rule 10f-3 under the Investment Company Act. Among other
things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that PaineWebber or any affiliate
thereof or an affiliate of a sub-adviser not participate in or benefit from the
sale to the funds.
As of October 31, 1999, the funds owned securities issued by their
regular broker-dealers as follows:
Global Equity Fund: Repurchase agreements with State Street Bank and
Trust Company ($275,000) and Dresner Bank AG ($7,591,000); common stock of
Morgan Stanley Dean Witter & Co. ($1,853,250 ).
Asia Pacific Growth Fund: Repurchase agreements with State Street Bank
and Trust Company ($1,724,000).
Emerging Markets Equity Fund. Repurchase agreements with State Street
Bank and Trust Company ($164,000); common stock of Daewoo Securities $6,437.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
The funds' respective portfolio turnover rates for the fiscal periods
shown were:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
------------------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND OCTOBER 31, 1999 OCTOBER 31, 1998
--------- ---------------- ----------------
<S> <C> <C>
Global Equity Fund.................... 72% 151%
Global Income Fund.................... 63% 93%
Asia Pacific Growth Fund.............. 70% 59%
Emerging Markets Equity Fund.......... 80% 64%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell
Hutchins may make payments out of its own resources to PaineWebber
55
<PAGE>
and to the variable annuity's sponsor, adviser or distributor in a
total amount not to exceed l% of the amount invested;
o Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee
for program services, provided that the program sponsor has entered
into a written agreement with PaineWebber permitting the sale of
shares at net asset value to that program. For investments made
pursuant to this waiver, Mitchell Hutchins may make a payment to
PaineWebber out of its own resources in an amount not to exceed 1%
of the amount invested. For subsequent investments or exchanges made
to implement a rebalancing feature of such an investment program,
the minimum subsequent investment requirement is also waived;
o Acquire shares in connection with a reorganization pursuant to which
a fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed. This contingent deferred sales
charge is waived if you are eligible to invest in certain offshore investment
pools offered by PaineWebber, your shares are sold before March 31, 2000 and the
proceeds are used to purchase interests in one or more of these pools (see
below).
COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
funds with concurrent purchases of Class A shares of any other PaineWebber
mutual fund and thus take advantage of the reduced sales charges indicated in
the tables of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the funds and Class A shares
of such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
56
<PAGE>
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of a fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check for
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, in which event 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 readjusted
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 "Taxes --
Special Rule for Class A Shareholders," below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
NON-RESIDENT ALIEN WAIVER OF CONTINGENT DEFERRED SALES CHARGE FOR CLASS
A, B AND C SHARES. Until March 31, 2000, investors who are non-resident aliens
will be able to sell their fund shares without incurring a contingent deferred
sales charge if they use the sales proceeds to immediately purchase shares of
certain offshore investment pools available through PaineWebber. The fund will
waive the contingent deferred sales charge that would otherwise apply to a sale
of Class A, Class B or Class C shares of a fund. Fund shareholders who want to
take advantage of this waiver should review the offering documents of the
offshore investment pools for further information, including investment
minimums, and fees and expenses. Shares of the offshore investment pools are
available only in those jurisdictions where the sale is authorized and are not
available to any U.S. person, including, but not limited to, any citizen or
resident of the United States, or any U.S. partnership or U.S. trust, and are
not available to residents of certain other countries. For more information on
how to take advantage of the deferred sales charge waiver, investors should
contact their PaineWebber Financial Advisors.
PURCHASES AND SALES OF CLASS Y SHARES THROUGH THE PACESM MULTI ADVISOR
PROGRAM. An investor who participates in the PACESM Multi Advisor Program is
eligible to purchase Class Y shares. The PACESM Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACESM Multi Advisor Program is subject
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<PAGE>
to payment of an advisory fee at the effective maximum annual rate of 1.5% of
assets. Employees of PaineWebber and its affiliates are entitled to a waiver of
this fee. Please contact your PaineWebber Financial Advisor or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACESM Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONESM
PROGRAM. Investors who purchase shares through the PaineWebber InsightOneSM
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOneSM Program offers a nondiscretionary brokerage account to
investors for an asset-based fee at an annual rate of up to 1.50% of the assets
in the account. Account holders may purchase or sell certain investment products
without paying commissions or other markups/markdowns.
PURCHASES AND SALES OF CLASS Y SHARES FOR PARTICIPANTS IN PW 401(K)
PLUS PLAN. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, "Plan Documents")
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-PWEBBER (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or a fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of the service organizations. A fund
will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like all customer orders, these
orders will be priced based on the fund's net asset value next computed after
receipt of the order by the service organizations or their agents. Service
organizations may include retirement plan service providers who aggregate
purchase and redemption instructions received from numerous retirement plans or
plan participants.
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AUTOMATIC INVESTMENT PLAN. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which a fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same dollar amount each month
under the plan, the investor will purchase more shares when a fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, an investor's average purchase price per share over
any given period will be lower than if the investor purchased a fixed number of
shares on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, because the automatic investment plan involves
continuous investing regardless of price levels, an investor should consider his
or her financial ability to continue purchases through periods of both low and
high price levels.
SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
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 $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to
a contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A shares, initial sales charges. On or about the 20th of a month for
monthly, quarterly, semi-annual and annual plans, PaineWebber will arrange for
redemption by the funds of sufficient fund shares to provide the withdrawal
payments specified by participants in the funds' systematic withdrawal plan. The
payments generally are mailed approximately five Business Days (defined under
"Valuation of Shares") after the redemption date. Withdrawal payments should not
be considered dividends, but redemption proceeds. If periodic withdrawals
continually exceed reinvested dividends and other distributions, a shareholder's
investment may be correspondingly reduced. A shareholder may change the amount
of the systematic withdrawal or terminate participation in the systematic
withdrawal plan at any time without charge or penalty by written instructions
with signatures guaranteed to PaineWebber or PFPC Inc. Instructions to
participate in the plan, change the withdrawal amount or terminate participation
in the plan will not be effective until five days after written instructions
with signatures guaranteed are received by PFPC. Shareholders may request the
forms needed to establish a systematic withdrawal plan from their PaineWebber
Financial Advisors, correspondent firms or PFPC at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available
through PaineWebber in which purchases of shares of PaineWebber mutual funds and
other investments may be made. Investors considering establishing an IRA should
review applicable tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
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PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN (SERVICEMARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED)(RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. 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(R) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities
held in the account;
o comprehensive 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. AN INVESTMENT IN A MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
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INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH A
MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A
MONEY MARKET FUND;
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 unlimited electronic funds transfers and a bill payment service for
an additional fee;
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 for the net equity securities balance in
the event of the liquidation of PaineWebber. This protection does
not apply to shares of funds that are held at PFPC and not through
PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Gold MasterCard, with an additional fee of $40 if the investor selects an
optional line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares
of that fund, based on the relative net asset values per share of the two
classes, as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (1) the date on which such Class B shares were
issued or (2) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The 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 their higher
ongoing expenses beyond six years from the date of purchase. Mitchell Hutchins
has no reason to believe that this condition will not continue to be met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
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Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued based on sales on the exchange considered by Mitchell Hutchins or the
sub-adviser as the primary market. Securities traded in the over-the-counter
market and listed on The Nasdaq Stock Market ("Nasdaq") are valued at the last
trade price on Nasdaq prior to valuation; other over-the-counter securities
normally are valued at the last bid price available prior to valuation.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the applicable board. It should be recognized that judgment often plays a
greater role in valuing thinly traded securities, including many lower rated
bonds, than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information is available. The amortized cost
method of valuation generally is used to value debt obligations with 60 days or
less remaining until maturity, unless the applicable board determines that this
does not represent fair value.
All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the current foreign currency exchange rate. Foreign
currency exchange rates are generally determined prior to the close of regular
trading on the New York Stock Exchange. Occasionally events affecting the value
of foreign investments and such exchange rates occur between the time at which
they are determined and the close of trading on the New York Stock Exchange,
which events would not be reflected in the computation of a fund's net asset
value on that day. If events materially affecting the value of such investments
or currency exchange rates occur during such time period, the investments will
be valued at their fair value as determined in good faith by or under the
direction of the applicable board. The foreign currency exchange transactions of
the funds conducted on a spot (I.E., cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. Under
normal market conditions this rate differs from the prevailing exchange rate by
less than one-tenth of one percent due to the costs of converting from one
currency to another.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
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.
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.
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The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
The following tables show performance information for each class of the
funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average annual return.
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (11/14/91) (8/25/95) (5/10/93) (5/10/93)
- ---------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1999:
Standardized Return*............. 10.34% 9.63% 13.67% 15.97%
Non-Standardized Return.......... 15.56% 14.63% 14.67% 15.97%
Five Years ended October 31, 1999:
Standardized Return*............. 7.42% N/A 7.60% 8.78%
Non-Standardized Return.......... 8.42% N/A 7.60% 8.78%
Inception to October 31, 1999
Standardized Return*............. 9.63% 7.92% 9.20% 10.39%
Non-Standardized Return.......... 10.27% 8.29% 9.20% 10.39%
GLOBAL INCOME FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (7/1/91) (3/20/87) (7/2/92) (8/26/91)
- ---------------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1999:
Standardized Return*.............. (6.34)% (7.90)% (3.62)% (2.10)%
Non-Standardized Return........... (2.44)% (3.29)% (2.93)% (2.10)%
Five Years ended October 31, 1999:
Standardized Return*.............. 5.37% 5.08% 5.72% 6.57%
Non-Standardized Return........... 6.24% 5.39% 5.72% 6.57%
Ten Years Ended October 31, 1999
Standardized Return*.............. N/A 7.24% N/A N/A
Non-Standardized Return........... N/A 7.24% N/A N/A
Inception to October 31, 1999
Standardized Return*.............. 5.77% 8.15% 5.01% 6.56%
Non-Standardized Return.......... 6.29% 8.15% 5.01% 6.56%
</TABLE>
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<TABLE>
<CAPTION>
ASIA PACIFIC GROWTH FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (3/25/97) (3/25/97) (3/25/97) (3//13/98)
<S> <C> <C> <C> <C>
Year ended October 31, 1999:
Standardized Return*............. 35.99% 36.25% 40.39% 42.56%
Non-Standardized Return.......... 42.38% 41.25% 41.39% 42.56%
Inception to October 31, 1999
Standardized Return*............. (10.83)% (10.97)% (9.89)% 7.03%
Non-Standardized Return.......... (9.24)% (9.92)% (9.89)% 7.03%
EMERGING MARKETS EQUITY FUND
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (1/19/94) (12/05/95) (1/19/94) (1/19/94)
- ---------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1999:
Standardized Return*............. 28.70% 28.75% 32.39% 35.11%
Non-Standardized Return.......... 34.82% 33.75% 33.39% 35.11%
Five Years ended October 31, 1999:
Standardized Return*............. (6.75)% N/A (6.67)% (5.68)%
Non-Standardized Return.......... (5.89)% N/A (6.67)% (5.68)%
Inception to October 31, 1999
Standardized Return*............. (5.90)% (2.26)% (5.91)% (4.93)%
Non-Standardized Return.......... (5.14)% (2.26)% (5.91)% (4.93)%
- --------------
* All Standardized Return figures for Class A shares reflect deduction of the current maximum sales charge of 4.5%
(4.0% for Global Income Fund). All Standardized Return figures for Class B and Class C shares reflect deduction of
the applicable contingent deferred sales charges imposed on a redemption of shares held for the period. Class Y
shares do not impose an initial or contingent deferred sales charge; therefore, the performance information is the
same for both standardized return and non-standardized return for the periods indicated.
</TABLE>
YIELD. Yields used in Global Income Fund's Performance Advertisements
are calculated by dividing the fund's interest income attributable to a class of
shares for a 30-day period ("Period"), net of expenses attributable to such
class, by the average number of shares of such class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:
YIELD = [OBJECT OMITTED]
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.
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Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), Global Income Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the fund, interest earned during the Period is then determined by totaling
the interest earned on all debt obligations. For purposes of these calculations,
the maturity of an obligation with one or more call provisions is assumed to be
the next date on which the obligation reasonably can be expected to be called
or, if none, the maturity date. With respect to Class A shares, in calculating
the maximum offering price per share at the end of the Period (variable "d" in
the above formula) the fund's current maximum 4% initial sales charge on Class A
shares is included. For the 30-day period ended October 31, 1999 the yields for
its Class A shares, Class B shares, Class C shares and Class Y shares were
4.63%, 3.69%, 4.32%, and 5.16%, respectively.
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), with the
performance of recognized stock and other indices, including (but not limited
to) the Standard & Poor's 500 Composite Stock 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 Standard & Poor's Oil Composite Index, the Morgan Stanley Capital
International World Index (including Asia Pacific regional indices), the Salomon
Brothers Non-U.S. Dollar Index, the Salomon Smith Barney Non-U.S. World
Government Bond Index, the Salomon Smith Barney World Government Index, other
similar Salomon Smith Barney 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, SMART MONEY, MUTUAL FUNDS, 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(R) Money Markets. In comparing the funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The bonds held by
the funds generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term bonds. An investment in any fund
involves greater risks than an investment in either a money market fund or a CD.
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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.
IBBOTSON CHART PLOT POINTS
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1999
YEAR COMMON STOCKS LONG-TERM GOV'T BONDS INFLATION/CPI TREASURY BILLS
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
1999 $28,456,286 $402,177 $93,998 $156,414
Source: STOCKS, BONDS, BILLS AND INFLATION 1999 YEARBOOKTM, Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
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 stocks 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.
Over time, stocks have outperformed all other investments by a wide
margin, offering a solid hedge against inflation. From January 1, 1926 to
December 31, 1999, stocks beat all other traditional asset classes. A $10,000
investment in the S&P 500 grew to $28,456,286, significantly more than any other
investment.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
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(which normally includes any initial sales charge paid on Class A shares). An
exchange of any fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when
a shareholder sells or exchanges Class A shares of a fund within 90 days of
purchase and subsequently acquires Class A shares of the same or another
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount would increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion of Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, a fund must distribute to its shareholders for each taxable year
at least 90% of its investment company taxable income (consisting generally of
net investment income, net short-term capital gains and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. For each fund, these requirements include the
following: (1) the fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) at the close of each quarter of the
fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with these other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (3) at the close of each quarter of the
fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer. By qualifying as a RIC, a fund (but not its
shareholders) will be relieved of federal income tax on the part of its
investment company taxable income and net capital gain (I.E., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
its shareholders). If any fund failed to qualify for that treatment for any
taxable year, (1) it would be taxed as an ordinary corporation on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (2) the shareholders would treat
all those distributions, including distributions of net capital gain, as taxable
dividends (that is, ordinary income) to the extent of the fund's earnings and
profits. In addition, the fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions declared by a fund
in October, November or December of any year and payable to shareholders of
record on a date in any of those months will be deemed to have been paid by the
fund and received by the shareholders on December 31 of that year if the
distributions are paid by the fund during the following January. Accordingly,
those distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends (whether paid in cash or additional shares)
from each fund's investment company taxable income may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion for a
fund may not exceed the aggregate dividends received by the fund from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax.
If shares of a fund are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
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
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pay full price for the shares and receive some portion of the price back as a
taxable distribution.
Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of a fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, it will be eligible to, and may, file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign taxes
paid by it. Pursuant to the election, the fund would treat those taxes as
dividends paid to its shareholders and each shareholder (1) would be required to
include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) would be required to treat his or her
share of those taxes and of any dividend paid by the fund that represents income
from foreign or U.S. possessions sources as his or her own income from those
sources, and (3) could either deduct the foreign taxes deemed paid by him or her
in computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his or her federal
income tax. A fund will report to its shareholders shortly after each taxable
year their respective shares of foreign taxes paid and the income from sources
within, and taxes paid to, foreign countries and U.S. possessions if it makes
this election. Individuals who have no more than $300 ($600 for married persons
filing jointly) of creditable foreign taxes included on Forms 1099 and all of
whose foreign source income is "qualified passive income" may elect each year to
be exempt from the extremely complicated foreign tax credit limitation, in which
event they would be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.
Each fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Each fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) 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 that stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income
to its shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax -- even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain of its requirements.
Each fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years under the election (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs). A
fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.
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The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses a fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a fund with respect
to its business of investing in securities or foreign currencies, will be
treated as qualifying income under the Income Requirement.
Certain futures and forward currency contracts in which a fund may
invest may be subject to section 1256 of the Internal Revenue Code ("section
1256 contracts"). Any section 1256 contracts a fund holds at the end of each
taxable year generally must be "marked-to-market" (that is, treated as having
been sold at that time for their fair market value) for federal income tax
purposes, with the result that unrealized gains or losses will be treated as
though they were realized. Sixty percent of any net gain or loss recognized on
these deemed sales, and 60% of any net realized gain or loss from any actual
sales of section 1256 contracts, will be treated as long-term capital gain or
loss, and the balance will be treated as short-term capital gain or loss. These
rules may operate to increase the amount that a fund must distribute to satisfy
the Distribution Requirement (I.E., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income, and to increase the net capital gain a fund recognizes, without in
either case increasing the cash available to the fund. A fund may elect not to
have the foregoing rules apply to any "mixed straddle" (that is, a straddle,
clearly identified by the fund in accordance with the regulations, at least one
(but not all) the positions of which are section 1256 contracts), although doing
so may have the effect of increasing the relative proportion of net short-term
capital gain (taxable as ordinary income) and thus increasing the amount of
dividends that must be distributed.
Offsetting positions in any actively traded security, option, futures
or forward currency contract entered into or held by a fund may constitute a
"straddle" for federal income tax purposes. Straddles are subject to certain
rules that may affect the amount, character and timing of a fund's gains and
losses with respect to positions of the straddle by requiring, among other
things, that (1) loss realized on disposition of one position of a straddle be
deferred to the extent of any unrealized gain in an offsetting position until
the latter position is disposed of, (2) the fund's holding period in certain
straddle positions not begin until the straddle is terminated (possibly
resulting in gain being treated as short-term rather than long-term capital
gain) and (3) losses recognized with respect to certain straddle positions, that
otherwise would constitute short-term capital losses, be treated as long-term
capital losses. Applicable regulations also provide certain "wash sale" rules,
which apply to transactions where a position is sold at a loss and a new
offsetting position is acquired within a prescribed period, and "short sale"
rules applicable to straddles. Different elections are available to the funds,
which may mitigate the effects of the straddle rules, particularly with respect
to mixed straddles.
When a covered call option written (sold) by a fund expires, it will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. When a fund terminates its obligations under such an
option by entering into a closing transaction, it will realize a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by a fund is exercised, the fund will be treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
If a fund has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward currency
contract or short sale) with respect to any stock, debt instrument (other than
"straight debt") or partnership interest the fair market value of which exceeds
its adjusted basis--and enters into a "constructive sale" of the position, the
fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or a futures or forward
currency contract entered into by a fund or a related person with respect to the
same or substantially identical property. In addition, if the appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to a fund's
transaction during any taxable year that otherwise would be treated as a
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constructive sale if the transaction is closed within 30 days after the end of
that year and the fund holds the appreciated financial position unhedged for 60
days after that closing (I.E., at no time during that 60-day period is the
fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
A fund may acquire zero coupon or other securities issued with original
issue discount ("OID") or Treasury inflation-protected securities ("TIPS"), on
which principal is adjusted based on changes in the Consumer Price Index. A fund
must include in its gross income the portion of the OID that accrues on those
securities, and the amount of any principal increases on TIPS, during the
taxable year, even if the fund receives no corresponding payment on them during
the year. Because a fund annually must distribute substantially all of its
investment company taxable income, including any accrued OID and other non-cash
income, to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from a fund's cash assets or from the proceeds
of sales of portfolio securities, if necessary. A 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.
The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the funds' activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged
to consult their own tax advisers for more detailed information and for
information regarding any state, local or foreign taxes applicable to the funds
and to dividends and other distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUSTS. Each Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a fund could, under certain circumstances, be held personally
liable for the obligations of the fund or its Trust. However, each Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust or the fund and requires that notice of such disclaimer be given in
each note, bond, contract, instrument, certificate or undertaking made or issued
by the board members or by any officers or officer by or on behalf of the Trust
or the fund, the board members or any of them in connection with the Trust. Each
Declaration of Trust provides for indemnification from the relevant fund's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the fund itself would be unable to meet its obligations, a possibility
that Mitchell Hutchins believes is remote and not material. Upon payment of any
liability incurred by a shareholder solely by reason of being or having been a
shareholder, the shareholder paying such liability would be entitled to
reimbursement from the general assets of the relevant fund. The board members
intend to conduct each fund's operations in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the fund.
CLASSES OF SHARES. A share of each class of a fund represents an
identical interest in that fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
funds will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
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
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the shares of a Trust may elect all of the board members of that Trust. The
shares of a fund will be voted together, except that only the shareholders of a
particular class of a fund may vote on matters affecting only that class, such
as the terms of a Rule 12b-1 Plan as it relates to the class. The shares of each
series of Investment Trust and Managed Trust will be voted separately, except
when an aggregate vote of all the series is required by law.
The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of a Trust may remove a board
member through a declaration in writing or by vote cast in person or by proxy at
a meeting called for that purpose. A meeting will be called to vote on the
removal of a board member at the written request of holders of 10% of the
outstanding shares of a Trust.
CLASS-SPECIFIC EXPENSES. Each fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by PFPC in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the applicable
charge. Although the transfer agency fee will differ on a per account basis as
stated above, the specific extent to which the transfer agency fees will differ
between the classes as a percentage of net assets is not certain, because the
fee as a percentage of net assets will be affected by the number of shareholder
accounts in each class and the relative amounts of net assets in each class.
PRIOR NAMES. Prior to August 25, 1995, the name of Global Equity Fund
was "Mitchell Hutchins/Kidder, Peabody Global Equity Fund." Prior to November
10, 1995, the fund's Class B shares were known as "Class E" shares and its Class
C shares were known as "Class B" shares, and the fund's Class Y shares were
known as "Class C" shares.
Prior to November 10, 1995, Global Income Fund's Class C shares were
known as "Class D" shares, and the fund's Class Y shares were known as "Class C"
shares.
Prior to November 1, 1995, the name of Emerging Markets Equity Fund was
"Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund." Prior to
November 10, 1995, the fund's Class C shares were called "Class B" shares, and
the fund's Class Y shares were called "Class C" shares. New Class B shares were
not offered prior to December 5, 1995.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for Asia
Pacific Growth Fund, Emerging Markets Equity Fund and Global Equity Fund and
employs foreign sub-custodians approved by the respective boards in accordance
with applicable requirements under the Investment Company Act to provide custody
of the funds' foreign assets. Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, serves as custodian for Global Income Fund and
employs foreign sub-custodians approved by the fund's board in accordance with
those same requirements to provide custody of the fund's foreign assets. PFPC
Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
COMBINED PROSPECTUS. Although each fund is offering only its own
shares, it is possible that a fund might become liable for a misstatement in the
Prospectus about another fund. The board of each fund has considered this factor
in approving the use of a single, combined Prospectus.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for Asia Pacific Growth Fund, Emerging
Markets Equity Fund and Global Equity Fund. PricewaterhouseCoopers LLP, 1177
71
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Avenue of the Americas, New York, New York 10036, serves as independent
accountants for Global Income Fund.
FINANCIAL STATEMENTS
Each fund's Annual Report to Shareholders for its last fiscal year
ended October 31, 1999 is a separate document supplied with this SAI, and the
financial statements, accompanying notes and report of independent auditors or
independent accountants appearing therein are incorporated herein by this
reference.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues; Aa.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than in Aaa securities; A. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; Baa. Bonds
which are rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well; Ba. Bonds which are rated Ba are judged to
have speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small; Caa. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; Ca. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions; BB. An
obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation; B. An
obligation rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
A-1
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the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
r. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUNDS AND
THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT. THE PROSPECTUS AND PaineWebber
THIS STATEMENT OF ADDITIONAL INFORMATION Global Equity Fund
ARE NOT AN OFFER TO SELL SHARES OF THE
FUNDS IN ANY JURISDICTION WHERE THE FUNDS PaineWebber
OR THEIR DISTRIBUTOR MAY NOT LAWFULLY Global Income Fund
SELL THOSE SHARES.
PaineWebber
------------- Asia Pacific Growth Fund
PaineWebber
Emerging Markets
Equity Fund
------------------------------------------
Statement of Additional Information
March 1, 2000
------------------------------------------
PAINEWEBBER
(C)2000 PaineWebber Incorporated. All rights reserved.
