<PAGE>
As filed with the Securities and Exchange Commission on February 27, 1998
1933 Act Registration No. 33-50716
1940 Act Registration No. 811-7104
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 15 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 14
(Check appropriate box or boxes.)
PAINEWEBBER INVESTMENT TRUST II
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ROBERT A. WITTIE, ESQ.
JENNIFER R. GONZALEZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W. 2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On March 1, 1998 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
PaineWebber Emerging Markets Equity Fund
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
PaineWebber Emerging Markets Equity Fund
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PaineWebber Emerging Markets Equity Fund
Form N-lA Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No.and Caption Prospectus Caption
-------------------------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Funds at a Glance; Investment Objectives &
Policies; Investment Philosophy & Process; The
Funds' Investments; General Information
5. Management of the Fund Management; General Information
5A. Managements Discussion of Fund Performance Financial Highlights
6. Capital Stock and Other Securities Cover Page; Flexible Pricing; Dividends & Taxes;
General Information
7. Purchase of Securities Being Offered Flexible Pricing; How to Buy Shares; Other
Services; Management; Determining the Shares' Net
Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
Part B Item No.and Caption Statement of Additional Information Caption
-------------------------- -------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objectives and Policies Investment Policies and Restrictions; Hedging and
Other Strategies Using Derivative Instruments;
Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of
Securities
15. Control Persons and Principal Holders of
Securities Trustees and Officers; Principal Holders of
Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Conversion of Class B Shares; Other Information
19. Purchase, Redemption and Pricing of Securities Reduced Sales Charges, Additional Exchange and
Being Offered Redemption Information and Other Services;
Valuation of Shares
20. Tax Status Taxes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B Item No.and Caption Statement of Additional Information Caption
-------------------------- -------------------------------------------
<S> <C>
21. Underwriters Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
------------------------------
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS -- MARCH 1, 1998
PaineWebber Global Funds are designed for investors generally seeking
long-term growth by investing mainly in foreign stocks or high current
income by investing mainly in global debt instruments. PaineWebber Asia
Pacific Growth Fund seeks long-term capital appreciation by investing
primarily in equity securities of companies in the Asia Pacific region,
excluding Japan. PaineWebber Emerging Markets Equity Fund seeks long-term
capital appreciation by investing primarily in equity securities of
companies in newly industrializing countries. PaineWebber Global Equity
Fund seeks long-term growth of capital by investing primarily in U.S. and
foreign equity securities. PaineWebber Global Income Fund seeks high
current income and, secondarily, capital appreciation by investing
primarily in high-quality bonds of foreign and U.S. issuers.
This Prospectus concisely sets forth information that a prospective
investor should know about the Funds before investing. Please read this
Prospectus carefully and retain a copy for future reference.
A Statement of Additional Information, dated March 1, 1998, has been filed
with the Securities and Exchange Commission (the 'Commission') and is
legally part of this Prospectus. The Statement of Additional Information
can be obtained without charge, and further inquiries can be made, by
contacting an individual Fund, your investment executive at PaineWebber or
one of its correspondent firms or by calling toll-free 1-800-647-1568. In
addition, the Commission maintains a website (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information regarding registrants that file
electronically with the Commission.
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of six broad
categories, which are presented here. Generally, investors seeking to
maximize return must assume greater risk. The Funds offered by this
Prospectus are all in the GLOBAL category.
<TABLE>
<S> <C>
/ / MONEY MARKET FUND for income and stability by / / ASSET ALLOCATION FUNDS for high total return by in-
investing in high-quality, short-term investments. vesting in stocks and bonds.
/ / BOND FUNDS for income by investing mainly in bonds. / / STOCK FUNDS for long-term growth by investing mainly
in stocks.
/ / TAX-FREE BOND FUNDS for income exempt from federal / / GLOBAL FUNDS for long-term growth by investing mainly
income tax and, in some cases, state and local income in foreign stocks or high current income by investing
taxes, by investing in municipal bonds. mainly in global debt instruments.
</TABLE>
A complete listing of the PaineWebber Family of Mutual Funds is found on
the back cover of this Prospectus.
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN
THIS PROSPECTUS. THE FUNDS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SHARES OF THE FUNDS IN ANY JURISDICTION
WHERE THE FUNDS OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
Prospectus Page 1
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Funds at a Glance................... 3
Expense Table........................... 6
Financial Highlights.................... 9
Investment Objectives & Policies........ 21
Investment Philosophy & Process......... 23
Performance............................. 25
The Funds' Investments.................. 29
Flexible Pricing(Service Mark).......... 36
How to Buy Shares....................... 39
How to Sell Shares...................... 41
Other Services.......................... 41
Management.............................. 42
Determining the Shares' Net Asset
Value................................. 45
Dividends & Taxes....................... 45
General Information..................... 47
</TABLE>
--------------------
Prospectus Page 2
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
- --------------------------------------------------------------------------------
The Funds offered by this Prospectus are not intended to provide a complete or
balanced investment program, but one or more of them may be appropriate as a
component of an investor's overall portfolio. Some common reasons to invest in
the Funds are to finance college educations, plan for retirement or diversify a
portfolio. When selling shares, investors should be aware that they may get more
or less for their shares than they originally paid for them. As with any mutual
fund, there is no assurance that the Funds will achieve their goals.
ASIA PACIFIC GROWTH FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of Asia Pacific Region companies (as described under 'Investment
Objectives and Policies').
INVESTMENT OBJECTIVE: Long-term capital apprecia-
tion.
SIZE: On January 31, 1998, the Fund had approximately $42.7 million in net
assets.
WHO SHOULD INVEST: Asia Pacific Growth Fund is for investors who want long-term
capital appreciation and who can withstand short-term market fluctuations. The
Fund seeks to achieve this by investing primarily in equity securities of Asia
Pacific Region companies. While recent currency devaluations have diminished
prospects for short-term growth in corporate earnings in many Asia Pacific
Region countries, conditions in the Asia Pacific Region may provide for high
levels of economic activity in the long-term, offering the potential for
long-term capital appreciation from investment in equity securities of Asia
Pacific Region companies. Because the value of these securities tends to be more
volatile than that of U.S. stocks, investors must be willing to tolerate greater
fluctuations in the value of the Fund's investments. These fluctuations may be
caused by events affecting the companies' businesses, as well as market
conditions, currency fluctuations, interest rate changes, liquidity concerns,
and adverse changes in economic, political and social conditions. The Fund may
be appropriate as a longer-term component of an investor's overall portfolio,
but it is not intended to provide current income.
EMERGING MARKETS EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of companies in newly industrializing countries.
INVESTMENT OBJECTIVE: Long-term capital apprecia-
tion.
SIZE: On January 31, 1998, the Fund had approximately $15.6 million in net
assets.
WHO SHOULD INVEST: Emerging Markets Equity Fund is for investors who want
long-term capital appreciation. The Fund seeks to achieve this by investing
primarily in equity securities of companies in emerging market countries. Over
time, foreign stocks have shown substantial growth potential. However, because
their value tends to fluctuate more than that of U.S. stocks, investors must be
willing to tolerate volatility in the value of the Fund's investments. These
risks are greater with respect to securities of issuers located in emerging
markets. Accordingly, Emerging Markets Equity Fund is designed for investors who
are able to bear the risk that comes with investment in equity securities of
emerging market issuers. The Fund may be appropriate as a longer-term component
of an investor's overall portfolio, but it is not intended to provide current
income.
GLOBAL EQUITY FUND
GOAL: To increase the value of your investment by investing primarily in equity
securities of U.S. and foreign companies.
INVESTMENT OBJECTIVE: Long-term growth of capital.
SIZE: On January 31, 1998, the Fund had approximately $466.3 million in net
assets.
WHO SHOULD INVEST: Global Equity Fund is for investors who want long-term growth
of capital. The Fund seeks to achieve this by investing primarily in equity
securities of U.S. and foreign companies. Over time, foreign stocks have shown
substantial growth potential. However, because their value tends to fluctuate
more than that of U.S. stocks, investors must be willing to tolerate volatility
in the value of the Fund's investments. Accordingly, Global Equity Fund is
designed for investors who are able to bear the risk that comes with investments
in foreign equity securities. The Fund may be appropriate as a longer-term
component of an investor's overall portfolio, but it is not intended to provide
current income.
--------------------
Prospectus Page 3
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
GLOBAL INCOME FUND
GOAL: To provide high current income and, secondarily, capital appreciation by
investing primarily in high-quality foreign and U.S. bonds.
INVESTMENT OBJECTIVE: The primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective.
SIZE: On January 31, 1998, the Fund had approximately $578.6 million in net
assets.
WHO SHOULD INVEST: Global Income Fund is for investors who want high current
income consistent with prudent investment risk and, secondarily, capital
appreciation. The Fund seeks to achieve this by investing primarily in high
quality bonds of foreign and U.S. issuers. The Fund also may invest in bonds
rated below investment grade, including bonds of issuers in emerging market
countries. Global Income Fund is designed for investors who are able to bear the
special risks that come with investments in foreign securities.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'), is the
investment adviser and administrator of Asia Pacific Growth Fund, Emerging
Markets Equity Fund, Global Equity Fund and Global Income Fund (each a 'Fund'
and, collectively, the 'Funds'). Mitchell Hutchins has appointed Schroder
Capital Management International Inc. ('Schroder Capital') as the investment
sub-adviser for Asia Pacific Growth Fund and Emerging Markets Equity Fund, and
GE Investment Management Incorporated ('GE Investment Management') as the
investment sub-adviser for Global Equity Fund.
MINIMUM INVESTMENT
To open an account, investors need $1,000; to add to an account, investors need
only $100.
RISKS
EACH FUND invests in foreign securities, including emerging market securities.
Investors in any of the Funds should be able to assume the special risks of
investing in these securities. These include possible adverse political, social
and economic developments abroad and differing characteristics of foreign
economies and markets. These risks are greater with respect to securities of
issuers located in emerging markets. Most of the Funds' foreign securities are
denominated in foreign currencies, and the value of these investments can be
adversely affected by fluctuations in foreign currency values. Foreign currency
values and securities prices in the Asia Pacific Region recently have been
highly volatile, and recent currency devaluations in some Asia Pacific Region
countries have resulted in high interest rate levels and sharp reductions in
economic activity. Each Fund may use derivatives, such as options, futures and
forward currency contracts and, in the case of Asia Pacific Growth Fund and
Global Income Fund, swap agreements, all of which may involve additional risks.
Each Fund's share price will rise and fall, and investors may lose money by
investing in a Fund. Investment in any of the Funds is not guaranteed.
ASIA PACIFIC GROWTH FUND, EMERGING MARKETS EQUITY FUND AND GLOBAL EQUITY FUND
all invest primarily in equity securities. Historically, equity
securities have shown greater growth potential than other types of securities,
but they also have shown greater volatility.
GLOBAL INCOME FUND invests primarily in bonds, which are subject to interest
rate and credit risk. Interest rate risk is the risk that interest rates will
rise and bond prices will fall, lowering the value of the Fund's investments and
share price. Credit risk is the risk that an issuer may be unable to pay
interest and principal. Certain investment grade bonds in which the Fund may
invest have speculative characteristics. Bonds rated below investment grade, in
which the Fund may invest up to 20% of its total assets, are subject to greater
risks of default or price fluctuation than investment grade bonds and are
considered predominantly speculative. The Fund may invest in mortgage-backed
securities, which involve special risks. The Fund is a non-diversified fund, as
defined in the Investment Company Act of 1940 ('1940 Act'), and as such is
subject to greater risk than funds that have a broader range of investments.
--------------------
Prospectus Page 4
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
THE FUNDS AT A GLANCE
(Continued)
- --------------------------------------------------------------------------------
HOW TO PURCHASE SHARES OF THE FUNDS
Investors may select among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% of the public offering price (4% in the case of Global
Income Fund). Although investors pay an initial sales charge when they buy Class
A shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
'contingent deferred sales charge' and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% (0.75% in the case of Global
Income Fund) is charged on shares sold within one year of purchase. Class C
shares never convert to any other class of shares.
CLASS Y SHARES
Class Y shares are offered only to limited groups of investors. See 'How to Buy
Shares.' The price is the net asset value. Investors do not pay an initial sales
charge when they buy Class Y shares. As a result, 100% of their purchase is
immediately invested. Investors also do not pay a contingent deferred sales
charge when they sell Class Y shares. Class Y shares have lower ongoing expenses
than any other class of shares.
--------------------
Prospectus Page 5
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
EXPENSE TABLE
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Funds.
Expenses shown below are based on those incurred for the most recent fiscal
year, except in the case of Asia Pacific Growth Fund, where amounts were
annualized because it commenced operations on March 25, 1997 and 'Other
Expenses' are based on estimated amounts for its current fiscal year. In
addition, in the case of Emerging Markets Equity Fund, expenses shown below
reflect anticipated fee waivers.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)
<CAPTION>
ASIA PACIFIC GROWTH FUND, EMERGING MARKETS EQUITY FUND
AND GLOBAL EQUITY FUND.................................. 4.5% None None None
GLOBAL INCOME FUND...................................... 4% None None None
Sales Charge on Reinvested Dividends (as a % of offering
price)...................................................... None None None None
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever is
less)
ASIA PACIFIC GROWTH FUND, EMERGING MARKETS EQUITY FUND
AND GLOBAL EQUITY FUND.................................. None 5% 1% None
GLOBAL INCOME FUND...................................... None 5% 0.75% None
Exchange Fee................................................ None None None None
ANNUAL FUND OPERATING EXPENSES (as a % of average net
assets)
ASIA PACIFIC GROWTH FUND
Management Fees............................................. 1.20% 1.20% 1.20% 1.20%
12b-1 Fees.................................................. 0.25 1.00 1.00 None
Other Expenses.............................................. 0.88 0.92 0.90 0.88
------- ------- ------- -------
Total Operating Expenses.................................... 2.33% 3.12% 3.10% 2.08%
------- ------- ------- -------
------- ------- ------- -------
EMERGING MARKETS EQUITY FUND
Management Fees (after fee waivers)*........................ 0.70% 0.70% 0.70% 0.70%
12b-1 Fees.................................................. 0.25 1.00 1.00 None
Other Expenses.............................................. 1.49 1.49 1.49 1.49
------- ------- ------- -------
Total Operating Expenses.................................... 2.44% 3.19% 3.19% 2.19%
------- ------- ------- -------
------- ------- ------- -------
GLOBAL EQUITY FUND
Management Fees............................................. 0.85% 0.85% 0.85% 0.85%
12b-1 Fees.................................................. 0.25 1.00 1.00 None
Other Expenses.............................................. 0.34 0.41 0.35 0.25
------- ------- ------- -------
Total Operating Expenses.................................... 1.44% 2.26% 2.20% 1.10%
------- ------- ------- -------
------- ------- ------- -------
GLOBAL INCOME FUND
Management Fees............................................. 0.74% 0.74% 0.74% 0.74%
12b-1 Fees.................................................. 0.25 1.00 0.75 None
Other Expenses.............................................. 0.22 0.25 0.20 0.20
------- ------- ------- -------
Total Operating Expenses.................................... 1.21% 1.99% 1.69% 0.94%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ------------------
* 'Management Fees' for Emerging Markets Equity Fund reflect anticipated fee
waivers by Mitchell Hutchins. Under an advisory contract for Emerging Markets
Equity Fund effective February 25, 1997, the annual percentage rate at which
the investment advisory and administrative fee is payable to Mitchell
Hutchins is 1.20% of the Fund's average daily net assets. This fee is lower
than the fee that was payable under the prior advisory contract; however,
after giving effect to fee waivers, the effective annual rate actually paid
by the Fund during the fiscal year ended October 31, 1997, was 0.78%. Without
taking into account anticipated fee waivers, 'Management Fees' and 'Total
Operating Expenses' for shares of Emerging Markets Equity Fund would be as
follows: 1.20% and 2.94% for Class A; 1.20% and 3.69% for Class B; 1.20% and
3.69% for Class C; and 1.20% and 2.69% for Class Y.
--------------------
Prospectus Page 6
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase plan
are available. Purchases of $1 million or more are not subject to an initial
sales charge; however, if 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.
CLASS B SHARES: Sales charge waivers are available. The maximum 5% contingent
deferred sales charge applies to sales of shares during the first year after
purchase. The charge generally declines by 1% annually, reaching zero after six
years.
CLASS C SHARES: If a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% (0.75% in the case of Global
Income Fund) of the offering price or the net asset value of the shares at the
time of sale by the shareholder, whichever is less, is imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees. Class Y
shares may be purchased by participants in certain investment programs that are
sponsored by PaineWebber and that may invest in PaineWebber mutual funds ('PW
Programs'), when Class Y shares are purchased through that Program.
Participation in a PW Program is subject to an advisory fee at an annual rate
of no more than 1.5% of assets held through that PW Program. This account
charge is not included in the table because investors who are not PW Programs
participants also are permitted to purchase Class Y Shares.
12b-1 distribution fees are asset-based sales charges. Long-term Class B and
Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 service fees................. 0.25% 0.25% 0.25% None
12b-1 distribution fees............ 0.00 0.75 0.75* None
</TABLE>
* 12b-1 distribution fees for Class C shares of Global Income Fund are 0.50%.
For more information, see 'Management' and 'Flexible Pricing(Service Mark).'
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses they would incur as shareholders of a Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
Exchange Commission ('SEC') applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A FUND MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in a Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
ASIA PACIFIC GROWTH FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Class A............................ $68 $114 $164 $ 300
Class B (Assuming sale of all
shares at end of period)......... $81 $126 $184 $ 308
Class B (Assuming no sale of
shares).......................... $31 $ 96 $164 $ 308
Class C (Assuming sale of all
shares at end of period)......... $41 $ 96 $162 $ 341
Class C (Assuming no sale of
shares).......................... $31 $ 96 $162 $ 341
Class Y............................ $21 $ 65 $112 $ 241
</TABLE>
--------------------
Prospectus Page 7
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
EXPENSE TABLE
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A............................ $69 $118 $169 $310
Class B (Assuming sale of all
shares at end of period)......... $82 $128 $187 $316
Class B (Assuming no sale of
shares).......................... $32 $ 98 $167 $316
Class C (Assuming sale of all
shares at end of period)......... $42 $ 98 $167 $349
Class C (Assuming no sale of
shares).......................... $32 $ 98 $167 $349
Class Y............................ $22 $ 69 $117 $252
<CAPTION>
GLOBAL EQUITY FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A............................ $59 $ 89 $120 $210
Class B (Assuming sale of all
shares at end of period)......... $73 $101 $141 $220
Class B (Assuming no sale of
shares).......................... $23 $ 71 $121 $220
Class C (Assuming sale of all
shares at end of period)......... $32 $ 69 $118 $253
Class C (Assuming no sale of
shares).......................... $22 $ 69 $118 $253
Class Y............................ $11 $ 35 $ 61 $134
<CAPTION>
GLOBAL INCOME FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A............................ $52 $ 77 $104 $181
Class B (Assuming sale of all
shares at end of period)......... $70 $ 92 $127 $193
Class B (Assuming no sale of
shares).......................... $20 $ 62 $107 $193
Class C (Assuming sale of all
shares at end of period)......... $25 $ 53 $ 92 $200
Class C (Assuming no sale of
shares).......................... $17 $ 53 $ 92 $200
Class Y............................ $10 $ 30 $ 52 $115
</TABLE>
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under 'Annual Fund Operating Expenses' remain the
same for years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% (4% in the case of Global
Income Fund) initial sales charge at the time of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six years.
Ten-year figures assume that Class B shares convert to Class A shares at the
end of the sixth year.
o CLASS C SHARES: Deduction of a 1% (0.75% in the case of Global Income Fund)
contingent deferred sales charge for sales of shares within one year of
purchase.
--------------------
Prospectus Page 8
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIA PACIFIC GROWTH FUND
The following table provides investors with data and ratios for one Class A,
Class B and Class C share for the period shown. The Fund had no Class Y shares
outstanding during that period. This information is supplemented by the
financial statements and accompanying notes appearing in Asia Pacific Growth
Fund's Annual Report to Shareholders for the period ended October 31, 1997 and
the report of Ernst & Young LLP, independent auditors, appearing in the Fund's
Annual Report to Shareholders. The financial statements, accompanying notes and
auditors' report are incorporated by reference into the Statement of Additional
Information. The financial statements and notes, as well as the financial
information in the table below relating to the period March 25, 1997
(commencement of operations) through October 31, 1997, have been audited by
Ernst & Young LLP, independent auditors. Further information about the Fund's
performance is also included in the Annual Report to Shareholders, which may be
obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
ASIA PACIFIC GROWTH FUND
-----------------------------------------------------------
CLASS A CLASS B CLASS C
----------------- ----------------- -----------------
FOR THE FOR THE FOR THE
PERIOD ENDED PERIOD ENDED PERIOD ENDED
OCTOBER 31, 1997+ OCTOBER 31, 1997+ OCTOBER 31, 1997+
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period......................... $ 12.50 $ 12.50 $ 12.50
----------------- ----------------- -----------------
Net investment income (loss)................................. 0.03 (0.03) (0.03)
Net realized and unrealized losses from investments and
foreign currency........................................... (3.57) (3.55) (3.55)
----------------- ----------------- -----------------
Net decrease from investment operations...................... (3.54) (3.58) (3.58)
----------------- ----------------- -----------------
Net asset value, end of period............................... $ 8.96 $ 8.92 $ 8.92
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Total investment return (1).................................. (28.32)% (28.64)% (28.64)%
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Ratios/Supplemental Data:
Net assets, end of period (000's)............................ $21,466 $22,949 $13,887
Expenses to average net assets............................... 2.33%* 3.12%* 3.10%*
Net investment income (loss) to average net assets........... 0.37%* (0.43)%* (0.42)%*
Portfolio turnover rate...................................... 13% 13% 13%
Average commission rate paid................................. $0.0156 $0.0156 $0.0156
</TABLE>
- ------------------
* Annualized
+ For the period March 25, 1997 (commencement of operations) to October 31,
1997.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. The figures do
not include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods less than a year
have not been annualized.
--------------------
Prospectus Page 9
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
EMERGING MARKETS EQUITY FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements and accompanying notes
appearing in Emerging Markets Equity Fund's Annual Report to Shareholders for
the fiscal year ended October 31, 1997 and the report of Ernst & Young LLP,
independent auditors, appearing in the Fund's Annual Report to Shareholders. The
financial statements, accompanying notes and auditors' report are incorporated
by reference into the Statement of Additional Information. The financial
statements and notes, as well as the financial information in the table below
relating to the fiscal year ended October 31, 1997, the four months ended
October 31, 1996 and the fiscal year ended June 30, 1996, have been audited by
Ernst & Young LLP, independent auditors. The financial information for the prior
years was audited by another independent accounting firm, whose reports thereon
were unqualified. Further information about the Fund's performance is also
included in the Annual Report to Shareholders, which may be obtained without
charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE FOR THE JUNE 30, FOR THE
YEAR ENDED FOUR MONTHS ENDED -------------------- PERIOD ENDED
OCTOBER 31, 1997*** OCTOBER 31, 1996 1996 1995** JUNE 30, 1994+
------------------- ----------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.46 $ 10.06 $ 9.73 $ 10.79 $ 12.00
-------- -------- -------- -------- --------
Net investment income
(loss)...................... (0.06) (0.13) (0.14) (0.04) 0.04
Net realized and unrealized
gains (losses) from
investment and foreign
currency.................... (0.01) (0.47) 0.47 (0.97) (1.25)
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... (0.07) (0.60) 0.33 (1.01) (1.21)
-------- -------- -------- -------- --------
Dividends from net investment
income...................... -- -- -- (0.05) --
-------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 9.39 $ 9.46 $ 10.06 $ 9.73 $ 10.79
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return (1)... (0.74)% (5.96)% 3.39% (9.29)% (10.08)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 9,222 $14,992 $20,680 $33,043 $ 46,758
Expenses, net of fee waivers,
to average
net assets.................. 2.44% 2.44%* 2.44% 2.44% 2.47%*
Expenses, before fee waivers,
to average
net assets.................. 3.01% 3.48%* 3.42% 2.54% 2.47%*
Net investment income (loss),
net of fee waivers, to
average net assets.......... (0.40)% (1.42)%* (0.52)% (0.76)% 0.72%*
Net investment income (loss),
before fee waivers, to
average net assets.......... (0.97)% (2.46)%* (1.50)% (0.86)% 0.72%*
Portfolio turnover rate....... 87% 22% 69% 76% 8%
Average commission rate paid
(2)......................... $0.0009 $0.0024 -- -- --
</TABLE>
- ------------------
* Annualized
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
*** Investment sub-advisory functions for the Fund were transferred from
Emerging Markets Management to Schroder Capital effective February 25, 1997.
+ For the period January 19, 1994 (commencement of operations) to June 30,
1994.
++ For the period December 5, 1995 (commencement of offering of shares) to June
30, 1996.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. The figures do not include sales charges;
results for each class would be lower if sales charges were included. Total
investment returns for periods of less than one year have not been
annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
--------------------
Prospectus Page 10
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
------------------------------------------------------------
CLASS B
------------------------------------------------------------
FOR THE
YEAR ENDED FOR THE FOR THE
OCTOBER 31, FOUR MONTHS ENDED PERIOD ENDED
1997*** OCTOBER 31, 1996 JUNE 30, 1996++
--------------- ----------------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.32 $ 9.94 $ 9.13
--------------- -------- ------
Net investment income
(loss)...................... (0.10) (0.07) (0.01)
Net realized and unrealized
gains (losses) from
investment and foreign
currency.................... (0.03) (0.55) 0.82
--------------- -------- ------
Net increase (decrease) from
investment operations....... (0.13) (0.62) 0.81
--------------- -------- ------
Dividends from net investment
income...................... -- -- --
--------------- -------- ------
Net asset value, end of $ 9.19 $ 9.32 $ 9.94
period...................... --------------- -------- ------
--------------- -------- ------
(1.39)% (6.24)% 8.87%
Total investment return (1)... --------------- -------- ------
--------------- -------- ------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 1,598 $ 879 $ 936
Expenses, net of fee waivers,
to average
net assets.................. 3.19% 3.19%* 3.19%*
Expenses, before fee waivers,
to average
net assets.................. 3.82% 4.23%* 4.97%*
Net investment income (loss),
net of fee waivers, to
average net assets.......... (1.25)% (2.12)%* (0.21)%*
Net investment income (loss),
before fee waivers, to
average net assets.......... (1.88)% (3.16)%* (1.99)%*
Portfolio turnover rate....... 87% 22% 69%
Average commission rate paid
(2)......................... $0.0009 $0.0024 --
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
FOR THE FOR THE YEARS ENDED
YEAR ENDED FOR THE JUNE 30, FOR THE
OCTOBER 31, FOUR MONTHS ENDED -------------------- PERIOD ENDED
1997*** OCTOBER 31, 1996 1996 1995** JUNE 30, 1994+
--------------- ----------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.32 $ 9.94 $ 9.67 $ 10.75 $ 12.00
--------------- -------- -------- -------- --------
Net investment income
(loss)...................... (0.14) (0.22) (0.24) (0.17) --
Net realized and unrealized
gains (losses) from
investment and foreign
currency.................... (0.01) (0.40) 0.51 (0.90) (1.25)
--------------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... (0.15) (0.62) 0.27 (1.07) (1.25)
--------------- -------- -------- -------- --------
Dividends from net investment
income...................... -- -- -- (0.01) --
--------------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 9.17 $ 9.32 $ 9.94 $ 9.67 $ 10.75
--------------- -------- -------- -------- --------
--------------- -------- -------- -------- --------
Total investment return (1)... (1.61)% (6.24)% 2.79% (10.01)% (10.42)%
--------------- -------- -------- -------- --------
--------------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 5,345 $ 7,882 $11,561 $18,551 $ 26,721
Expenses, net of fee waivers,
to average
net assets.................. 3.19% 3.19%* 3.19% 3.19% 3.22%*
Expenses, before fee waivers,
to average
net assets.................. 3.78% 4.23%* 4.17% 3.29% 3.22%*
Net investment income (loss),
net of fee waivers, to
average net assets.......... (1.18)% (2.16)%* (1.28)% (1.50)% (0.03)%*
Net investment income (loss),
before fee waivers, to
average net assets.......... (1.77)% (3.20)%* (2.26)% (1.60)% (0.03)%*
Portfolio turnover rate.......
Average commission rate paid 87% 22% 69% 76% 8%
(2)......................... $0.0009 $0.0024 -- -- --
--------------------
Prospectus Page 11
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
------------------------------------------------------------------------------------
CLASS Y
------------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE FOR THE JUNE 30, FOR THE
YEAR ENDED FOUR MONTHS ENDED -------------------- PERIOD ENDED
OCTOBER 31, 1997*** OCTOBER 31, 1996 1996 1995** JUNE 30, 1994+
------------------- ----------------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 9.51 $ 10.11 $ 9.75 $ 10.80 $ 12.00
-------- -------- -------- -------- --------
Net investment income
(loss)...................... (0.02) (0.05) (0.01) 0.01 0.05
Net realized and unrealized
gains (losses) from
investment and foreign
currency.................... (0.03) (0.55) 0.37 (0.99) (1.25)
-------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... (0.05) (0.60) 0.36 (0.98) (1.20)
-------- -------- -------- -------- --------
Dividends from net investment
income...................... -- -- -- (0.07) --
-------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 9.46 $ 9.51 $ 10.11 $ 9.75 $ 10.80
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return (1)... (0.53)% (5.93)% 3.69% (9.03)% (10.00)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $10,053 $11,375 $12,979 $12,332 $ 15,435
Expenses, net of fee waivers,
to average
net assets.................. 2.19% 2.19%* 2.19% 2.19% 2.22%*
Expenses, before fee waivers,
to average
net assets.................. 2.69% 3.23%* 3.29% 2.29% 2.22%*
Net investment income (loss),
net of fee waivers, to
average net assets.......... (0.15)% (1.13)%* (0.15)% (0.51)% 0.97%*
Net investment income (loss),
before fee waivers, to
average net assets.......... (0.65)% (2.17)%* (1.25)% (0.61)% 0.97%*
Portfolio turnover rate....... 87% 22% 69% 76% 8%
Average commission rate paid
(2)......................... $0.0009 $0.0024 -- -- --
</TABLE>
- ------------------
* Annualized
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
*** Investment sub-advisory functions for the Fund were transferred from
Emerging Markets Management to Schroder Capital effective February 25, 1997.
+ For the period January 19, 1994 (commencement of operations) to June 30,
1994.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. Total investment returns for periods of less
than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investments purchased or sold.
--------------------
Prospectus Page 12
<PAGE>
[This page intentionally left blank]
--------------------
Prospectus Page 13
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements and accompanying notes
appearing in Global Equity Fund's Annual Report to Shareholders for the fiscal
year ended October 31, 1997 and the report of Ernst & Young LLP, independent
auditors, appearing in the Fund's Annual Report to Shareholders. The financial
statements, accompanying notes and auditors' report are incorporated by
reference into the Statement of Additional Information. The financial
statements and notes, as well as the financial information in the table below
relating to the fiscal year ended October 31, 1997, the two months ended October
31, 1996 and to each of the two years in the period ended August 31, 1996, have
been audited by Ernst & Young LLP, independent auditors. The financial
information for the prior years was audited by another independent accounting
firm, whose reports thereon were unqualified. Further information about the
Fund's performance is also included in the Annual Report to Shareholders, which
may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
-----------------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------------
FOR THE FOR THE
YEAR TWO MONTHS FOR THE
ENDED ENDED FOR THE YEARS ENDED AUGUST 31, PERIOD
OCTOBER 31, OCTOBER 31, ------------------------------------------------- NOV. 14, 1991+
1997 1996 1996 1995** 1994 1993 TO AUG. 31, 1992
----------- ----------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 17.43 $ 16.81 $ 16.12 $ 16.98 $ 14.55 $ 12.87 $ 12.00
----------- ----------- -------- -------- -------- -------- --------
Net investment income
(loss)...................... 0.00 (0.02) 0.02 0.02 0.01 0.03 0.09
Net realized and unrealized
gains (losses) from
investments and foreign
currency.................... 1.52 0.64 1.24 0.37 2.63 1.89 0.78
----------- ----------- -------- -------- -------- -------- --------
Net increase (decrease) from
investment operations....... 1.52 0.62 1.26 0.39 2.64 1.92 0.87
----------- ----------- -------- -------- -------- -------- --------
Dividends from net investment
income...................... -- -- -- -- -- (0.08) --
Distributions from net
realized gains.............. (0.58) -- (0.57) (1.25) (0.21) (0.16) --
----------- ----------- -------- -------- -------- -------- --------
Total dividends and
distributions............... (0.58) 0.00 (0.57) (1.25) (0.21) (0.24) 0.00
----------- ----------- -------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 18.37 $ 17.43 $ 16.81 $ 16.12 $ 16.98 $ 14.55 $ 12.87
----------- ----------- -------- -------- -------- -------- --------
----------- ----------- -------- -------- -------- -------- --------
Total investment return (1)... 8.87% 3.69% 8.06% 3.24% 18.23% 15.24% 7.25%
----------- ----------- -------- -------- -------- -------- --------
----------- ----------- -------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 294,878 $ 307,267 $305,218 $360,652 $185,493 $156,451 $113,070
Expenses to average net
assets...................... 1.44% 1.53%* 1.48% 1.71%(2) 1.58% 1.53% 1.68%*
Net investment income (loss)
to average net assets....... 0.01% (0.80)%* 0.10% 0.09%(2) 0.07% 0.22% 0.93%*
Portfolio turnover rate....... 86% 3% 33% 40% 51% 56% 30%
Average commission rate paid
(3)......................... $ 0.0069 $ 0.0069 $ 0.0120 -- -- -- --
</TABLE>
- ------------------
* Annualized
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
+ Commencement of operations
++ Commencement of offering of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than one
year have not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.06%, 0.00%
and 0.06% for Class A, Class B and Class C shares, respectively.
(3) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
--------------------
Prospectus Page 14
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
--------------------------------------------------------------
CLASS B
--------------------------------------------------------------
FOR THE
FOR THE TWO MONTHS FOR THE FOR THE
YEAR ENDED ENDED YEAR ENDED PERIOD
OCTOBER 31, OCTOBER 31, AUGUST 31, AUG. 25, 1995++
1997 1996 1996 TO AUG. 31, 1995
----------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 16.93 $ 16.35 $ 15.82 $ 15.83
----------- ----------- ---------- --------
Net investment income
(loss)...................... (0.21) (0.05) (0.12) 0.00
Net realized and unrealized
gains (losses) from
investments and foreign
currency.................... 1.55 0.63 1.22 (0.01)
----------- ----------- ---------- --------
Net increase (decrease) from
investment operations....... 1.34 0.58 1.10 (0.01)
----------- ----------- ---------- --------
Dividends from net investment
income...................... -- -- -- --
Distributions from net
realized gains.............. (0.58) -- (0.57) --
----------- ----------- ---------- --------
Total dividends and
distributions............... (0.58) 0.00 (0.57) 0.00
----------- ----------- ---------- --------
Net asset value, end of
period...................... $ 17.69 $ 16.93 $ 16.35 $ 15.82
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Total investment return (1)... 8.05% 3.55% 7.18% (0.06)%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 87,104 $ 113,445 $113,235 $ 142,880
Expenses to average net
assets...................... 2.26% 2.34%* 2.25% 2.17%*(2)
Net investment income (loss)
to average net assets....... (0.80)% (1.61)%* (0.68)% (1.92)%*(2)
Portfolio turnover rate....... 86% 3% 33% 40%
Average commission rate paid
(3)......................... $ 0.0069 $ 0.0069 $ 0.0120 --
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------
FOR THE
FOR THE TWO MONTHS
YEAR ENDED ENDED FOR THE YEARS ENDED AUGUST 31, FOR THE PERIOD
OCTOBER 31, OCTOBER 31, -------------------------------- MAY 10, 1993++
1997 1996 1996 1995** 1994 TO AUG. 31, 1993
----------- ----------- -------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 16.93 $ 16.35 $ 15.82 $ 16.81 $ 14.52 $ 13.80
----------- ----------- -------- ------- ------- -------
Net investment income
(loss)...................... (0.23) (0.05) (0.13) (0.11) (0.07) (0.02)
Net realized and unrealized
gains (losses) from
investments and foreign
currency.................... 1.57 0.63 1.23 0.37 2.57 0.74
----------- ----------- -------- ------- ------- -------
Net increase (decrease) from
investment operations....... 1.34 0.58 1.10 0.26 2.50 0.72
----------- ----------- -------- ------- ------- -------
Dividends from net investment
income...................... -- -- -- -- -- --
Distributions from net
realized gains.............. (0.58) -- (0.57) (1.25) (0.21) --
----------- ----------- -------- ------- ------- -------
Total dividends and
distributions............... (0.58) 0.00 (0.57) (1.25) (0.21) 0.00
----------- ----------- -------- ------- ------- -------
Net asset value, end of
period...................... $ 17.69 $ 16.93 $ 16.35 $ 15.82 $ 16.81 $ 14.52
----------- ----------- -------- ------- ------- -------
----------- ----------- -------- ------- ------- -------
Total investment return (1)... 8.05% 3.55% 7.18% 2.46% 17.29% 5.22%
----------- ----------- -------- ------- ------- -------
----------- ----------- -------- ------- ------- -------
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $ 54,510 $67,530 $ 66,585 $83,485 $31,837 $ 10,807
Expenses to average net
assets...................... 2.20% 2.30%* 2.27% 2.48%(2) 2.33% 2.28%*
Net investment income (loss)
to average net assets....... (0.75)% (1.57)%* (0.70)% (0.68)%(2) (0.68)% (0.53)%*
Portfolio turnover rate....... 86% 3% 33% 40% 51% 56%
Average commission rate paid
(3)......................... $ 0.0069 $0.0069 $ 0.0120 -- -- --
</TABLE>
--------------------
Prospectus Page 15
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY FUND
--------------------------------------------------------------------------------
CLASS Y
--------------------------------------------------------------------------------
FOR THE FOR THE
YEAR TWO MONTHS FOR THE
ENDED ENDED FOR THE YEARS ENDED AUGUST 31, PERIOD
OCTOBER 31, OCTOBER 31, -------------------------------- MAY 10, 1993+
1997 1996 1996 1995** 1994 TO AUGUST 31, 1993
----------- ----------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............... $ 17.60 $ 16.97 $ 16.22 $ 17.03 $ 14.56 $ 13.80
----------- ----------- ------- ------- ------- -------
Net investment income (loss)....................... 0.10 (0.01) 0.07 0.07 0.05 0.02
Net realized and unrealized gains from investments
and foreign currency............................. 1.51 0.64 1.25 0.37 2.63 0.74
----------- ----------- ------- ------- ------- -------
Net increase from investment operations............ 1.61 0.63 1.32 0.44 2.68 0.76
----------- ----------- ------- ------- ------- -------
Dividends from net investment income............... -- -- -- -- -- --
Distributions from net realized gains.............. (0.58) -- (0.57) (1.25) (0.21) --
----------- ----------- ------- ------- ------- -------
Total dividends and distributions.................. (0.58) 0.00 (0.57) (1.25) (0.21) 0.00
----------- ----------- ------- ------- ------- -------
Net asset value, end of period..................... $ 18.63 $ 17.60 $ 16.97 $ 16.22 $ 17.03 $ 14.56
----------- ----------- ------- ------- ------- -------
----------- ----------- ------- ------- ------- -------
Total investment return (1)........................ 9.31% 3.71% 8.39% 3.54% 18.49% 5.51%
----------- ----------- ------- ------- ------- -------
----------- ----------- ------- ------- ------- -------
Ratios/Supplemental Data:
Net assets, end of period (000's).................. $57,683 $63,225 $61,736 $57,150 $28,390 $ 19,098
Expenses to average net assets..................... 1.10% 1.18%* 1.17% 1.46%(2) 1.33% 1.28%*
Net investment income (loss) to average net
assets........................................... 0.36% (0.45)%* 0.46% 0.36%(2) 0.32% 0.47%*
Portfolio turnover rate............................ 0.86% 3% 33% 40% 51% 56%
Average commission rate paid (3)................... $0.0069 $0.0069 $0.0120 -- -- --
</TABLE>
- ------------------
* Annualized
** Investment advisory functions for the Fund were transferred from Kidder
Peabody Asset Management, Inc. to Mitchell Hutchins on February 13, 1995.
+ Commencement of offering of shares
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a sale
at net asset value on the last day of each period reported. Total investment
returns for periods of less than one year have not been annualized.
(2) These ratios include non-recurring reorganization expenses of 0.06% for
Class Y shares.
(3) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
--------------------
Prospectus Page 16
<PAGE>
[This page intentionally left blank]
--------------------
Prospectus Page 17
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
GLOBAL INCOME FUND
The following tables provide investors with data and ratios for one Class A,
Class B, Class C and Class Y share for each of the periods shown. This
information is supplemented by the financial statements and accompanying notes
appearing in Global Income Fund's Annual Report to Shareholders for the fiscal
year ended October 31, 1997 and the report of Price Waterhouse LLP, independent
accountants, appearing in the Fund's Annual Report to Shareholders. The
financial statements, accompanying notes and independent accountants' report are
incorporated by reference into the Statement of Additional Information. The
financial statements and notes, as well as the financial information in the
table below insofar as they relate to each of the periods presented in the five
year period ended October 31, 1997, have been audited by Price Waterhouse LLP,
independent accountants. Further information about the Fund's performance is
also included in the Annual Report to Shareholders, which may be obtained
without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
--------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 1,
FOR THE YEARS ENDED OCTOBER 31, 1991+ TO
----------------------------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.46 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.75 $ 10.40
-------- -------- -------- -------- -------- -------- -----
Net investment income.......... 0.69@ 0.72@ 0.77@ 0.72 0.59 0.83 0.20
Net realized and unrealized
gains (losses) from
investments and foreign
currency...................... (0.19)@ 0.13@ 0.31@ (1.05) 0.68 (0.12) 0.40
-------- -------- -------- -------- -------- -------- -----
Net increase (decrease) from
investment transactions....... 0.50 0.85 1.08 (0.33) 1.27 0.71 0.60
-------- -------- -------- -------- -------- -------- -----
Dividends from net investment
income........................ (0.54) (0.74) (0.72) (0.33) (0.80) (0.64) (0.23)
Distributions from net realized
gains from investments and
foreign currency
transactions.................. -- -- -- -- (0.14) (0.18) (0.02)
Distributions in excess of net
investment income............. (0.06) -- -- -- -- -- --
Distributions from
paid-in-capital............... (0.09) -- -- (0.32) -- -- --
-------- -------- -------- -------- -------- -------- -----
Total dividends and
distributions to
shareholders.................. (0.69) (0.74) (0.72) (0.65) (0.94) (0.82) (0.25)
-------- -------- -------- -------- -------- -------- -----
Net asset value, end of
period........................ $ 10.27 $ 10.46 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.75
-------- -------- -------- -------- -------- -------- -----
-------- -------- -------- -------- -------- -------- -----
Total investment return (1).... 4.99% 8.60% 11.09% (3.10)% 12.41% 6.70% 5.79%
-------- -------- -------- -------- -------- -------- -----
-------- -------- -------- -------- -------- -------- -----
Ratios/supplemental data:
Net assets, end of period
(000's)....................... $486,718 $549,932 $663,022 $611,855 $648,853 $107,033 $16,501
Expenses to average net
assets........................ 1.21% 1.27% 1.24%(2) 1.17% 1.32%** 1.21% 1.35%*
Net investment income to
average net assets............ 6.66% 6.88% 7.47%(2) 6.94% 6.82%** 7.84% 8.59%*
Portfolio turnover rate........ 172% 126% 113% 108% 90% 92% 53%
<CAPTION>
CLASS B
------------------------------------------------
FOR THE YEARS
ENDED OCTOBER 31,
------------------------------------------------
1997 1996 1995 1994
----------- -------- -------- --------
<S> <<C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.44 $ 10.31 $ 9.96 $ 10.95
----------- -------- -------- --------
Net investment income.......... 0.58@ 0.64@ 0.69@ 0.86
Net realized and unrealized
gains (losses) from
investments and foreign
currency...................... (0.17)@ 0.15@ 0.30@ (1.28)
----------- -------- -------- --------
Net increase (decrease) from
investment transactions....... 0.41 0.79 0.99 (0.42)
----------- -------- -------- --------
Dividends from net investment
income........................ (0.48) (0.66) (0.64) (0.29)
Distributions from net realized
gains from investments and
foreign currency
transactions.................. -- -- -- --
Distributions in excess of net
investment income............. (0.05) -- -- --
Distributions from
paid-in-capital............... (0.08) -- -- (0.28)
----------- -------- -------- --------
Total dividends and
distributions to
shareholders.................. (0.61) (0.66) (0.64) (0.57)
----------- -------- -------- --------
Net asset value, end of
period........................ $ 10.24 $ 10.44 $ 10.31 $ 9.96
----------- -------- -------- --------
----------- -------- -------- --------
Total investment return (1).... 4.11% 7.95% 10.24% (3.90)%
----------- -------- -------- --------
----------- -------- -------- --------
Ratios/supplemental data:
Net assets, end of period
(000's)....................... $ 103,312 $307,577 $484,534 $725,553
Expenses to average net
assets........................ 1.99% 1.99% 2.00%(2) 1.94%
Net investment income to
average net assets............ 5.83% 6.14% 6.71%(2) 6.05%
Portfolio turnover rate........ 172% 126% 113% 108%
</TABLE>
- ------------------
@ Calculated using the average shares outstanding for the year.
* Annualized
** Includes 0.15% of interest expense related to the reverse repurchase
agreement transactions entered into during the fiscal year.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment return information for periods of
less than one year is not annualized.
(2) These ratios include non-recurring acquisition expenses of 0.04%.
--------------------
Prospectus Page 18
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
----------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.62 $ 10.74 $ 11.07 $ 10.08 $ 11.10 $ 10.28
---------- ---------- ---------- ---------- ---------- ----------
Net investment income.......... 0.78 0.94 0.85 1.01 1.01 0.98
Net realized and unrealized
gains (losses) from
investments and foreign
currency...................... 0.40 (0.32) (0.09) 0.96 (0.64) 1.15
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) from
investment transactions....... 1.18 0.62 0.76 1.97 0.37 2.13
---------- ---------- ---------- ---------- ---------- ----------
Dividends from net investment
income........................ (0.71) (0.56) (0.97) (0.98) (0.94) (1.06)
Distributions from net realized
gains from investments and
foreign currency
transactions.................. (0.14) (0.18) (0.12) -- (0.45) (0.25)
Distributions in excess of net
investment income............. -- -- -- -- -- --
Distributions from
paid-in-capital............... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions to
shareholders.................. (0.85) (0.74) (1.09) (0.98) (1.39) (1.31)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period........................ $ 10.95 $ 10.62 $ 10.74 $ 11.07 $ 10.08 $ 11.10
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Total investment return (1).... 11.45% 5.93% 7.39% 20.32% 3.66% 18.29%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Ratios/supplemental data:
Net assets, end of period
(000's)....................... $1,188,890 $1,542,255 $1,593,814 $1,323,495 $1,085,851 $1,145,460
Expenses to average net
assets........................ 2.11%** 1.98% 1.94% 1.90% 1.95% 2.05%
Net investment income to
average net assets............ 5.97%** 7.11% 8.09% 9.88% 9.73% 9.13%
Portfolio turnover rate........ 90% 92% 33% 126% 124% 120%
<CAPTION>
CLASS C
-------------------------------------------------------------
FOR THE
PERIOD
JULY 2,
FOR THE YEARS ENDED OCTOBER 31, 1992+ TO
------------------------------------------------- OCTOBER
1997 1996 1995 1994 1993 31, 1992
------- ------- ------- ------- ------- ----------
<S> <<C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.45 $ 10.33 $ 9.98 $ 10.96 $ 10.64 $ 10.94
------- ------- ------- ------- ------- -----
Net investment income.......... 0.63@ 0.67@ 0.71@ 0.70 0.68 0.20
Net realized and unrealized
gains (losses) from
investments and foreign
currency...................... (0.18)@ 0.14@ 0.31@ (1.09) 0.52 (0.13)
------- ------- ------- ------- ------- -----
Net increase (decrease) from
investment transactions....... 0.45 0.81 1.02 (0.39) 1.20 0.07
------- ------- ------- ------- ------- -----
Dividends from net investment
income........................ (0.50) (0.69) (0.67) (0.30) (0.74) (0.21)
Distributions from net realized
gains from investments and
foreign currency
transactions.................. -- -- -- -- (0.14) (0.16)
Distributions in excess of net
investment income............. (0.06) -- -- -- -- --
Distributions from
paid-in-capital............... (0.08) -- -- (0.29) -- --
------- ------- ------- ------- ------- -----
Total dividends and
distributions to
shareholders.................. (0.64) (0.69) (0.67) (0.59) (0.88) (0.37)
------- ------- ------- ------- -------
Net asset value, end of
period........................ $ 10.26 $ 10.45 $ 10.33 $ 9.98 $ 10.96 $ 10.64
------- ------- ------- ------- ------- -----
------- ------- ------- ------- ------- -----
Total investment return (1).... 4.48% 8.12% 10.49% (3.56)% 11.64% 0.61%
------- ------- ------- ------- ------- -----
------- ------- ------- ------- ------- -----
Ratios/supplemental data:
Net assets, end of period
(000's)....................... $36,935 $50,928 $71,329 $92,480 $135,847 $36,598
Expenses to average net
assets........................ 1.69% 1.73% 1.75%(2) 1.68% 1.83%** 1.75%*
Net investment income to
average net assets............ 6.17% 6.40% 6.96%(2) 6.34% 6.17%** 7.02%*
Portfolio turnover rate........ 172% 126% 113% 108% 90% 92%
</TABLE>
--------------------
Prospectus Page 19
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FINANCIAL HIGHLIGHTS
(Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INCOME FUND
-----------------------------------------------------------------------------
CLASS Y
-----------------------------------------------------------------------------
FOR THE
PERIOD
AUGUST 26,
FOR THE YEARS ENDED OCTOBER 31, 1991+ TO
-------------------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 10.49 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.76 $ 10.53
------- ------- ------- ------- ------- ------- -----------
Net investment income................... 0.71@ 0.75@ 0.78@ 0.75 0.71 0.81 0.17
Net realized and unrealized gains
(losses) from investments and
foreign currency...................... (0.21)@ 0.17@ 0.32@ (1.06) 0.58 (0.08) 0.32
------- ------- ------- ------- ------- ------- -----------
Net increase (decrease) from investment
transactions.......................... 0.50 0.92 1.10 (0.31) 1.29 0.73 0.49
------- ------- ------- ------- ------- ------- -----------
Dividends from net investment income.... (0.56) (0.78) (0.74) (0.34) (0.82) (0.67) (0.24)
Distributions from net realized gains
from investments and
foreign currency transactions......... -- -- -- -- (0.14) (0.18) (0.02)
Distributions in excess of net
investment income..................... (0.06) -- -- -- -- -- --
Distributions from paid-in-capital...... (0.10) -- -- (0.33) -- -- --
------- ------- ------- ------- ------- ------- -----------
Total dividends and distributions to
shareholders.......................... (0.72) (0.78) (0.74) (0.67) (0.96) (0.85) (0.26)
------- ------- ------- ------- ------- ------- -----------
Net asset value, end of period.......... $ 10.27 $ 10.49 $ 10.35 $ 9.99 $ 10.97 $ 10.64 $ 10.76
------- ------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- ------- -----------
Total investment return (1)............. 5.20% 9.25% 11.39% (2.86)% 12.60% 6.98% 4.63%
------- ------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- ------- -----------
Ratios/supplemental data:
Net assets, end of period (000's)....... $10,096 $13,077 $16,613 $12,975 $12,043 $ 7,252 $ 2,565
Expenses to average net assets.......... 0.94% 0.96% 0.95%(2) 0.88% 1.06%** 0.94% 1.09%*
Net investment income to average net
assets................................ 6.93% 7.19% 7.77%(2) 7.23% 7.00%** 8.15% 8.79%*
Portfolio turnover rate................. 172% 126% 113% 108% 90% 92% 53%
</TABLE>
- ------------------
@ Calculated using the average shares outstanding for the year.
* Annualized
** Includes 0.15% of interest expense related to the reverse repurchase
agreement transactions entered into during the fiscal year.
+ Commencement of issuance of shares.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. Total investment
return information for periods of less than one year is not annualized.
(2) These ratios include non-recurring acquisition reorganization expenses of
0.04%.
--------------------
Prospectus Page 20
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The Funds' investment objectives may not be changed without shareholder
approval. Except where noted, the Funds' other investment policies are not
fundamental and may be changed by their boards.
ASIA PACIFIC GROWTH FUND
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 Asia Pacific Region companies. The Fund considers the 'Asia
Pacific Region' to be the region located south of the former Soviet Union, east
of Afghanistan and Iran and west of the International Date Line, but excluding
Japan. The Asia Pacific Region countries that currently have established
securities markets and that Schroder Capital normally considers for investments
by the Fund include: Australia, China, Hong Kong, India, Indonesia, Malaysia,
New Zealand, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka,
Taiwan and Thailand. The Fund may also invest in other Asia Pacific Region
countries whose securities markets become sufficiently established. Except under
unusual conditions, the Fund invests in a minimum of three, and generally in a
larger number of, 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.
The 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 Schroder Capital,
either (A) derive at least 50% of their revenues from goods produced or sold,
investments made or services performed in Asia Pacific Region countries or (B)
maintain at least 50% of their assets in Asia Pacific Region countries, or
o for which the principal securities trading market is an exchange or
over-the-counter ('OTC') market in the Asia Pacific Region.
Under normal market conditions, the Fund will invest 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 OTC market. When Schroder Capital believes it is
consistent with the Fund's investment objective, the Fund may invest up to 10%
of its total assets in convertible and non-convertible bonds issued or
guaranteed by Asia Pacific Region issuers, including obligations of sovereign
governmental issuers ('sovereign debt').
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through investment in a
diversified portfolio consisting primarily of equity securities of issuers in
emerging markets. 'Emerging markets' are the markets in all the countries not
included in the Morgan Stanley Capital International ('MSCI') World Index, an
index of major world economies. Malaysia will be considered an emerging market.
Under normal market conditions, the Fund invests a minimum of 65% of its total
assets in equity securities of issuers located in emerging market countries and
maintains investments in at least three emerging market countries. The Fund
considers issuers to be located in an emerging market country if: (1) the
principal securities trading market for the issuer is in an emerging market
country; (2) the issuer derives 50% or more of its annual revenue or profit from
either goods produced, sales made, investments made or services performed in
emerging market countries; or (3) the issuer is organized under the laws of an
emerging market country.
Schroder Capital attempts to spread the Fund's investments over geographic as
well as economic sectors. Generally, Schroder Capital will not invest more than
35% of the Fund's total assets in any single country, and it will not invest 25%
or more of the Fund's total assets in any single industry. Within each emerging
market, the Fund is diversified through investments in a number of local
companies characterized by attractive valuation relative to expected growth.
There are currently over 60 newly industrializing and developing countries with
equity markets. A number of these emerging markets are not yet easily accessible
to foreign investors and have unattractive tax barriers
--------------------
Prospectus Page 21
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
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.
In recent years, many emerging market countries have begun programs of economic
reform: removing import tariffs, dismantling trade barriers, deregulating
foreign investment, privatizing state owned industries, permitting the value of
their currencies to float against the dollar and other major currencies, and
generally reducing the level of state intervention in industry and commerce.
Important intra-regional economic integration also holds the promise of greater
trade and growth. At the same time, significant progress has been made in
restructuring the heavy external debt burden that certain emerging market
countries accumulated during the 1970s and 1980s. While there is no assurance
that these trends will continue, Schroder Capital will seek out attractive
investment opportunities in these countries.
GLOBAL EQUITY FUND
Global Equity Fund's investment objective is long-term growth of capital. The
Fund attempts to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States. Under
normal circumstances, at least 80% of the Fund's total assets are invested in
securities of issuers in countries represented in the MSCI World Index. This is
a well-known index that reflects major world markets.
The International Equity Team at GE Investment Management selects equity
securities issued by companies located in developed and developing countries
throughout the world. The Fund normally invests in at least three countries, one
of which is typically the United States. The Fund considers an issuer to be
located in the country in which the issuer (a) is organized, (b) derives at
least 50% of its revenues or profits from goods produced or sold, investments
made or services performed, (c) has at least 50% of its assets situated or (d)
has the principal trading market for its securities. The Fund normally invests
at least 65% of its total assets in equity securities of foreign and U.S.
companies.
When the International Equity Team believes it is consistent with the Fund's
investment objective of long-term growth of capital, the Fund may invest up to
35% of its total assets in investment grade bonds 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 the International Equity Team considers market,
economic, political or currency conditions abroad to be unstable, the Fund may
assume a temporary defensive position by investing all or a significant portion
of its assets in securities of U.S. and Canadian issuers or by holding cash or
short-term money market investments. Global Equity Fund's investments in money
market instruments may be made indirectly through investments in a cash
management investment fund established and managed by GE Investment Management
at no additional cost to the Fund.
GLOBAL INCOME FUND
Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by
investing principally in high-quality bonds issued or guaranteed by foreign
governments, by the U.S. government, by their respective agencies or
instrumentalities or by supranational organizations, or issued by U.S. or
foreign companies.
The Fund's portfolio consists primarily of 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 recognized statistical rating organization ('NRSRO') or, if unrated,
determined by Mitchell Hutchins to be of comparable quality. Normally, at least
65% of the Fund's total assets consist of high-quality bonds (and receivables
from the sale of such bonds), denominated in foreign currencies or U.S. dollars,
of issuers located in at least three of the following countries: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, Thailand, the United Kingdom and the United States. No more
than 40% of the Fund's assets normally are invested in securities of issuers
located in any one country other than the United States. Up to 5% of the Fund's
total assets may be invested in bonds convertible into equity securities. At
least 65% of the Fund's total assets normally will be invested in income
producing securities.
The Fund may invest up to 35% of its total assets in bonds rated below the two
highest grades assigned by an NRSRO. 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 NRSRO or, if unrated, determined by Mitchell
Hutchins to be of comparable quality). Within this
--------------------
Prospectus Page 22
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
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 NRSRO or, in the case of bonds assigned a
short-term debt rating, as low as D by S&P or comparably rated by another NRSRO
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 such 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 such
securities for the Fund only when it concludes that the anticipated return to
the Fund on such investments warrants exposure to the additional level of risks.
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 the 20% noted above.
In the event that, due to a downgrade of one or more bonds, an amount in excess
of 20% of the 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 such securities do not exceed 20% of the Fund's total
assets.
The 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 NRSRO 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.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY & PROCESS
- --------------------------------------------------------------------------------
ASIA PACIFIC GROWTH FUND
Stock selection is at the heart of Schroder Capital's investment philosophy. Its
approach to selecting investments emphasizes fundamental company analysis.
Schroder Capital's stock selection focuses on Asia Pacific Region companies that
it believes have a sustainable competitive advantage and whose growth potential
is undervalued by other investors. In selecting companies for investment,
Schroder Capital considers historical growth rates and future growth prospects,
management capability, the ability of the company to access capital, government
regulation, market share, profit margins, competitive position in both domestic
and export markets and other factors. Schroder Capital allocates investments
among Asia Pacific Region countries based on its assessment of the likelihood
that those countries will have favorable long-term business environments.
Schroder Capital is committed to maximizing risk- adjusted returns for
investors through comprehensive research conducted by an extensive network of
locally based analysts. This investment approach is consistent with the Fund's
overall strategy of taking a long-term view to investment based upon its
assessment of growth potential. Schroder Capital is a wholly owned indirect
subsidiary of Schroders plc, the holding company parent of an international
group of banks and financial services companies ('Schroder Group'), with
associated companies and investment and representative offices located around
the world. Schroder Capital believes that one of its key strengths is the
Schroder Group's worldwide network of investment management affiliates and
access to its extensive network of research offices, many long established, in
the Asia Pacific Region, including, as of December 31, 1997, offices in Bangkok,
Beijing, Hong Kong, Singapore, Manila, Seoul, Sydney, Jakarta, Kuala Lumpur,
Shanghai, Taipei and Tokyo. As of that date, Schroder Capital's global research
network was staffed by over 50 investment professionals, including 10 Asia
Pacific Region specialists in Schroder Capital's London office.
Each year, the Schroder Group researches and conducts on-site visits with
approximately 1200 companies in the Asia Pacific Region countries. Of those
companies, the Schroder Group's investment professionals further develop
extensive management contacts with, and produce independent forecasts of
earnings estimates for, approximately 550 companies.
--------------------
Prospectus Page 23
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
Schroder Capital's analysis includes small and medium-sized companies, as well
as the larger capitalization companies.
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. While the currency crisis diminished prospects
for short-term corporate earnings growth, International Monetary Fund
initiatives may persuade governments and corporations to restructure the
financial sector in a manner that would be a positive long-term factor for the
Asia Pacific Region. Such restructuring may provide for a return to high levels
of long-term economic activity and the return of economic conditions that have
supported economic growth in the Asia Pacific Region in the past. There can be
no assurance that economic growth in the Asia Pacific Region will occur, that
the growth rate will be as high on either an absolute or relative scale as in
the past or that market performance will reflect any actual economic growth in
the Asia Pacific Region overall. Many of the countries within the Asia Pacific
Region may experience political, social or economic instability.
EMERGING MARKETS EQUITY FUND
In selecting emerging market equity securities for Emerging Markets Equity Fund,
Schroder Capital combines rigorous, fundamental research with a quantitative
assessment of the economic potential of the various countries in which
investments might be made. Schroder Capital focuses on companies in emerging
market countries where it believes there is likely to be a favorable long-term
business environment and where it believes a company's growth is less likely to
be impeded by adverse macro-economic or political factors. Within those
countries, Schroder Capital selects stocks of companies that, based on its
analysis of fundamental corporate data, it believes have a sustainable
competitive advantage and whose growth potential is undervalued by other
investors.
Schroder Capital believes that one of its key strengths is the Schroder Group's
worldwide network of investment management affiliates and access to its network
of local research offices, many long established, in emerging market countries.
Each year, the Schroder Group researches and conducts on-site visits with
approximately 1,200 companies in emerging market countries. Of those companies,
the Schroder Group's investment professionals further develop extensive
management contacts with, and produce independent forecasts of earnings
estimates for, approximately 1,000 companies. Schroder Capital's analysis
includes small and medium-sized companies, as well as the larger capitalization
companies.
GLOBAL EQUITY FUND
In selecting equity securities for Global Equity Fund, the International Equity
Team ('Team') at GE Investment Management searches for growth companies selling
at reasonable prices, with an emphasis on undervalued medium- to large-size
growth companies with a global presence. The investment process employed by the
Team involves several steps.
First, the Team carefully screens a universe of thousands of global stocks by
comparing each company's price-to-cash flow ratio with its long-term growth.
This evaluation helps eliminate companies whose stock prices are too expensive,
typically resulting in a list of several hundred stocks. Next, this smaller
group of stocks is rigorously analyzed by the Team's experienced investment
professionals. This step, which is designed to determine whether a stock's price
reflects its true value and whether the market may eventually recognize the
stock's value, reduces the universe to fewer stocks.
Finally, the Team looks for a catalyst (such as new management, new products or
changing industry dynamics) that might cause the market to realize a stock is
undervalued. This process typically results in fewer than 100 stocks that the
Team will buy for the Fund's portfolio.
The strength of the Team's conviction about each company is part of what
determines the size of each holding.
The Team regularly reviews the equity securities held in the Fund's portfolio to
assess risks, such as stability in the political and economic conditions of
underlying countries, fluctuations in currency rates, liquidity, changes in
company earnings and other relevant
factors.
GLOBAL INCOME FUND
Global Income Fund's investment policies are designed to enable it to capitalize
on unique investment opportunities presented throughout the world and in
international financial markets influenced by the increasing interdependence of
economic cycles and currency exchange rates. Over the past decade, bonds offered
by certain foreign governments provided higher investment returns than U.S.
government debt securities. Such returns reflect interest rates and other market
conditions prevailing in those countries and the effect of gains and losses in
the denominated currencies, which have had a substantial impact on investment in
foreign bonds. The importance of global debt
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
markets is illustrated by the Salomon Brothers World Government Bond Market
Index, a popular index used to assess both U.S. government and foreign
government debt markets. As of December 31, 1997, more than 65% of this index
was represented by securities denominated in currencies other than the U.S.
dollar.
The Global Fixed Income Management Team at Mitchell Hutchins relies on
fundamental economic strength, credit quality and currency and interest rate
trends as the principal determinants of the various country, geographic and
industry sector weightings within the Fund's portfolio. In addition, certain of
the Fund's assets are invested in bonds of U.S. governmental and corporate
issuers. The Global Fixed Income Management Team believes that over time
investment in a composite of foreign fixed income markets and in the U.S.
government and corporate bond markets is less risky than a portfolio comprised
exclusively of foreign securities and provides investors with the potential to
earn a higher return than a portfolio invested exclusively in U.S. debt
securities.
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
These charts show the total returns for the Funds. Sales charges have not been
deducted from total returns shown in the charts. Returns would be lower if sales
charges were deducted. Total returns both before and after deducting the maximum
sales charges are shown below in the tables that follow the performance charts.
Past results are not a guarantee of future results.
ASIA PACIFIC GROWTH FUND
3/25/97-12/31/97
Class A -33.92%
Class B -34.32%
Class C -34.32%
The inception date for Class A, Class B and Class C shares was March 25, 1997;
thus, the 1997 return represents the period from March 25, 1997 through December
31, 1997. As of December 31, 1997, no Class Y shares had been sold to the
public.
<TABLE>
<CAPTION>
TOTAL RETURN
As of October 31, 1997
CLASS A CLASS B CLASS C CLASS Y
SHARES SHARES SHARES SHARES
------- -------- -------- --------
LIFE (3/25/97 - 10/31/97)
<S> <C> <C> <C> <C>
Before deducting maximum sales
charges....................... (28.32)% (28.64)% (28.64)% N/A
After deducting maximum sales
charges....................... (31.55)% (32.21)% (29.35)% N/A
</TABLE>
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
EMERGING MARKETS EQUITY FUND
1/19/94-12/31/94 1995 1996 1997
Class A -12.58% -11.20% 4.86% -4.53%
Class B 0.55% 4.14% -4.52%
Class C -13.17% -11.87% 4.03% -5.34%
Class Y -12.33% -10.92% 5.05% -4.50%
The inception date for Class A, Class C and Class Y shares was January 19, 1994;
thus, the 1994 return represents the period from January 19, 1994 through
December 31, 1994. The inception date for the Class B shares was
December 5, 1995; thus the 1995 return represents the period from December 5,
1995 to December 31, 1995. Schroder Capital was appointed sub-adviser for
Emerging Markets Equity Fund effective February 25, 1997; thus, while past
performance is never a guarantee of future results, information for periods
prior to that date may be less relevant than would otherwise be the case.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1997
CLASS A CLASS B CLASS C CLASS Y
--------- --------- --------- ---------
Inception Date..................... 1/19/94 12/5/95 1/19/94 1/19/94
<S> <C> <C> <C> <C>
ONE YEAR
Before deducting maximum sales
charges....................... (0.74)% (1.39)% (1.61)% (0.53)%
After deducting maximum sales
charges....................... (5.25)% (6.39)% (2.61)% (0.53)%
LIFE
Before deducting maximum sales
charges....................... (6.13)% 0.34% (6.85)% (5.90)%
After deducting maximum sales
charges....................... (7.27)% (1.76)% (6.85)% (5.90)%
</TABLE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
11/14/91-12/31/91 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 2.42% 3.26% 30.77% -2.53% 13.54% 14.80% 6.34%
Class B 1.29% 13.91% 5.49%
Class C 17.39% -3.12% 12.76% 13.91% 5.55%
Class Y 18.19% -2.16% 13.90% 15.12% 6.79%
</TABLE>
The inception date for Class A shares was November 14, 1991; thus, the 1991
return represents the period from November 14, 1991 through December 31, 1991.
As the inception date of Class B shares was August 25, 1995, the 1995 return for
Class B shares represents the period from August 25, 1995 through December 31,
1995. The inception date of Class C and Class Y shares was May 10, 1993; thus,
the 1993 returns for Class C and Class Y shares represent the period from May
10, 1993 through December 31, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1997
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>
ONE YEAR
Before deducting maximum sales
charges....................... 8.87% 8.05% 8.05% 9.31%
After deducting maximum sales
charges....................... 3.98% 3.05% 7.05% 9.31%
FIVE YEARS
Before deducting maximum sales
charges....................... 12.04% N/A N/A N/A
After deducting maximum sales
charges....................... 11.00% N/A N/A N/A
LIFE
Before deducting maximum sales
charges....................... 10.76% 8.63% 9.74% 10.92%
After deducting maximum sales
charges....................... 9.90% 7.38% 9.74% 10.92%
</TABLE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
3/20/87-12/31/87 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 11.11% 1.22% 14.16% -3.89% 13.20% 7.13% 3.84%
Class B 17.58% 12.15% 5.44% 17.72% 10.75% 0.38% 13.36% -4.77% 12.39% 6.34% 3.06%
Class C 0.10% 13.64% -4.43% 12.54% 6.70% 3.33%
Class Y 9.83% 1.51% 14.54% -3.74% 13.53% 7.54% 4.05%
</TABLE>
The inception date for Class A shares was July 1, 1991; thus, the 1991 return
for Class A shares represents the period from July 1, 1991 through December 31,
1991. The inception date of Class B shares was March 20, 1987; thus, the 1987
return represents the period from March 20, 1987 through December 31, 1987. The
inception date of Class C shares was July 2, 1992; thus, the 1992 return for
Class C shares represents the period from July 2, 1992 through December 31,
1992. The inception date for Class Y shares was August 26, 1991; thus, the 1991
return for Class Y shares represents the period from August 26, 1991 through
December 31, 1991.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
As of October 31, 1997
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>
ONE YEAR
Before deducting maximum sales
charges....................... 4.99% 4.11% 4.48% 5.20%
After deducting maximum sales
charges....................... 0.75% (0.89)% 3.73% 5.20%
FIVE YEARS
Before deducting maximum sales
charges....................... 6.64% 5.81% 6.10% 6.91%
After deducting maximum sales
charges....................... 5.78% 5.49% 6.10% 6.91%
TEN YEARS (OR LIFE OF CLASS)
Before deducting maximum sales
charges....................... 7.23% 9.02% 5.82% 7.43%
After deducting maximum sales
charges....................... 6.55% 9.02% 5.82% 7.43%
</TABLE>
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
PERFORMANCE INFORMATION
The Funds perform a standardized computation of annualized total return and may
show this return in advertisements or promotional materials. Standardized return
shows the change in value of an investment in a Fund as a steady compound annual
rate of return. Actual year-by-year returns fluctuate and may be higher or lower
than standardized return. Standardized returns for Class A shares of the Funds
reflect deduction of the Funds' maximum initial sales charge of 4.5% (4% in the
case of Global Income Fund) at the time of purchase, and standardized returns
for the Class B and Class C shares of the Funds reflect deduction of the
applicable contingent deferred sales charge imposed on the sale of shares held
for the period. One-, five-and ten-year periods will be shown, unless the Fund
or Class has been in existence for a shorter period. If so, returns will be
shown for the period since inception, known as 'Life.' Total return calculations
assume reinvestment of dividends and other distributions.
The Funds may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
Global Income Fund also may advertise its yield. Yield reflects investment
income net of expenses over a 30-day (or one month) period on a Fund share.
Yield is expressed as an annualized percentage of the maximum offering price for
a Fund share at the end of the period. For Class B, C and Y shares, the maximum
offering price is the same as the net asset value per share. Yield computations
differ from other accounting methods and may differ from dividends actually paid
or reported net income.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Funds will
fluctuate. The amount investors receive when selling shares may be more or less
than what they paid. Further information about each Fund's performance is
contained in its Annual Report, which may be obtained without charge by
contacting the Fund, your PaineWebber investment executive or PaineWebber's
correspondent firms or by calling toll-free 1-800-647-1568.
- --------------------------------------------------------------------------------
THE FUNDS' INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES include common stocks, most preferred stocks and securities
that are convertible into them, including common stock purchase warrants and
rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises and depository receipts. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Depository receipts typically are issued by banks or trust companies and
evidence ownership of underlying equity securities.
BONDS are fixed or variable rate debt obligations, including notes, debentures,
and similar instruments and securities. Mortgage- and asset-backed securities
are types of bonds, and income-producing, non-convertible preferred stocks may
be treated as bonds for investment purposes. Bonds 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. Bonds have varying degrees of investment risk and varying
levels of sensitivity to changes in interest rates.
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
RISKS
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that a Fund may experience a
substantial or complete loss on an individual equity investment.
BONDS. Bonds are subject to interest rate risk and credit risk. Interest rate
risk is the risk that interest rates will rise and bond prices will fall,
lowering the value of a Fund's investments in bonds. Credit risk is the risk
that an issuer may be unable to pay interest and principal on the bond. In
addition, there is a risk that bonds will be downgraded by rating agencies,
which can be expected to lower value and liquidity. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
volatility of the security's value or its liquidity 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.
Bonds rated below investment grade (that is, rated lower than BBB by S&P, Baa by
Moody's, comparably rated by another NRSRO or determined to be of similar
quality), generally offer a higher current yield than that available for higher
grade issues, but they involve higher risks. They are especially subject to
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. Such
securities, commonly referred to as 'junk bonds,' are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal and may involve major risk exposure to adverse conditions. These
securities may be rated in the lowest rating category by a ratings agency and
may be in default.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress, which could adversely affect their
ability to make payments of interest and principal and increase the possibility
of default. In addition, such issuers may not have more traditional methods of
financing available to them and may be unable to repay debt at maturity by
refinancing. The risk of loss due to default by such issuers is significantly
greater because such securities frequently are unsecured and subordinated to the
prior payment of senior indebtedness.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest 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.
FOREIGN INVESTING. Investing in foreign securities involves more risks than
investing in the United States. Their value is subject to economic and political
developments in the countries where the companies operate and to changes in
foreign currency values. Values may also be affected by foreign tax laws,
changes in foreign economic or monetary policies, exchange control regulations
and regulations involving prohibitions on the repatriation of foreign
currencies. Investments in foreign countries could be affected by other factors
not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations. Transactions in foreign
securities may be subject to less efficient settlement practices, including
extended clearance and settlement periods.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
higher than those in the United States. These costs include relatively higher
brokerage commissions and foreign custody expenses.
Investments in foreign government bonds involve special risks. The issuer of the
bond or the governmental authorities that control the repayment of the bond may
be unable or unwilling to pay interest or repay principal when due in accordance
with the terms of the bond, and a Fund may have limited legal recourse in the
event of default. Political conditions, especially a sovereign entity's
willingness to meet the terms of its debt obligations, are of considerable
significance.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies
located in emerging markets involves additional risks. These countries typically
have economic and political systems that are relatively less mature, and can be
expected to be less stable, than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners in those
countries, and there is a risk of government expropriation or nationalization of
private property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets may also result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
The emerging markets in which the Funds may invest include formerly communist
countries of Eastern Europe, the Commonwealth of Independent States (formerly
the Soviet Union) and the People's Republic of China. Upon the accession to
power of communist regimes approximately 50 to 80 years ago, the governments of
a number of these countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
There can be no assurance that a Fund's investments in these countries, if any,
would not also be expropriated, nationalized or otherwise confiscated, in which
case the Fund could lose its entire investment in the country involved. In
addition, any change in the leadership or policies of these countries may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring. The Funds may invest in Hong Kong, which reverted to Chinese
administration on July 1, 1997. The long-term effects of this reversion are not
known at this time. However, a Fund's investments in Hong Kong may now be
subject to the same or similar risks as any investment in China.
CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of a Fund's foreign investments. A Fund's share
value may change significantly when investments are denominated in foreign
currencies. Generally, currency exchange rates are determined by supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries. Currency exchange rates can also be affected by the
intervention of the U.S. and foreign governments or central banks, the
imposition of currency controls, speculation or other political or economic
developments inside and outside the United States.
CURRENCY-LINKED INVESTMENTS. The Funds may invest in securities that are indexed
to specific foreign currency exchange rates. The principal amount of these
securities may be adjusted up or down (but not below zero) at maturity to
reflect changes in the exchange rate between two currencies. A Fund may
experience loss of principal due to these adjustments.
DERIVATIVES. Some of the instruments in which the Funds may invest may be
referred to as 'derivatives,' because their value depends on (or 'derives' from)
the value of an underlying asset, reference rate or index. These instruments
include options, futures contracts, forward currency contracts, swap agreements
and similar instruments. There is limited consensus as to what constitutes a
'derivative' security. However, in Mitchell Hutchins' view, derivative
securities also include 'stripped' securities, specially structured types of
mortgage- and asset-backed securities and dollar denominated securities whose
value is linked to foreign currencies. The market value of derivative
instruments and securities sometimes is more volatile than that of other
investments, and each type of derivative instrument may pose its own special
risks. Mitchell Hutchins and the sub-advisers take these risks into account in
their management of the Funds.
COUNTERPARTIES. The Funds may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, Mitchell Hutchins and
the sub-advisers, subject to the supervision of the Funds' boards, monitor and
evaluate the creditworthiness of the parties with which each Fund does business.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which Global
Income Fund may invest include direct obligations of the U.S. government (such
as Treasury bills, notes and bonds) and obligations issued or guaranteed as to
principal and interest (but not as to market value) by U.S. government agencies
and instrumentalities, including U.S. government mortgage-backed securities.
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
Global Income Fund may invest in 'zero coupon' Treasury securities, which are
Treasury bills, notes and bonds that have been stripped of their unmatured
interest coupons, and receipts or certificates representing interest in such
stripped debt obligations and coupons. A zero coupon security pays no cash
interest to its holder prior to maturity. Accordingly, these securities usually
are issued and traded at a deep discount from their face or par value and are
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make current income
payments. Federal tax law requires that the holder of a zero coupon security
include in gross income each year the original issue discount that accrues on
the security for the year, even though the holder receives no interest payment
on the security during the year. For additional discussion of the tax treatment
of zero coupon securities, see 'Taxes' in the Statement of Additional
Information.
Global Income Fund may also invest in Treasury Inflation-Protection Securities
('TIPS'), which 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 the 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.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are bonds that 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 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, including
investment banking firms and mortgage originators. 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 in this Prospectus as
'CMOs.' Some CMOs are directly supported by other CMOs, which in turn are
supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the underlying mortgages. The portions of these
payments that investors receive, as well as the priority of their rights to
receive payments, are determined by the specific terms of the CMO class. CMOs
involve special risk, and evaluating them requires special knowledge.
A major difference between mortgage-backed securities and traditional bonds is
that interest and principal payments are made more frequently (usually monthly)
and that principal may be repaid at any time. When interest rates go down and
homeowners refinance their mortgages, mortgage-backed securities may be paid off
more quickly than investors expect. When interest rates rise, mortgage-backed
securities may be paid off more slowly than originally expected. Changes in the
rate or 'speed' of these prepayments can cause the value of mortgage-backed
securities to fluctuate rapidly.
Because of prepayments, mortgage-backed securities may benefit less than other
bonds from declining interest rates. Reinvestments of prepayments may occur at
lower interest rates than the original investment, thus adversely affecting a
Fund's yield. Actual prepayment experience may cause the yield of a
mortgage-backed security to differ from what was assumed when the Fund purchased
the security.
CMO classes may be specially structured in a manner that provides any of a wide
variety of investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
Certain classes of CMOs and other mortgage-backed securities are structured in a
manner that makes them extremely sensitive to changes in prepayment rates.
Interest-only ('IO') and principal-only ('PO') classes are examples of this. IOs
are entitled to receive all or a portion of the interest, but none (or only a
nominal
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
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 certan 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.
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 assurace
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 seeks to manage the Fund's investments in
mortgage-backed securities so that the volatility of the Fund's portfolio, taken
as a whole, is consistent with the Fund's investment objective. If market
interest rates or other factors that affect the volatility of securities held by
the Fund change in ways that Mitchell Hutchins does not anticipate, the Fund's
ability to meet its investment objective may be reduced.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global Income Fund may invest in fixed and
floating rate loans arranged through private negotiations with a U.S. or foreign
borrower. These investments normally are participations in or assignments of all
or a portion of loans made by banks. Participations typically will result in the
Fund's having a contractual relationship only with the lender, not with the
borrower. In a participation, the Fund is entitled to receive payments of
principal, interest and any loan fees by the lender only when and if they are
received. Also, the Fund may not directly benefit from any collateral supporting
the underlying loan. As a result, the Fund assumes the credit risk of both the
borrower and the lender that is selling the participation. If the lender becomes
insolvent, the Fund may be treated as a general creditor of the lender and may
not benefit from any set-off between the lender and the borrower. In a loan
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 on to
the Fund.
NON-DIVERSIFIED STATUS. Global Income Fund is 'non-diversified,' as that term is
defined in the 1940 Act, but it intends to continue to qualify as a 'regulated
investment company' for federal income tax purposes. See 'Dividends & Taxes.'
This means, in general, that more than 5% of the total assets of the Fund may be
invested in securities of one issuer (including a foreign government), but only
if, at the close of each quarter of the Fund's taxable year, the aggregate
amount of such holdings does not exceed 50% of the value of its total assets and
no more than 25% of the value of its total assets is invested in the securities
of a single issuer. To the extent that the Fund's portfolio at times may include
the securities of a smaller number of issuers than if it were 'diversified' (as
defined in the 1940 Act), the Fund will at such times be subject to greater risk
with respect to its portfolio securities than an investment company that invests
in a broader range of securities, in that changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the Fund's
total return and the price of Fund shares.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, each of the Funds could be adversely affected
if the computer systems used by its investment adviser, sub-advisers and other
service providers and
--------------------
Prospectus Page 33
<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
entities with computer systems that are linked to Fund records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the 'Year 2000 Issue.' Mitchell Hutchins is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Funds' other major service providers. However, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Funds.
OTHER INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS. Each Fund may use
certain instruments and strategies designed to adjust the overall risk of its
investment portfolio ('hedge') or, in the case of Global Income Fund, to enhance
income or realize gains. Use of derivative instruments solely to enhance income
or realize gains may be considered a form of speculation. These strategies
involve derivative instruments, including options (both exchange traded and
over-the-counter), futures contracts and forward currency contracts. In
addition, Asia Pacific Growth Fund and Global Income Fund may use interest rate
swaps and similar contracts to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against an increase in the
price of securities that either Fund anticipates purchasing at a later date.
Asia Pacific Growth Fund may also engage in currency swaps. New financial
products and risk management techniques continue to be developed, and they may
be used by any Fund if consistent with its investment objective and policies.
The Funds' ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations. In addition, in some countries there
may not be a market for derivative instruments, or it may be too small to permit
effective hedging. The Statement of Additional Information contains further
information on these derivative instruments and related strategies.
The Funds might not use any derivative instruments or hedging strategies, and
there can be no assurance that using any strategy will succeed. If Schroder
Capital, GE Investment Management or Mitchell Hutchins, as applicable, is
incorrect in its judgment on market values, interest rates or other economic
factors in using a derivative instrument or strategy, a Fund may have lower net
income and a net loss on the investment. Each of these strategies involves
certain risks, which include:
o the fact that the skills needed to use derivative instruments are different
from those needed to select securities for the Funds;
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative instruments used in hedging strategies and price
movements of the securities or currencies being hedged;
o possible constraints placed on a Fund's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Fund to maintain
'cover' or to segregate securities; and
o the possibility that a Fund is unable to close out or liquidate its hedged
position.
REPURCHASE AGREEMENTS. Each Fund may use repurchase agreements. Repurchase
agreements are transactions in which a Fund purchases securities from a bank or
recognized securities dealer and simultaneously commits to resell the securities
to the bank or dealer at an agreed-upon date or upon demand and at a price
reflecting a market rate of interest unrelated to the coupon rate or maturity of
the purchased securities. Repurchase agreements carry certain risks not
associated with direct investments in securities, including a possible decline
in the market value of the underlying securities and delays and costs to the
Fund if the other party to the repurchase agreement becomes insolvent. Each Fund
intends to enter into repurchase agreements only with banks and dealers in
transactions believed by Mitchell Hutchins or a sub-adviser to present minimum
credit risks in accordance with guidelines established by the Fund's board.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements with banks and securities dealers up to the percentages specified
below under 'Other Information.' Such agreements involve the sale of securities
held by the Fund subject to its agreement to repurchase the securities at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes.
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 the Funds later than the normal
settlement date for such securities at a stated price and yield. The Funds
--------------------
Prospectus Page 34
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a Fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a Fund on a when-issued or delayed-delivery basis may
result in that 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. When-issued and
delayed-delivery securities will not exceed 10% of Global Equity Fund's net
assets.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of that
Fund's total assets. Lending securities enables a Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
PORTFOLIO TURNOVER. Each Fund's portfolio turn-over rate may vary greatly from
year to year and will not be a limiting factor when Mitchell Hutchins or a
sub-adviser deems portfolio changes appropriate. A higher turnover rate (100% or
more) for a Fund will involve correspondingly greater transaction costs, which
will be borne directly by the Fund, and may increase the potential for
short-term capital gains.
TEMPORARY DEFENSIVE POSITIONS. When Mitchell Hutchins or a sub-adviser, as
applicable, believes that unusual circumstances warrant a defensive posture,
each Fund may temporarily commit all or any portion of its assets to cash (U.S.
dollars or foreign currencies) or investment grade money market instruments of
U.S. or foreign issuers, including repurchase agreements.
ILLIQUID SECURITIES. Global Equity Fund and Global Income Fund each may invest
up to 10% of its net assets, and Emerging Markets Equity Fund and Asia Pacific
Growth Fund up to 15% of its net assets, in illiquid securities, including
certain cover for over-the-counter options and securities whose disposition is
restricted under the federal securities laws other than those Mitchell Hutchins,
or a sub-adviser, as applicable, has determined to be liquid pursuant to
guidelines established by a Fund's board. To the extent that securities are
freely tradeable in the country in which they are principally traded, they are
not considered illiquid even if they are not freely tradeable in the United
States. Each Fund may invest in restricted securities that are eligible for
resale to qualified institutional buyers pursuant to SEC Rule 144A, but a Fund
will not consider those securities to be illiquid if Mitchell Hutchins or a
sub-adviser, as applicable, determines them to be liquid in accordance with
procedures approved by the Fund's board. 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.
OTHER INFORMATION. Each Fund may borrow money from banks or through reverse
repurchase agreements for temporary or emergency purposes in the following
amounts of total assets: Asia Pacific Growth Fund-- 33 1/3%, Emerging Markets
Equity Fund--33 1/3%, Global Equity Fund--20%, and Global Income Fund--10%.
However, none of the Funds will purchase portfolio securities while borrowings
(including reverse repurchase agreements) in excess of 5% of the value of its
total assets are outstanding. Each Fund may sell securities short 'against the
box.' When a security is sold against the box, the seller owns the security. In
addition, each Fund may invest up to 10% of its total assets in the securities
of other investment companies. To the extent a Fund invests in other investment
companies, its shareholders incur duplicative fees and expenses, including
investment advisory fees. Each Fund may invest up to 35% of its total assets in
cash (U.S. dollars or foreign currencies) or investment grade money market
instruments of U.S. or foreign issuers for liquidity purposes, pending
investment in other securities, to reinvest cash collateral from securities
lending or, in the case of Global Income Fund, as part of its ordinary
investment activities. Global Income Fund's investment of cash collateral from
securities lending in such money market instruments is not subject to this 35%
limitation.
--------------------
Prospectus Page 35
<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
FLEXIBLE PRICING(SM)
- --------------------------------------------------------------------------------
Each Fund offers through this Prospectus four classes of shares that differ in
terms of sales charges and expenses. An investor can select the class that is
best suited to his or her investment needs, based upon the holding period and
the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price or, in the case of
Global Income Fund, 4% of the public offering price) next calculated after
PaineWebber's New York City headquarters or PFPC Inc., the Funds' transfer agent
('Transfer Agent'), receives the purchase order. Although investors pay an
initial sales charge when they buy Class A shares, the ongoing expenses for this
class are lower than the ongoing expenses of Class B and Class C shares. Class A
shares sales charges are calculated as follows:
ASIA PACIFIC GROWTH FUND, EMERGING MARKETS
EQUITY FUND AND GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF DISCOUNT TO
------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE
AMOUNT OF INVESTMENT PRICE INVESTED OF OFFERING PRICE
- ----------------------------------- -------- ---------- -----------------
<S> <C> <C> <C>
Less than $50,000.................. 4.50% 4.71% 4.25%
$50,000 to $99,999................. 4.00 4.17 3.75
$100,000 to $249,999............... 3.50 3.63 3.25
$250,000 to $499,999............... 2.50 2.56 2.25
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF DISCOUNT TO
------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE
AMOUNT OF PURCHASE PRICE INVESTED OF OFFERING PRICE
- ----------------------------------- -------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000................. 4.00% 4.17% 3.75%
$100,000 to $249,999............... 3.00 3.09 2.75
$250,000 to $499,999............... 2.25 2.30 2.00
$500,000 to $999,999............... 1.75 1.78 1.50
$1,000,000 and over (1)............ None None 1.00(2)
</TABLE>
- ------------------
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of any dividends or other
distributions are not subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan are not subject to this charge. However,
investors may withdraw annually no more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mutual
fund may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously owned
shares to qualify for a reduced sales charge. To determine the sales charge
reduction in either case, please refer to the charts above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
o their spouses, parents or children under age 21;
o their Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o any company controlled by the investor;
o trusts created by the investor;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts created
by the investor or group
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<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
of investors for the benefit of the investors' children; or
o accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
o is an employee, director, trustee or officer of PaineWebber, its affiliates or
any PaineWebber mutual fund;
o is the spouse, parent or child of any of the above;
o buys these shares through a PaineWebber investment executive who was formerly
employed as a broker with a competing brokerage firm that was registered as a
broker-dealer with the SEC; and
o was the investment executive's client at the competing brokerage firm;
o within 90 days of buying Class A shares in a Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten
by the competing brokerage firm or its affiliates and (b) the investor
either paid a sales charge to buy those shares, paid a contingent
deferred sales charge when selling them or held those shares until the
contingent deferred sales charge was waived; and
o the amount that the investor purchases does not exceed the total amount
of money the investor received from the sale of the other mutual fund;
o is a certificate holder of unit investment trusts sponsored by PaineWebber and
has elected to have dividends and other distributions from that investment
automatically invested in Class A shares;
o is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k), or
section 403(b) of the Internal Revenue Code ('Code') (each a 'qualified
pension plan'). (This waiver is subject to minimum requirements, with respect
to the number of employees and amount of plan assets, established by Mitchell
Hutchins. Currently, the plan must have 50 or more eligible employees and at
least $1 million in plan assets.) 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;
o is a participant in the PaineWebber Members Only Program(Trademark). For
investments made pursuant to this waiver, Mitchell Hutchins may make payments
out of its own resources to PaineWebber and to participating membership
organizations in a total amount not to exceed 1% of the amount invested;
o is a variable annuity offered only to qualified pension plans. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;
o acquires Class A shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for program
services, provided that the program sponsor has entered into a written
agreement with PaineWebber permitting the sale of Class A shares at net asset
value to that program. For investments made pursuant to this waiver, Mitchell
Hutchins may make a payment to PaineWebber out of its own resources in an
amount not to exceed 1% of the amount invested. For subsequent investments or
exchanges made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also waived; or
o acquires Class A shares in connection with a reorganization pursuant to which
a Fund acquires substantially all of the assets and liabilities of another
investment company in exchange solely for shares of the Fund.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or the Fund if they seek any of these waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Fund investment, investors may have to pay
a sales charge when they sell their Fund shares. This sales charge is called a
'contingent deferred sales charge.' The amount
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Prospectus Page 37
<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
of the charge depends on how long the investor owned the shares. The sales
charge is calculated by multiplying the offering price (the net asset value of
the shares at the time of purchase) or the net asset value of the shares at the
time of sale by the shareholder, whichever is less, by the percentage shown on
the following table. Investors who own shares for more than six years do not
have to pay a sales charge when selling those shares.
<TABLE>
<CAPTION>
PERCENTAGE BY WHICH
THE SHARES' NET
ASSET
IF THE INVESTOR VALUE IS
SELLS SHARES WITHIN: MULTIPLIED:
- ----------------------------------- -------------------
<S> <C>
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
</TABLE>
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Fund in the form of
additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Fund uses the purchase date at which the initial
investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED
SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Fund automatically will minimize the sales charge by assuming the investors are
selling:
o First, Class B shares owned through reinvested dividends and capital gain
distributions; and
o Second, Class B shares held in the portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
o sales of shares under the Fund's 'Systematic Withdrawal Plan' (investors may
withdraw annually no more than 12% of the value of the Fund account under the
Plan);
o a distribution from an IRA, a self-employed individual retirement plan ('Keogh
Plan') or a custodial account under Section 403(b) of the Code (after the
investor reaches age 59 1/2);
o a tax-free return of an excess IRA contribution;
o a tax-qualified retirement plan distribution following retirement; or
o Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or with
his or her spouse as a joint tenant with the right of survivorship.
Investors must provide satisfactory information to PaineWebber or the Fund to
seek any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class C shares, 100% of their purchase is immediately
invested. Class C shares never convert to any other class of shares.
A contingent deferred sales charge of 1% (0.75% in the case of Global Income
Fund) of the offering price (the net asset value at the time of purchase) or the
net asset value of the shares at the time of sale by the shareholder, whichever
is less, is charged on sales of shares made within one year of the purchase
date. Other PaineWebber mutual funds may impose a different contingent deferred
sales charge on Class C shares sold within one year of the purchase date. A sale
of Class C shares acquired through an exchange and held less than one year will
be subject to the same contingent deferred sales charge that would have been
imposed on Class C shares of the PaineWebber mutual fund originally purchased.
Class C shares representing reinvestment of any dividends or capital gain
distributions will not be subject to the 1% charge. Withdrawals under the
Systematic Withdrawal Plan also will not be subject to this charge. However,
investors may withdraw no more than 12% of the value of the Fund account under
the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED: Eligible investors may purchase Class Y shares at the
net asset value next calculated after PaineWebber's New York City
--------------------
Prospectus Page 38
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
headquarters or the Transfer Agent receives the purchase order. Because
investors do not pay an initial sales charge when they buy Class Y shares, 100%
of their purchase is immediately invested. No contingent deferred sales charge
is imposed on Class Y shares, and the ongoing expenses for Class Y shares are
lower than for the other classes because Class Y shares are not subject to Rule
12b-1 distribution or service fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
o a participant in one of the PW Programs listed below when Class Y shares are
purchased through that PW Program;
o an investor who buys $10 million or more at any one time in any combination of
PaineWebber mutual funds in the Flexible Pricing(Service Mark) System;
o a qualified pension plan that has either 5,000 or more eligible employees or
$50 million or more in assets;
o an investment company advised by PaineWebber or an affiliate of PaineWebber;
and
o for Global Equity Fund and Global Income Fund, the trustee of the PaineWebber
Savings Investment Plan ('PW SIP').
PACE MULTI-ADVISOR PROGRAM. An investor who participates in the PACE
Multi-Advisor Program is eligible to purchase Class Y shares. The PACE Multi-
Advisor Program is an advisory program sponsored by PaineWebber that provides
comprehensive investment services, including investor profiling, a personalized
asset allocation strategy using an appropriate combination of funds, and a
quarterly investment performance review. Participation in the PACE Multi-Advisor
Program is subject to payment of an advisory fee at the 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 investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi-Advisor Program.
INSIGHT. An investor who participates in the INSIGHT Advisory Program
('INSIGHT'), a total portfolio asset allocation program sponsored by
PaineWebber, is eligible to purchase Class Y shares. Participation in INSIGHT is
subject to payment of an advisory fee to PaineWebber at the maximum annual rate
of 1.5% of assets held through the program. Employees of PaineWebber and its
affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT.
PURCHASES BY THE TRUSTEE OF THE PW SIP. The Class Y shares of Global Equity Fund
and Global Income Fund also are offered for sale to the trustee of the PW SIP, a
defined contribution plan sponsored by Paine Webber Group Inc. ('PW Group'). The
trustee of the PW SIP purchases and redeems these Class Y shares to implement
the investment choices of individual plan participants with respect to their PW
SIP contributions. Individual plan participants should consult the Summary Plan
Description and other plan material of the PW SIP (collectively the 'Plan
Documents') for a description of the procedures and limitations applicable to
making and changing investment choices.
Copies of the Plan Documents are available from the Benefits Connection, 100
Halfday Road, Lincoln- shire, IL 60069 or by calling 1-888-PWebber
(1-888-793-2237).
As described in the Plan Documents, the average net asset value per share at
which Class Y shares of Global Equity Fund and Global Income Fund are purchased
or redeemed by the trustee of the PW SIP for the accounts of individual
participants might be more or less than the net asset value per share prevailing
at the time that such participants made their investment choices or made their
contributions to the PW SIP.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Prices are calculated for each class of a Fund's shares once each Business Day,
at the close of regular trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). A 'Business Day' is any day, Monday through Friday, on
which the New York Stock Exchange is open for business. The Funds and Mitchell
Hutchins reserve the right to reject any purchase order and to suspend the
offering of Fund shares for a period of time.
--------------------
Prospectus Page 39
<PAGE>
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PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or an individual Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up an
account through the Transfer Agent (PFPC Inc.) by completing an account
application, which you may obtain by calling 1-800-647-1568. The application and
check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
Investors who are new to PaineWebber may complete and sign an account
application and mail it along with a check. Investors may also open an account
in person.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
o mail an application with a check; or
o open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account................. $1,000
To add to an account............... $ 100
</TABLE>
A Fund may waive or reduce these minimums for:
o employees of PaineWebber or its affiliates;
o participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Fund's automatic investment plan; or
o transactions in Class A and Class Y shares made in certain investment
programs.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, B and C
shares for the same class of other PaineWebber mutual fund shares. Class Y
shares are not exchangeable. For classes of shares where no initial sales charge
is imposed, a contingent deferred sales charge may apply if the investor sells
the shares acquired through the exchange.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
o Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or wire.
o Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a 'letter of instruction' to the Transfer Agent. The letter of
instruction must include:
o the investor's name and address;
o the Fund's name;
o the Fund account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock exchange
member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when Class A, B or C shares are
exchanged for the corresponding class of shares of other PaineWebber mutual
funds. A Fund will use the purchase date of the initial investment to determine
any contingent deferred sales charge due when the acquired shares are sold. Fund
shares may be exchanged only after the settlement date has passed and payment
for the shares has been made. The exchange privilege is available only in those
jurisdictions where the sale of the Fund shares to be
--------------------
Prospectus Page 40
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
acquired is authorized. This exchange privilege may be modified or terminated at
any time and, when required by SEC rules, upon 60 days' notice. See the back
cover of this Prospectus for a list of other PaineWebber mutual funds.
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Fund will assume they are first selling their
Class A shares, then Class C, then Class B and last, Class Y.
If a shareholder wants to sell shares that were purchased recently, the Fund may
delay payment until it verifies that good payment was received. In the case of
purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through the Fund's Transfer Agent (PFPC Inc.) may sell shares by writing a
'letter of instruction,' as detailed in 'How to Exchange Shares.'
Because the Funds incur certain fixed costs in maintaining shareholder accounts,
each Fund reserves the right to purchase back all Fund shares in any shareholder
account with a net asset value of less than $500.
If a Fund elects to do so, it will notify the shareholder of the opportunity to
increase the amount invested to $500 or more within 60 days of the notice. A
Fund will not purchase back accounts that fall below $500 solely due to a
reduction in net asset value per share.
SALES BY PARTICIPANTS IN PW SIP
The trustee of the PW SIP sells Class Y shares of Global Equity Fund and Global
Income Fund to implement the investment choices of individual plan participants
with respect to their PW SIP contributions, as described in the Plan Documents
referenced under 'How to Buy Shares' above. The price at which Class Y shares
are sold by the trustee of PW SIP might be more or less than the price per share
at the time the participants made their investment choices.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive at
PaineWebber or one of its correspondent firms at the time of purchase.
- --------------------------------------------------------------------------------
OTHER SERVICES
- --------------------------------------------------------------------------------
Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Funds' Class A, B and C shares:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Fund will deduct $50 or more monthly,
quarterly, semi-annually or annually from the investor's bank account to invest
directly in the
--------------------
Prospectus Page 41
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
Fund. In addition to providing a convenient and disciplined manner of investing,
participation in the Automatic Investment Plan enables the investor to use the
technique of 'dollar cost averaging.'
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and December) 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 $20,000; minimum monthly, quarterly, and semi-
annual and annual withdrawals of $200, $400, $600 and $800, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may withdraw 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.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Fund in a Paine-
Webber brokerage account transfer their brokerage accounts to another firm, the
Fund shares will be moved to an account with the Transfer Agent. However, if the
other firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the Fund, the shareholder may be able to hold Fund shares in an
account with the other firm.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
Each Fund is governed by a board of trustees, which oversees the Fund's
operations. Each board has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority of
the board). Mitchell Hutchins is responsible for the day-to-day management of
Global Income Fund's investments and has appointed the sub-advisers to be
responsible for the day-to-day management of the other Funds' investments, as
described below.
In accordance with procedures adopted by each Fund's board, brokerage
transactions for each Fund may be conducted through PaineWebber or its
affiliates or the affiliates of a sub-adviser, and each Fund may pay fees to
PaineWebber for its services as lending agent in its portfolio securities
lending program. Personnel of Mitchell Hutchins and each sub-adviser may engage
in securities transactions for their own accounts pursuant to each firm's code
of ethics that establishes procedures for personal investing and restricts
certain transactions.
ASIA PACIFIC GROWTH FUND. Schroder Capital is the Fund's sub-adviser. Since its
founding in 1980, Schroder Capital has developed an expertise in Asia Pacific
Region investments. Louise Croset and Heather Crighton, with the assistance of
Schroder Capital's Asia Pacific Region investment committee, are primarily
responsible for the day-to-day management of the Fund. Mesdames Croset and
Crighton have served in this capacity since the Fund's inception. Ms. Croset, a
first vice president and director of Schroder Capital, has been with the firm
since 1993. Previously, she was a Vice President of Wellington Management Co.
Ms. Croset has managed Asia Pacific Region equity investments for the past 14
years. Ms. Crighton, a first vice president of Schroder Capital, has also been
with the firm since 1993. Previously, she was fund manager at Mercantile &
General Reinsurance Co. She has managed Asia Pacific Region equity investments
for the past nine years.
EMERGING MARKETS EQUITY FUND. Schroder Capital is the Fund's sub-adviser.
Schroder Group companies
--------------------
Prospectus Page 42
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
have invested internationally for over 50 years. Schroder Capital has developed
an expertise in emerging markets investments and has 54 investment professionals
located in 13 offices in emerging market countries around the world. John A.
Troiano, with the assistance of an emerging markets investment committee, has
been primarily responsible for the day-to-day management of Emerging Markets
Equity Fund since Schroder Capital was appointed sub-adviser on February 25,
1997; recently, Ms. Crighton and Mark Bridgeman began sharing primary
responsibility for the day-to-day management of the Fund with Mr. Troiano. Mr.
Troiano has been chief executive of Schroder Capital since July 1997, and has
been employed by various Schroder Group companies in the portfolio management
area since 1988. He is currently chairman of Schroder Capital's emerging markets
investment committee. Mr. Bridgeman has been a vice president and international
fund manager of Schroder Capital since 1995. After joining Schroders in 1990, he
worked in the Schroders U.K. Research Department as an Investment Analyst and
then from 1992 until 1995 served in Schroders Australia as an Industrial Analyst
and Fund Manager.
GLOBAL EQUITY FUND. GE Investment Management is the Fund's sub-adviser. Ralph R.
Layman is the head of the International Equity Team at GE Investment Management
and serves as portfolio manager of the Fund, primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Layman has served in this
capacity since the Fund's inception in 1991. He is a Chartered Financial Analyst
and an Executive Vice President and senior investment manager of GE Investment
Management and General Electric Investment Corporation.
From 1989 to 1991, Mr. Layman served as Executive Vice President, partner and
portfolio manager of Northern Capital Management Co. Prior to 1989 when he
joined Northern, he served as Vice President and portfolio manager of Templeton
Investment Counsel, Inc., and Vice President of the Templeton Emerging Markets
Fund.
Directly assisting Mr. Layman are Michael J. Solecki, vice president of
international equities at GE Investment Management, and the rest of the
International Equity Team. Mr. Solecki is a Chartered Financial Analyst and has
been with GE Investment Management for seven years. From 1992 to 1995, Mr.
Solecki was a senior European analyst at GE Investment Management's London,
England office. Prior to 1992, he was an international analyst with GE
Investment Management. The International Equity Team is comprised of twelve
analysts, eight of whom manage portfolios.
GLOBAL INCOME FUND. Mitchell Hutchins is responsible for the day-to-day
management of the Fund's investments. Stuart Waugh and William King are
primarily responsible for the day-to-day portfolio management of the Fund. Mr.
Waugh has been involved with the Fund since its inception, first as an analyst
and then as portfolio manager since 1993. Mr. Waugh is a vice president of
PaineWebber Investment Series and a managing director of global fixed income
investments and currency trading of Mitchell Hutchins. Mr. Waugh has been with
Mitchell Hutchins since 1983. Mr. King joined Mitchell Hutchins in November 1995
and assumed his present responsibilities with respect to the Fund in March 1996.
Previously, he was at IBM Corporation where he was responsible for the
management of IBM Pension Fund's global bond portfolio. Both Mr. Waugh and Mr.
King are Chartered Financial Analysts.
Other members of Mitchell Hutchins' international fixed income group provide
input on market outlook, interest rate forecasts and other considerations
pertaining to global fixed income investments.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is an asset management subsidiary of PaineWebber, which is wholly owned
by Paine Webber Group Inc., a publicly owned financial services holding company.
On January 31, 1998, Mitchell Hutchins was adviser or sub-adviser of 30
investment companies with 65 separate portfolios and aggregate assets of over
$37.4 billion.
ABOUT THE SUB-ADVISERS
Schroder Capital, the sub-adviser to Asia Pacific Growth Fund and Emerging
Markets Equity Fund, is located at 787 Seventh Avenue, New York, New York 10019.
It is a wholly owned U.S. subsidiary of Schroders Incorporated, the wholly owned
U.S. holding company subsidiary of Schroders plc. Schroders plc, which is listed
on the London Stock Exchange, is the holding company parent of a large worldwide
group of banks and financial services companies (referred to as the 'Schroder
Group'), with associated companies, branch and representative offices located in
23 countries worldwide. As of December 31, 1997, the investment management
subsidiaries of the Schroder Group had approximately $175 billion in client
--------------------
Prospectus Page 43
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
assets under management. Schroder Capital, together with its United Kingdom
affiliate Schroder Capital Management International Limited, had over $25
billion under management as of that date.
GE Investment Management, the sub-adviser to Global Equity Fund, is located at
3003 Summer Street, Stamford, Connecticut 06905 and is a wholly owned subsidiary
of General Electric Company. GE Investment Management is a registered investment
adviser, and its principal officers and directors serve in similar capacities
with respect to General Electric Investment Corporation ('GEIC') also a
registered investment adviser and a wholly owned subsidiary of General Electric
Company. As of December 31, 1997, GE Investment Management and GEIC together
provided investment management services to various institutional accounts with
total assets in excess of $69 billion, of which more than $15.6 billion is
invested in mutual funds.
MANAGEMENT FEES & OTHER EXPENSES
ASIA PACIFIC GROWTH FUND. The Fund pays Mitchell Hutchins a monthly fee for its
services at the annual rate of 1.20% of its average daily net assets up to $100
million and 1.10% of its average daily net assets over $100 million.
Mitchell Hutchins (not the Fund) pays Schroder Capital a monthly fee for
sub-advisory services at an annual rate of 0.65% of the Fund's average daily net
assets up to $100 million and 0.55% of the Fund's average daily net assets over
$100 million.
EMERGING MARKETS EQUITY FUND. The Fund is obligated to pay Mitchell Hutchins a
monthly fee for its services at an annual rate of 1.20% of the Fund's average
daily net assets. However, after giving effect to fee waivers, the effective
annual rate actually paid by the Fund during the fiscal year ended October 31,
1997, was 0.78%. During that year, Mitchell Hutchins (not the Fund) paid
Schroder Capital a fee for sub-advisory services at the annual rate of 0.70% of
the Fund's average daily net assets.
GLOBAL EQUITY FUND. For the fiscal year ended October 31, 1997, Global Equity
Fund paid advisory fees to Mitchell Hutchins at the annual rate of 0.85% of its
average daily net assets. During that year, Mitchell Hutchins (not the Fund)
paid GE Investment Management sub-advisory fees at the annual rate of 0.31% of
the Fund's average daily net assets.
GLOBAL INCOME FUND. For the fiscal year ended October 31, 1997, Global Income
Fund paid advisory fees to Mitchell Hutchins at the effective annual rate of
0.74% of its average daily net assets.
Each Fund incurs various other expenses in its operations, such as custody and
transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its shares, taxes and governmental fees, fees and expenses of trustees, costs of
obtaining insurance, expenses of printing and distributing shareholder
materials, organizational expenses and extraordinary expenses, including costs
or losses in any litigation.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Funds' Class Y shares. Under distribution
plans for Class A, Class B and Class C shares ('Class A Plan,' 'Class B Plan'
and 'Class C Plan,' collectively, 'Plans'), each Fund pays Mitchell Hutchins:
o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
o Monthly distribution fees at the annual rate of 0.75% of the average daily net
assets of Class B and Class C shares (0.50% for Class C shares of Global
Income Fund).
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 investment executives
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
o Offset the commissions it pays to PaineWebber for selling each Fund's Class B
and Class C shares, respectively.
o Offset each Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are bought by
--------------------
Prospectus Page 44
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
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 each class of shares
('Distribution Contracts') specify that each Fund must pay service and
distribution fees to Mitchell Hutchins for its activities, not as reimbursement
for specific expenses incurred. Therefore, even if Mitchell Hutchins' expenses
exceed the service or distribution fees it receives, the Funds will not be
obligated to pay more than those fees. On the other hand, if Mitchell Hutchins'
expenses are less than such fees, it will retain its full fees and realize a
profit. Expenses in excess of service and distribution fees received or accrued
through the termination date of any Plan will be Mitchell Hutchins' sole
responsibility and not that of the Funds. Annually, the board of each Fund
reviews the Plans and Mitchell Hutchins' corresponding expenses for each class
separately from the Plans and expenses of the other classes.
- --------------------------------------------------------------------------------
DETERMINING THE SHARES'
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of each Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.
Each Fund values its assets based on their current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of each Fund's board. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining to
maturity, unless the board determines that this does not represent fair value.
Investments denominated in foreign currencies are valued daily in U.S. dollars
based on the then-prevailing exchange rates. It should be recognized that
judgment plays a greater role in valuing thinly traded securities and
lower-rated debt securities in which a Fund may invest, because there is less
reliable, objective data available.
- --------------------------------------------------------------------------------
DIVIDENDS & TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Asia Pacific Growth Fund, Emerging Markets Equity Fund and Global Equity Fund
each pays an annual dividend from its net investment income, net short-term
capital gains and net realized gains from foreign currency transactions, if any.
Global Income Fund declares monthly dividends from its net investment income,
which may be accompanied by distributions of net realized short-term capital
gains and foreign currency gains. Although Global Income Fund will not, in any
month, distribute more than the amount of such income and gains then available
for distribution, capital losses and/or foreign currency losses realized later
in the same fiscal year may convert a portion of such a distribution to a
nontaxable return of capital. Each Fund also distributes annually substantially
all of its net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any. In the case of Global Income Fund, that
distribution is accompanied by any undistributed net realized short-term capital
gains and foreign currency gains. The
--------------------
Prospectus Page 45
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
Funds may make additional distributions, if necessary, to avoid a 4% excise tax
on certain undistributed income and capital gains.
Dividends and other distributions paid on each class of shares of a Fund are
calculated at the same time and in the same manner. Dividends on Class A, Class
B and Class C shares of a Fund are expected to be lower than those on its Class
Y shares because the other shares have higher expenses resulting from their
service fees and, in the case of Class B and Class C shares, their distribution
fees. Dividends on Class B and Class C shares of a Fund are expected to be lower
than those on its Class A shares because Class B and Class C shares have higher
expenses resulting from their distribution fees. Dividends on each class also
might be affected differently by the allocation of other class-specific
expenses. See 'General Information.'
The Funds' dividends and other distributions are paid in additional Fund shares
of the same class at net asset value, unless the shareholder has requested cash
payments. Shareholders who wish to receive dividends and other distributions in
cash, either mailed to them by check or credited to their PaineWebber accounts,
should contact their investment executives at PaineWebber or one of its
correspondent firms or complete the appropriate section of the account
application. For PW SIP participants, each Fund's Class Y dividends and other
distributions are paid in additional Class Y shares at net asset value unless
the Transfer Agent is instructed otherwise.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code so that it will not have to pay federal
income tax on that part of its investment company taxable income (generally
consisting of net investment income, net short-term capital gains and net gains
from certain foreign currency transactions)
and net capital gain that it distributes to its share-
holders.
Dividends from each Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as ordinary
income. Distributions of each Fund's net capital gain (whether paid in cash or
additional shares) are taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. Under the Taxpayer
Relief Act of 1997, different maximum tax rates apply to a non-corporate
taxpayer's net capital gain depending on the taxpayer's holding period and
marginal rate of federal income tax -- generally, 28% for gain recognized on
securities held for more than one year but not more than 18 months and 20% (10%
for taxpayers in the 15% marginal tax bracket) for gain recognized on securities
held for more than 18 months. Pursuant to an Internal Revenue Service notice,
each Fund may divide each net capital gain distribution into a 28% rate gain
distribution and a 20% rate gain distribution (in accordance with the Fund's
holding periods for the securities it sold that generated the distributed gain)
and its shareholders must treat those portions accordingly. Shareholders not
subject to tax on their income generally will not be required to pay tax on
distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Fund notifies its shareholders of
the amounts of dividends and capital gain distributions paid (or deemed paid)
for that year, their share of any foreign taxes paid by the Fund that year and
any portion of those dividends that qualifies for special treatment. The
information regarding capital gain distributions designates the portions thereof
subject to the different maximum rates of tax applicable to non-corporate
taxpayers' net capital gain indicated above.
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 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.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholder receives more or less than his
or her adjusted basis for the shares (which normally includes any initial sales
charge paid on Class A shares). An exchange of any Fund's shares for shares of
another PaineWebber mutual fund generally will have similar tax consequences. In
addition, if a Fund's shares are bought within 30 days before or after selling
other shares of the Fund (regardless of class) at a loss, all or a portion of
that loss will not be deductible and will increase the basis of the newly
purchased shares.
--------------------
Prospectus Page 46
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
SPECIAL TAX RULES
FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
No gain or loss will be recognized by a shareholder as a result of a conversion
from Class B shares into Class A shares.
* * * *
The foregoing only summarizes some of the important federal income tax
considerations affecting the Funds and their shareholders; see the Statement of
Additional Information for a further discussion. Prospective shareholders are
urged to consult their tax advisers.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION
ASIA PACIFIC GROWTH FUND
Asia Pacific Growth Fund is a diversified series of PaineWebber Managed
Investments Trust ('Managed Trust'), an open-end management investment company
that was organized on November 21, 1986 as a business trust under the laws of
the Commonwealth of Massachusetts. The trustees have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
of $0.001 per share. Shares of five other series have been authorized.
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund is a diversified series of PaineWebber Investment
Trust II, an open-end management investment company that was organized on August
10, 1992 as a business trust under the laws of the Commonwealth of
Massachusetts. The trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series, par value of $0.001 per share.
GLOBAL EQUITY FUND
Global Equity Fund is a diversified series of PaineWebber Investment Trust
('Investment Trust'), an open-end management investment company that was
organized on March 28, 1991 as a business trust under the laws of the
Commonwealth of Massachusetts. The trustees have authority to issue an unlimited
number of shares of beneficial interest of separate series, par value of $0.001
per share. Shares of one other series have been authorized.
GLOBAL INCOME FUND
Global Income Fund is a non-diversified series of PaineWebber Investment Series,
an open-end management investment company that was organized on December 22,
1986 as a business trust under the laws of the Commonwealth of Massachusetts.
The trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series, with a par value of $0.001 per share.
SHARES
The shares of each Fund are divided into four classes, designated Class A, Class
B, Class C and Class Y shares. A share of each class represents an identical
interest in the respective Fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, 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 each Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. However, due to
the differing expenses of the classes, dividends on Class A, B, C and Y shares
will differ.
--------------------
Prospectus Page 47
<PAGE>
------------------------------
PaineWebber
Asia Pacific Growth Fund Global Equity Fund
Emerging Markets Equity Fund Global Income Fund
Although each Fund is offering only its own shares, it is possible that a Fund
might become liable for a misstatement in this Prospectus about another Fund.
The board of each Fund has considered this factor in approving the use of a
single, combined Prospectus.
VOTING RIGHTS
Shareholders of each Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, as a result, the holders of more than 50% of all the shares of any Fund (or
Investment Trust or Managed Trust, which each have more than one series) may
elect all of the board members of that Fund or of Investment Trust or Managed
Trust. The shares of a Fund will be voted together, except that only the
shareholders of a particular class of a Fund may vote on matters affecting only
that class, such as the terms of a Plan as it relates to the class. The shares
of each series of Investment Trust and Managed Trust will be voted separately,
except when an aggregate vote of all the series is required by law.
SHAREHOLDER MEETINGS
The Funds do not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
Investment Trust, Managed Trust or a Fund, as applicable, may remove a board
member through a declaration in writing or by vote cast in person or by proxy at
a meeting called for that purpose. A meeting will be called to vote on the
removal of a board member at the written request of holders of 10% of the
outstanding shares of Investment Trust, Managed Trust or a Fund.
REPORTS TO SHAREHOLDERS
Each Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by the
Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated herein by reference, is available
to shareholders upon request.
CUSTODIAN & RECORDKEEPING AGENT; TRANSFER & DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
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 1940 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.
--------------------
Prospectus Page 48
<PAGE>
------------------------------
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
PROSPECTUS -- MARCH 1, 1998
/ / PAINEWEBBER BOND FUNDS
High Income Fund
Investment Grade Income Fund
Low Duration U.S. Government
Income Fund
Strategic Income Fund
U.S. Government Income Fund
/ / PAINEWEBBER TAX-FREE BOND FUNDS
California Tax-Free Income Fund
Municipal High Income Fund
National Tax-Free Income Fund
New York Tax-Free Income Fund
/ / PAINEWEBBER ASSET
ALLOCATION FUNDS
Balanced Fund
Tactical Allocation Fund
/ / PAINEWEBBER STOCK FUNDS
Capital Appreciation Fund
Financial Services Growth Fund
Growth Fund
Growth and Income Fund
Small Cap Fund
Utility Income Fund
/ / PAINEWEBBER GLOBAL FUNDS
Asia Pacific Growth Fund
Emerging Markets Equity Fund
Global Equity Fund
Global Income Fund
/ / PAINEWEBBER MONEY MARKET FUND
/ / MITCHELL HUTCHINS PORTFOLIOS
Aggressive Portfolio
Moderate Portfolio
Conservative Portfolio
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.
(Copyright) 1998 PaineWebber Incorporated
--------------------
<PAGE>
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER GLOBAL INCOME FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above (each a 'Fund' and, collectively, 'Funds') are
series of professionally managed open-end management investment companies
organized as Massachusetts business trusts (each a 'Trust' and, collectively,
'Trusts'). PaineWebber Asia Pacific Growth Fund ('Asia Pacific Growth Fund'), a
diversified series of PaineWebber Managed Investments Trust ('Managed Trust'),
seeks long-term capital appreciation by investing primarily in equity securities
of companies in the Asia Pacific region, excluding Japan. PaineWebber Emerging
Markets Equity Fund ('Emerging Markets Equity Fund'), a diversified series of
PaineWebber Investment Trust II ('Investment Trust II'), seeks long-term capital
appreciation by investing primarily in equity securities of companies in newly
industrializing countries. PaineWebber Global Equity Fund ('Global Equity
Fund'), a diversified series of PaineWebber Investment Trust ('Investment
Trust'), seeks long-term growth of capital by investing primarily in U.S. and
foreign equity securities. PaineWebber Global Income Fund ('Global Income
Fund'), a non-diversified series of PaineWebber Investment Series ('Investment
Series'), seeks high current income and, secondarily, capital appreciation by
investing primarily in high-quality bonds of foreign and U.S. issuers.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), an asset
management subsidiary of PaineWebber Incorporated ('PaineWebber'). As
distributor for the Funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of Fund shares. Schroder Capital Management
International Inc. ('Schroder Capital') serves as investment sub-adviser for
Asia Pacific Growth Fund and Emerging Markets Equity Fund. GE Investment
Management Incorporated ('GE Investment Management') serves as investment
sub-adviser for Global Equity Fund. Schroder Capital and GE Investment
Management are each sometimes referred to as a 'Sub-Adviser.'
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated March 1,
1998. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free
1-800-647-1568. This Statement of Additional Information is dated March 1, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or the Statement of Additional Information, there
are no policy limitations on a Fund's ability to use the investments or
techniques discussed in these documents.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ('Moody's'),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ('S&P'), and
other nationally recognized statistical rating organizations ('NRSROs') are
private services that provide ratings of the credit quality of debt obligations
(bonds) and certain other securities. A description of the ratings assigned to
corporate bonds by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The process by which S&P and Moody's determine
ratings for mortgage-backed securities includes consideration of the likelihood
of the receipt by security holders of all distributions, the nature of the
underlying securities, the credit quality of the guarantor, if any, and the
structural, legal and tax aspects associated with such securities. Not even the
highest such ratings represents an assessment of the likelihood that principal
prepayments will be made by mortgagors or the degree to which such prepayments
may differ from that originally anticipated, nor do such ratings
<PAGE>
address the possibility that investors may suffer a lower than anticipated yield
or that investors in such securities may fail to recoup fully their initial
investment due to prepayments.
The Funds may use these ratings in determining whether to purchase, sell or
hold a security. It should be emphasized, however, that ratings are general and
are not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins or a Sub-Adviser will analyze interest rate trends and developments
that may affect individual issuers, including factors such as liquidity,
profitability and asset quality. The yields on bonds are dependent on a variety
of factors, including general money market conditions, general conditions in the
bond market, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and its rating. There is a wide variation in the
quality of bonds, both within a particular classification and between
classifications. An issuer's obligations under its bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Asia Pacific Growth Fund is authorized to invest up to 10% of its net
assets in non-investment grade debt securities. Global Income Fund is authorized
to invest up to 20% of its total assets in non-investment grade debt securities.
Global Equity Fund may invest up to 10% of its net assets in convertible
securities rated below investment grade. Non-investment grade debt securities
are debt securities that are not rated at the time of purchase within one of the
four highest grades assigned by S&P or Moody's, comparably rated by another
NRSRO or determined by Mitchell Hutchins or a Sub-Adviser, as appropriate, to be
of comparable quality. Non-investment grade debt securities are commonly refered
to as 'junk bonds'; they are deemed by the NRSROs to be predominantly
speculative and may involve significant risk exposure to adverse conditions.
Non-investment grade debt securities generally offer a higher current yield than
that available for investment grade issues; however, they involve higher risks,
in that they are especially sensitive to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for non-investment grade debt securities, especially those of
foreign issuers, has expanded rapidly in recent years, which has been a period
of generally expanding growth and lower inflation. These securities will be
susceptible to greater risk when economic growth slows or reverses and when
inflation increases or deflation occurs. This has been reflected in recent
volatility in emerging market securities, particularly in Asia. In the past,
many lower rated debt securities experienced substantial price declines
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur. The market for non-investment grade
debt issues generally is thinner and less active than that for higher quality
securities, which may limit a Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of non-investment grade
securities, especially in a thinly traded market.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Investors should
recognize that investing in non-U.S. securities involves certain risks and
special considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. companies. Investments in
foreign securities involve risks relating to political, social and economic
developments abroad, as well as risks resulting from the differences between the
regulations to which U.S. and foreign issuers and markets are subject. These
risks
2
<PAGE>
may include expropriation, confiscatory taxation, withholding taxes on interest
and/or dividends, limitations on the use of or transfer of Fund assets and
political or social instability or diplomatic developments. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Securities of many foreign companies may be less liquid and their prices more
volatile than securities of comparable U.S. companies. While the Funds generally
invest only in securities that are traded on recognized exchanges or in
over-the-counter markets ('OTC'), from time to time foreign securities may be
difficult to liquidate rapidly without significantly depressing the price of
such securities. There may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Transactions in foreign securities may be subject to less
efficient settlement practices. Foreign securities trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts.
Securities of foreign issuers may not be registered with the Securities and
Exchange Commission ('SEC'), and the issuers thereof may not be subject to its
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Funds than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
The Funds may invest in foreign securities by purchasing depository
receipts, including American Depository Receipts ('ADRs'), European Depository
Receipts ('EDRs') and Global Depository Receipts ('GDRs'), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each Fund's investment policies, ADRs, EDRs and GDRs
are deemed to have the same classification as the underlying securities they
represent. Thus, an ADR, EDR or GDR representing ownership of common stock will
be treated as common stock.
ADRs are publicy traded on exchanges or OTC in the United States and are
issued through 'sponsored' or 'unsponsored' arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid directly by the ADR holders. In addition, less information is available in
the United States about an unsponsored ADR than about a sponsored ADR.
The Funds anticipate that their brokerage transactions involving foreign
securities of companies headquartered in countries other than the United States
will be conducted primarily on the principal exchanges of such countries.
Although each Fund will endeavor to achieve the best net results in effecting
its portfolio transactions, transactions on foreign exchanges are usually
subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions. There is generally less government supervision
and regulation of exchanges and brokers in foreign countries than in the United
States.
Investment income on certain foreign securities in which the Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Funds would be subject. In addition, substantial limitations may
exist in certain countries with respect to the Funds' ability to repatriate
investment capital or the proceeds of sales of securities.
3
<PAGE>
FOREIGN SOVEREIGN DEBT. Investment by the Funds in debt securities issued
by foreign governments and their political subdivisions or agencies ('Sovereign
Debt') involves special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and/or interest when due in accordance with the terms of such
debt, and the Funds may have limited legal recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Funds'
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins and the Sub-Advisers manage the
Funds' portfolios in a manner that is intended to minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause
the Funds to suffer a loss of interest or principal on any of its holdings.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments
in other investment companies may be the most effective available means by which
a Fund may invest in securities of issuers in certain countries. Investment in
such investment companies may involve the payment of management expenses and, in
connection with some purchases, sales loads and payment of substantial premiums
above the value of such companies' portfolio securities. At the same time, a
Fund would continue to pay its own management fees and other expenses. Each Fund
may invest in such investment companies when, in the judgment of Mitchell
Hutchins or a Sub-Adviser, the potential benefits of such investment outweigh
the payment of any applicable premium, sales load and expenses. In addition, the
Funds' investments in such investment companies are subject to limitations under
the Investment Company Act of 1940 ('1940 Act') and market availability, and may
result in special federal income tax consequences.
FOREIGN CURRENCY TRANSACTIONS. A significant portion of each Fund's assets
may be invested in foreign securities, and substantially all related income may
be received by a Fund in foreign currencies. Each Fund values its assets daily
in U.S. dollars and does not intend to convert its holdings of foreign
currencies to U.S. dollars on a daily basis. From time to time a Fund's foreign
currencies may be held as 'foreign currency call accounts' at foreign branches
of foreign or domestic banks. These accounts bear interest at negotiated rates
and are payable upon relatively short demand periods. If a bank became
insolvent, a Fund could suffer a loss of some or all of the amounts deposited.
Each Fund may convert foreign currency to U.S. dollars from time to time.
The value of the assets of a Fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, a Fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
a 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.
4
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO ASIA PACIFIC REGION AND OTHER EMERGING
MARKET INVESTMENTS. Certain of the risks associated with international
investments are heightened for investments in emerging markets, including many
Asia Pacific Region countries (as defined in the Prospectus). For example, many
of the currencies of Asia Pacific Region countries recently have experienced
significant devaluations relative to the U.S. dollar, and major adjustments have
been made periodically in various emerging market currencies.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a Fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a Fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. A Fund could be adversely affected by delays in, or a refusal to grant,
any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
For example, in China, India, Indonesia, Malaysia, the Philippines,
Singapore, South Korea and Thailand, government regulation or a company's
charter may limit the maximum foreign aggregate ownership of equity in any one
company. South Korea generally prohibits foreign investment in Won-denominated
debt securities and Sri Lanka prohibits foreign investment in government debt
securities. South Korea prohibits foreign investment in specified
telecommunications companies and the Philippines prohibits foreign investment in
mass media companies and companies providing certain professional services. In
the Philippines, a Fund may generally invest in 'B' shares of Philippine issuers
engaged in partly nationalized business activities, the market prices, liquidity
and rights of which may vary from shares owned by nationals. Similarly, in
China, a Fund may only invest in 'B' shares of securities traded on The Shanghai
Securities Exchange and The Shenzhen Stock Exchange, currently the two
officially recognized securities exchanges in China. 'B' shares traded on The
Shanghai Securities Exchange are settled in U.S. dollars, and those traded on
The Shenzhen Stock Exchange are generally settled in Hong Kong dollars.
If, because of restrictions on repatriation or conversion, a Fund were
unable to distribute substantially all of its net investment income, including
net short-term capital gains and net long-term capital gains within applicable
time periods, the Fund could be subject to federal income and excise taxes that
would not otherwise be incurred and could cease to qualify for the favorable tax
treatment afforded to regulated investment companies ('RICs') under the Internal
Revenue Code ('Code'). In such case, it would become subject to federal income
tax on all of its income and net gains.
Differences Between the U.S. and Emerging Market Securities Markets. Most
of the securities markets of emerging market countries have substantially less
volume than the New York Stock Exchange, and equity securities of most companies
in emerging market countries are less liquid and more volatile than equity
securities of U.S. companies of comparable size. Some of the stock exchanges in
emerging market countries, such as those in China, are in the earliest stages of
their development. As a result, security settlements may in some instances be
subject to delays and related administrative uncertainties. Many companies
traded on securities markets in emerging market countries are smaller, newer and
less seasoned than companies whose securities are traded on securities markets
in the United States. Investments in smaller companies involve greater risk than
is customarily associated with investing in larger companies. Smaller companies
may have 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
5
<PAGE>
large investors trading significant blocks of securities, than is usual in the
United States. To the extent that an emerging market country experiences rapid
increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in that country may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.
Government Supervision of Emerging Market Securities Markets; Legal
Systems. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to a Fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to a Fund than to local market
participants. Brokers in other countries may not be as well capitalized as those
in the United States, so that they are more susceptible to financial failure in
times of market, political or economic stress. In addition, existing laws and
regulations are often inconsistently applied. As legal systems in some of the
emerging market countries develop, foreign investors may be adversely affected
by new laws and regulations, changes to existing laws and regulations and
preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market issuer may not reflect its financial position
or results of operations in the way they would be reflected had the financial
statements been prepared in accordance with U.S. generally accepted accounting
principles. In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules may require, for both tax and accounting
purposes, that certain assets and liabilities be restated on the issuer's
balance sheet in order to express items in terms of currency of constant
purchasing power. Inflation accounting may indirectly generate losses or
profits. Consequently, financial data may be materially affected by restatements
for inflation and may not accurately reflect the real condition of those issuers
and securities markets.
Social, Political and Economic Factors. Many emerging market countries may
be subject to a greater degree of social, political and economic instability
than is the case in the United States. Such instability may result from, among
other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, and changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection. Such social, political and economic
instability could significantly disrupt the financial markets in those countries
and elsewhere and could adversely affect the value of a Fund's assets. In
addition, there may be the possibility of asset expropriations or future
confiscatory levels of taxation affecting a Fund.
Few of the Asia Pacific Region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military coups, while others have periodically demonstrated repressive
police state characteristics. In several Asia Pacific Region countries, the
leadership ability of the government has suffered as a result of recent
corruption scandals. Disparities of wealth, among other factors, have also led
to social unrest in some of the Asia Pacific Region countries, accompanied, in
certain cases, by violence and labor unrest. Ethnic, religious and racial
disaffection, as evidenced in India, Pakistan and Sri Lanka, for example, have
created social, economic and political problems. Such problems also have
occurred in other regions.
As in some other regions, several Asia Pacific Region countries have or in
the past have had hostile relationships with neighboring nations or have
experienced internal insurgency. For example, Thailand has experienced border
conflicts with Laos and Cambodia, and India is engaged in border disputes with
several of its neighbors, including China and Pakistan. Tension between the
Tamil and Sinhalese communities in Sri Lanka has resulted in periodic outbreaks
of violence. An uneasy truce exists between North Korea and South Korea, and the
recurrence of hostilities remains possible. Reunification of North Korea and
South Korea could
6
<PAGE>
have a detrimental effect on the economy of South Korea. Also, China continues
to claim sovereignty over Taiwan and has conducted military maneuvers near
Taiwan. China is acknowledged to possess nuclear weapons capability; North Korea
is alleged to possess or be in the process of developing such a capability.
China assumed sovereignty over Hong Kong on July 1, 1997. Although China
has committed by treaty to preserve the economic and social freedoms enjoyed in
Hong Kong for 50 years after regaining control, there can be no assurance that
China will not renege, and in fact China has announced its intent to repeal
certain laws. Business confidence and market and business performance in Hong
Kong, therefore, can be significantly affected by political developments.
The reversion of Hong Kong also presents a risk that the Hong Kong dollar
will be devalued and a risk of possible loss of investor confidence in the Hong
Kong markets and dollar. However, factors exist that may mitigate this risk.
First, China has stated its intention to implement a 'one country, two systems'
policy, which would preserve monetary sovereignty and leave control in the hands
of the Hong Kong Monetary Authority ('HKMA'). Second, fixed rate parity with the
U.S. dollar is seen as critical to maintaining investors' confidence in the
transition to Chinese rule. Therefore, it is generally anticipated that, in the
event international investors lose confidence in Hong Kong dollar assets, the
HKMA would intervene to support the currency, though such intervention cannot be
assured. Third, Hong Kong's and China's sizable combined foreign exchange
reserve may be used to support the value of the Hong Kong dollar, provided that
China does not appropriate such reserves for other uses, which is not
anticipated, but cannot be assured. Finally, China would be likely to experience
significant adverse political and economic consequences if confidence in the
Hong Kong dollar and the territory's assets were to be endangered.
As is the case in many other emerging markets, the economies of most of the
Asia Pacific Region countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally the United States, Japan,
China and the European Community. The enactment by the United States or other
principal trading partners of protectionist trade legislation, reduction of
foreign investment in the local economies and general declines in the
international securities markets could have a significant adverse effect upon
the securities markets of these countries. In addition, the economies of some
countries are vulnerable to weakness in world prices for their commodity
exports, including crude oil.
U.S. GOVERNMENT SECURITIES. The Funds may invest in various direct
obligations of the U.S. Treasury and obligations issued or guaranteed by the
U.S. government or one of it agencies or instrumentalities (collectively, 'U.S.
government securities'). Among the U.S. government securities that may be held
by the Funds are securities that are supported by the full faith and credit of
the United States; securities that are supported primarily or solely by the
creditworthiness of the government-related issuer; and securities, such as
mortgage-backed securities, that are supported in part by pools of assets.
CONVERTIBLE SECURITIES. Each Fund is permitted to invest in convertible
securities. Before conversion, convertible securities have characteristics
similar to non-convertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable non-convertible securities.
The value of a convertible security is a function of its 'investment value'
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
'conversion value' (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. In addition, a convertible
security generally will sell at a premium over its
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conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. The U.S. government
mortgage-backed securities in which Global Income Fund may invest include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by the Ginnie Mae (also known as
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association) or Freddie Mac (also known as the Federal Home
Loan Mortgage Corporation) or other government-sponsored enterprises. Other
mortgage-backed securities are issued by private issuers, generally originators
of and investors in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers and special purpose entities
(collectively 'Private Mortgage Lenders'). Payments of principal and interest
(but not the market value) of such private mortgage-backed securities may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-government
credit enhancement.
New types of mortgage-backed securities are developed and marketed from
time to time and, consistent with their investment limitations, the Funds expect
to invest in those new types of mortgage-backed securities that Mitchell
Hutchins or the Sub-Advisers believe may assist the Funds in achieving their
investment objectives. Similarly, the Funds may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified herein. The Funds also may invest in foreign mortgage-backed
securities which may be structured differently than domestic mortgage-backed
securities.
Ginnie Mae Certificates--Ginnie Mae guarantees certain mortgage
pass-through certificates ('Ginnie Mae certificates') that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are 'passed through' to certificateholders such as Global Income Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
Fannie Mae Certificates--Fannie Mae facilitates a national secondary
market in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as 'conventional mortgage loans' or 'conventional loans')
through its mortgage purchase and mortgage-backed securities sales activities.
Fannie Mae issues guaranteed mortgage pass-through certificates ('Fannie Mae
certificates'), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates--Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ('PCs') and guaranteed mortgage certificates
('GMCs'). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
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Private Mortgage-Backed Securities--Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to CMOs issued or guaranteed
by Ginnie Mae, Fannie Mae and Freddie Mac. Such mortgage-backed securities may
be supported by pools of U.S. government or agency insured or guaranteed
mortgage loans or by other mortgage-backed securities issued by a government
agency or instrumentality, but they generally are supported by pools of
conventional (i.e., non-government guaranteed or insured) mortgage loans. Since
such mortgage-backed securities normally are not guaranteed by an entity having
the credit standing of Ginnie Mae, Fannie Mae and Freddie Mac, they normally are
structured with one or more types of credit enhancement. See '--Types of Credit
Enhancement.' These credit enhancements do not protect investors from changes in
market value.
Collateralized Mortgage Obligations and Multi-Class Mortgage
Pass-Throughs--CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called 'Mortgage Assets'). CMOs may be issued by Private Mortgage Lenders or by
government entities such as Fannie Mae or Freddie Mac. Multi-class mortgage
pass-through securities are interests in trusts that are comprised of Mortgage
Assets and that have multiple classes similar to those in CMOs. Unless the
context indicates otherwise, references herein to CMOs include multi-class
mortgage pass-through securities. Payments of principal of, and interest on, the
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt services on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on all classes of a CMO (other than any
principal-only or 'PO' class) on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest rates--
i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an 'inverse IO,' on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
Types of Credit Enhancement--To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that
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transferred the underlying loans to the issuer of the security), to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting after default and liquidation ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor, from third parties, through
various means of structuring the transaction or through a combination of such
approaches. A Fund will not pay any additional fees for such credit enhancement,
although the existence of credit enhancement may increase the price of a
security. Credit enhancements do not provide protection against changes in the
market value of the security. Examples of credit enhancement arising out of the
structure of the transaction include 'senior-subordinated securities' (multiple
class securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of 'spread accounts' or 'reserve funds' (where cash or
investments, sometimes funded from a portion of the payments on the underlying
assets, are held in reserve against future losses) and 'over-collateralization'
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed that required to make payment of the securities and pay any
servicing or other fees). The degree of credit enhancement provided for each
issue generally is based on historical information regarding the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated could adversely affect the return on an investment in such a
security.
Special Characteristics of Mortgage-Backed Securities--The yield
characteristics of mortgage-backed securities differ from those of traditiona1
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans generally may be
prepaid at any time. Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of a Fund.
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Adjustable Rate Mortgage and Floating Rate Mortgage-Backed
Securities--Adjustable Rate Mortgage ('ARM') mortgage-backed securities are
mortgage-backed securities that represent a right to receive interest payments
at a rate that is adjusted to reflect the interest earned on a pool of mortgage
loans bearing variable or adjustable rates of interest (such mortgage loans are
referred to as 'ARMs'). Floating rate mortgage-backed securities are classes of
mortgage-backed securities that have been structured to represent the right to
receive interest payments at rates that fluctuate in accordance with an index
but that generally are supported by pools comprised of fixed-rate mortgage
loans. Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ('negative
amortization'), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
and the principal payment that would have been necessary to amortize the
oustanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
'lock-in' at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ('COFI'), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global Income Fund may invest in
secured or unsecured fixed or floating rate loans ('Loans') arranged through
private negotiations between a borrowing corporation, government or other entity
and one or more financial institutions ('Lenders'). The Fund's investments in
Loans may be in the form of participations ('Participations') in Loans or
assignments ('Assignments') of all or a portion of Loans from third parties.
Participations typically result in the Fund having a contractual relationship
only with the Lender, not with the borrower. The Fund has the right to receive
payments of 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,
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the Fund generally has no direct right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and the Fund may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Fund assumes the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the selling
Lender, the Fund may be treated as a general creditor of that Lender and may not
benefit from any set-off between the Lender and the borrower. Global Income Fund
will acquire Participations only if Mitchell Hutchins determines that the
selling Lender is creditworthy.
When Global Income Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the 1933
Act and thus may be subject to the Fund's limitation on investment in illiquid
securities. Because there may be no liquid market for such securities, the Fund
anticipates that such securities may be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on the Fund's ability to
dispose of particular Assignments or Participations when necessary to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower.
MONEY MARKET INVESTMENTS. Each Fund may invest up to 35% of its total
assets in money market investments. Such investments include, among other
things, (i) securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers, (iii) commercial paper
and notes, including those with variable and floating rates of interest, (iv)
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks, (v) debt obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (vi) debt securities issued by foreign issuers, (vii)
repurchase agreements and (viii) other investment companies that invest
exclusively in money market instruments.
Global Equity Fund may invest up to 25% of its assets in the GEIM
Short-Term Investment Fund (the 'Investment Fund'), an investment fund created
specifically to serve as a vehicle for the collective investment of cash
balances of the Fund and other accounts advised by either GE Investment
Management, or its affiliate, General Electric Investment Corporation. The
Investment Fund invests exclusively in the money market instruments described in
(i) through (vii) above. The Investment Fund is advised by GE Investment
Management. No advisory fee is charged by GE Investment Management to the
Investment Fund, nor will the Fund incur any sales charge, redemption fee,
distribution fee or service fee in connection with its investments in the
Investment Fund.
WARRANTS. Warrants are securities permitting, but not obligating, holders
to subscribe for other securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
ILLIQUID SECURITIES. Global Equity Fund and Global Income Fund each may
invest up to 10% of its net assets, and Asia Pacific Growth Fund and Emerging
Markets Equity Fund each may invest up to 15% of its net assets, in illiquid
securities. The term 'illiquid securities' for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Fund has valued the securities and
includes, among other things, purchased OTC options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins or a Sub-Adviser, as applicable, has determined are liquid
pursuant to guidelines established by each Fund's board. The assets used as
cover for OTC options written by the Funds will be considered illiquid unless
the OTC options are sold to qualified dealers who agree that the Funds may
repurchase any OTC options they write at a maximum price to be calculated by a
formula set forth in the option agreements. The cover for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase
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price under the formula exceeds the intrinsic value of the option. Under current
SEC guidelines, interest-only ('IO') and principal-only ('PO') classes of
mortgage-backed securities are considered illiquid. However, IO and PO classes
of fixed-rate mortgage-backed securities issued by the U.S. government or one of
its agencies or instrumentalities will not be considered illiquid if Mitchell
Hutchins or a Sub-Adviser has determined that they are liquid pursuant to
guidelines established by each Fund's board. To the extent a Fund invests in
illiquid securities, it may not be able to readily liquidate such investments
and may have to sell other investments if necessary to raise cash to meet its
obligations.
Restricted securities are not registered under the Securities Act of 1933
('1933 Act') and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time a Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
However, not all restricted securities are illiquid. To the extent that
foreign securities are freely tradeable in the country in which they are
principally traded, they are not considered illiquid, even if they are
restricted in the United States. A large institutional market has developed for
many U.S. and foreign securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a 'safe harbor' from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a Fund, however, could affect adversely the marketability of such portfolio
securities, and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins or a Sub-Adviser, as applicable, pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited and the mechanics of transfer).
Mitchell Hutchins or a Sub-Adviser monitors the liquidity of restricted
securities in each Fund's portfolio and reports periodically on such decisions
to the applicable board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to or upon demand is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by a Fund upon acquisition is accrued as
interest and included in its net investment income. Repurchase agreements carry
certain risks not associated with direct investments in securities, including
possible declines in the market value of the underlying securities and delays
and costs to a Fund if the other party to a repurchase agreement becomes
insolvent.
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The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins or a Sub-Adviser to
present minimal credit risks in accordance with guidelines established by each
board. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. As indicated in the Prospectus, each Fund
may enter into reverse repurchase agreements with banks and securities dealers.
While a reverse repurchase agreement is outstanding, a Fund will maintain, in a
segregated account with its custodian, cash or liquid securities, marked to
market daily, in an amount at least equal to its obligations under the reverse
repurchase agreement.
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a Fund might be unable to deliver them when that Fund seeks
to repurchase. In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
trustee or receiver may receive an extension of time to determine whether to
enforce that Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with that Fund's custodian in an amount, marked to market
daily, at least equal to the market value of the securities loaned, plus accrued
interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. Each Fund may reinvest any cash
collateral in money market investments or other short-term liquid investments.
In determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any of its loans at any time. Each Fund may pay reasonable fees in connection
with a loan and may pay the borrower or placing broker a negotiated portion of
the interest earned on the reinvestment of cash held as collateral. A Fund will
receive amounts equivalent to any dividends, interest or other distributions on
the securities loaned. Each Fund will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription
rights, when regaining such rights is considered to be in the Fund's interest.
Pursuant to procedures adopted by the boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The boards also have authorized the payment of fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
SHORT SALES 'AGAINST THE BOX.' Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales 'against the
box'). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the Fund
maintains, in a segregated account with its custodian, the securities that could
be used to cover the short sale. Each Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales 'against the box.'
A Fund might make a short sale 'against the box' in order to hedge against
market risks when Mitchell Hutchins or a Sub-Adviser believes that the price of
a security may decline, thereby causing a decline in the value of a security
owned by the Fund or a security convertible into or exchangeable for a security
owned by the Fund. In such case, any loss in the Fund's long position after the
short sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position after the short sale should be reduced
by a corresponding loss in the short position. The extent to which gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the 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.
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SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis, or reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the Fund's obligation or commitment under such
transactions. As described below under 'Hedging and Other Strategies Using
Derivative Instruments,' segregated accounts may also be required in connection
with certain transactions involving options, futures or forward currency
contracts (and, for Asia Pacific Growth Fund and Global Income Fund, swaps).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase
securities on a 'when-issued' basis or may purchase or sell for delayed
delivery. A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a Fund's net asset value. When a Fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See 'Investment Policies and
Restrictions--Segregated Accounts.' A Fund purchases when-issued securities only
with the intention of taking delivery, but may sell the right to acquire the
security prior to delivery if Mitchell Hutchins or a Sub-Adviser, as applicable,
deems it advantageous to do so, which may result in a gain or loss to the Fund.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of the
shares of the Fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
Each Fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having their
principal business activities in the same industry, except that this limitation
does not apply to securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess of 33 1/3% of the Fund's total assets (including
the amount of the senior securities issued but reduced by any liabilities not
constituting senior securities) at the time of the issuance or borrowing, except
that the Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
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(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
In addition, Asia Pacific Growth Fund, Emerging Markets Equity Fund and
Global Equity Fund will not:
(7) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets (15% of net assets for Asia
Pacific Growth Fund and Emerging Markets Equity Fund) in illiquid securities;
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments;
(4) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short 'against the box' and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments; or
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of reorganization, consolidation, or merger (and except that a Fund
will not purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act).
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HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins and the
Sub-Advisers may use a variety of financial instruments ('Derivative
Instruments'), including certain options, futures contracts (sometimes referred
to as 'futures'), options on futures contracts and forward currency contracts,
to attempt to hedge each Fund's portfolio. Global Income Fund also may use these
Derivative Instruments to attempt to enhance income or realize gains. Asia
Pacific Growth Fund and Global Income Fund may enter into interest rate swaps,
and Asia Pacific Growth Fund may engage in currency swaps, as also described
below. A Fund may enter into transactions involving one or more types of
Derivative Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, each Fund's use of these instruments will
place at risk a much smaller portion of its assets. In particular, each Fund may
use the Derivative Instruments described below.
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDICES--A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as 'short hedges' and 'long hedges.' A
short hedge is a purchase or sale of a Derivative
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Instrument intended partially or fully to offset potential declines in the value
of one or more investments held in a Fund's portfolio. Thus, in a short hedge a
Fund takes a position in a Derivative Instrument whose price is expected to move
in the opposite direction of the price of the investment being hedged. For
example, a Fund might purchase a put option on a security to hedge against a
potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, a Fund could exercise the put and
thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, a Fund
might be able to close out the put option and realize a gain to offset the
decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge, a Fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, a Fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transactions costs.
Alternatively, a Fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A Fund may purchase and write (sell) straddles on securities or indices of
securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is less than or equal to the exercise price of the
call. A Fund might enter into a long straddle when Mitchell Hutchins or a
Sub-Adviser believes it likely that the prices of the securities will be more
volatile during the term of the option than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security where
the exercise price of the put is less than or equal to the exercise price of the
call. A Fund might enter into a short straddle when Mitchell Hutchins or a
Sub-Adviser believes it unlikely that the prices of the securities will be as
volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ('CFTC'). In addition, a Fund's
ability to use Derivative Instruments will be limited by tax considerations. See
'Taxes.'
Income strategies that Global Income Fund may use include the writing of
covered options to obtain the related option premiums. Gain strategies that
Global Income Fund may use include the use of Derivative Instruments to increase
or reduce the Fund's exposure to an asset class without buying or selling the
underlying instruments.
In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the Sub-Advisers may discover additional
opportunities in connection with Derivative Instruments and with hedging, income
and gain strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins or a Sub-Adviser may
utilize these opportunities for a Fund to the extent that they are consistent
with the Fund's investment objective and permitted by its investment limitations
and applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(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
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requires different skills than predicting changes in the prices of individual
securities. While Mitchell Hutchins and the Sub-Advisers are experienced in the
use of Derivative Instruments, there can be no assurance that any particular
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because Mitchell Hutchins or a Sub-Adviser projected a decline in the
price of a security in that Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if the
price of the Derivative Instrument declined by more than the increase in the
price of the security, that Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund was
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Funds to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ('covered') position in securities,
currencies or other options or futures contracts or (2) cash and liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
Fund's assets to cover positions or to segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, in the case of Asia Pacific Growth Fund, Emerging
Markets Equity Fund and Global Equity Fund, on equity and debt securities, stock
and bond indices and foreign currencies, or in the case of Global Income Fund,
on debt securities, bond indices and foreign currencies. The purchase of call
options may serve as a long hedge, and the purchase of put options may serve as
a short hedge. In addition, Global Income Fund may purchase options to realize
gains by increasing or reducing its exposure to an asset class without
purchasing or selling the underlying securities. Writing covered put or call
options can enable a Fund to enhance income by reason of the premiums paid by
the purchasers of such options. Writing covered call options serves as a limited
short hedge, because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of
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the call option, it can be expected that the option will be exercised and the
affected Fund will be obligated to sell the security at less than its market
value. Writing covered put options serves as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for OTC options written by a Fund would be considered
illiquid to the extent described under 'Investment Policies and Restrictions--
Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between a Fund and its contra party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the contra party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the transaction.
The Funds will enter into OTC option transactions only with contra parties that
have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that a Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, a Fund might be unable to close out an OTC option position at any
time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the Fund could cause material losses because the Fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A Fund may purchase and write put and call options on indices in much the
same manner as the more traditional options discussed above, except the index
options may serve as a hedge against overall fluctuations in a securities market
(or market sector) rather than anticipated increases or decreases in the value
of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by each respective Fund's board
without shareholder vote:
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(1) Each Fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with
the premiums on all other options held by the Fund, does not exceed 5% of
its total assets.
(2) The aggregate value of securities underlying put options written
by each Fund, determined as of the date the put options are written will
not exceed 50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on
futures contracts) purchased by each Fund that are held at any time will
not exceed 20% of its net assets.
FUTURES. The Funds may purchase and sell securities index futures
contracts, interest rate futures contracts, bond index future contracts and
foreign currency futures contracts. A Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, Global
Income Fund may purchase or sell futures contracts or purchase options thereon
to realize gains by increasing or reducing its exposure to an asset class
without purchasing or selling the underlying securities.
Futures strategies also can be used to manage the average duration of
Global Income Fund's portfolio. If Mitchell Hutchins wishes to shorten the
average duration of this Fund's portfolio, the Fund may sell a futures contract
or a call option thereon, or purchase a put option on that futures contract. If
Mitchell Hutchins wishes to lengthen the average duration of the Fund's
portfolio, the Fund may buy a futures contract or a call option thereon, or sell
a put option thereon.
A Fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A Fund will engage in this
strategy only when it is more advantageous to a Fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a Fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
21
<PAGE>
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by a Fund's board without shareholder vote:
(1) To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are 'in-the-money') may not exceed
5% of its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on
futures contracts) purchased by each Fund that are held at any time will
not exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of its total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Each Fund may
use options and futures on foreign currencies, as described above, and forward
currency contracts, as described below, to hedge against movements in the values
of the foreign currencies in which the Fund's securities are denominated. Such
currency hedges can protect against price movements in a security a Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are considered expensive. In such cases, the Fund may
hedge against price movements in that currency by entering into transactions
using Derivative Instruments on another currency or a basket of currencies, the
value of which Mitchell Hutchins or a Sub-Adviser believes will have a positive
correlation to the value of the currency being hedged. For example, if a Fund
owned securities denominated in a foreign currency and Mitchell Hutchins or the
Sub-Adviser believed that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as 'cross
hedging.' The risk that movements in the price of the Derivative Instrument will
not correlate perfectly with movements in the price of the currency being hedged
is magnified when this strategy is used.
22
<PAGE>
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, a Fund could be disadvantaged by having to deal in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Funds might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, a Fund may purchase a forward currency contract to lock in
the U.S. dollar price of a security denominated in a foreign currency that the
Fund intends to acquire. Forward currency contract transactions may also serve
as short hedges--for example, a Fund may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency. Global Income Fund may use forward
currency contracts to realize gains from favorable changes in exchange rates.
A Fund may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which Mitchell Hutchins or a Sub-Adviser believes will
have a positive correlation to the values of the currency being hedged. In
addition, a Fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a Fund owned
securities denominated in a foreign currency and Mitchell Hutchins or a
Sub-Adviser believes that currency would decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as 'cross
hedging.' Use of a different foreign currency magnifies the risk that movements
in the price of a hedging instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The cost to a Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When a Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the
23
<PAGE>
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. Asia Pacific Growth Fund and Global Income Fund each
may enter into interest rate swap transactions. Asia Pacific Growth Fund also
may enter into currency swap transactions. Swap transactions include swaps,
caps, floors and collars. Interest rate swaps involve an agreement between two
parties to exchange payments that are based, for example, on variable and fixed
rates of interest and that are calculated on the basis of a specified amount of
principal (the 'notional principal amount') for a specified period of time.
Interest rate cap and floor transactions involve an agreement between two
parties in which the first party agrees to make payments to the contra party
when a designated market interest rate goes above (in the case of a cap) or
below (in the case of a floor) a designated level on predetermined dates or
during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which payments are made when a designated
market interest rate either goes above a designated ceiling level or goes below
a designated floor level on predetermined dates or during a specified time
period. Currency swaps, caps, floors and collars are similar to interest rate
swaps, caps, floors and collars but they are based on currency exchange rates
rather than interest rates.
Asia Pacific Growth Fund and Global Income Fund each may enter into
interest rate swap transactions to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities it anticipates purchasing at a later date. Each of these
Funds intends to use these transactions as a hedge and not as a speculative
investment. Interest rate swap transactions are subject to risks comparable to
those described above with respect to other hedging strategies.
Asia Pacific Growth Fund and Global Income Fund each may enter into
interest rate swaps, caps, floors and collars on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with a Fund receiving or paying,
as the case may be, only the net amount of the two payments. Inasmuch as these
interest rate swap transactions are entered into for good faith hedging
purposes, and inasmuch as segregated accounts will be established with respect
to such transactions, Mitchell Hutchins and Schroder Capital believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to either Fund's borrowing restrictions. The net amount of
the excess, if any, of a Fund's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis, and appropriate
Fund assets having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account as described above in
'Investment Policies and Restrictions--Segregated Accounts.' Each Fund also will
establish and maintain such segregated accounts with respect to its total
obligations under any swaps that are not entered into on a net basis and with
respect to any caps, floors and collars that are written by the Fund.
Asia Pacific Growth Fund and Global Income Fund each will enter into swap
transactions only with banks and recognized securities dealers believed by
Mitchell Hutchins or, in the case of Asia Pacific Growth Fund, Schroder Capital
to present minimal credit risk in accordance with guidelines established by the
Fund's board. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
24
<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Trustee and President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutch-
ins (since January 1995), and also an ex-
ecutive vice president and a director of
PaineWebber. Mrs. Alexander is president
and a director or trustee of 30 investment
companies for which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Richard Q. Armstrong; 62 Trustee Mr. Armstrong is chairman and principal of
78 West Brother Drive RQA Enterprises (management consulting
Greenwich, CT 06830 firm) (since April 1991 and principal
occupation since March 1995). Mr. Arm-
strong is also a director of Hi Lo Auto-
motive, Inc. He was chairman of the board,
chief executive officer and co-owner of
Adirondack Beverages (producer and
distributor of soft drinks and spar-
kling/still waters) (October 1993-March
1995). Mr. Armstrong was a partner of The
New England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Luis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
E. Garrett Bewkes, Jr.**; 71 Trustee and Chairman of the Mr. Bewkes is a director of Paine Webber
Board of Trustees Group Inc. ('PW Group') (holding company of
PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company. Mr.
Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeu-
tics, Inc. Mr. Bewkes is a director or
trustee of 30 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1101 Connecticut Avenue, N.W. (international investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a
partner of McKinsey & Company (management
consulting firm) (since 1991). He is also a
director of American Publishing Company and
Archer-Daniels-Midland Co. (agricultural
commodities). He was the chief negotiator
in the Strategic Arms Reduction Talks with
the former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a director
or trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment
adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist and member of
the Investment Policy Committee
of PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a member of the
Financial Women's Association and Women's
Economic Roundtable and appears as a
regular panelist on Wall $treet Week with
Louis Rukeyser. She also serves on the
Board of Overseers of New York University's
Stern School of Business. Ms. Farrell is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Meyer Feldberg; 55 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois
Institute of Technology. Dean Feldberg is
also a director of K-III Communications
Corporation, Federated Department Stores,
Inc. and Revlon, Inc. Dean Feldberg is a
director or trustee of 29 investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, New York 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a director or
trustee of 29 investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager
Washington, D.C. 20004 of Bush-Quayle '92. From 1990 to 1992, he
was vice chairman and, from 1989 to 1990,
he was president of Northwest Airlines
Inc., NWA Inc. (holding company of North-
west Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.). Prior to
1989, he was employed by the Marriott
Corporation (hotels, restaurants, airline
catering and contract feeding), where he
most recently was an
executive vice president and president of
Marriott Hotels and Resorts. Mr. Malek is
also a director of American Management
Systems, Inc. (management consulting and
computer related services), Automatic Data
Processing, Inc., CB Commercial Group, Inc.
(real estate services), Choice Hotels
International (hotel and hotel
franchising), FPL Group, Inc. (electric
services), Integra, Inc. (bio-medical),
Manor Care, Inc. (health care), National
Education Corporation and Northwest
Airlines Inc. Mr. Malek is a director or
trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
P.O. Box 1164 Foundation (charitable foundation sup-
Princeton, NJ 08542 porting mainly oceanographic exploration
and research). He is a director of Roadway
Express, Inc. (trucking), The Guardian
Group of Mutual Funds, Evans Systems, Inc.
(motor fuels, convenience store and
diversified company), Electronic Clearing
House, Inc., (financial transactions
processing), Wainoco Oil Corporation and
Nutraceutix, Inc. (biotechnology company).
Prior to January 1993, he was chairman of
the Investment Advisory Committee of the
Howard Hughes Medical Institute. Mr. Scha-
fer is a director or trustee of 29
investment companies for which Mitchell
Hutchins or PaineWebber serves as an
investment adviser.
T. Kirkham Barneby; 51 Vice President Mr. Barneby is a managing director and chief
(Investment Trust only) investment officer--quantitative investment
of Mitchell Hutchins. Prior to September
1994, he was a senior vice president at
Vantage Global Management. Prior to June
1993, he was a senior vice president at
Mitchell Hutchins. Mr. Barneby is a vice
president of six investment companies for
which Mitchell Hutchins or PaineWebber
serves as
investment adviser.
Julieanna Berry; 34 Vice President Ms. Berry is a first vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins. Ms.
Berry is a vice president of two in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Karen L. Finkel; 40 Vice President Mrs. Finkel is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Mrs. Finkel is a vice president of two in-
vestment companies for which Mitchell
Hutchins serves as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
James F. Keegan; 37 Vice President Mr. Keegan is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to March 1996, he was director of
fixed income strategy and research of
Merrion Group, L.P. From 1987 to 1994, he
was a vice president of global investment
management of Bankers Trust. Mr. Keegan is
a vice president of three investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Thomas J. Libassi; 39 Vice President Mr. Libassi is a senior vice president and
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to May 1994, he was a vice president
of Keystone Custodian Funds Inc. with
portfolio management responsibility. Mr.
Libassi is a vice president of four
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dennis McCauley; 51 Vice President (Managed Mr. McCauley is a managing director
Trust and Investment Series and chief investment officer--fixed income
only) of Mitchell Hutchins. Prior to December
1994, he was director of fixed
income investments of IBM Corporation. Mr.
McCauley is a vice president of 18
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ann E. Moran; 40 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance division of
Mitchell Hutchins. Ms. Moran is also a vice
president and assistant treasurer of 30
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 45 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is a vice presi-
dent and secretary of 29 investment
companies and a vice president and
assistant secretary of one investment
company for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Emil Polito; 37 Vice President Mr. Polito is a senior vice president and di-
rector of operations and control for
Mitchell Hutchins. From March 1991
to September 1993, he was director of the
mutual funds sales support and service
center for Mitchell Hutchins and
PaineWebber. Mr. Polito is a vice presi-
dent of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Prior
to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 29 investment companies
and a vice president and secretary of one
investment company for which Mitchell
Hutchins
or PaineWebber serves as investment
adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a first vice president and
Treasurer director of the mutual fund finance divi-
sion of Mitchell Hutchins. From August 1992
to August 1994, he was a vice president at
BlackRock Financial Management L.P. Mr.
Schubert is a vice president and treasurer
of 30 investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment
adviser.
Nirmal Singh; 41 Vice President Mr. Singh is a senior vice president and a
(Managed Trust only) portfolio manager of Mitchell Hutchins.
Prior to 1993, he was a member of the
portfolio management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is a vice
president of four investment companies for
which Mitchell Hutchins or PaineWebber
serves as
investment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 36 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance divi-
sion of Mitchell Hutchins. Prior to Feb-
ruary 1995, he was a manager of the mutual
fund finance division of Kidder Peabody
Asset Management, Inc. Mr. Taglialatela is
a vice president and assistant treasurer of
30 investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
Mark A. Tincher; 42 Vice President Mr. Tincher is a managing director and chief
(Investment Trust, investment officer--equities of Mitchell
Investment Trust II and Hutchins. Prior to March 1995, he was a
Managed Trust only) vice president and directed the U.S. funds
management and equity research areas of
Chase Manhattan Private Bank. Mr. Tincher
is a vice president of 14 investment
companies for which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior vice president and
(Managed Trust only) a portfolio manager of Mitchell Hutchins.
Mr. Varrelman is a vice president of four
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Stuart Waugh; 42 Vice President (Investment Mr. Waugh is a managing director and a
Series only) portfolio manager of Mitchell Hutchins
responsible for global fixed income invest-
ments and currency trading. Mr. Waugh is
a vice president of five investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 36 Vice President and Mr. Weller is a first vice president and as-
Assistant Secretary sociate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is
a vice president and assistant secretary of
29 investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME AND ADDRESS*; AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Ian W. Williams; 40 Vice President and Mr. Williams is a vice president and a man-
Assistant Treasurer ager of the mutual fund finance division of
Mitchell Hutchins. Mr. Williams is a vice
president and assistant treasurer of 30
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of each
Fund as defined in the 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber, and/or PW Group.
Board members are compensated as follows:
o MANAGED TRUST has six series and pays each trustee who is not an
'interested person' of the Trust $1,000 annually for each series.
Therefore, Managed Trust pays each such trustee $6,000 annually,
plus any additional amounts due for board or committee meetings.
o INVESTMENT TRUST II and INVESTMENT SERIES each pays board members
who are not 'interested persons' of the Trust $1,000 annually for
its sole series, plus any additional amounts due for board or
committee meetings.
o INVESTMENT TRUST has two series and pays each board member who is
not an 'interested person' of the Trust $1,000 annually for Global
Equity Fund and an additional $1,500 annually for its second series.
Therefore, Investment Trust pays each such board member $2,500
annually, plus any additional amounts due for board or committee
meetings.
Each Trust pays an additional $150 for each board meeting and each separate
meeting of a board committee with respect to each series. Each chairman of the
audit and contract review committees of individual funds within the PaineWebber
fund complex receives additional compensation, aggregating $15,000 annually,
from the relevant funds. All board members are reimbursed for any expenses
incurred in attending meetings. Board members and officers own in the aggregate
less than 1% of the outstanding shares of each Fund. Because PaineWebber,
Mitchell Hutchins and, as applicable, a Sub-Adviser perform substantially all
the services necessary for the operation of the Trusts and each Fund, the Trusts
require no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from the Trusts for acting as a
board member or officer.
32
<PAGE>
The table below includes certain information relating to the compensation
of the current board members who held office with the Trusts or with other
PaineWebber funds during the Funds' fiscal years ended October 31, 1997.
COMPENSATION TABLE+
<TABLE>
<CAPTION>
TOTAL
AGGREGATE AGGREGATE AGGREGATE COMPENSATION
AGGREGATE COMPENSATION COMPENSATION COMPENSATION FROM THE
COMPENSATION FROM FROM FROM TRUSTS AND
FROM MANAGED INVESTMENT INVESTMENT INVESTMENT THE FUND
NAME OF PERSON, POSITION TRUST * SERIES* TRUST* TRUST II* COMPLEX**
- --------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 94,885
Richard R. Burt,
Trustee........................ $7,300 $1,750 $3,075 $1,350 $ 87,085
Meyer Feldberg,
Trustee........................ $7,300 $3,053 $4,965 $2,305 $117,853
George W. Gowen,
Trustee........................ $7,700 $1,900 $3,075 $1,350 $101,567
Frederic V. Malek,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 95,845
Carl W. Schafer,
Trustee........................ $7,300 $1,900 $3,075 $1,350 $ 94,885
</TABLE>
- ------------------
+ Only independent board members are compensated by the Trusts and identified
above; board members who are 'interested persons,' as defined by the 1940
Act, do not receive compensation.
* Represents fees paid to each Trustee from the Trust indicated for the fiscal
year ended October 31, 1997.
** Represents total compensation paid to each board member during the calendar
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholder is shown in the Global Equity Fund records as
owning more than 5% of its shares:
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES BENEFICIALLY
NAME AND ADDRESS* OWNED AS OF JANUARY 31, 1998
- ----------------------------------------------------------------------------------- ----------------------------
<S> <C>
Northern Trust Company as Trustee 1,783,111.002
FBO PaineWebber 401 K Plan 6.16%
</TABLE>
- ------------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset Management
Inc., 1285 Avenue of the Americas, New York, NY 10019.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Fund pursuant to separate contracts (each an
'Advisory Contract') with each Trust. Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rates indicated below.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the Fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to board members and officers who are not interested persons (as defined
in the 1940 Act) of the applicable Trust or Mitchell Hutchins; (6) all expenses
incurred in connection with the board members' services, including travel
expenses; (7) taxes (including any income or franchise taxes) and governmental
fees; (8) costs of any liability, uncollectible items of deposit and other
insurance or
33
<PAGE>
fidelity bonds; (9) any costs, expenses or losses arising out of a liability of
or claim for damages or other relief asserted against the applicable Trust or
Fund for violation of any law; (10) legal, accounting and auditing expenses,
including legal fees of special counsel for the independent board members; (11)
charges of custodians, transfer agents and other agents; (12) costs of preparing
share certificates; (13) expenses of setting in type and printing prospectuses,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders, and costs of mailing such materials to
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Fund; (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to board members
and officers; and (18) costs of mailing, stationery and communications
equipment.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. Each Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the Fund's board or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to the Fund.
ASIA PACIFIC GROWTH FUND. Mitchell Hutchins acts as the investment adviser
and administrator of Asia Pacific Growth Fund pursuant to an Investment Advisory
and Administration Contract with Managed Trust, dated April 21, 1988, made
applicable to the Fund by means of an Investment Advisory and Administration Fee
Agreement dated December 18, 1996 (together an 'Advisory Contract'). Under the
Advisory Contract, the Fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 1.20% of the Fund's average daily net assets
up to and including $100 million and at an annual rate of 1.10% of its average
daily net assets in excess of $100 million. During the period March 25, 1997
(commencement of operations) through October 31, 1997, the Fund paid (or
accrued) to Mitchell Hutchins advisory and administrative fees of $533,412.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with Schroder Capital, dated December 18,
1996 ('Sub-Advisory Contract'), pursuant to which Schroder Capital determines
what securities will be purchased, sold or held by Asia Pacific Growth Fund.
Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays Schroder
Capital a fee, computed daily and paid monthly, at an annual rate of 0.65% of
the Fund's average daily net assets up to and including $100 million and at an
annual rate of 0.55% of the Fund's average daily net assets in excess of $100
million. Schroder Capital bears all expenses incurred by it in connection with
its services under the Sub-Advisory Contract. During the period March 25, 1997
(commencement of operations) through October 31, 1997, Mitchell Hutchins (not
the Fund) paid (or accrued) Schroder Capital $284,106 in sub-advisory fees.
Under the Sub-Advisory Contract, Schroder Capital will not be liable for
any error of judgment or mistake of law or for any loss suffered by Managed
Trust, Asia Pacific Growth Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to Managed
Trust, the Fund, its shareholders or Mitchell Hutchins to which Schroder Capital
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by Managed Trust's board or by vote of the holders of a majority of the
Fund's outstanding voting securities on 60 days' notice to Schroder Capital, or
by Schroder Capital on 120 days' written notice to Mitchell Hutchins. The
Sub-Advisory Contract may also be terminated by Mitchell Hutchins (1) upon
material breach by Schroder Capital of its representations and warranties, which
breach shall not have been cured within a 20-day period after notice of such
breach; (2) if the Sub-Adviser becomes unable to discharge its duties and
obligations under the Sub-Advisory Contract or (3) on 120 days' notice to
Schroder Capital.
Prior to August 1, 1997, PaineWebber provided certain services to Asia
Pacific Growth Fund not otherwise provided by its transfer agent. Pursuant to an
agreement between PaineWebber and the Fund
34
<PAGE>
relating to those services, for the period from March 25, 1997 (commencement of
operations) through October 31, 1997, Asia Pacific Growth Fund paid (or accrued)
to PaineWebber $9,958.
EMERGING MARKETS EQUITY FUND. Mitchell Hutchins acts as the investment
adviser and administrator of Emerging Markets Equity Fund pursuant to an
Advisory Contract with Investment Trust II dated February 25, 1997. Under the
Advisory Contract, the Fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 1.20% of the Fund's average daily net
assets. During the fiscal year ended October 31, 1997, the four months ended
October 31, 1996, and the fiscal years ended June 30, 1996 and June 30, 1995,
the Fund paid (or accrued) to Mitchell Hutchins, under either the current or a
prior contract, and/or to Kidder Peabody Asset Management, Inc. ('KPAM') (the
Fund's investment adviser prior to February 13, 1995) advisory and
administrative fees of $438,676, $220,071, $867,093 and $1,261,493,
respectively.
During the fiscal year ended October 31, 1997, the four months ended
October 31, 1996 and the fiscal years ended June 30, 1996 and June 30, 1995,
Mitchell Hutchins waived part of its management fees and reimbursed Emerging
Markets Equity Fund in the amounts of $180,568, $142,160, $538,618 and $81,217,
respectively; during these periods, certain expense limitations were applicable
which are no longer in effect. As of the date of this Statement of Additional
Information, Mitchell Hutchins was voluntarily waiving part of its management
fees and making reimbursements to Emerging Markets Equity Fund so that the
Fund's 'Total Operating Expenses' were as listed in the Expense Table in the
Prospectus. Mitchell Hutchins may discontinue these voluntary waivers and
reimbursements at any time.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with Schroder Capital, dated February 25,
1997 ('Sub-Advisory Contract'), pursuant to which Schroder Capital determines
what securities will be purchased, sold or held by Emerging Markets Equity Fund.
Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays Schroder
Capital a fee, computed daily and paid monthly, at an annual rate of 0.70% of
the Fund's average daily net assets. Schroder Capital bears all expenses
incurred by it in connection with its services under the Sub-Advisory Contract.
During the fiscal year ended October 31, 1997, Mitchell Hutchins (not the Fund)
paid (or accrued) to Schroder Capital $161,715 in sub-advisory fees. Under
sub-advisory contracts with the Fund's former sub-adviser, Emerging Markets
Management, from November 1, 1996 through February 24, 1997, for the four months
ended October 31, 1996 and the fiscal years ended June 30, 1996, and June 30,
1995, Mitchell Hutchins and/or KPAM paid (or accrued) fees of $86,731, $152,148,
$599,472 and $872,143, respectively, to Emerging Markets Management.
Under the Sub-Advisory Contract, Schroder Capital will not be liable for
any error of judgment or mistake of law or for any loss suffered by Investment
Trust II, Emerging Markets Equity Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to Investment
Trust II, the Fund, its shareholders or Mitchell Hutchins to which Schroder
Capital would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the Sub-Advisory
Contract.
The Sub-Advisory Contract terminates automatically upon the assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by Investment Trust II's board or by vote of the holders of a majority
of the Fund's outstanding securities on 60 days' notice to Schroder Capital, or
by Schroder Capital on 60 days' written notice to Mitchell Hutchins. The
Sub-Advisory Contract may also be terminated by Mitchell Hutchins (1) upon
material breach by Schroder Capital of its representations and warranties, which
breach shall not have been cured within a 20-day period after notice of such
breach; (2) if the Sub-Adviser becomes unable to discharge its duties and
obligations under the Sub-Advisory Contract or (3) on 120 days' notice to
Schroder Capital.
GLOBAL EQUITY FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Equity Fund pursuant to an Advisory Contract with
Investment Trust dated August 25, 1995. Under the Advisory Contract, the Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.85% of the Fund's average daily net assets up to and including $500
million, 0.83% of amounts over $500 million and up to and including $1 billion,
and 0.805% of amounts over $1 billion. During the fiscal year ended October 31,
1997, the two months ended October 31, 1996 and for the fiscal years ended
August 31, 1996 and August 31, 1995, the Fund paid (or accrued) to Mitchell
Hutchins and/or KPAM (the Fund's
35
<PAGE>
investment adviser prior to February 13, 1995) advisory and administrative fees
of $4,689,662, $794,518, $4,990,588 and $2,109,091, respectively.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers, but does not require Mitchell Hutchins to do so. Mitchell Hutchins
has entered into a separate contract with GE Investment Management dated August
25, 1995 ('Sub-Advisory Contract'), pursuant to which GE Investment Management
determines what securities will be purchased, sold or held by Global Equity
Fund. Under the Sub-Advisory Contract, Mitchell Hutchins (not the Fund) pays GE
Investment Management a fee, computed daily and paid monthly, at an annual rate
of 0.31% of the Fund's of its average daily net assets up to and including $500
million, 0.29% of amounts over $500 million up to and including $1 billion, and
0.265% of amounts over $1 billion. GE Investment Management bears all expenses
incurred by it in connection with its services under the Sub-Advisory Contract.
Under the Sub-Advisory Contract (or a prior sub-advisory contract between KPAM
and GE Investment Management) for the fiscal year ended October 31, 1997, the
two months ended October 31, 1996 and the fiscal years ended August 31, 1996 and
August 31, 1995, Mitchell Hutchins and/or KPAM paid (or accrued) fees of
$1,695,840, $287,688, $1,808,760 and $1,523,282, respectively, to GE Investment
Management.
Under the Sub-Advisory Contract, GE Investment Management will not be
liable for any error of judgment or mistake of law or for any loss suffered by
Investment Trust, Global Equity Fund, its shareholders or Mitchell Hutchins in
connection with the Sub-Advisory Contract, except any liability to the
Investment Trust, the Fund, its shareholders or Mitchell Hutchins to which GE
Investment Management would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under the
Sub-Advisory Contract.
The Sub-Advisory Contract terminates automatically upon its assignment or
the termination of the Advisory Contract and is terminable at any time without
penalty by Investment Trust's board or by vote of the holders of a majority of
the Fund's outstanding voting securities on 60 days' notice to GE Investment
Management and Mitchell Hutchins, or by GE Investment Management or Mitchell
Hutchins on 60 days' written notice to Investment Trust.
GLOBAL INCOME FUND. Mitchell Hutchins acts as the investment adviser and
administrator of Global Income Fund pursuant to an Advisory Contract with
Investment Series dated April 21, 1988. Under the Advisory Contract, the Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate of 0.75% of the value of its average daily net assets up to and including
$500 million, 0.725% of amounts in excess of $500 million and up to $1 billion,
0.70% of amounts in excess of $1 billion and up to $1.5 billion, 0.675% of
amounts in excess of $1.5 billion and up to $2.0 billion, and 0.65% of amounts
over $2 billion. For the fiscal years ended October 31, 1997, October 31, 1996
and October 31, 1995, the Fund paid (or accrued) to Mitchell Hutchins advisory
and administrative fees of $5,683,381, $7,812,766 and $9,229,318, respectively.
Prior to August 1, 1997, PaineWebber provided certain services to Global
Income Fund not otherwise provided by its transfer agent. Pursuant to an
agreement between PaineWebber and the Fund relating to those services, for the
fiscal years ended October 31, 1997, October 31, 1996 and October 31, 1995,
Global Income Fund paid (or accrued) to PaineWebber $189,131, $305,944 and
$376,299, respectively.
ALL FUNDS. During its fiscal year period ended October 31, 1997, the
indicated Fund paid (or accrued) the following fees to PaineWebber for its
services as securities lending agent:
<TABLE>
<CAPTION>
FUND AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Asia Pacific Growth Fund.......................................................... $ 14,324
Emerging Markets Equity Fund...................................................... $ 5,582
Global Equity Fund................................................................ $ 42,125
Global Income Fund................................................................ $ 26,057
</TABLE>
Subsequent to August 1, 1997, PFPC (not the Funds) pays PaineWebber for
certain transfer agency related services that PFPC has delegated to PaineWebber.
36
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
January 31, 1998, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
- --------------------------------------------------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................................ $ 6,697.8
Global........................................................................... $ 3,365.6
Equity/Balanced.................................................................. $ 5,173.7
Fixed Income (excluding Money Market)............................................ $ 4,889.7
Taxable Fixed Income........................................................ $ 3,300.0
Tax-Free Fixed Income....................................................... $ 1,589.7
Money Market Funds............................................................... $ 27,372.6
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients. Personnel of
each Sub-Adviser may also invest in securities for their own accounts pursuant
to comparable codes of ethics.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with
each Trust (collectively, 'Distribution Contracts'). Each Distribution Contract
requires Mitchell Hutchins to use its best efforts, consistent with its other
businesses, to sell shares of the applicable Fund. Shares of each Fund are
offered continuously. Under separate exclusive dealer agreements between
Mitchell Hutchins and PaineWebber relating to each class of shares of the Funds
(collectively, 'Exclusive Dealer Agreements'), PaineWebber and its correspondent
firms sell each Fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares of each Fund adopted by each Trust in the manner prescribed under
Rule 12b-1 under the 1940 Act (each, respectively, a 'Class A Plan,' 'Class B
Plan' and 'Class C Plan,' and collectively, 'Plans'), each Fund pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate of
0.25% of the average daily net assets of each class of shares. Under the Class B
Plan, each Fund pays Mitchell Hutchins a distribution fee, accrued daily and
payable monthly, at the annual rate of 0.75% of the average daily net assets of
the Class B shares. Under the Class C Plan, each Fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
(in the case of Asia Pacific Growth Fund, Emerging Markets Equity Fund and
Global Equity Fund) or 0.50% (in the case of Global Income Fund) of the average
daily net assets of the Class C shares. There is no distribution plan with
respect to the Funds' Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the board members will
review, reports regarding all amounts expended under the Plan and the purposes
for which such expenditures were made, (2) the Plan will continue in effect only
so long as it is approved at least annually, and any material amendment thereto
is approved, by the applicable board, including those board members who are not
'interested persons' of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan,
acting in person at a meeting called for that purpose, (3) payments by a Fund
under the Plan shall not be materially increased without the affirmative vote of
the holders of a majority of the outstanding shares of the relevant class and
(4) while the Plan remains in effect, the selection and nomination of board
members who are not 'interested persons' of the Trust shall be committed to the
discretion of the board members who are not 'interested persons' of that Trust.
In reporting amounts expended under the Plans to the board members,
Mitchell Hutchins allocates expenses attributable to the sale of each class of
each Fund's shares to such class based on the ratio of sales of shares of such
class to the sales of all three classes of shares. The fees paid by one class of
a Fund's shares will not be used to subsidize the sale of any other class of
Fund shares.
37
<PAGE>
The Funds paid (or accrued) the following fees to Mitchell Hutchins under
the Class A, Class B and Class C Plans during the fiscal year (or period) ended
October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A........................... $ 43,850 $ 32,006 $ 789,664 $ 1,317,917
Class B........................... $ 167,837 $ 13,867 $ 1,070,444 $ 1,847,036
Class C........................... $ 101,270 $ 66,418 $ 650,447 $ 325,118
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to each Fund during the fiscal year
(or period) ended October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
CLASS A
Marketing and advertising......... $ 0 $60,062 $ 199,199 $ 348,403
Amortization of commissions....... $ 0 $ 0 $ 0 $ 0
Printing of prospectuses and
statements of additional
information..................... $11,988 $ 938 $ 16,675 $ 1,896
Branch network costs allocated and
interest expense................ $79,808 $88,809 $ 1,269,679 $ 2,405,758
Service fees paid to PaineWebber
investment executives........... $16,663 $12,073 $ 298,221 $ 500,809
CLASS B
Marketing and advertising......... $ 0 $ 6,508 $ 67,518 $ 114,697
Amortization of commissions....... $44,419 $ 3,985 $ 310,227 $ 539,463
Printing of prospectuses and
statements of additional
information..................... $11,470 $ 102 $ 5,652 $ 624
Branch network costs allocated and
interest expense................ $90,536 $ 9,624 $ 465,675 $ 799,194
Service fees paid to PaineWebber
investment executives........... $15,945 $ 1,311 $ 101,024 $ 175,469
CLASS C
Marketing and advertising......... $ 0 $31,153 $ 41,022 $ 28,228
Amortization of commissions....... $28,862 $18,795 $ 184,177 $ 82,363
Printing of prospectuses and
statement of additional
information..................... $ 6,919 $ 487 $ 3,434 $ 154
Branch network costs allocated and
interest expense................ $46,407 $46,067 $ 263,148 $ 194,222
Service fees paid to PaineWebber
investment executives........... $ 9,621 $ 6,265 $ 61,393 $ 41,182
</TABLE>
'Marketing and advertising' includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. 'Branch
network costs allocated and interest expense' consist of an allocated portion of
the expenses of various PaineWebber departments involved in the distribution of
the Funds' shares, including the PaineWebber retail branch system.
In approving each Fund's overall Flexible Pricing(Service Mark) system of
distribution, the applicable board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the Fund and attracting
new investors and assets to the Fund to the benefit of the Fund and its
shareholders, (2) facilitate distribution of the Fund's shares and (3) maintain
the competitive position of the Fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
38
<PAGE>
In approving the Class A Plan, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Fund than might otherwise be the case, (3)
the advantages to the shareholders of economies of scale resulting from growth
in the Fund's assets and potential continued growth, (4) the services provided
to the Fund and its shareholders by Mitchell Hutchins, (5) the services provided
by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board of each Fund considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
investment executives and correspondent firms, resulting in greater growth of
the Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness to
compensate PaineWebber and its investment executives, without the concomitant
receipt by Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in Fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber investment executives and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the investment executives and
correspondent firms, resulting in greater growth to the Fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the Fund's assets and potential continued growth,
(5) the services provided to the Fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The board members also recognized
that Mitchell Hutchins' willingness to compensate PaineWebber and its investment
executives, without the concomitant receipt by Mitchell Hutchins of initial
sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the boards considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of a Fund, which
fees would increase if the Plan were successful and the Fund attained and
maintained significant asset levels.
39
<PAGE>
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>
PERIOD ENDED
OCTOBER 31, 1997
------------------
<S> <C>
ASIA PACIFIC GROWTH FUND
Earned.......................................... $1,142,055
Retained........................................ $ 67,143
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
FOUR MONTHS JUNE 30,
FISCAL YEAR ENDED ENDED OCTOBER 31, --------------------
OCTOBER 31, 1997 1996 1996 1995
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
EMERGING MARKETS EQUITY FUND
Earned.......................................... $ 10,692 $ 4,109 $ 25,696 $ 28,289
Retained........................................ $ 662 $ 251 $ 1,280 $ 225
<CAPTION>
FISCAL YEARS ENDED
TWO MONTHS AUGUST 31,
FISCAL YEAR ENDED ENDED OCTOBER 31, --------------------
OCTOBER 31, 1997 1996 1996 1995
------------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
GLOBAL EQUITY FUND
Earned.......................................... $ 132,728 $ 22,360 $229,590 $130,094
Retained........................................ $ 8,400 $ 1,366 $ 10,949 $ 3,353
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------------------
1997 1996 1995
------------------ ----------------- --------
<S> <C> <C> <C>
GLOBAL INCOME FUND
Earned.......................................... $ 29,617 $ 37,752 $ 43,136
Retained........................................ $ 2,950 $ 6,564 $ 12,003
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of shares for the fiscal year (or
period) ended October 31, 1997:
<TABLE>
<CAPTION>
ASIA PACIFIC EMERGING MARKETS
GROWTH FUND EQUITY FUND GLOBAL EQUITY FUND GLOBAL INCOME FUND
------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A........................... $ 0 $ 0 $ 0 $ 0
Class B........................... $ 7,821 $ 785 $ 249,534 $ 387,664
Class C........................... $10,620 $ 1,792 $ 2,641 $ 8,479
</TABLE>
40
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, Mitchell Hutchins or a
Sub-Adviser, as applicable, is responsible for the execution of each Fund's
portfolio transactions and the allocation of brokerage transactions. In
executing portfolio transactions, Mitchell Hutchins or the Sub-Adviser seeks to
obtain the best net results for a Fund, taking into account such factors as the
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved.
While Mitchell Hutchins and the Sub-Advisers generally seek reasonably
competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions, through which most debt securities and some
equity securities are traded, generally include a 'spread,' which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The Funds may invest in securities traded
in the OTC market and will engage primarily in transactions directly with the
dealers who make markets in such securities, unless a better price or execution
could be obtained by using a broker. For the period March 25, 1997 (commencement
of operations) to October 31, 1997, Asia Pacific Growth Fund paid $454,243 in
brokerage commissions. For the fiscal year ended October 31, 1997, the four
months ended October 31, 1996, and the fiscal years ended June 30, 1996 and June
30, 1995, Emerging Markets Equity Fund paid $266,325, $80,726, $264,723 and
$531,901, respectively, in brokerage commissions. For the fiscal year ended
October 31, 1997, the two months ended October 31, 1996 and the fiscal years
ended August 31, 1996 and August 31, 1995, Global Equity Fund paid $384,903,
$118,589, $1,472,329 and $850,531, respectively, in brokerage commissions. For
the fiscal years ended October 31, 1997, 1996 and 1995, Global Income Fund paid
$3,330, $0 and $0, respectively, in brokerage commissions.
The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate that, consistent
with the policy of obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or its affiliates, including PaineWebber, or
brokerage affiliates of Schroder Capital or GE Management. Each board has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure
that all brokerage commissions paid to PaineWebber or brokerage affiliates of
Schroder Capital or GE Management are reasonable and fair. Specific provisions
in the Advisory Contracts and the applicable Sub-Advisory Contracts authorize
Mitchell Hutchins and Schroder Capital or GE Management, respectively, and any
of their affiliates that is a member of a national securities exchange to effect
portfolio transactions for the applicable Funds on such exchange and to retain
compensation in connection with such transactions. Any such transactions will be
effected and related compensation paid only in accordance with applicable SEC
regulations. None of the Funds paid brokerage commissions to PaineWebber or
Schroder Capital's or GE Management's affiliates during its last three fiscal
years (or with respect to Asia Pacific Growth Fund, since operations commenced).
Transactions in futures contracts are executed through futures commission
merchants ('FCMs'), who receive brokerage commissions for their services. The
Funds' procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates or brokerage affiliates of Schroder Capital or GE Management, are
similar to those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the Funds and subject to the review of
each board, Mitchell Hutchins or a Sub-Adviser may cause a Fund to purchase and
sell portfolio securities through brokers who provide that Fund with research,
analysis, advice and similar services. In return for such services, the Funds
may pay to those brokers a higher commission than may be charged by other
brokers, provided that Mitchell Hutchins or the Sub-Adviser determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of Mitchell Hutchins or the
Sub-Adviser, as applicable, to that Fund and its other clients, and that the
total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For the fiscal period March 25, 1997
(commencement of operations) to October 31, 1997, Schroder Capital directed
$882,017 in Asia Pacific Growth Fund's portfolio transactions to brokers chosen
because they provided research services, for which Asia Pacific Growth Fund paid
$4,678 in commissions. For the fiscal year ended October 31, 1997, Schroder
Capital directed none of Emerging Markets Equity Fund's portfolio transactions
to brokers chosen for research services. For the fiscal year ended October 31,
1997, GE Investment Management directed none of Global Equity Fund's portfolio
transactions
41
<PAGE>
to brokers chosen research services. For the fiscal year ended October 31, 1997,
Mitchell Hutchins directed none of Global Income Fund's portfolio transactions
to brokers chosen for research services.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins or the applicable Sub-Adviser seeks best execution. Although
Mitchell Hutchins and the Sub-Adviser may receive certain research or execution
services in connection with these transactions, Mitchell Hutchins and the
Sub-Advisers will not purchase securities at a higher price or sell securities
at a lower price than would otherwise be paid if no weight was attributed to the
services provided by the executing dealer. Moreover, Mitchell Hutchins and the
Sub-Advisers will not enter into any explicit soft dollar arrangements relating
to principal transactions and will not receive in principal transactions the
types of services that could be purchased for hard dollars. Mitchell Hutchins or
a Sub-Adviser may engage in agency transactions in OTC equity and debt
securities in return for research and execution services. These transactions are
entered into only in compliance with procedures ensuring that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services. These procedures include Mitchell Hutchins or the Sub-Adviser
receiving multiple quotes from dealers before executing the transactions on an
agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins or a Sub-Adviser in advising other funds or accounts and,
conversely, research services furnished to Mitchell Hutchins or a Sub-Adviser by
brokers or dealers in connection with other funds or accounts that either of
them advises may be used in advising the Funds. Information and research
received from brokers or dealers will be in addition to, and not in lieu of, the
services required to be performed by Mitchell Hutchins under the Advisory
Contracts or the Sub-Advisers under the Sub-Advisory Contracts.
Investment decisions for a Fund and for other investment accounts managed
by Mitchell Hutchins or by a Sub-Adviser are made independently of each other in
light of differing considerations for the various accounts. However, the same
investment decision may occasionally be made for a Fund and one or more of such
accounts. In such cases, simultaneous transactions are inevitable. Purchases or
sales are then averaged as to price and allocated between that Fund and such
other account(s) as to amount according to a formula deemed equitable to the
Fund and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Funds
are concerned, or upon their ability to complete their entire order, in other
cases it is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Funds.
The Funds will not purchase securities that are offered in underwritings in
which PaineWebber or an affiliate of a Sub-Adviser is a member of the
underwriting or selling group, except pursuant to procedures adopted by each
board pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the spread or commission paid in connection with such a
purchase be reasonable and fair, the purchase be at not more than the public
offering price prior to the end of the first business day after the date of the
public offering and that PaineWebber or any affiliate thereof or an affiliate of
a Sub-Adviser not participate in or benefit from the sale to the Funds.
As of October 31, 1997, Global Equity Fund owned common stock issued by the
following company which is a regular broker-dealer for the Fund: Morgan Stanley,
Dean Witter, Discover & Co. ($4,289,901). In addition, the Fund had entered
into repurchase agreement transactions as of that date with State Street Bank &
Trust Company ($10,510,000), also one of its regular broker-dealers.
As of October 31, 1997, Emerging Markets Equity Fund had entered into a
repurchase agreement transaction with the following regular broker-dealer for
the Fund: State Street Bank & Trust Company ($269,000).
As of October 31, 1997, Asia Pacific Growth Fund had entered into
repurchase agreement transactions with the following regular broker-dealers for
the Fund: Union Bank of Switzerland ($2,740,000); State Street Bank & Trust
Company ($1,010,000); and Dresdner Bank AG ($2,740,000).
As of October 31, 1997, Global Income Fund had entered into repurchase
agreement transactions with the following regular broker-dealers for the Fund:
Citicorp Securities Inc. ($20,000,000); Dresdner Securities (USA) Inc.
($1,466,000); Salomon Brothers Inc. ($13,247,000); J.P. Morgan Inc.
($15,368,000); and Union Bank of Switzerland ($30,000,000).
42
<PAGE>
PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year.
The Funds' respective portfolio turnover rates for the fiscal periods shown
were:
<TABLE>
<S> <C>
ASIA PACIFIC GROWTH FUND
Fiscal Period March 25, 1997 (commencement of operations) to October 31, 1997............................. 13%
EMERGING MARKETS EQUITY FUND
Fiscal Year ended October 31, 1997........................................................................ 87%
Four Months ended October 31, 1996........................................................................ 22%
Fiscal Year ended June 30, 1996........................................................................... 69%
GLOBAL EQUITY FUND
Fiscal Year ended October 31, 1997........................................................................ 86%
Two Months ended October 31, 1996......................................................................... 3%
Fiscal Year ended August 31, 1996......................................................................... 33%
GLOBAL INCOME FUND
Fiscal Year ended October 31, 1997........................................................................ 172%
Fiscal Year ended October 31, 1996........................................................................ 126%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual fund
and thus take advantage of the reduced sales charges indicated in the table of
sales charges for Class A shares in the Prospectus. The sales charge payable on
the purchase of Class A shares of the Funds and Class A shares of such other
funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An 'eligible group of related Fund investors' can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account
('IRA');
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Funds among related accounts at the offering price
applicable to
43
<PAGE>
the total of (1) the dollar amount then being purchased plus (2) an amount equal
to the then-current net asset value of the purchaser's combined holdings of
Class A Fund shares and Class A shares of any other PaineWebber mutual fund. The
purchaser must provide sufficient information to permit confirmation of his or
her holdings, and the acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the sole shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Shareholders will
receive at least 60 days' notice of any termination or material modification of
the exchange offer, except no notice need be given if, under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a Fund temporarily delays or ceases the sales of its shares
because it is unable to invest amounts effectively in accordance with the Fund's
investment objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each Fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
it is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of its net asset value during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal.
The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ('NYSE') is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a Fund's portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of 'dollar cost averaging.' When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure a profit or protect against loss in declining markets.
Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the 'Initial Account Balance' (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional shares of a Fund concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 20th of a month for monthly,
quarterly, 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, with the tax consequences
described under 'Dividends & Taxes' in the Prospectus. If periodic withdrawals
continually
44
<PAGE>
exceed reinvested dividends and other distributions, a shareholder's investment
may be correspondingly reduced. A shareholder may change the amount of the
systematic withdrawal or terminate participation in the systematic withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to PaineWebber or PFPC Inc. ('Transfer Agent').
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days after
written instructions with signatures guaranteed are received by the Transfer
Agent. Shareholders may request the forms needed to establish a systematic
withdrawal plan from their PaineWebber investment executives, correspondent
firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed Class A shares of a Fund may reinstate their
account without a sales charge. Shareholders may exercise the reinstatement
privilege by notifying the Transfer Agent of such desire and forwarding a check
for the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised; however, a loss arising out of a
redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in 'Dividends & Taxes' in the
Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SERVICE MARK);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED) (RMA)(REGISTERED)
Shares of PaineWebber mutual funds (each a 'PW Fund' and, collectively, the
'PW Funds') are available for purchase through the RMA Resource Accumulation
Plan ('Plan') by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ('RMA accountholders'). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under 'Valuation of Shares') after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of 'dollar cost
averaging.' By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices.
45
<PAGE>
However, over time, dollar cost averaging generally results in a lower average
original investment cost than if an investor invested a larger dollar amount in
a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities held
in the account;
o comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
o automatic 'sweep' of uninvested cash into the RMA accountholder's choice
of one of the six RMA money market funds-RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New York
Municipal Money Fund. Each money market fund attempts to maintain a
stable price per share of $1.00, although there can be no assurance that
it will be able to do so. Investments in the money market funds are not
insured or guaranteed by the U.S. government;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $100 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the Transfer Agent and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset values per share of the two classes,
as of the close of business on the first Business Day (as defined under
'Valuation of Shares') of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
46
<PAGE>
'preferential dividends' under the Code and that the conversion of shares does
not constitute a taxable event. If the conversion feature ceased to be
available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not continue to be
met.
VALUATION OF SHARES
Each Fund determines its net asset value per share separately for each
class of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday through
Friday when the NYSE is open. Currently the NYSE is closed on the observance of
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued
at the last sale price on the day the securities are valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins or the Sub-Adviser as the primary
market. Securities traded in the OTC market and listed on the Nasdaq Stock
Market ('Nasdaq') are valued at the last trade price on Nasdaq at 4:00 p.m.,
Eastern time; other OTC securities are valued at the last bid price available
prior to valuation (other than short-term investments that mature in 60 days or
less which are valued as described further below). Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the applicable board. It
should be recognized that judgment often plays a greater role in valuing thinly
traded securities and lower rated bonds than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available. The amortized cost method of valuation generally is
used to value debt obligations with 60 days or less remaining until maturity,
unless the applicable board determines that this does not represent fair value.
All investments quoted in foreign currency will be valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by a Fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of regular trading on
the NYSE. Occasionally events affecting the value of foreign investments and
such exchange rates occur between the time at which they are determined and the
close of trading on the NYSE, which events would not be reflected in the
computation of a Fund's net asset value on that day. If events materially
affecting the value of such investments or currency exchange rates occur during
such time period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the applicable board. The
foreign currency exchange transactions of the Funds conducted on a spot (that
is, cash) basis are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market. Under normal market conditions this
rate differs from the prevailing exchange rate by less than one-tenth of one
percent due to the costs of converting from one currency to another.
47
<PAGE>
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ('Performance Advertisements') represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ('Standardized
Return') used in each Fund's Performance Advertisements are calculated according
to the following formula:
<TABLE>
<C> <S>
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or 'T' in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge (4.0% for Global Income Fund) is deducted from the
initial $1,000 payment and, for Class B and Class C shares, the applicable
contingent deferred sales charge imposed on a redemption of Class B or Class C
shares held for the period is deducted. All dividends and other distributions
are assumed to have been reinvested at net asset value.
The Funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ('Non-Standardized Return'). The Funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following tables show performance information for each class of the
Funds' shares outstanding for the periods indicated. All returns for periods of
more than one year are expressed as an average return.
ASIA PACIFIC GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Inception** to October 31, 1997:
Standardized Return*.................. (31.55 )% (32.21 )% (29.35 )%
Non-Standardized Return............... (23.82 )% (28.64 )% (28.64 )%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for Class A, Class B and Class C shares was March 25,
1997. There were no Class Y shares outstanding as of October 31, 1997.
48
<PAGE>
EMERGING MARKETS EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. (5.25)% (6.39)% (2.61)% (0.53)%
Non-Standardized Return............... (0.74)% (1.39)% (1.61)% (0.53)%
Inception** to October 31, 1997:
Standardized Return*.................. (7.27)% (1.76)% (6.85)% (5.90)%
Non-Standardized Return............... (6.13)% 0.34% (6.85)% (5.90)%
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for each Class of shares is as follows: Class A--January
19, 1994, Class B-- December 5, 1995, Class C--January 19, 1994, and Class
Y--January 19, 1994.
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. 3.98 % 3.05 % 7.05 % 9.31 %
Non-Standardized Return............... 8.87 % 8.05 % 8.05 % 9.31 %
Five Years ended October 31, 1997:
Standardized Return*.................. 11.00 % N/A N/A N/A
Non-Standardized Return............... 12.04 % N/A N/A N/A
Inception** to October 31, 1997:
Standardized Return*.................. 9.90 % 7.38 % 9.74 % 10.92 %
Non-Standardized Return............... 10.76 % 8.63 % 9.74 % 10.92 %
</TABLE>
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the period.
** The inception date for each Class of shares is as follows: Class A--November
14, 1991, Class B-- August 25, 1995, and Class C--May 10, 1993 and Class
Y--May 10, 1993.
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Standardized Return*.................. 0.75% (0.89 )% 3.73% 5.20%
Non-Standardized Return............... 4.99% 4.11 % 4.48% 5.20%
Five years ended October 31, 1997:
Standardized Return*.................. 5.78% 5.49 % 6.10% 6.91%
Non-Standardized Return............... 6.64% 5.81 % 6.10% 6.91%
Inception** to October 31, 1997:
Standardized Return*.................. 6.55% 9.08 % 5.82% 7.43%
Non-Standardized Return............... 7.23% 9.08 % 5.82% 7.43%
</TABLE>
(Footnotes on next page)
49
<PAGE>
(Footnotes from previous page)
- ------------------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4%. All Standardized Return figures for Class
B and Class C shares reflect deduction of the applicable contingent deferred
sales charges imposed on a redemption of shares held for the period.
** The inception date for each Class of shares is as follows: Class A--July 1,
1991, Class B--March 20, 1987, and Class C-- July 2, 1992 and Class Y--August
26, 1991.
YIELD. Yields used in Global Income Fund's Performance Advertisements are
calculated by dividing the Fund's interest income attributable to a Class of
shares for a 30-day period ('Period'), net of expenses attributable to such
Class, by the average number of shares of such Class entitled to receive
dividends during the Period and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the maximum offering price per
share (in the case of Class A shares) or the net asset value per share (in the
case of Class B and Class C shares) at the end of the Period. Yield quotations
are calculated according to the following formula:
a-b 6
YIELD = 2 [( --- +1 ) -1 ]
cd
<TABLE>
<S> <C>
where: a = interest earned during the Period attributable to a Class of shares
b = expenses accrued for the Period attributable to a Class of shares (net of
reimbursements)
c = the average daily number of shares of a Class outstanding during the Period that were
entitled to receive dividends
d = the maximum offering price per share (in the case of Class A shares) or the net asset
value per share (in the case of Class B and Class C shares) on the last day of the
Period.
</TABLE>
Except as noted below, in determining interest income earned during the
Period (variable 'a' in the above formula), Global Income Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the Fund, interest earned during the Period is then determined by totalling
the interest earned on all debt obligations. For purposes of these calculations,
the maturity of an obligation with one or more call provisions is assumed to be
the next date on which the obligation reasonably can be expected to be called
or, if none, the maturity date. With respect to Class A shares, in calculating
the maximum offering price per share at the end of the Period (variable 'd' in
the above formula) the Fund's current maximum 4% initial sales charge on Class A
shares is included. For the 30-day period ended October 31, 1997, the yields for
its Class A shares, Class B shares, Class C shares and Class Y shares were
6.06%, 5.52%, 5.63%, and 6.66% respectively.
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ('Lipper'), CDA Investment
Technologies, Inc. ('CDA'), Wiesenberger Investment Companies Service
('Wiesenberger'), Investment Company Data, Inc. ('ICD') or Morningstar Mutual
Funds ('Morningstar'), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ('S&P 500'), the Dow Jones Industrial Average, the
International Finance Corporation Global Total Return Index, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman
Brothers Government/Corporate Bond Index, other similar Lehman Brothers indices
or components thereof, 30-year and 10-year U.S. Treasury bonds, the Morgan
Stanley Capital International Perspective Indices, the Morgan Stanley Capital
International Energy Sources Index, the Standard & Poor's Oil Composite Index,
the Morgan Stanley Capital International World Index (including Asia Pacific
regional indices), the Salomon Brothers Non-U.S. Dollar Index, the Salomon
Brothers Non-U.S. World Government
50
<PAGE>
Bond Index, the Salomon Brothers World Government Index, other similar Salomon
Brothers indices or components thereof and changes in the Consumer Price Index
as published by the U.S. Department of Commerce. The Funds also may refer in
such materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Funds and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST AND THE
KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in graphic
form.
The Funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. 'Compounding' refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested in
additional Fund shares, any future income or capital appreciation of a Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the value
of a Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(Registered) Money Markets. In comparing the
Funds' performance to CD performance, investors should keep in mind that bank
CDs are insured in whole or in part by an agency of the U.S. government and
offer fixed principal and fixed or variable rates of interest, and that bank CD
yields may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Funds are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the Funds generally have longer maturities than most CDs and
may reflect interest rate fluctuations for longer term debt securities. An
investment in any Fund involves greater risks than an investment in either a
money market fund or a CD.
51
<PAGE>
Each Fund may also compare its performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
<TABLE>
<CAPTION>
S&P 500 TR U.S. LT Gvt TR U.S. 30 Day Tbill TR U.S. Inflation
---------- -------------- -------------------- --------------
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $10,327 $9,851
1927 $15,347 $11,739 $10,649 $9,646
1928 $22,040 $11,751 $11,028 $9,553
1929 $20,185 $12,153 $11,552 $9,572
1930 $15,159 $12,719 $11,830 $8,994
1931 $8,590 $12,044 $11,957 $8,138
1932 $7,886 $14,073 $12,072 $7,300
1933 $12,144 $14,062 $12,108 $7,337
1934 $11,969 $15,472 $12,128 $7,486
1935 $17,674 $16,243 $12,148 $7,710
1936 $23,669 $17,464 $12,170 $7,803
1937 $15,379 $17,504 $12,207 $8,045
1938 $20,165 $18,473 $12,205 $7,821
1939 $20,082 $19,570 $12,208 $7,784
1940 $18,117 $20,761 $12,208 $7,859
1941 $16,017 $20,955 $12,216 $8,622
1942 $19,275 $21,629 $12,248 $9,423
1943 $24,267 $22,080 $12,291 $9,721
1944 $29,060 $22,702 $12,332 $9,926
1945 $39,649 $25,139 $12,372 $10,149
1946 $36,449 $25,113 $12,416 $11,993
1947 $38,529 $24,454 $12,478 $13,073
1948 $40,649 $25,285 $12,580 $13,426
1949 $48,287 $26,916 $12,718 $13,184
1950 $63,601 $26,932 $12,870 $13,948
1951 $78,875 $25,873 $13,063 $14,767
1952 $93,363 $26,173 $13,279 $14,898
1953 $92,439 $27,125 $13,521 $14,991
1954 $141,084 $29,075 $13,638 $14,916
1955 $185,614 $28,699 $13,852 $14,972
1956 $197,783 $27,096 $14,193 $15,400
1957 $176,457 $29,117 $14,639 $15,866
1958 $252,975 $27,342 $14,864 $16,145
1959 $283,219 $26,725 $15,303 $16,387
1960 $284,549 $30,407 $15,711 $16,629
1961 $361,060 $30,703 $16,045 $16,741
1962 $329,545 $32,818 $16,483 $16,946
1963 $404,685 $33,216 $16,997 $17,225
1964 $471,388 $34,381 $17,598 $17,430
1965 $530,081 $34,625 $18,289 $17,765
1966 $476,737 $35,889 $19,159 $18,361
1967 $591,038 $32,594 $19,966 $18,920
1968 $656,415 $32,509 $21,005 $19,814
1969 $600,590 $30,860 $22,388 $21,024
1970 $624,653 $34,596 $23,849 $22,179
1971 $714,058 $39,173 $24,895 $22,924
1972 $849,559 $41,400 $25,851 $23,706
1973 $725,003 $40,942 $27,643 $25,792
1974 $533,110 $42,725 $29,855 $28,939
1975 $731,443 $46,653 $31,588 $30,969
1976 $905,842 $54,470 $33,193 $32,458
1977 $840,766 $54,095 $34,893 $34,656
1978 $895,922 $53,458 $37,398 $37,784
1979 $1,061,126 $52,799 $41,279 $42,812
1980 $1,405,137 $50,715 $45,917 $48,120
1981 $1,336,161 $51,657 $52,671 $52,421
1982 $1,622,226 $72,507 $58,224 $54,451
1983 $1,987,451 $72,979 $63,347 $56,518
1984 $2,111,991 $84,274 $69,586 $58,753
1985 $2,791,168 $110,371 $74,960 $60,968
1986 $3,306,709 $137,446 $79,580 $61,657
1987 $3,479,675 $133,716 $83,929 $64,376
1988 $4,064,583 $146,650 $89,257 $67,221
1989 $5,344,555 $173,215 $98,728 $70,345
1990 $5,174,990 $183,924 $104,286 $74,640
1991 $6,755,922 $219,420 $110,121 $76,927
1992 $7,274,115 $237,092 $113,982 $79,159
1993 $8,000,785 $280,339 $117,284 $81,334
1994 $8,105,379 $258,556 $121,862 $83,510
1995 $11,139,184 $340,436 $128,681 $85,630
1996 $13,709,459 $337,265 $135,381 $88,475
1997 $18,272,762 $390,736 $142,496 $90,092
</TABLE>
The chart is shown for illustrative purposes only and does not represent any
Fund's performance. These returns consist of income and capital appreciation (or
depreciation) and should not be considered an indication or guarantee of future
investment results. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in certain markets from
time to time. Stocks are measured by the S&P 500, an unmanaged weighted index
comprising 500 widely held common stock and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged and
are not available for investment.
- ------------------
Source: Ibbotson Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex
A. Sinquefield).
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1925 to 1997, stocks beat all
other traditional asset classes. A $10,000 investment in the S&P 500 grew to
$18,272,762, significantly more than any other investment.
TAXES
In order to continue to qualify for treatment as a RIC under the Code, each
Fund must distribute to its shareholders for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income, net short-term capital gains and net gains from certain foreign currency
transactions) ('Distribution Requirement') and must meet several additional
requirements. For each Fund, these requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other
52
<PAGE>
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ('Income Requirement');
(2) at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer. If a
Fund failed to qualify for treatment as a RIC for any taxable year, it would be
taxed as an ordinary corporation on its taxable income for that year (even if
that income was distributed to its shareholders) and all distributions out of
its earnings and profits would be taxable to its shareholders, as dividends
(that is, ordinary income).
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back as
a taxable distribution.
Dividends and interest received, and gains realized, by a Fund on foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions (collectively 'foreign taxes') that would
reduce the yield and/or total return on its securities. However, tax conventions
between certain countries and the United States may reduce or eliminate foreign
taxes and many foreign countries do not impose taxes on capital gains in respect
of investments by foreign investors. If more than 50% of the value of a Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, it will be eligible to, and may, file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign taxes
paid by it. Pursuant to the election, the Fund would treat those taxes as
dividends paid to its shareholders and each shareholder would be required to (1)
include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) treat his or her share of those taxes
and of any dividend paid by the Fund that represents income from foreign or U.S.
possessions sources as his or her own income from those sources, and (3) either
deduct the foreign taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in calculating
the foreign tax credit against his or her federal income tax. If a Fund makes
this election, it will report to its shareholders, shortly after each taxable
year, their respective shares of the foreign taxes paid by the Fund on its
income from foreign countries and U.S. possession sources.
Each Fund will be subject to a nondeductible 4% excise tax ('Excise Tax')
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Each Fund may invest in the stock of 'passive foreign investment companies'
('PFICs') if such stock is a permissible investment. A PFIC is a foreign
corporation--other than a 'controlled foreign corporation' (i.e., a foreign
corporation of which, on any day during its taxable year, more than 50% of the
total voting power of its
53
<PAGE>
voting stock or the total value of all of its stock is owned, directly,
indirectly, or constructively, by 'U.S. shareholders,' defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which a Fund is U.S. shareholder (effective for their
taxable years beginning November 1, 1998)--that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a Fund will be subject to
federal income tax on a portion of any 'excess distribution' received on the
stock of a PFIC or of any gain from disposition of such stock (collectively
'PFIC income'), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC as
a 'qualified electing fund' ('QEF'), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(the excess of net long-term capital gain over net short-term capital
loss)--which may have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax--even if those earnings and
gain are not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain of
its requirements.
Effective for their taxable years beginning November 1, 1998, each Fund may
elect to 'mark to market' its stock in any PFIC. 'Marking-to-market,' in this
context, means including in ordinary income each taxable year the excess, if
any, of the fair market value of a PFIC's stock over a Fund's adjusted basis
therein as of the end of that year. Pursuant to the election, a Fund also would
be allowed to deduct (as an ordinary, not capital, loss) the excess, if any, of
its adjusted basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market gains with
respect to that stock included by the Fund for prior taxable years. A Fund's
adjusted basis in each PFIC's stock with respect to which it has made this
election will be adjusted to reflect the amounts of income included and
deductions taken under the election. Regulations proposed in 1992 would have
provided a similar election with respect to the stock of certain PFIC's.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the amount,
character and timing of recognition of the gains and losses a Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts derived by a Fund with respect
to its business of investing in securities or foreign currencies, will qualify
as permissible income under the Income Requirement.
A Fund may acquire zero coupon or other securities issued with original
issue discount or Treasury Inflation-Protection Securities ('TIPS'), on which
principal is adjusted based on changes in the Consumer Price Index. A Fund must
include in its gross income the portion of the original issue discount
(including the amount of any principal increases on TIPS) that accrues on such
securities during the taxable year, even if the Fund receives no corresponding
payment on them during the year. Because a Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued original issue discount, to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from the Fund's cash
assets or from the proceeds of sales of portfolio securities, if necessary. The
Fund may realize capital gains or losses from those sales, which would increase
or decrease its investment company taxable income and/or net capital gain.
OTHER INFORMATION
Each Trust is an entity of the type commonly known as a 'Massachusetts
business trust.' Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the Fund
or its Trust. However, each Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust or the Fund and requires that
notice of such disclaimer be given in
54
<PAGE>
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.
Prior to November 1, 1995, the name of Emerging Markets Equity Fund was
'Mitchell Hutchins/Kidder Peabody Emerging Markets Equity Fund.' Prior to
February 13, 1995, the name of the Fund was 'Kidder, Peabody Emerging Markets
Equity Fund.' Prior to November 10, 1995, the Fund's Class C shares were called
'Class B' shares, and the Fund's Class Y shares were called 'Class C'shares. New
Class B shares were not offered prior to December 5, 1995.
Prior to August 25, 1995, the name of Global Equity Fund was 'Mitchell
Hutchins/Kidder, Peabody Global Equity Fund.' Prior to February 13, 1995, the
name of the Fund was 'Kidder, Peabody Global Equity Fund.' Prior to November 10,
1995, the Fund's Class B shares were known as 'Class E' shares and its Class C
shares were known as 'Class B' shares, and the Fund's Class Y shares were known
as 'Class C' shares.
Prior to November 10, 1995, Global Income Fund's Class C shares were known
as 'Class D' shares, and the Fund's Class Y shares were known as 'Class C'
shares.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of
its expenses (in addition to service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the Transfer Agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for Asia Pacific Growth Fund, Emerging Markets
Equity Fund and Global Equity Fund. Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, serves as independent accountants for Global
Income Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for its last fiscal year (or
period) is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors or independent accountants appearing therein are
incorporated herein by this reference.
55
<PAGE>
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 a
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future; Baa. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; BA. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
lowest degree of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation rated
BB is less vulnerable to nonpayment than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation; B. An obligation rated B is
more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the
A-1
<PAGE>
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 commitments on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
R. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
[This page intentionally left blank]
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY A FUND OR ITS DISTRIBUTOR. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY ANY
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Other Strategies Using Derivative
Instruments.................................. 17
Trustees and Officers; Principal Holders of
Securities................................... 25
Investment Advisory and Distribution
Arrangements................................. 33
Portfolio Transactions......................... 41
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 43
Conversion of Class B Shares................... 46
Valuation of Shares............................ 47
Performance Information........................ 48
Taxes.......................................... 52
Other Information.............................. 54
Financial Statements........................... 55
Appendix....................................... A-1
</TABLE>
(Copyright)1998 PaineWebber Incorporated
PaineWebber
Asia Pacific
Growth Fund
PaineWebber
Emerging Markets
Equity Fund
PaineWebber
Global Equity Fund
PaineWebber
Global Income Fund
----------------------------------------
Statement of Additional Information
March 1, 1998
----------------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (filed herewith)
PaineWebber Emerging Markets Equity Fund
Included in Part A of the Registration Statement:
Financial Highlights for one Class A, Class C and Class Y
share of the Fund for the year ended October 31, 1997, for
the four months ended October 31, 1996, for each of the two
years in the period ended June 30, 1996 and for the period
January 19, 1994 (commencement of operations) to June 30,
1994.
Financial Highlights for one Class B share of the Fund for
the year ended October 31, 1997, for the four months ended
October 31, 1996 and for the period December 5, 1995
(commencement of offering) to June 30, 1996.
Included in Part B of the Registration Statement through
incorporation by reference from the Annual Report to Shareholders,
previously filed with the Securities and Exchange Commission through
EDGAR on December 30, 1997, (Accession No. 0000890567-97-000003).
Portfolio of Investments at October 31, 1997.
Statement of Assets and Liabilities at October 31, 1997.
Statement of Operations for the year ended October 31, 1997.
Statement of Changes in Net Assets for the year ended
October 31, 1997, for the four months ended October 31, 1996
and the year ended June 30, 1996
Notes to Financial Statements
Financial Highlights for one Class A, Class C and Class Y
share of the Fund for the year ended October 31, 1997, for
the four months ended October 31, 1996, for each of the two
years in the period ended June 30, 1996 and for the period
January 19, 1994 (commencement of operations) to June 30,
1994.
Financial Highlights for one Class B share of the Fund for
the year ended October 31, 1997, for the four months ended
October 31, 1996 and for the period December 5, 1995
(commencement of offering) to June 30, 1996.
Report of Ernst & Young LLP, Independent Auditors, dated
December 19, 1997
(b) Exhibits:
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Amended and Restated By-Laws (filed herewith)
(3) Voting Trust Agreement - None
(4) Instruments defining the rights of the holders of Registrant's shares
of beneficial interest 1/
(5) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Sub-Advisory Agreement (filed herewith)
C-1
<PAGE>
(6) (a) Distribution Contract for Class A Shares 3/
(b) Distribution Contract for Class B Shares 3/
(c) Distribution Contract for Class C Shares 3/
(d) Distribution Contract for Class Y Shares 3/
(e) Exclusive Dealer Agreement with respect to Class A Shares 3/
(f) Exclusive Dealer Agreement with respect to Class B Shares 3/
(g) Exclusive Dealer Agreement with respect to Class C Shares 3/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 3/
(7) Bonus, profit sharing or pension plans - none
(8) Custody Contract (filed herewith)
(9) Transfer Agency Services and Shareholder Services Agreement (filed
herewith)
(10) Opinion and consent of counsel (filed herewith)
(11) Consent of Ernst & Young LLP (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Purchase Agreement (filed herewith)
(14) Model Retirement Plan - none
(15) (a) Shareholder Servicing and Distribution Plan 2/
(b) Amendment to Shareholder Servicing and Distribution Plan
effective December 16, 1994 2/
(c) Shareholder Servicing Agreement 2/
(d) Distribution Related Services Agreement 2/
(16) Schedule for computation of performance quotations 3/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 4/
- -------------------------------
1/ Incorporated by reference from Articles IV, V, VI, VII, and VIII of
Registrant's Amended and Restated Declaration of Trust, and from
Articles II and XI of Registrant's Amended and Restated By-Laws.
2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on November 1, 1995.
3/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on October 31, 1996.
4/ Incorporated by reference from Post-Effective Amendment No. 11 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on August 30, 1996.
C-2
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Shareholders as of
Title of Class February 17, 1998
-------------- -----------------
<S> <C>
Shares of Beneficial Interest, par value $0.001
per share
PaineWebber Emerging Markets Equity Fund
Class A Shares 924
Class B Shares 160
Class C Shares 625
Class Y Shares 294
</TABLE>
Item 27. Indemnification
Section 4.2 of Article IV of the Registrant's Declaration of Trust
provides that no Trustee, officer, employee or agent of the Trust shall be
liable to the Trust, its shareholders, or to any shareholder, Trustee,
officer, employee, or agent thereof for any action or failure to act
(including without limitation the failure to compel in any way any former or
acting Trustee to redress any breach of trust) except for his or her own bad
faith, willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Section 4.3(a) of Article IV of the Registrant's Declaration of Trust
provides that the appropriate series of the Registrant will indemnify its
Trustees and officers to the fullest extent permitted by law against all
liability and against all expenses reasonably incurred or paid by such
Trustees and officers in connection with any claim, action, suit or proceeding
in which such Trustee or officer becomes involved as a party or otherwise by
virtue of his or her being or having been a Trustee or officer and against
amounts paid or incurred by him or her in the settlement thereof.
Additionally, Section 4.3(b) of Article IV provides that no such person shall
be indemnified (i) where such person is liable to the Trust, a series thereof
or the shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office, (ii) where such person has been finally adjudicated not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Trust, or a series thereof, or (iii) in the event of a
settlement or other disposition not involving a final adjudication as provided
in (ii) above resulting in a payment by a Trustee or officer, unless there has
been a determination by the court of other body approving the settlement or
other disposition or based upon a review of readily available facts by vote of
a majority of the non-interested Trustees or written opinion of independent
legal counsel, that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Section 4.3(c) of Article IV
further provides that the rights of indemnification may be insured against by
policies maintained by the Trust. Section 4.4 of Article IV provides that no
Trustee shall be obligated to give any bond or other security for the
performance of any of his or her duties hereunder.
Section 4.6 of Article IV provides that each Trustee, officer or
employee of the Trust or a series thereof shall, in the performance of his or
her duties, be fully and completely justified and protected with regard to any
act or any failure to act resulting from reliance in good faith upon the books
of account or other records of the Trust or a series thereof, upon an opinion
of counsel, or upon reports made to the Trust or a series thereof by any of
its officers or employees or by the Investment Adviser, the Administrator, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or
other experts or consultants selected with reasonable care by the Trustees,
officers or employees of the Trust, regardless of whether such counsel or
expert may also be a Trustee.
C-3
<PAGE>
Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that
Mitchell Hutchins shall not be liable for any error of judgment or mistake of
law or for any loss suffered by any series of the Registrant in connection
with the matters to which the Contract relates, except for a loss resulting
from the willful misfeasance, bad faith, or gross negligence of Mitchell
Hutchins in the performance of its duties or from its reckless disregard of
its obligations and duties under the Contract. Section 13 of the Contract
provides that the Trustees shall not be liable for any obligations of the
Trust or any series under the Contract and that Mitchell Hutchins shall look
only to the assets and property of the Registrant in settlement of such right
or claim and not to the assets and property of the Trustees.
Section 9 of the current Sub-Investment Advisory provides that
Schroder Capital Management International Inc. shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the Agreement relates, except for a loss
resulting from the willful misfeasance, bad faith, or gross negligence of
Schroder Capital Management International Inc. in the performance of its
duties or from its reckless disregard of its obligations and duties under the
Agreement. Section 6 of the Agreement also provides that the Trustees shall
not be liable for any obligations of the Trust under the Agreement and that
Mitchell Hutchins and Schroder Capital Management International Inc. shall
look only to the assets and property of the Trust in settlement of such right
or claim and not to the assets and property of the Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling
persons against all liabilities arising from any alleged untrue statement of
material fact in the Registration Statement or from any alleged omission to
state in the Registration Statement a material fact required to be stated in
it or necessary to make the statements in it, in light of the circumstances
under which they were made, not misleading, except insofar as liability arises
from untrue statements or omissions made in reliance upon and in conformity
with information furnished by Mitchell Hutchins to the Trust for use in the
Registration Statement; and provided that this indemnity agreement shall not
protect any such persons against liabilities arising by reason of their bad
faith, gross negligence or willful misfeasance; and shall not inure to the
benefit of any such persons unless a court of competent jurisdiction or
controlling precedent determines that such result is not against public policy
as expressed in the Securities Act of 1933. Section 9 of each Distribution
Contract also provides that Mitchell Hutchins agrees to indemnify, defend and
hold the Trust, its officers and Trustees free and harmless of any claims
arising out of any alleged untrue statement or any alleged omission of
material fact contained in information furnished by Mitchell Hutchins for use
in the Registration Statement or arising out of an agreement between Mitchell
Hutchins and any retail dealer, or arising out of supplementary literature or
advertising used by Mitchell Hutchins in connection with the Contract.
Section 10 of each Distribution Contract contains provisions similar
to Section 13 of the Investment Advisory and Administration Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of the relevant Distribution Contract with respect to
PaineWebber Incorporated ("PaineWebber").
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to Trustees, officers and
controlling persons of the Trust, pursuant to the foregoing provisions or
otherwise, the Trust has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Trust of expenses incurred or paid by a Trustee, officer or controlling
person of the Trust in connection with the successful defense of any action,
suit or proceeding or payment pursuant to any insurance policy) is asserted
against the Trust by such Trustee, officer or controlling person in connection
with the securities being registered, the Trust will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
C-4
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
(a) Mitchell Hutchins Asset Management Inc. Mitchell Hutchins, a
Delaware corporation, is a registered investment adviser and
is a wholly owned subsidiary of PaineWebber which is, in
turn, a wholly owned subsidiary of PaineWebber Group Inc.
Mitchell Hutchins is primarily engaged in the investment
advisory business. Information as to the officers and
directors of Mitchell Hutchins is included in its Form ADV,
as filed with the Securities and Exchange Commission
(registration number 801-13219) and is incorporated herein
by reference.
(b) Schroder Capital Management International Inc. Schroder
Capital Management International Inc. ("Schroder Capital"),
a New York corporation, is the investment sub-adviser for
PaineWebber Emerging Markets Equity Fund. Schroder Capital
is a registered investment adviser and is primarily engaged
in the investment advisory business. Schroder Capital is a
wholly owned indirect subsidiary of Schroders plc, the
London Stock Exchange listed holding company parent of a
large worldwide group of banks and financial services
companies (referred to as the "Schroder Group") with
associated companies and branch and representative offices
located worldwide. Information regarding the officers and
directors of Schroder Capital is included in its Form ADV,
as filed with the Securities and Exchange Commission
(registration number 801-15834) and is incorporated herein
by reference.
Item 29. Principal Underwriters
(a) Mitchell Hutchins serves as principal underwriter and/or
investment adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's
shares. The directors and officers of Mitchell Hutchins,
their principal business addresses, and their positions and
offices with Mitchell Hutchins are identified in its Form
ADV, as filed with the Securities and Exchange Commission
(registration number 801-13219). The directors and officers
of PaineWebber, their principal business addresses, and
their positions and offices with PaineWebber are identified
in its Form ADV, as filed with the Securities and Exchange
Commission (registration number 801-7163). The foregoing
information is hereby incorporated herein by reference. The
information set forth below is
C-5
<PAGE>
furnished for those directors and officers of Mitchell
Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the
principal business address of each person named is 1285
Avenue of the Americas, New York, NY 10019.
<TABLE>
<CAPTION>
Positions and Office With Positions and Offices With Underwriter or
Name Registrant Exclusive Dealer
---- ---------- ----------------
<S> <C> <C>
Margo N. Alexander Trustee and President President, Chief Executive Officer and Director
of Mitchell Hutchins; Executive Vice President
and Director of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment Strategist
and Member of the Investment Policy Committee of
PaineWebber
Ann E. Moran Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General Counsel
of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of Operations
and Control of Mitchell Hutchins
Victoria E. Schonfeld Vice President Managing Director and General Counsel of
Mitchell Hutchins
Paul H. Schubert Vice President and Treasurer First Vice President and Director of the Mutual
Fund Finance Division of Mitchell Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
Mark A. Tincher Vice President Managing Director and Chief Investment Officer -
U.S. Equity Investments of Mitchell Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate Counsel of
Secretary Mitchell Hutchins
Ian W. Williams Vice President and Assistant Vice President and Manager of the Mutual Fund
Treasurer Finance Division of Mitchell Hutchins
</TABLE>
(c) None.
Item 30. Location of Accounts and Records
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in
the physical possession of Registrant's investment adviser and administrator,
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New York 10019. All
other accounts, books and documents required by Rule 31a-1 are maintained in
the physical possession of Registrant's transfer agent and custodians.
Item 31. Management Services
Not applicable.
C-6
<PAGE>
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of its shareholders for
the purpose of voting upon the question of removal of a trustee or trustees of
Registrant when requested in writing to do so by the holders of at least 10%
of Registrant's outstanding shares and, in connection with the meeting, to
comply with the provisions of Section 16(c) of the 1940 Act relating to
communications with the shareholders of certain common-law trusts.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report
to shareholders upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 25th day of February, 1998.
PAINEWEBBER INVESTMENT TRUST II
By: /s/ Dianne E. O'Donnell
-----------------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee February 25, 1998
- ------------------------------------ (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman February 25, 1998
- ------------------------------------ of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee February 25, 1998
- ------------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee February 25, 1998
- ------------------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee February 25, 1998
- ------------------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee February 25, 1998
- ------------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee February 25, 1998
- ------------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee February 25, 1998
- ------------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee February 25, 1998
- ------------------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer (Chief February 25, 1998
- ------------------------------------ Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (Continued)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
<PAGE>
PAINEWEBBER INVESTMENT TRUST II
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) Amended and Restated Declaration of Trust (filed herewith)
(2) Amended and Restated By-Laws (filed herewith)
(3) Voting Trust Agreement - None
(4) Instruments defining the rights of the holders of Registrant's shares
of beneficial interest 1/
(5) (a) Investment Advisory and Administration Contract (filed herewith)
(b) Sub-Advisory Agreement (filed herewith)
(6) (a) Distribution Contract for Class A Shares 3/
(b) Distribution Contract for Class B Shares 3/
(c) Distribution Contract for Class C Shares 3/
(d) Distribution Contract for Class Y Shares 3/
(e) Exclusive Dealer Agreement with respect to Class A Shares 3/
(f) Exclusive Dealer Agreement with respect to Class B Shares 3/
(g) Exclusive Dealer Agreement with respect to Class C Shares 3/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 3/
(7) Bonus, profit sharing or pension plans - none
(8) Custody Contract (filed herewith)
(9) Transfer Agency Services and Shareholder Services Agreement (filed
herewith)
(10) Opinion and consent of counsel (filed herewith)
(11) Consent of Ernst & Young LLP (filed herewith)
(12) Financial statements omitted from prospectus - none
(13) Purchase Agreement (filed herewith)
(14) Model Retirement Plan - none
(15) (a) Shareholder Servicing and Distribution Plan 2/
(b) Amendment to Shareholder Servicing and Distribution Plan
effective December 16, 1994 2/
(c) Shareholder Servicing Agreement 2/
(d) Distribution Related Services Agreement 2/
(16) Schedule for computation of performance quotations 3/
(17) and (27) Financial Data Schedule (filed herewith)
(18) Plan pursuant to Rule 18f-3 4/
- -------------------------------
1/ Incorporated by reference from Articles IV, V, VI, VII, and VIII of
Registrant's Amended and Restated Declaration of Trust, and from
Articles II and XI of Registrant's Restated By-Laws.
2/ Incorporated by reference from Post-Effective Amendment No. 8 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on November 1, 1995.
3/ Incorporated by reference from Post-Effective Amendment No. 13 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on October 31, 1996.
4/ Incorporated by reference from Post-Effective Amendment No. 11 to the
registration statement of PaineWebber Investment Trust II, SEC File
No. 33-50716, filed on August 30, 1996.
<PAGE>
Exhibit No. 1
- -------------------------------------------------------------------------------
AMENDED AND RESTATED DECLARATION OF TRUST
OF
PAINEWEBBER INVESTMENT TRUST II
Dated February 11, 1998
- -------------------------------------------------------------------------------
<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
OF
PAINEWEBBER INVESTMENT TRUST II
THE DECLARATION OF TRUST of PaineWebber Investment Trust II is made
on the 10th day of August, 1992 and amended and restated this 11th day of
February, 1998 by the parties signing hereto, as trustees (such persons and
any successors to such persons and additional persons, so long as they
continue in or be admitted to office in accordance with the terms of this
Declaration of Trust, and all other persons who at the time in question have
been duly elected or appointed as trustees in accordance with the terms of
this Declaration of Trust and are then in office, are hereinafter referred to
as the "Trustees").
W I T N E S S E T H
WHEREAS, the Trustees desire to form a Massachusetts business trust
for the investment and reinvestment of funds contributed thereto; and
WHEREAS, it is proposed that the beneficial interest in the trust
assets shall be divided into transferable shares of beneficial interest which,
in the discretion of the Trustees, may be divided into separate series as
hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold IN
TRUST, all money and property contributed to the trust fund and manage and
dispose of the same for the benefit of the holders, from time to time, of the
shares of beneficial interest issued hereunder and subject to the provisions
hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is
"PaineWebber Investment Trust II."
Section 1.2. Definitions. Wherever they are used herein, the
following terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust,
to the contract described in Section 3.3 hereof.
(b) "By-laws" means the By-laws referred to in Section 2.8
hereof, as from time to time amended.
(c) "Class" means any class of Shares within a Series, which
Class is or has been established within such Series in accordance with the
provisions of Article V.
<PAGE>
(d) The terms "Commission" and "Interested Person", have the
meanings given them in the 1940 Act. Except as otherwise defined by the
Trustees in conjunction with the establishment of any Series of Shares, the
term "vote of a majority of the Shares outstanding and entitled to vote" shall
have the same meaning as the term "vote of a majority of the outstanding
voting securities" given it in the 1940 Act.
(e) "Custodian" means any Person other than the Trust who
has custody of any Trust Property as required by ss.17(f) of the 1940 Act, but
does not include a system for the central handling of securities described in
said ss.17(f).
(f) "Declaration" means this Declaration of Trust as amended
from time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein," and "hereunder" shall be deemed to refer to this
Declaration rather than exclusively to the article or section in which such
words appear.
(g) "Distributor" means the party, other than the Trust, to
the contract described in Section 3.1 hereof.
(h) The "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
(i) "Fund" or "Funds" individually or collectively means the
separate Series of Shares of the Trust, together with the assets and
liabilities assigned thereto.
(j) "His" shall include the feminine and neuter, as well as
the masculine, genders.
(k) "Investment Adviser" means the party, other than the
Trust, to the contract described in Section 3.2 hereof.
(l) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(m) "Series" individually or collectively means the separate
Series of the Trust as may be established and designated from time to time by
the Trustees pursuant to Section 5.11 hereof. Unless the context otherwise
requires, the term "Series" shall include Classes into which Shares of the
Trust, or of a Series, may be divided from time to time.
(n) "Shareholder" means record owner of Outstanding Shares.
(o) "Shares" means the equal proportionate units of interest
into which the beneficial interest in the Trust shall be divided from time to
time, including the Shares of any and all Series or of any Class within any
Series (as the context may require) which may be established by the Trustees,
and includes fractions of Shares as well as whole Shares. "Outstanding" Shares
means those Shares shown from time to time on the books of the Trust or its
Transfer Agent as then issued and outstanding, but shall not include Shares
which have been redeemed or repurchased by the Trust and which are at the time
held in the treasury of the Trust.
-2-
<PAGE>
(p) "Transfer Agent" means any Person other than the Trust
who maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.
(q) "Trust" means PaineWebber Investment Trust II.
(r) "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust or the Trustees.
(s) The "Trustees" means the persons who have signed this
Declaration, so long as they shall continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly elected,
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to
such persons in their capacities as trustees hereunder.
ARTICLE II
TRUSTEES
Section 2.1. General Powers. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without The Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Declaration, the presumption shall be in
favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed
as limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 2.2. Investments. The Trustees shall have the power:
(a) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and appropriate to the conduct
of such operations.
(b) To invest in, hold for investment, or reinvest in,
securities, including common and preferred stocks; warrants; bonds,
debentures, bills, time notes and all other evidences of indebtedness;
negotiable or non-negotiable instruments; government securities, including
securities of any state, municipality or other political subdivision thereof,
or any governmental or
-3-
<PAGE>
quasi-governmental agency or instrumentality; and money market instruments
including bank certificates of deposit, finance paper, commercial paper,
bankers' acceptances and all kinds of repurchase agreements, of any
corporation, company, trust, association, firm or other business organization
however established, and of any country, state, municipality or other
political subdivision, or any governmental or quasi-governmental agency or
instrumentality.
(c) To acquire (by purchase, subscription or otherwise), to
hold, to trade in and deal in, to acquire any rights or options to purchase or
sell, to sell or otherwise dispose of, to lend and to pledge any such
securities, to enter into repurchase agreements and forward foreign currency
exchange contracts, to purchase and sell options on securities or indices,
futures contracts and options on futures contracts of all descriptions and to
engage in all types of hedging and risk management transactions.
(d) To exercise all rights, powers and privileges of
ownership or interest in all securities and repurchase agreements included in
the Trust Property, including the right to vote thereon and otherwise act with
respect thereto and to do all acts for the preservation, protection,
improvement and enhancement in value of all such securities and repurchase
agreements.
(e) To acquire (by purchase, lease or otherwise) and to
hold, use, maintain, develop and dispose of (by sale or otherwise) any
property, real or personal, including cash, and any interest therein.
(f) To borrow money and in this connection issue notes or
other evidence of indebtedness; to secure borrowings by mortgaging, pledging
or otherwise subjecting as security the Trust Property; and to endorse,
guarantee, or undertake the performance of any obligation or engagement of any
other Person and to lend Trust Property.
(g) To aid by further investment any corporation, company,
trust, association or firm, any obligation of or interest in which is included
in the Trust Property or in the affairs of which the Trustees have any direct
or indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee
or become surety on any or all of the contracts, stocks, bonds, notes,
debentures and other obligations of any such corporation, company, trust,
association or firm.
(h) To enter into a plan of distribution and any related
agreements whereby the Trust may finance directly or indirectly any activity
which is primarily intended to result in sale of Shares.
(i) To adopt on behalf of the Trust, any Series or Class of
any Series thereof.
(j) In general to carry on any other business in connection
with or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of
any object or the furtherance of any power hereinbefore set forth, either
alone or in association with others, and to do every other act or thing
incidental or appurtenant to or arising out of or connected with the aforesaid
business or purposes, objects or powers.
-4-
<PAGE>
The foregoing clauses shall be construed both as objects and powers,
and, the foregoing enumeration of specific powers shall not be held to limit
or restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations
maturing before the possible termination of the Trust, nor shall the Trustees
be limited by any law limiting the investments which may be made by
fiduciaries.
Section 2.3. Legal Title. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name
of one or more of the Trustees, or in the name of the Trust or any Series of
the Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees
in the Trust Property shall vest automatically in each Person who may
hereafter become a Trustee. Upon the termination of the term of office,
resignation, removal or death of a Trustee he shall automatically cease to
have any right, title or interest in any of the Trust Property, and the right,
title and interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed
and delivered.
Section 2.4. Issuance and Repurchase of Shares. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer and otherwise deal in Shares and,
subject to the provisions set forth in Articles VI and VII and Section 5.11
hereof, to apply to any such repurchase, redemption, retirement, cancellation
or acquisition of Shares any funds or property of the Trust, whether capital
or surplus or otherwise, to the full extent now or hereafter permitted by the
laws of the Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees
or agents of the Trust the doing of such things, and the execution of such
instruments either in the name of this Trust or any Series of the Trust or the
names of the Trustee, or otherwise as the Trustees may deem expedient, to the
same extent as such delegation is permitted by the 1940 Act.
Section 2.6. Collection and Payment. Subject to Section 5.11 hereof,
the Trustees shall have power to collect all property due to the Trust; to pay
all claims, including taxes, against the Trust Property; to prosecute, defend,
compromise or abandon any claims relating to the Trust Property; to foreclose
any security interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases, agreements and
other instruments.
Section 2.7. Expenses. Subject to Section 5.11 hereof, the Trustees
shall have the power to incur and pay any expenses which in the opinion of the
Trustees are necessary or incidental to carry out any of the purposes of this
Declaration, and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees.
-5-
<PAGE>
Section 2.8. Manner of Acting; By-laws. Except as otherwise provided
herein or in the By-laws, any action to be taken by the Trustees may be taken
by a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone
circuit or similar communications equipment by means of which all persons
participating in the meeting can hear each other, or by written consents of
the entire number of Trustees then in office. The Trustees may adopt By-laws
not inconsistent with this Declaration to provide for the conduct of the
business of the Trust and may amend or repeal such By-laws to the extent such
power is not reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of
the By-laws, the Trustees may by resolution appoint a committee consisting of
less than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of
such committee were the acts of all the Trustees then in office, with respect
to the institution, prosecution, dismissal, settlement, review or
investigation of any action, suit or proceeding which shall be pending or
threatened to be brought before any court, administrative agency or other
adjudicatory body.
Section 2.9. Miscellaneous Powers. Subject to Section 5.11 hereof,
the Trustees shall have the power to: (a) employ or contract with such Persons
as the Trustees may deem desirable for the transaction of the business of the
Trust or any Series thereof; (b) enter into joint ventures, partnerships and
any other combinations or associations; (c) remove Trustees or fill vacancies
in or add to their number, elect and remove such officers and appoint and
terminate such agents or employees as they consider appropriate, and appoint
from their own number, and terminate, any one or more committees which may
exercise some or all of the power and authority of the Trustees as the
Trustees may determine; (d) purchase, and pay for out of Trust Property or the
Property of the appropriate Series of the Trust, insurance policies insuring
the Shareholders, Trustees, officers, employees, agents, investment advisers,
administrators distributors, selected dealers or independent contractors of
the Trust against all claims arising by reason of holding any such position or
by reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would have
the power to indemnify such Person against such liability; (e) establish
pension, profit-sharing, share purchase, and other retirement, incentive and
benefit plans for any Trustees, officers, employees and agents of the Trust;
(f) to the extent permitted by law, indemnify any person with whom the Trust
or any Series thereof has dealings, including the Investment Adviser,
Administrator, Distributor, Transfer Agent and selected dealers, to such
extent as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the fiscal year of
the Trust or any Series thereof and the method by which its accounts shall be
kept; and (i) adopt a seal for the Trust, but the absence of such seal shall
not impair the validity of any instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions. Except in transactions not
permitted by the 1940 Act or rules and regulations adopted by the Commission,
the Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust or any Series thereof to, any
Trustee or officer of the Trust or any firm of which any such Trustee or
officer is a member acting as principal, or have any such dealings with the
Investment Adviser,
-6-
<PAGE>
Distributor or transfer agent or with any Interested Person of such Person;
and the Trust or a Series thereof may employ any such Person, or firm or
company in which such Person is an Interested Person, as broker, legal
counsel, registrar, transfer agent, dividend disbursing agent or custodian
upon customary terms.
Section 2.11. Number of Trustees. The number of Trustees shall
initially be three (3), and thereafter shall be such number as shall be fixed
from time to time by a resolution adopted by a majority of the Trustees;
provided, however, that the number of Trustees shall in no event be less than
one (1) nor more than fifteen (15).
Section 2.12. Election and Term. Except for the Trustees named herein
or appointed to fill vacancies pursuant to Section 2.14 hereof, the Trustees
shall be elected by the Shareholders owning of record a plurality of the
Shares voting at a meeting of Shareholders on a date fixed by the Trustees.
Except in the event of resignation or removals pursuant to Section 2.13
hereof, each Trustee shall hold office until such time as less than a majority
of the Trustees holding office have been elected by Shareholders. In such
event the Trustees then in office will call a Shareholders' meeting for the
election of Trustees. Except for the foregoing circumstances, the Trustees
shall continue to hold office and may appoint successor Trustees.
Section 2.13. Resignation and Removal. Any Trustee may resign his
trust (without the need for any prior or subsequent accounting) by an
instrument in writing signed by him and delivered to the other Trustees and
such resignation shall be effective upon such delivery, or at a later date
according to the terms of the instrument. Any of the Trustees may be removed
(provided the aggregate number of Trustees after such removal shall not be
less than one) with cause, by the action of a majority of the remaining
Trustees or by action of a majority of the outstanding Shares of beneficial
interest of the Trust at a meeting duly called pursuant to Section 5.10 hereof
by the Shareholders for such purpose. Upon the resignation or removal of a
Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of the resigning or removed Trustee. Upon the incapacity or death of
any Trustee, his legal representative shall execute and deliver on his behalf
such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.14. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of his death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform
the duties of the office of a Trustee. No such vacancy shall operate to annul
the Declaration or to revoke any existing agency created pursuant to the terms
of the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject (but only
after the Trust's initial registration statement under the Securities Act of
1933 shall have become effective) to the provisions of Section 16(a) of the
1940 Act, the remaining Trustees shall fill such vacancy by the appointment of
such other person as they in their discretion shall see fit, made by a written
instrument signed by a majority of the Trustees then in office. Any such
appointment shall not become effective, however, until the person named in the
written instrument of appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms, of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by
-7-
<PAGE>
reason of retirement, resignation or increase in the number of Trustees,
provided that such appointment shall not become effective prior to such
retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.14, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. A written
instrument certifying the existence of such vacancy signed by a majority of
the Trustees in office shall be conclusive evidence of the existence of such
vacancy.
Section 2.15. Delegation of Power to Other Trustees. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted
to the Trustees under this Declaration except as herein otherwise expressly
provided.
ARTICLE III
CONTRACTS
Section 3.1. Distribution Contract. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
distribution contract or contracts providing for the sale of the Shares to net
the Trust or the applicable Series of the Trust not less than the amount
provided for in Section 7.1 of Article VII hereof, whereby the Trustees may
either agree to sell the Shares to the other party to the contract or appoint
such other party their sales agent for the Shares, and in either case on such
terms and conditions, if any, as may be prescribed in the By-laws, and such
further terms and conditions as the Trustees may in their discretion determine
not inconsistent with the provisions of this Article III or of the By-laws;
and such contract may also provide for the repurchase of the Shares by such
other party as agent of the Trustees.
Section 3.2. Advisory or Management Contract. The Trustees may in
their discretion from time to time enter into an investment advisory contract
or, if the Trustees establish multiple Series, separate investment advisory
contracts with respect to each Series, whereby the other party to such
contract or contracts shall undertake to manage the investment operations of
one or more Series of the Trust and the compositions of the portfolios of the
Trust or such Series, including the purchase, retention and disposition of
securities and other assets, in accordance with the investment objectives,
policies and restrictions of the Trust or such Series and all upon such terms
and conditions as the Trustees may in their discretion determine, including
the grant of authority to such other party to determine what securities shall
be purchased or sold by the Trust or the applicable Series of the Trust and
what portion of its assets shall be uninvested, which authority shall include
the power to make changes in the investments of the Trust or any Series.
Section 3.3. Administration and Service Agreements. The Trustees may
in their discretion from time to time enter into an administration contract
or, if the Trustees establish multiple Series or Classes separate
administration contracts with respect to each Series or Class, whereby the
other party to such contract shall undertake to manage the business affairs of
the
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<PAGE>
Trust or of a Series of the Trust and furnish the Trust or a Series or
Class thereof office facilities, and shall be responsible for the ordinary
clerical, bookkeeping and recordkeeping services at such office facilities,
and other facilities and services, if any, and all upon such terms and
conditions as the Trustees may in their discretion determine. The Trustees may
in their discretion also from time to time enter into service agreements with
respect to one or more Classes of Shares whereby the other parties to such
service agreements will provide distribution services and support services
upon such terms and conditions as the Trustees in their discretion may
determine.
Section 3.4. Affiliations of Trustees or Officers, Etc. The fact that:
(i) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or for
any parent or affiliate of any organization, with which a contract of
the character described in Sections 3.1, 3.2 or 3.3 above or for
services as Custodian, Transfer Agent or disbursing agent or for
related services may have been or may hereafter be made, or that any
such organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or
other organization with which a contract of the character described
in Sections 3.1, 3.2 or 3.3 above or for services as Custodian,
Transfer Agent or disbursing agent or for related services may have
been or may hereafter be made also has any one or more of such
contracts with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests, shall not affect the validity of any such contract or
disqualify any Shareholder, Trustee or officer of the Trust from
voting upon or executing the same or create any liability or
accountability to the Trust or its Shareholders.
Section 3.5. Compliance with 1940 Act. Any contract entered into
pursuant to Sections 3.1 or 3.2 shall be consistent with and subject to the
requirements of Section 15 of the 1940 Act (including any other applicable Act
of Congress hereafter enacted) with respect to its continuance in effect, its
termination and the method of authorization and approval of such contract or
renewal thereof.
ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs
of the Trust. No Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever to any Person, other than to the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising
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from bad faith, willful misfeasance, gross negligence or reckless disregard of
his duties with respect to such Person; and all such Persons shall look solely
to the Trust Property, or to the Property of one or more specific Series of
the Trust if the claim arises from the conduct of such Trustee, officer,
employee or agent with respect to only such Series, for satisfaction of claims
of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability.
The Trust shall indemnify and hold each Shareholder harmless from and against
all claims and liabilities, to which such Shareholder may become subject by
reason of his being or having been a shareholder, and shall reimburse such
Shareholder out of the Trust Property for all legal and other expenses
reasonably incurred by him in connection with any such claim or liability. The
indemnification and reimbursement required by the preceding sentence shall be
made only out of assets of the one or more Series whose Shares were held by
said Shareholder at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights accruing to a
shareholder under this Section 4.1 shall not impair any other right to which
such Shareholder may be lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel
in any way any former or acting Trustee to redress any breach of trust) except
for his own bad faith, willful misfeasance, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer or the Trust shall be indemnified by the Trust, or by one or
more Series thereof if the claim arises from his or her conduct with
respect to only such Series to the fullest extent permitted by law
against all liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits, or
proceedings (civil, criminal, or other, including appeals), actual or
threatened; and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid
in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
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(i) against any liability to the Trust, a Series
thereof or the Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office;
(ii) with respect to any matter as to which he
shall have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best interest of
the Trust or a Series thereof;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b) (ii) resulting in a payment by a Trustee or officer,
unless there has been a determination that such Trustee or officer
did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office:
(A) by the court or other body approving
the settlement or other disposition; or
(B) based upon a review of readily
available facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Non-interested Trustees acting
on the matter (provided that a majority of the
Non-interested Trustees then in office act on the matter) or
(y) written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee
or officer and shall inure to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing contained herein shall
affect any rights to indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph (a)
of this Section 4.3 may be advanced by the trust or a Series thereof prior to
final disposition thereof upon receipt of an undertaking by or on behalf of
the recipient to repay such amount if it is ultimately determined that he is
not entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient, or the Trust or
Series thereof shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Non-interested Trustees act
on the matter) or an independent legal counsel in a written opinion
shall determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that there
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is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who
(i) is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), and (ii) is not involved in the claim, action, suit or
proceeding.
Section 4.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust Instruments,
Etc. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust or a Series thereof
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered
to or on the order of the Trustees or of said officer, employee or agent.
Every obligation, contract, instrument, certificate, Share, other security of
the Trust or a Series thereof or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall be conclusively
presumed to have been executed or done by the executors thereof only in their
capacity as Trustees under this Declaration or in their capacity as officers,
employees or agents of the Trust or a Series thereof. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or a Series thereof or undertaking made or issued by the Trustees may
recite that the same is executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations of the Trust or a
Series thereof under any such instrument are not binding upon any of the
Trustees or Shareholders individually, but bind only the Trust Property or the
Trust Property of the applicable Series, and may contain any further recital
which they may deem appropriate, but the omission of such recital shall not
operate to bind the Trustees individually. The Trustees shall at all times
maintain insurance for the protection of the Trust Property or the Trust
Property of the applicable Series, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to
cover possible tort liability and such other insurance as the Trustees in
their sole judgment shall deem advisable.
Section 4.6. Reliance on Experts, Etc. Each Trustee, officer or
employee of the Trust or a Series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or a Series thereof, upon an opinion of
counsel, or upon reports made to the Trust or a Series thereof by any of its
officers or employees or by the Investment Adviser, the Administrator, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or
other experts or consultants selected with reasonable care by the Trustees,
officers or employees of the Trust, regardless of whether such counsel or
expert may also be a Trustee.
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ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest,
all of one class, except as provided in Section 5.11 hereof, par value $.001
per share. The number of shares of beneficial interest authorized hereunder is
unlimited. All Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall be
fully paid and non-assessable.
Section 5.2. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business
hereinbefore described are vested exclusively in the Trustees, and the
Shareholders shall have no interest therein other than the beneficial interest
conferred by their Shares, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the
Trust nor can they be called upon to share or assume any losses of the Trust
or suffer an assessment of any kind by virtue of their ownership of Shares.
The Shares shall be personal property giving only the rights specifically set
forth in this Declaration. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights, except as
the Trustees may determine with respect to any Series of Shares.
Section 5.3. Trust Only. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the Trustees
and each Shareholder from time to time. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment or any form of legal relationship other
than a trust. Nothing in this Declaration of Trust shall be construed to make
the Shareholders, either by themselves or with the Trustees, partners or
members of a joint stock association.
Section 5.4. Issuance of Shares. The Trustees in their discretion
may, from time to time without vote of the Shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times and on such
terms as the Trustees may deem best, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in connection with
the assumption of, liabilities) and businesses. In connection with any
issuance of Shares, the Trustees may issue fractional Shares and Shares held
in the treasury. The Trustees may from time to time divide or combine the
Shares of the Trust or, if the Shares be divided into Series, of any Series of
the Trust or of any Class thereof, into a greater or lesser number without
thereby changing the proportionate beneficial interests in the Trust or in the
Trust Property allocated or belonging to such Series or Class. Contributions
to the Trust or Series thereof may be accepted for, and Shares shall be
redeemed as, whole Shares and/or 1/1,000ths of a Share or integral multiples
thereof.
Section 5.5. Register of Shares. A register shall be kept at the
principal office of the Trust or an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers
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thereof. Such register shall be conclusive as to who are the holders of the
Shares and who shall be entitled to receive dividends or distributions or
otherwise to exercise or enjoy the rights of Shareholders. No Shareholder
shall be entitled to receive payment of any dividend or distribution, nor to
have notice given to him as herein or in the By-laws provided, until he has
given his address to the Transfer Agent or such other officer or agent of the
Trustees as shall keep the said register for entry thereon. It is not
contemplated that certificates will be issued for the Shares; however, the
Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their use.
Section 5.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with such
evidence of the genuineness of each such execution and authorization and of
other matters as may reasonably be required. Upon such delivery the transfer
shall be recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any transfer agent or
registrar nor any officer, employee or agent of the Trust shall be affected by
any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees of
the Transfer Agent, but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy
or incompetence, or other operation of law.
Section 5.7. Notices. Any and all notices to which any Shareholder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of record at
his last known address as recorded on the register of the Trust.
Section 5.8. Treasury Shares. Shares held in the treasury shall,
until resold pursuant to Section 5.4, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 5.9. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.12; (ii) with
respect to any investment advisory contract entered into pursuant to Section
3.2; (iii) with respect to termination of the Trust or a Series thereof as
provided in Section 8.2; (iv) with respect to any amendment of this
Declaration to the extent and as provided in Section 8.3; (v) with respect to
any merger, consolidation or sale of assets as provided in Section 8.4; (vi)
with respect to incorporation of the Trust to the extent and as provided in
Section 8.5; (vii) to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action, proceeding or claim
should or should not be brought or maintained derivatively or as a class
action on behalf of the Trust or a Series or Class thereof or the Shareholders
of any of them (provided, however, that a Shareholder of a
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specific Series or Class shall not be entitled to a derivative or class action
on behalf of any other Series or Class (or Shareholder of any other Series or
Class) of the Trust); (viii) with respect to any plan adopted pursuant to Rule
12b-1 (or any successor rule) under the 1940 Act, and related matters; and
(ix) with respect to such additional matters relating to the Trust as may be
required by this Declaration, the By-laws or any registration of the Trust as
an investment company under the 1940 Act with the Commission (or any successor
agency) or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled
to vote and each fractional Share shall be entitled to a proportionate
fractional vote. If separate Series of Shares are established, Shares shall be
voted by individual Series on any matter submitted to a vote of the
Shareholders of the Trust except as provided in Section 5.11(f) hereof. There
shall be no cumulative voting in the election of Trustees. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required by law, this Declaration or the By-laws to be taken by
Shareholders. The By-laws may include further provisions for Shareholders'
votes and meetings and related matters.
Section 5.10. Meetings of Shareholders. Meetings of the Shareholders
of the Trust may be called at any time by the President, and shall be called
by the President or the Secretary at the request, in writing or by resolution,
of a majority of the Trustees, or at the written request of the holder or
holders of ten percent (10%) or more of the total number of Shares then issued
and outstanding of the Trust entitled to vote at such meeting. Meetings of the
Shareholders of any Series or Class of the Trust shall be called by the
President or the Secretary at the written request of the holder or holders of
ten percent (10%) or more of the total number of Shares then issued and
outstanding of such Series or Class of the Trust entitled to vote at such
meeting. Any such request shall state the purpose of the proposed meeting.
Section 5.11. Series Designation. The Trustees, in their discretion,
may authorize the division of Shares into two or more Series, and may divide
the Shares or the Shares of any Series into two or more Classes, and the
different Series or Classes shall be established and designated, and the
variations in the relative rights and preferences as between the different
Series (and Classes thereof) shall be fixed and determined, by the Trustees;
provided, that all Shares shall be identical except that there may be
variations so fixed and determined between different Series (and Classes
thereof) as to investment objective, purchase price, right of redemption or
obligations to make payments, special and relative rights as to dividends and
on liquidation, reinvestment, exchange conversion rights, and conditions under
which the several Series shall have separate voting rights, all of which are
subject to the limitations set forth below. All references to Shares in this
Declaration shall be deemed to be Shares of any or all Series as the context
may require.
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If the Trustees shall divide Shares of any Series into two or more
Classes, the following provisions shall be applicable:
(a) The number of authorized Shares and the number of Shares of each
Series or Class that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously issued and
reacquired of any Series or Class thereof into one or more other Series (or
Classes within the same or one or more other Series) that may be established
and designated from time to time. The Trustees may hold as treasury shares (of
the same or some other Series or Class thereof), reissue for such
consideration and on such terms as they may determine, or cancel any Shares of
any Series or Class thereof reacquired by the Trust at their discretion from
time to time.
(b) All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable tax laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
one or more of the Series established and designated from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all Series for all purposes. No holder of
Shares of any Series shall have any claim on or right to any assets allocated
or belonging to any other Series.
(c) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series or Class or
Classes thereof and all expenses, costs, charges and reserves attributable to
that Series or Class or Classes thereof, and any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular Series or Class or Classes thereof
shall be allocated and charged by the Trustees to and among any one or more of
the Series or Class or Classes thereof established and designated from time to
time in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Series or Classes for all purposes. The Trustees shall
have full discretion, to the extent not inconsistent with the 1940 Act, to
determine which items are capital; and each such determination and allocation
shall be conclusive and binding upon the Shareholders. The assets of a
particular Series of the Trust shall, under no circumstances, be charged with
liabilities attributable to any other Series or Class of the Trust. All
persons extending credit to, or contracting with or having any claim against a
particular Series of the Trust shall look only to the assets of that
particular Series for payment of such credit, contract or claim.
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Shares of each Class of each Series shall bear the expenses of
payments under any agreements ("Special Class Agreements") entered into by or
on behalf of the Trust with organizations that provide for services to
beneficial owners of Shares of that Class. Expenses described in the preceding
sentence are sometimes referred to herein as "Special Class Expenses."
(d) The power of the Trustees to pay dividends and make distributions
shall be governed by Section 7.2 of this Declaration with respect to any one
or more Series or Classes which represents the interests in the assets of the
Trust immediately prior to the establishment of two or more Series or Classes.
With respect to any other Series or Class, dividends and distributions on
Shares of a particular Series or Class may be paid with such frequency as the
Trustees may determine, which may be daily or otherwise, pursuant to a
standing resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, to the holders of Shares of that Series or Class,
from such of the income and capital gains, accrued or realized, from the
assets belonging to that Series or Class, as the Trustees may determine, after
providing for actual and accrued liabilities belonging to that Series or Class
(including, without limitation the allocation to a Class of Special Class
expenses relating to that Class). All dividends and distributions on Shares of
a particular Series or Class shall be distributed pro rata to the Shareholders
of that series or Class in proportion to the number of Shares of that Series
or Class held by such Shareholders at the time of record established for the
payment of such dividends or distribution.
(e) Each Share of a Series of the Trust shall represent a beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
or Class shall be entitled to receive his pro rata share of distributions of
income and capital gains made with respect to such Series or Class. Upon
redemption of his Shares or indemnification for liabilities incurred by reason
of his being or having been a Shareholder of a Series, such Shareholder shall
be paid solely out of the funds and property of such Series of the Trust. Upon
liquidation or termination of a Series or Class of the Trust, Shareholders of
such Series shall be entitled to receive a pro rata share of the net assets of
such Series or Class. A Shareholder of a particular Series of the Trust shall
not be entitled to participate in a derivative or class action on behalf of
any other Series or the Shareholders of any other Series of the Trust.
(f) On each matter submitted to a vote of Shareholders, all Shares
shall be voted by individual Series, provided, however, that (a) when required
by the 1940 Act, Shares shall be voted in the aggregate and not by individual
Series; (b) to the extent that a matter affects only the interests of one
Class of a Series, then only the Shareholders of such Class shall be entitled
to vote thereon; and (c) to the extent that a matter affects more than one
Class or Series and the interests of each such Class or Series in the matter
are identical, then, subject to following paragraph, the Shares of all such
affected Classes or Series shall vote as a single class.
On any matter that pertains to any Special Class Agreement or to any
Special Class Expenses with respect to any Series, which matter is submitted
to a vote of Shareholders, only Shares of the Class of such Series shall be
entitled to vote except that to the extent said matter affects Shares of
another Class or Series, such other Shares shall also be entitled to vote.
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Except as otherwise provided in this Article V, the Trustees shall
have the power to determine the designations, preferences, privileges, payment
obligations, limitations and rights, including voting and dividend rights, of
each Class and Series of Shares.
The establishment and designation of any Series of Shares shall be
effective (i) upon the execution by a majority of the then Trustees of an
instrument setting forth such establishment and designation and the relative
rights, payment obligations, if any, and preferences of such Series, (ii) upon
the execution of an instrument in writing by an officer of the Trust pursuant
to a vote of a majority of the Trustees, or (iii) as otherwise provided in
such instrument. Each instrument referred to in this section shall have the
status of an amendment to this Declaration. Without limiting the authority of
the Trustees set forth in this Article V to establish and designate any
further Series or Classes, the Trustees have established and designated the
Series of Shares and Classes listed in Schedule A attached hereto and made a
part hereof.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
Section 6.1. Redemption of Shares. All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the Trust.
The Trust shall redeem the Shares of the Trust or any Series or Class
thereof at the price determined as hereinafter set forth, upon the
appropriately verified application of the record holder thereof (or upon such
other form of request as the Trustees may determine) at such office or agency
as may be designated from time to time for that purpose by the Trustees. The
Trustees may from time to time specify additional conditions, not inconsistent
with the 1940 Act, regarding the redemption of Shares in the Trust's then
effective prospectus under the Securities Act of 1933.
Section 6.2. Price. Shares shall be redeemed at their net asset value
determined as set forth in Section 7.1 hereof as of such time as the Trustees
shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be the net asset
value of such Shares next determined as set forth in Section 7.1 hereof after
receipt of such application.
Section 6.3. Payment. Payment of the redemption price of Shares of
the Trust or any Series or Class thereof shall be made in cash or in property
to the Shareholder at such time and in the manner, not inconsistent with the
1940 Act or other applicable laws, as may be specified from time to time in
the Trust's then effective prospectus under the Securities Act of 1933,
subject to the provisions of Section 6.4 hereof.
Section 6.4. Effect of Suspension of Determination of Net Asset
Value. If, pursuant to Section 6.9 hereof, the Trustees shall declare a
suspension of the determination of net asset value with respect to Shares of
the Trust or of any Series thereof, the rights of Shareholders (including
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those who shall have applied for redemption pursuant to Section 6.1 hereof but
who shall not yet have received payment) to have Shares redeemed and paid for
by the Trust or a Series or Class thereof shall be suspended until the
termination of such suspension is declared. Any record holder who shall have
his redemption right so suspended may, during the period of such suspension,
by appropriate written notice of revocation at the office or agency where
application was made, revoke any application for redemption not honored and
withdraw any certificates on deposit. The redemption price of Shares for which
redemption applications have not been revoked shall be the net asset value of
such Shares next determined as set forth in Section 7.1 after the termination
of such suspension, and payment shall be made within seven (7) days after the
date upon which the application was made plus the period after such
application during which the determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per share determined as of the time when the purchase or contract
of purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 7.1 hereof, provided payment is not made for
the Shares prior to the time as of which such net asset value is determined.
Section 6.6. Redemption of Shareholder's Interest. The Trustees, in
their sole discretion, may cause the Trust to redeem all of the Shares of one
or more Series held by any Shareholder if the value of such Shares held by
such Shareholder is less than the minimum amount established from time to time
by the Trustees.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding. If the Trustees shall, at any time
and in good faith, be of the opinion that direct or indirect ownership of
Shares or other securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify the Trust or any Series of the
Trust as a regulated investment company under the Internal Revenue Code, then
the Trustees shall have the power by lot or other means deemed equitable by
them (i) to call for redemption by any such Person a number, or principal
amount, of Shares or other securities of the Trust or any Series of the Trust
sufficient to maintain or bring the direct or indirect ownership of Shares or
other securities of the Trust or any Series of the Trust into conformity with
the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust or any Series of the Trust to
any Person whose acquisition of the Shares or other securities of the Trust or
any Series of the Trust in question would result in such disqualification. The
redemption shall be effected at the redemption price and in the manner
provided in Section 6.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as
the Trustees deem necessary to comply with the provisions of the Internal
Revenue Code, or to comply with the requirements of any other taxing
authority.
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Section 6.8. Reductions in Number of Outstanding Shares Pursuant to
Net Asset Value Formula. The Trust may also reduce the number of outstanding
Shares of the Trust or of any Series of the Trust pursuant to the provisions
of Section 7.3.
Section 6.9. Suspension of Right of Redemption. The Trust may declare
a suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New
York Stock Exchange is closed other than customary weekend and holiday
closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which
disposal by the Trust or a Series thereof of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust or a
Series thereof fairly to determine the value of its net assets, or (iv) during
any other period when the Commission may for the protection of Shareholders of
the Trust by order permit suspension of the right of redemption or
postponement of the date of payment or redemption; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (ii), (iii), or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the
close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment on
redemption until the Trust shall declare the suspension at an end, except that
the suspension shall terminate in any event on the first day on which said
stock exchange shall have reopened or the period specified in (ii) or (iii)
shall have expired (as to which in the absence of an official ruling by the
Commission, the determination of the Trust shall be conclusive). In the case
of a suspension of the right of redemption, a Shareholder may either withdraw
his request for redemption or receive payment based on the net asset value
existing after the termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
Section 7.1. Net Asset Value. The value of the assets of the Trust or
of any Series or Class of the Trust may be determined on the basis of the
amortized cost of such securities, by appraisal of the securities owned by the
Trust or any Series of the Trust, or by such other method as shall be deemed
to reflect the fair value thereof, determined in good faith by or under the
direction of the Trustees. From the total value of said assets, there shall be
deducted all indebtedness, interest, taxes, payable or accrued, including
estimated taxes on unrealized book profits, expenses and management charges
accrued to the appraisal date, net income determined and declared as a
distribution and all other items in the nature of liabilities which shall be
deemed appropriate, as incurred by or allocated to any Series or Class of the
Trust, including any Special Class Expenses allocable to a Class. The
resulting amount which shall represent the total net assets of the Trust or
Series or Class thereof shall be divided by the number of Shares of the Trust
or Series or Class thereof outstanding at the time and the quotient so
obtained shall be deemed to be the net asset value of the Shares of the Trust
or Series or Class thereof. The net asset value of the Shares shall be
determined at least once on each business day, as of the close of trading on
the New York Stock Exchange or as of such other time or times as the Trustees
shall determine. The power and duty to make the daily calculations may be
delegated by the Trustees
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to the Investment Adviser, the Administrator, the Custodian, the Transfer
Agent or such other Person as the Trustees by resolution may determine. The
Trustees may suspend the daily determination of net asset value to the extent
permitted by the 1940 Act.
Section 7.2. Distributions to Shareholders. The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
Series thereof such proportion of the net profits, surplus (including paid-in
surplus), capital, or assets of the Trust or such Series held by the Trustees
as they may deem proper. Such distributions may be made in cash or property
(including without limitation any type of obligations of the Trust or Series
or any assets thereof), and the Trustees may distribute ratably among the
Shareholders of the Trust or Series thereof additional Shares of the Trust or
Series thereof issuable hereunder in such manner, at such times, and on such
terms as the Trustees may deem proper. Such distributions may be among the
Shareholders of the Trust or Series thereof at the time of declaring a
distribution or among the Shareholders of the Trust or Series thereof at such
other date or time or dates or times as the Trustees shall determine. The
Trustees may in their discretion determine that, solely for the purposes of
such distributions, Outstanding Shares shall exclude Shares for which orders
have been placed subsequent to a specified time on the date the distribution
is necessary to pay the debts or expenses of the Trust or a Series thereof or
Class thereof or to meet obligations of the Trust or a Series or Class
thereof, or as they may deem desirable to use in the conduct of its affairs or
to retain for future requirements or extensions of the business. The Trustees
may adopt and offer to Shareholders such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem appropriate.
The Trustees may in their discretion determine that an account administration
fee or other similar charge may be deducted directly from the income and other
distributions paid on Shares to a Shareholder's account in each Series.
Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or a Series or Class thereof to avoid or reduce liability for
taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares. Subject to Section 5.11 hereof, the net
income of the Series of the Trust shall be determined in such manner as the
Trustees shall provide by resolution. Expenses of the Trust or of a Series
thereof, including the advisory or management fee, shall be accrued each day.
Each Class shall bear only expenses relating to its Shares and an allocable
share of Series expenses in accordance with such policies as may be
established by the Trustees from time to time and as are not inconsistent with
the provisions of this Declaration of Trust or of any applicable document
filed by the Trust with the Commission or of the Internal Revenue Code of
1986, as amended. Such net income may be determined by or under the direction
of the Trustees as of the close of trading on the New York Stock Exchange on
each day on which such market is open or as of such other time or times as the
Trustees shall determine, and, except as provided herein, all the net income
of any Series or Class of the Trust, as so determined, may be declared as a
dividend on the Outstanding Shares of such Series. If, for any reason, the net
income of any Series of the Trust determined at any time is a negative amount,
the Trustees shall have the power with respect to such Series (i) to offset
each Shareholder's pro rata share of such negative
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amount from the accrued dividend account of such Shareholder, or (ii) to
reduce the number of Outstanding Shares of such Series by reducing the number
of Shares in the account of such Shareholder by that number of full and
fractional Shares which represents the amount of such excess negative net
income, or (iii) to cause to be recorded on the books of the Trust an asset
account in the amount of such negative net income, which account may be
reduced by the amount, provided that the same shall thereupon become the
property of the Trust with respect to such Series and shall not be paid to any
Shareholder, of dividends declared thereafter upon the Outstanding Shares of
such Series on the day such negative net income is experienced, until such
asset account is reduced to zero; or (iv) to combine the methods described in
clauses (i) and (ii) and (iii) of this sentence, in order to cause the net
asset value per Share of such Series to remain at a constant amount per
Outstanding Share immediately after each such determination and declaration.
The Trustees shall also have the power to fail to declare a dividend out of
net income for the purpose of causing the net asset value per Share to be
increased to a constant amount. The Trustees shall have full discretion to
determine whether any cash or property received shall be treated as income or
as principal and whether any item of expense shall be charged to the income or
the principal account, and their determination made in good faith shall be
conclusive upon the Shareholders. In the case of stock dividends received, the
Trustees shall have full discretion to determine, in the light of the
particular circumstances, how much if any of the value thereof shall be
treated as income, the balance, if any, to be treated as principal. The
Trustees shall not be required to adopt, but may at any time adopt,
discontinue or amend the practice of maintaining the net asset value per Share
of a Series at a constant amount.
Section 7.4. Power to Modify Foregoing Procedures. Notwithstanding
any of the foregoing provisions of this Article VII, but subject to Section
5.11 hereof, the Trustees may prescribe, in their absolute discretion, such
other bases and times for determining the per Share net asset value of the
Shares of the Trust or a Series thereof or net income of the Trust or a Series
thereof, or the declaration and payment of dividends and distributions as they
may deem necessary or desirable. Without limiting the generality of the
foregoing, the Trustees may establish several Series of Shares in accordance
with Section 5.11, and declare dividends thereon in accordance with Section
5.11(d).
ARTICLE VIII
DURATION; TERMINATION OF TRUST OR A SERIES
OR A CLASS; AMENDMENT; MERGERS, ETC.
Section 8.1. Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article VIII.
Section 8.2. Termination of the Trust, a Series or a Class. (a) The
Trust or any Series or Class thereof may be terminated by (i) the affirmative
vote of the holders of not less than a majority of the Shares outstanding and
entitled to vote at any meeting of Shareholders of the Trust or the
appropriate Series or Class thereof or (ii) an instrument in writing signed by
a majority of the Trustees, stating that a majority of the Trustees has
determined that the continuation of the Trust or a Series or Class thereof is
not in the best interest of such Series or Class, the Trust or their
respective shareholders as a result of such factors or events adversely
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affecting the ability of such Series or the Trust to conduct its business and
operations in an economically viable manner. Such factors and events may
include the inability of a Series or Class or the Trust to maintain its assets
at an appropriate size, changes in laws or regulations governing the Series or
Class or the Trust or affecting assets of the type in which such Series or
Class or the Trust invests or economic developments or trends having a
significant adverse impact on the business or operations of such Series or the
Trust. Upon the termination of the Trust or the Series,
(i) The Trust or the Series shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of
the Trust or the Series and all of the powers of the Trustees under
this Declaration shall continue until the affairs of the Trust shall
have been wound up, including the power to fulfill or discharge the
contracts of the Trust or the Series, collect its assets, sell,
convey, assign, exchange, transfer or otherwise dispose of all or any
part of the remaining Trust Property or Trust Property allocated or
belonging to such Series to one or more persons at public or private
sale for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its
business; provided that any sale, conveyance, assessment, exchange,
transfer or other disposition of all or substantially all the Trust
Property or Trust Property allocated or belonging to such Series
shall require Shareholder approval in accordance with Section 8.4
hereof.
(iii) After paying or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities
and refunding agreements as they deem necessary for their protection,
the Trustees may distribute the remaining Trust Property or the
remaining property of the terminated Series, in cash or in kind or
partly each, among the Shareholders of the Trust or the Series
according to their respective rights. Nothing in this Declaration
shall preclude the Trustees from distributing such remaining proceeds
or assets so that holders of the Shares of a particular Class of the
Trust or any affected Series receive as their ratable distribution
shares solely of an analogous class, as determined by the Trustees,
of another trust, corporation, association or other organization.
(b) After termination of the Trust or the Series and distribution to
the Shareholders as herein provided, a majority of the Trustees (or an officer
of the Trust pursuant to a vote of a majority of the Trustees) shall execute
and lodge among the records of the Trust and file with the Office of the
Secretary of the Commonwealth of Massachusetts an instrument in writing
setting forth the fact of such termination, and the Trustees shall thereupon
be discharged from all further liabilities and duties with respect to the
Trust or the terminated Series, and the rights and interest of all
Shareholders of the Trust or the terminated Series shall thereupon cease.
Section 8.3. Amendment Procedure. (a) This Declaration may be amended
by a vote of the holders of a majority of the Shares outstanding and entitled
to vote or by any instrument in
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writing, without a meeting, signed by a majority of the Trustees and consented
to by the holders of a majority of the Shares outstanding and entitled to
vote. The Trustees may amend this Declaration without the vote or consent of
Shareholders if they deem it necessary to conform this Declaration to the
requirements of applicable federal or state laws or regulations or the
requirements of the regulated investment company provisions of the Internal
Revenue Code, but the Trustees shall not be liable for failing so to do. The
Trustees may also amend this Declaration without the vote or consent of
Shareholders if they deem it necessary or desirable to change the name of the
Trust or to make any other changes in the Declaration which do not materially
affect the rights of Shareholders hereunder.
(b) No amendment may be made under this Section 8.3 which would
change any rights with respect to any Shares of the Trust or Series thereof by
reducing the amount payable thereon upon liquidation of the Trust or Series
thereof or by diminishing or eliminating any voting rights pertaining thereto,
except with the vote or consent of the holders of a majority of the Shares of
the Trust or such Series outstanding and entitled to vote. Nothing contained
in this Declaration shall permit the amendment of this Declaration to impair
the exemption from personal liability of the Shareholders, Trustees, officers,
employees and agents of the Trust or to permit assessments upon Shareholders.
(c) Subject to the foregoing, any amendment shall be effective as
provided in the instrument containing the terms of such amendment or, if there
is no provision therein with respect to effectiveness, upon the execution of
such instrument and of a certificate (which may be a part of such instrument)
executed by a Trustee or officer to the effect that such amendment has been
duly adopted. Copies of the amendment to this Declaration shall be filed as
specified in Section 1 of Article X. A restated Declaration, integrating into
a single instrument all of the provisions of the Declaration which are then in
effect and operative, may be executed from time to time by a majority of the
Trustees and shall be effective upon filing as specified in Section 1 of
Article X.
Section 8.4. Merger, Consolidation and Sale of Assets. The Trust or
any Series thereof may merge or consolidate with any other corporation,
association, trust or other organization or may sell, lease or exchange all or
substantially all of the Trust Property or Trust Property allocated or
belonging to such Series, including its good will, upon such terms and
conditions and for such consideration when and as authorized at any meeting of
Shareholders called for the purpose by the affirmative vote of the holders of
a majority of the Shares of the Trust or such Series outstanding and entitled
to vote, or by an instrument or instruments in writing without a meeting,
consented to by the holders of a majority of the Shares of the Trust or such
Series, provided, however, that any such merger, consolidation, sale, lease or
exchange shall be deemed for all purposes to have been accomplished under and
pursuant to Massachusetts law.
Section 8.5. Incorporation. With the approval of the holders of a
majority of the Shares of the Trust or a Series thereof outstanding and
entitled to vote, the Trustees may cause to be organized or assist in
organizing a corporation or corporations under the laws of any jurisdiction or
any other trust, partnership, association or other organization to take over
all of the Trust Property or the Trust Property allocated or belonging to such
Series or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the
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Trust Property or the Trust Property allocated or belonging to such Series
to any such corporation, trust, association or organization in exchange for
the shares or securities thereof or otherwise, and to lend money to, subscribe
for the shares or securities of, and enter into any contracts with any such
corporation, trust, partnership, association or organization, or any
corporation, partnership, trust, association or organization in which the
Trust or such Series holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize
or assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organization or entities.
ARTICLE IX
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders
a written financial report of the transactions of the Trust, including
financial statements which shall at least annually be certified by independent
public accountants.
ARTICLE X
MISCELLANEOUS
Section 10.1. Execution and Filing. A copy of this Declaration and of
each amendment hereto shall be filed by the Trustees with the Secretary of the
Commonwealth of Massachusetts and the Boston City Clerk, as well as any other
governmental office where such filing may from time to time be required.
Anyone dealing with the Trust may rely on a certificate by an officer or
Trustee of the Trust as to whether or not any such amendments to this
Declaration have been made and as to any matters in connection with the Trust
hereunder, and with the same effect as if it were the original, may rely on a
copy certified by an officer or Trustee of the Trust to be a copy of this
Declaration or of any such amendments.
Section 10.2. Governing Law. This Declaration is executed by the
Trustees and delivered in The Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said State.
Section 10.3. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 10.4. Reliance by Third Parties. Any certificate executed by
an individual who, according to the records of the Trust appears to be a
Trustee hereunder, certifying (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any
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instrument or writing, (c) the form of any vote passed at a meeting of
Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of
the Trust, shall be conclusive evidence as to the matters so certified in
favor of any Person dealing with the Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any
of the remaining provisions of this Declaration or render invalid or improper
any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provisions in any other jurisdiction or any other provision of
this Declaration in any jurisdiction.
Section 10.6. The Trustees shall maintain a resident agent in The
Commonwealth of Massachusetts which agent shall initially be CT Corporation
System, 2 Oliver Street, Boston, Massachusetts 02109. The Trustees may
designate from time to time a successor resident in The Commonwealth of
Massachusetts.
Schedule A
Series of the Trust
PaineWebber Emerging Markets Equity Fund
Classes of Shares of Each Series
An unlimited number of shares of beneficial interest have been established by
the Board as Class A shares, Class B shares, Class C shares and Class Y shares
of each of the above Series. Each of the Class A shares, Class B shares, Class
C shares and Class Y shares of a Series represents interests in the assets of
only that Series and has the same preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of shares, except as provided in the
Trust's Declaration of Trust and as set forth below with respect to the Class
B shares of each Series:
1. Each Class B share, other than a share purchased through the
reinvestment of a dividend or a distribution with respect to the
Class B share, shall be converted automatically, and without any
action or choice on the part of the holder thereof, into
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Class A shares of the same Series, based on the relative net
asset value of each such class at the time of the calculation of
the net asset value of such class of shares on the date that is
the first Business Day (as defined in the Series' prospectus
and/or statement of additional information) of the month in
which the sixth anniversary of the issuance of such Class B
shares occurs (which, for the purpose of calculating the holding
period required for conversion, shall mean (i) the date on which
the issuance of such Class B shares occurred or (ii) for Class B
shares obtained through an exchange, the date on which the
issuance of the Class B shares of an eligible PaineWebber fund
occurred, if such shares were exchanged directly, or through a
series of exchanges for the Series' Class B shares (the
"Conversion Date")).
2. Each Class B share purchased through the reinvestment of a
dividend or a distribution with respect to the Class B shares
and the dividends and distributions on such shares shall be
segregated in a separate sub-account on the stock records of the
Series for each of the holders of record thereof. On any
Conversion Date, a number of the shares held in the sub-account
of the holder of record of the share or shares being converted,
calculated in accordance with the next following sentence, shall
be converted automatically, and without any action or choice on
the part of the holder thereof, into Class A shares of the same
Series. The number of shares in the holder's sub-account so
converted shall bear the same relation to the total number of
shares maintained in the sub-account on the Conversion Date as
the number of shares of the holder converted on the Conversion
Date pursuant to Paragraph 2(a) hereof bears to the total number
of Class B shares of the holder on the Conversion Date not
purchased through the automatic reinvestment of dividends or
distributions with respect to the Class B shares.
3. The number of Class A shares into which a Class B share is
converted pursuant to paragraphs 1 and 2 hereof shall equal the
number (including for this purpose fractions of a share)
obtained by dividing the net asset value per share of the Class
B shares for purposes of sales and redemptions thereof at the
time of the calculation of the net asset value on the Conversion
Date by the net asset value per share of the Class A shares for
purposes of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date.
4. On the Conversion Date, the Class B shares converted into Class
A shares will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof will cease
(except the right to receive declared but unpaid dividends to
the Conversion Date).
For purposes of Paragraph 1 above, the term "eligible PaineWebber fund"
includes any and all mutual funds for which PaineWebber Incorporated or
Mitchell Hutchins Asset Management Inc. serves as investment adviser that
offer shares with a contingent deferred sales charge imposed upon certain
redemptions of such shares and that are exchangeable with the Class B shares
of the Series.
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IN WITNESS WHEREOF, the undersigned, being the all the Trustees of
the Trust, have executed this Amended and Restated Declaration of Trust as of
the day and year first above written.
/s/ Margo N. Alexander /s/ Meyer Feldberg
- ----------------------------- -----------------------------
Margo N. Alexander Meyer Feldberg
/s/ E. Garrett Bewkes, Jr. /s/ George W. Gowen
- ----------------------------- -----------------------------
E. Garrett Bewkes, Jr. George W. Gowen
/s/ Richard Q. Armstrong /s/ Frederic V. Malek
- ----------------------------- -----------------------------
Richard Q. Armstrong Frederic V. Malek
/s/ Richard R. Burt /s/ Carl W. Schafer
- ----------------------------- -----------------------------
Richard R. Burt Carl W. Schafer
/s/ Mary C. Farrell
- -----------------------------
Mary C. Farrell
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Exhibit No. 2
BY-LAWS
OF
PAINEWEBBER INVESTMENT TRUST II
ARTICLE I
DEFINITIONS
The terms "By-laws", "Commission", "Custodian", "Declaration", "1940
Act", "Series", "Shareholder", "Shares" "Transfer Agent", "Trust", "Trust
Property" and "Trustees" have the respective meanings given them in the
Declaration of Trust of PaineWebber Investment Trust II as amended and
restated on February 11, 1998 and amended from time to time thereafter.
ARTICLE II
SHAREHOLDERS
Section 1. Meetings. Meetings of the Shareholders of the Trust or a
Series thereof shall be held as provided in the Declaration at such place
within or without the Commonwealth of Massachusetts as the Trustees shall
designate.
Section 2. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his address as recorded
on the register of the Trust mailed at least (10) days and not more than
ninety (90) days before the meeting; provided, however, that notice of a
meeting need not be given to a shareholder to whom such notice need not be
given under the proxy rules of the Commission under the 1940 Act and the
Securities Exchange Act of 1934. Only the business stated in the notice of the
meeting shall be considered at such meeting. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his current address
or if a written waiver of notice is executed by the Shareholder, or his
attorney thereunto authorized, before or after the meeting and which waiver is
filed with the records of the meeting.
Section 3. Quorum and Adjournment of Meetings. The holders of record
of thirty percent (30%) of the outstanding Shares of the Trust or a Series
thereof present in person or by proxy shall constitute a quorum at any meeting
of the Shareholders of the Trust or a Series thereof, except as otherwise
provided in the Declaration. If, however, such quorum shall not be present or
represented at any meeting of Shareholders, the holders of a majority of the
Shares present in person or by proxy shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until the requisite number of Shares entitled to vote at such meeting
shall be present. At such adjourned meeting, any business may be transacted
that might have been transacted at the meeting as originally notified.
<PAGE>
Section 4. Record Date for Meetings and Other Purposes. For the
purpose of determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or for the purpose
of any other action, the Trustees may fix in advance, as a record date, a date
not more than ninety (90) or less than ten (10) days prior to the date of any
meeting of Shareholders or distribution or other action, for the determination
of the persons to be treated as Shareholders of record for such purposes,
except for dividend payments, which shall be governed by the Trust's
Prospectus(es) and Statement(s) of Additional Information as in effect from
time to time.
Section 5. Voting; Proxies. Shareholders entitled to vote may vote
either in person or by proxy, provided that such proxy to act is authorized to
act by (1) a written instrument, dated not more than eleven months before the
meeting and executed either by the Shareholder or by his or her duly
authorized attorney in fact (who may be so authorized by a writing or by any
non-written means permitted by the laws of the Commonwealth of Massachusetts)
or (2) such electronic, telephonic, computerized or other alternative means as
may be approved by a resolution adopted by the Trustees. Proxies shall be
delivered to the secretary of the Trust or other person responsible for
recording the proceedings before being voted. A proxy with respect to shares
held in the name of two or more persons shall be valid if executed by one of
them unless at or prior to exercise of such proxy the Trust receives a
specific written notice to the contrary from any one of them. Unless otherwise
specifically limited by their terms, proxies shall entitle the holder thereof
to vote at any adjournment of a meeting. A proxy purporting to be exercised by
or on behalf of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise and the burden of proving invalidity shall rest on the
challenger. At all meetings of the Shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualifications of
voters, the validity of proxies, and the acceptance or rejection of votes
shall be decided by the chairman of the meeting. Each whole share shall be
entitled to one vote as to any matter on which it is entitled by the
Declaration to vote and each fractional Share shall be entitled to a
proportionate fractional vote.
Section 6. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 7. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consents shall be treated for
all purposes as a vote taken at a meeting of Shareholders.
ARTICLE III
TRUSTEES
Section 1. Meetings of the Trustees. Regular meetings of the Trustees
shall be held at such time and on such notice as the Trustees may from time to
time determine. Special meetings
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of the Trustees shall be held whenever called by the Chairman, the Secretary,
or by two or more of the Trustees, at the time being in office.
Section 2. Notice of Special Meetings. Notice of the time and place
of each special meeting shall be given by the Secretary or an Assistant
Secretary or by the officer or Trustees calling the meeting and shall be
mailed to each Trustee at least one day before the meeting, or shall be
telegraphed, cabled, or wirelessed to each Trustee at his business address, or
personally delivered to him at least one day before the meeting. Such notice
may, however, be waived by any Trustee. Notice of a meeting need not be given
to any Trustee if a written waiver of notice, executed by him before or after
the meeting, is filed with the records of the meeting, or to any Trustee who
attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. A notice or waiver of notice need not specify the
purpose of any meeting.
Section 3. Quorum and Adjournment of Meetings. A majority of the
Trustees shall be present in person at any regular or special meeting of the
Trustees in order to constitute a quorum for the transaction of business at
such meeting and, except as otherwise required by law, the Declaration or
these By-laws, the act of a majority of the Trustees present at any such
meeting at which a quorum is present, shall be the act of the Trustees. In the
absence of a quorum, a majority of the Trustees present may adjourn the
meeting from time to time until a quorum shall have been obtained. Notice of
an adjourned meeting need not be given.
Section 4. Committees. The Trustees, by vote of a majority of all the
Trustees, may elect from their own number committees to consist of not less
than two (2) members to hold office at the pleasure of the Trustees, and shall
have such powers as the Trustees may, from time to time, delegate to them by
resolution, except those powers which by law, the Declaration or these By-laws
they are prohibited from delegating. A majority of all members of any such
committee may determine its action and fix the time and place of its meetings,
unless the Trustees shall otherwise provide. The Trustees shall have the power
at any time to change the members and powers of any such committee, to fill
vacancies and to discharge any such committee.
Section 5. Telephone Meetings. The Trustees or a committee of the
Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting.
Section 6. Action Without Meeting. Any action required or permitted
to be taken at any meeting of the Trustees or any committee thereof may be
taken by the Trustees without a meeting if all the Trustees consent to the
action in writing and the written consents are filed with the records of the
Trustees' meetings. Such consents shall be treated as a vote for all purposes.
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ARTICLE IV
OFFICERS
Section 1. General Provisions. The executive officers of the Trust
shall be a Chairman, a President, a Vice Chairman, a Treasurer, one or more
Vice Presidents and a Secretary, each of whom shall be elected by the
Trustees. The Trustees may elect or appoint such other officers, agents or
employees as the business of the Trust may require, including one or more
Assistant Secretaries and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers, agents or employees.
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration or these By-laws, the Chairman, the
President, the Vice Chairman, the Vice President(s), the Treasurer and the
Secretary shall each hold office until his successor shall have been duly
elected and qualified, and all other officers shall hold office at the
pleasure of the Trustees. Any two offices may be held by the same person,
except that the Chairman or the President may not be the same person as the
Treasurer. Any officer may be but, except for the Chairman and the Vice
Chairman, none need be, a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting
of the Trustees, may remove any officer with or without cause, by a vote of a
majority of the Trustees then in office. Any officer or agent appointed by an
officer or committee may be removed with or without cause by such appointing
officer or committee.
Section 4. Powers and Duties. The officers of the Trust shall have
such powers and duties as generally pertain to their respective offices, as
well as such powers and duties as may from time to time be conferred by the
Trustees.
Section 5. Compensation of Officers and Trustees. Subject to any
applicable provisions of the Declaration, the compensation of the officers and
Trustees shall be fixed from time to time by the Trustees or, in the case of
officers, by any committee or officer upon whom such power may be conferred by
the Trustees. No officer shall be prevented from receiving such compensation
as such officer by reason of the fact that he is also a Trustee.
ARTICLE V
FISCAL YEAR
The fiscal year of the Trust or, if applicable, each Series of the
Trust, shall be fixed by resolution of the Trustees and shall be the taxable
year of each Series of the Trust or Series.
ARTICLE VI
SEAL
The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
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ARTICLE VII
SUFFICIENCY AND WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Notice, if mailed for the
purposes of these By-laws, shall be deemed to have been given when deposited
in the U.S. mail. Notice, if telegraphed, cabled or wirelessed for the
purposes of these By-laws, shall be deemed to have been given when delivered
to a representative of any telegraph, cable or wireless company with
instructions that it be telegraphed, cabled or wirelessed.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Trust shall place and at
all times maintain in the custody of one or more Custodians (including any
sub-custodian for the Custodian), to the extent required by and in a manner
consistent with the 1940 Act and the rules thereunder, all funds, securities
and similar investments included in the Trust Property or the Trust Property
allocated or belonging to a Series thereof.
Section 2. Action Upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian and
require that the cash and securities owned by the Trust be delivered directly
to the successor custodian.
ARTICLE IX
AMENDMENTS
These By-laws, or any of them, may be altered, amended or repealed,
or new By-laws may be adopted by (a) vote of a majority of the Shares
outstanding and entitled to vote or (b) by a majority of the Trustees,
provided, however, that no By-laws may be amended, adopted or repealed by the
Trustees, if such amendment, adoption or repeal requires, pursuant to laws,
the Declaration of these By-laws, a vote of the Shareholders.
As amended and restated February 11, 1998
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Exhibit No. 5(a)
INVESTMENT ADVISORY AND ADMINISTRATION CONTRACT
Contract made as of February 25, l997 between PAINEWEBBER INVESTMENT
TRUST II, a Massachusetts business trust ("Trust"), and MITCHELL HUTCHINS ASSET
MANAGEMENT INC. ("Mitchell Hutchins"), a Delaware corporation registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act"), and as an investment adviser under the Investment Advisers Act of 1940,
as amended.
WHEREAS the Trust is registered under the Investment Company Act of
1940, as amended ("1940 Act"), as an open-end management investment company, and
intends to offer for public sale distinct series of shares of beneficial
interest ("Series"), each corresponding to a distinct portfolio; and
WHEREAS the Trust desires to retain Mitchell Hutchins as investment
adviser and administrator to furnish certain administrative, investment advisory
and portfolio management services to the Trust and each Series as now exists and
as hereafter may be established, and Mitchell Hutchins is willing to furnish
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints Mitchell Hutchins as
investment adviser and administrator of the Trust and each Series for the period
and on the terms set forth in this Contract. Mitchell Hutchins accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. Duties as Investment Adviser.
(a) Subject to the supervision of the Trust's Board of Trustees
("Board"), Mitchell Hutchins will provide a continuous investment program for
each Series, including investment research and management with respect to all
securities and investments and cash equivalents in each Series. Mitchell
Hutchins will determine from time to time what securities and other investments
will be purchased, retained or sold by each Series.
(b) Mitchell Hutchins agrees that in placing orders with brokers, it
will attempt to obtain the best net result in terms of price and execution;
provided that, on behalf of any Series, Mitchell Hutchins may, in its
discretion, use brokers who provide the Series with research, analysis, advice
and similar services to execute portfolio transactions on behalf of the Series,
and Mitchell Hutchins may pay to those brokers in return for brokerage and
research services a higher commission than may be charged by other brokers,
subject to Mitchell Hutchins' determining in good faith that such commission is
reasonable in terms either of the particular transaction or of the overall
responsibility of Mitchell Hutchins to such Series and its other
<PAGE>
clients and that the total commissions paid by such Series will be reasonable in
relation to the benefits to the Series over the long term. In no instance will
portfolio securities be purchased from or sold to Mitchell Hutchins, or any
affiliated person thereof, except in accordance with the federal securities laws
and the rules and regulations thereunder. Whenever Mitchell Hutchins
simultaneously places orders to purchase or sell the same security on behalf of
a Series and one or more other accounts advised by Mitchell Hutchins, such
orders will be allocated as to price and amount among all such accounts in a
manner believed to be equitable to each account. The Trust recognizes that in
some cases this procedure may adversely affect the results obtained for the
Series.
(c) Mitchell Hutchins will oversee the maintenance of all books and
records with respect to the securities transactions of each Series, and will
furnish the Board with such periodic and special reports as the Board reasonably
may request. In compliance with the requirements of Rule 31a-3 under the 1940
Act, Mitchell Hutchins hereby agrees that all records which it maintains for the
Trust are the property of the Trust, agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any records which it maintains for
the Trust and which are required to be maintained by Rule 31a-1 under the 1940
Act and further agrees to surrender promptly to the Trust any records which it
maintains for the Trust upon request by the Trust.
(d) Mitchell Hutchins will oversee the computation of the net asset
value and the net income of each Series as described in the currently effective
registration statement of the Trust under the Securities Act of 1933, as
amended, and the 1940 Act and any supplements thereto ("Registration Statement")
or as more frequently requested by the Board.
(e) The Trust hereby authorizes Mitchell Hutchins and any entity or
person associated with Mitchell Hutchins which is a member of a national
securities exchange to effect any transaction on such exchange for the account
of any Series. which transaction is permitted by Section 11(a) of the 1934 Act
and Rule 11a2-2(T) thereunder, and the Trust hereby consents to the retention of
compensation by Mitchell Hutchins or any person or entity associated with
Mitchell Hutchins for such transactions in accordance with Rule
11a2-2(T)(a)(2)(iv).
3. Duties as Administrator. Mitchell Hutchins will administer the
affairs of the Trust and each Series subject to the supervision of the Board and
the following understandings:
(a) Mitchell Hutchins will supervise all aspects of the operations of
the Trust and each Series, including oversight of transfer agency, custodial and
accounting services, except as hereinafter set forth: provided, however, that
nothing herein contained shall be deemed to relieve or deprive the Board of its
responsibility for and control of the conduct of the affairs of the Trust and
each Series.
(b) Mitchell Hutchins will provide the Trust and each Series with such
corporate, administrative and clerical personnel (including officers of the
Trust) and services as are reasonably deemed necessary or advisable by the
Board, including the maintenance of certain books and records of the Trust and
each Series.
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(c) Mitchell Hutchins will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as applicable) of the Trust's
Registration Statement, proxy material, tax returns and required reports to each
Series' shareholders and the Securities and Exchange Commission and other
appropriate federal or state regulatory authorities.
(d) Mitchell Hutchins will provide the Trust and each Series with, or
obtain for it, adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items.
(e) Mitchell Hutchins will provide the Board on a regular basis with
economic and investment analyses and reports and make available to the Board
upon request any economic, statistical and investment services normally
available to institutional or other customers of Mitchell Hutchins.
4. Further Duties. In all matters relating to the performance of this
Contract. Mitchell Hutchins will act in conformity with the Declaration of
Trust, By-Laws and Registration Statement of the Trust and with the instructions
and directions of the Board and will comply with the requirements of the 1940
Act, the rules thereunder, and all other applicable federal and state laws and
regulations.
5. Delegation of Mitchell Hutchins' Duties as Investment Adviser and
Administrator. With respect to any or all Series. Mitchell Hutchins may enter
into one or more contracts ("Sub-Advisory or Sub-Administration Contract") with
a sub-adviser or sub-administrator in which Mitchell Hutchins delegates to such
sub-adviser or sub-administrator any or all its duties specified in Paragraphs 2
and 3 of this Contract, provided that each Sub-Advisory or Sub-Administration
Contract imposes on the sub-adviser or sub-administrator bound thereby all the
duties and conditions to which Mitchell Hutchins is subject by Paragraphs 2, 3
and 4 of this Contract, and further provided that each Sub-Advisory or
Sub-Administration Contract meets all requirements of the 1940 Act and rules
thereunder.
6. Services Not Exclusive. The services furnished by Mitchell Hutchins
hereunder are not to be deemed exclusive and Mitchell Hutchins shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired thereby. Nothing in this Contract shall limit or restrict the
right of any director, officer or employee of Mitchell Hutchins, who may also be
a Trustee, officer or employee of the Trust, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
7. Expenses.
(a) During the term of this Contract, each Series will bear all
expenses, not specifically assumed by Mitchell Hutchins, incurred in its
operations and the offering of its shares.
(b) Expenses borne by each Series will include but not be limited to
the following (or each Series' proportionate share of the following): (i) the
cost (including brokerage commissions) of securities purchased or sold by the
Series and any losses incurred in connection
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therewith; (ii) fees payable to and expenses incurred on behalf of the Series by
Mitchell Hutchins under this Contract; (iii) expenses of organizing the Trust
and the Series; (iv) filing fees and expenses relating to the registration and
qualification of the Series' shares and the Trust under federal and/or state
securities laws and maintaining such registrations and qualifications; (v) fees
and salaries payable to the Trust's Trustees and officers who are not interested
persons of the Trust or Mitchell Hutchins; (vi) all expenses incurred in
connection with the Trustees' services, including travel expenses; (vii) taxes
(including any income or franchise taxes) and governmental fees; (viii) costs of
any liability, uncollectible items of deposit and other insurance and fidelity
bonds; (ix) any costs, expenses or losses arising out of a liability of or claim
for damages or other relief asserted against the Trust or Series for violation
of any law and any indemnification relating thereto; (x) legal, accounting and
auditing expenses, including legal fees of special counsel for those Trustees of
the Trust who are not interested persons of the Trust; (xi) charges of
custodians, transfer agents and other agents; (xii) costs of preparing share
certificates; (xiii) expenses of setting in type and printing prospectuses and
supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders; (xiv) costs of
mailing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials to existing
shareholders; (xv) any extraordinary expenses (including fees and disbursements
of counsel, costs of actions, suits or proceedings to which the Trust is a party
and the expenses the Trust may incur as a result of its legal obligation to
provide indemnification to its officers, Trustees, agents and shareholders or
Mitchell Hutchins) incurred by the Trust or Series; (xvi) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (xvii) cost of mailing and tabulating proxies
and costs of meetings of shareholders, the Board and any committees thereof;
(xviii) the cost of investment company literature and other publications
provided by the Trust to its Trustees and officers; and (xix) costs of mailing,
stationery and communications equipment.
(c) The Trust or a Series may pay directly any expenses incurred by it
in its normal operations and, if any such payment is consented to by Mitchell
Hutchins and acknowledged as otherwise payable by Mitchell Hutchins pursuant to
this Contract, the Series may reduce the fee payable to Mitchell Hutchins
pursuant to Paragraph 8 thereof by such amount. To the extent that such
deductions exceed the fee payable to Mitchell Hutchins on any monthly payment
date, such excess shall be carried forward and deducted in the same manner from
the fee payable on succeeding monthly payment dates.
(d) Mitchell Hutchins will assume the cost of and compensation for
services provided to the Trust received by the officers of the Trust and by
those Trustees who are interested persons of the Trust.
(e) The payment or assumption by Mitchell Hutchins of any expenses of
the Trust or a Series that Mitchell Hutchins is not required by this Contract to
pay or assume shall not obligate Mitchell Hutchins to pay or assume the same or
any similar expense of the Trust or a Series on any subsequent occasion.
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<PAGE>
8. Compensation.
(a) For the services provided and the expenses assumed pursuant to this
Contract, with respect to the PaineWebber Emerging Markets Equity Fund series,
the Trust will pay to Mitchell Hutchins a fee, computed daily and paid monthly,
at an annual rate of 1.20% of such Series's average daily net assets.
(b) For the services provided and the expenses assumed pursuant to this
Contract with respect to any Series hereafter established, the Trust will pay to
Mitchell Hutchins from the assets of such Series a fee in an amount to be agreed
upon in a written fee agreement ("Fee Agreement") executed by the Trust on
behalf of such Series and by Mitchell Hutchins. All such Fee Agreements shall
provide that they are subject to all terms and conditions of this Contract.
(c) The fee shall be computed daily and paid monthly to Mitchell
Hutchins on or before the first business day of the next succeeding calendar
month.
(d) If this Contract becomes effective or terminates before the end of
any month, the fee for the period from the effective day to the end of the month
or from the beginning of such month to the date of termination, as the case may
be, shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs.
9. Limitation of Liability of Mitchell Hutchins. Mitchell Hutchins and
its delegates, including any Sub-Adviser or Sub-Administrator to any Series or
the Trust, shall not be liable for any error of judgment or mistake of law or
for any loss suffered by any Series, the Trust or any of its shareholders, in
connection with the matters to which this Contract relates, except to the extent
that such a loss results from 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 this Contract. Any person, even though also an
officer, director, employee, or agent of Mitchell Hutchins, who may be or become
an officer, Trustee, employee or agent of the Trust shall be deemed, when
rendering services to any Series or the Trust or acting with respect to any
business of such Series or the Trust, to be rendering such service to or acting
solely for the Series or the Trust and not as an officer, director, employee, or
agent or one under the control or direction of Mitchell Hutchins even though
paid by it.
10. Limitation of Liability of the Trustees and Shareholders of the
Trust. The Trustees of the Trust and the shareholders of any Series shall not be
liable for any obligations of any Series or the Trust under this Contract, and
Mitchell Hutchins agrees that, in asserting any rights or claims under this
Contract, it shall look only to the assets and property of the Trust in
settlement of such right or claim, and not to such Trustees or shareholder.
11. Duration and Termination.
(a) This Contract shall become effective upon the date hereinabove
written provided that, with respect to any Series, this Contract shall not take
effect unless it has first been approved (i) by a vote of a majority of those
Trustees of the Trust who are not parties to this Contract or
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<PAGE>
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by vote of a majority of that
Series' outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Contract shall
continue in effect for two years from the above written date. Thereafter, if not
terminated, this Contract shall continue automatically for successive periods of
twelve months each, provided that such continuance is specifically approved at
least annually (i) by a vote of a majority of those Trustees of the Trust who
are not parties to this Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or with respect to any given Series by vote of a majority of
the outstanding voting securities of such Series.
(c) Notwithstanding the foregoing, with respect to any Series this
Contract may be terminated at any time, without the payment of any penalty, by
vote of the board or by a vote of a majority of the outstanding voting
securities of such Series on sixty days' written notice to Mitchell Hutchins or
by Mitchell Hutchins at any time, without the payment of any penalty, on sixty
days' written notice to the Trust. Termination of this Contract with respect to
any given Series shall in no way affect the continued validity of this Contract
or the performance thereunder with respect to any other Series. This Contract
will automatically terminate in the event of its assignment.
12. Amendment of this Contract. No provision of this Contract may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Contract as to any
given Series shall be effective until approved by vote of a majority of such
Series' outstanding voting securities.
13. Governing Law. This Contract shall be construed in accordance with
the laws of the State of Delaware, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act, provided, however,
that Section 10 above will be construed in accordance with the laws of the
Commonwealth of Massachusetts. To the extent that the applicable laws of the
State of Delaware or the Commonwealth of Massachusetts conflict with the
applicable provisions of the 1940 Act, the latter shall control.
14. Miscellaneous. The captions in this Contract are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Contract shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Contract shall not be affected
thereby. This Contract shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors. As used in this Contract,
the terms "majority of the outstanding voting securities", "affiliated person",
"interested person", "assignment", "broker", "investment adviser", "national
securities exchange", "net assets", "prospectus", "sale", sell" and "security"
shall have the same meaning as such terms have in the 1940 Act, subject to such
exemption as may be granted by the Securities and Exchange Commission by any
rule, regulation or order. Where the effect of a requirement of the 1940 Act
reflected in any provision of this Contract is
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<PAGE>
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or general application, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
Attest: MITCHELL HUTCHINS ASSET MANAGEMENT INC.
/s/ Jennifer Farrell By /s/ Dianne E. O'Donnell
- ---------------------------- --------------------------------------
Dianne E. O'Donnell
Senior Vice President
Attest: PAINEWEBBER INVESTMENT TRUST II
/s/ Ilene Shore By /s/ Keith A. Weller
- ---------------------------- --------------------------------------
Keith A. Weller
Vice President and Assistant Secretary
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Exhibit No. 5(b)
SUB-ADVISORY AGREEMENT
Agreement made as of February 25, 1997 between MITCHELL HUTCHINS ASSET
MANAGEMENT INC., a Delaware corporation ("Mitchell Hutchins"), and SCHRODER
CAPITAL MANAGEMENT INTERNATIONAL INC., a New York corporation ("Sub-Adviser"),
(the "Agreement").
RECITALS
(1) Mitchell Hutchins has entered into an Investment Advisory and
Administration Contract, dated February 25, 1997 ("Advisory Contract"), with
PaineWebber Investment Trust II ("Trust"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act");
(2) The Trust offers for public sale distinct series of shares of
beneficial interest and may offer additional distinct series in the future;
(3) Under the Advisory Contract, Mitchell Hutchins has agreed to provide
certain investment advisory and administrative services to each series of the
Trust as now exists and as hereafter may be established;
(4) The Advisory Contract permits Mitchell Hutchins to delegate certain
of its duties as investment adviser under the Advisory Contract to a
sub-adviser; and
(5) Mitchell Hutchins desires to retain the Sub-Adviser to furnish
certain investment advisory services with respect to the PaineWebber Emerging
Markets Equity Fund ("Fund") series of the Trust, and the Sub-Adviser is willing
to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. Mitchell Hutchins hereby appoints the Sub-Adviser as an
investment sub-adviser with respect to the Fund for the period and on the terms
set forth in this Agreement. The Sub-Adviser accepts that appointment and agrees
to render the services herein set forth, for the compensation herein provided.
2. Duties as Sub-Adviser.
(a) Subject to the supervision of and any written guidelines adopted by
the Trust's Board of Trustees (the "Board") and Mitchell Hutchins, the
Sub-Adviser will provide a continuous investment program for the Fund, including
investment research and management with respect to all securities and
investments and cash equivalents in the Fund. The Sub-Adviser will determine
from time to time what investments will be purchased, retained or sold by the
Fund. The Sub-Adviser will be responsible for placing purchase and sell orders
for investments
<PAGE>
and for other related transactions. The Sub-Adviser will provide services under
this Agreement in accordance with the Fund's investment objective, policies and
restrictions as stated in the Trust's currently effective registration statement
under the 1940 Act, and any amendments or supplements thereto ("Registration
Statement").
(b) The Sub-Adviser agrees that, in placing orders with brokers, it will
obtain the best net result in terms of price and execution; provided that, on
behalf of the Fund, the Sub-Adviser may, in its discretion use brokers who
provide the Fund with research, analysis, advice and similar services to execute
portfolio transactions, and the Sub-Adviser may pay to those brokers in return
for brokerage and research services a higher commission than may be charged by
other brokers, subject to the Sub-Adviser's determining in good faith that such
commission is reasonable in terms either of the particular transaction or of the
overall responsibility of the Sub-Adviser to the Fund and its other clients and
that the total commissions paid by the Fund will be reasonable in relation to
the benefits to the Fund over the long term. In no instance will portfolio
securities be purchased from or sold to the Sub-Adviser, or any affiliated
person thereof, except in accordance with the federal securities laws and the
rules and regulations thereunder. The Sub-Adviser may aggregate sales and
purchase orders with respect to the assets of the Fund with similar orders being
made simultaneously for other accounts advised by the Sub-Adviser or its
affiliates. Whenever the Sub-Adviser simultaneously places orders to purchase or
sell the same security on behalf of the Fund and one or more other accounts
advised by the Sub-Adviser, the orders will be allocated as to price and amount
among all such accounts in a manner believed to be equitable over time to each
account. Mitchell Hutchins recognizes that in some cases this procedure may
adversely affect the results obtained for the Fund.
(c) The Sub-Adviser will maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions by the
Sub-Adviser on behalf of the Fund, and will furnish the Board and Mitchell
Hutchins with such periodic and special reports as the Board or Mitchell
Hutchins reasonably may request. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records that it
maintains for the Fund are the property of the Trust, agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act any records that it
maintains for the Trust and that are required to be maintained by Rule 31a-1
under the 1940 Act, and further agrees to surrender promptly to the Trust any
records that it maintains for the Fund upon request by the Trust.
(d) At such times as shall be reasonably requested by the Board or
Mitchell Hutchins, the Sub-Adviser will provide the Board and Mitchell Hutchins
with economic and investment analyses and reports as well as quarterly reports
setting forth the Fund's performance and make available to the Board and
Mitchell Hutchins any economic, statistical and investment services normally
available to institutional or other customers of the Sub-Adviser.
(e) In accordance with procedures adopted by the Board, as amended from
time to time, the Sub-Adviser is responsible for assisting in the fair valuation
of all portfolio securities and will use its reasonable efforts to arrange for
the provision of a price(s) from a party(ies) independent of the Sub-Adviser for
each portfolio security for which the custodian does not obtain prices in the
ordinary course of business from an automated pricing service.
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3. Further Duties. In all matters relating to the performance of this
Agreement, the Sub-Adviser will act in conformity with the Trust's Declaration
of Trust, By-Laws and Registration Statement; and with the written instructions
and written directions of the Board and Mitchell Hutchins; and will comply with
the requirements of the 1940 Act and the Investment Advisers Act of 1940, as
amended ("Advisers Act") and the rules under each; Subchapter M of the Internal
Revenue Code ("Code"), as applicable to regulated investment companies; the
diversification requirements applicable to the Fund under Section 817(h) of the
Code; and all other applicable federal and state laws and regulations. Mitchell
Hutchins agrees to provide to the Sub-Adviser copies of the Trust's Declaration
of Trust, By-Laws, Registration Statement, written instructions and directions
of the Board and Mitchell Hutchins, and any amendments or supplements to any of
these materials as soon as practicable after such materials become available:
provided, however, that the Sub-Advisers duty under this Agreement to act in
conformity with any document instruction, or guideline produced by the Trust or
Mitchell Hutchins shall not arise until it has been delivered to the
Sub-Adviser. Any changes to the Fund's objectives, policies or restrictions will
make due allowance for the time within which the Sub-Adviser shall have to come
into compliance.
4. Expenses. During the term of this Agreement, the Sub-Adviser will
bear all expenses incurred by it in connection with its services under this
Agreement. The Sub-Adviser shall not be responsible for any expenses incurred by
the Trust, the Fund or Mitchell Hutchins.
5. Compensation.
(a) For the services provided and the expenses assumed by the
Sub-Adviser pursuant to this Agreement, Mitchell Hutchins, not the Fund, will
pay to the Sub-Adviser a fee, computed daily and payable monthly, at an annual
rate of 0.70% of the Fund's average daily net assets and will provide the
Sub-Adviser with a schedule showing the manner in which the fee was computed.
(b) The fee shall be computed daily and payable monthly to the
Sub-Adviser on or before the last business day of the next succeeding calendar
month.
(c) If this Agreement becomes effective or terminates before the end of
any month, the fee for the period from the effective date to the end of the
month or from the beginning of such month to the date of termination, as the
case may be, shall be prorated according to the proportion that such period
bears to the full month in which such effectiveness or termination occurs.
6. Limitation of Liability. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund, the
Trust or its shareholders or by Mitchell Hutchins in connection with the matters
to which this Agreement relates, except a loss resulting from 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 this
Agreement. Nothing in this paragraph shall be deemed to constitute a limitation
or waiver of any obligation or duty that may not by law be limited or waived.
3
<PAGE>
7. Representations of Sub-Adviser. The Sub-Adviser represents, warrants
and agrees as follows:
(a) The Sub-Adviser (i) is registered as an investment adviser under the
Advisers Act and will continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement; (iii) has met and
will seek to continue to meet, for so long as this Agreement remains in effect,
any other applicable federal or state requirements, or the applicable
requirements of any regulatory or industry self-regulatory agency necessary to
be met in order to perform the services contemplated by this Agreement; (iv) has
the authority to enter into and perform the services contemplated by this
Agreement; and (v) will promptly notify Mitchell Hutchins of the occurrence of
any event that would disqualify the Sub-Adviser from serving as an investment
adviser of an investment company pursuant to Section 9(a) of the 1940 Act or
otherwise. In addition to being registered as an investment adviser, the
Sub-Adviser is regulated in the conduct of its investment business in the United
Kingdom by the investment Management Regulatory Organization Limited ("IMRO").
The Sub-Adviser confirms that the Fund is a Non-private Customer as defined by
IMRO.
(b) The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-l under the 1940 Act and will provide Mitchell
Hutchins and the Board with a copy of such code of ethics, together with
evidence of its adoption. Within fifteen days of the end of the last calendar
quarter of each year that this Agreement is in effect, the president or a
vice-president of the Sub-Adviser shall certify to Mitchell Hutchins that the
Sub-Adviser has complied with the requirements of Rule 17j-l during the previous
year and that there has been no violation of the Sub-Adviser's code of ethics
or, if such a violation has occurred, that appropriate action was taken in
response to such violation. Upon the written request of Mitchell Hutchins, the
Sub-Adviser shall permit Mitchell Hutchins, its employees or its agents to
examine the reports required to be made to the Sub-Adviser by Rule 17j-l(c)(1)
and all other records relevant to the Sub-Adviser's code of ethics.
(c) Not less than 48 hours prior to the signing of this Agreement, the
Sub-Adviser has provided Mitchell Hutchins with a copy of its Form ADV, which as
of the date of this Agreement is its Form ADV as most recently filed with the
Securities and Exchange Commission ("SEC"), and promptly will furnish a copy of
all amendments to Mitchell Hutchins at least annually.
(d) The Sub-Adviser will notify Mitchell Hutchins of any change of
control of the Sub-Adviser, including any change of its general partners or 25%
shareholders, as applicable, and any changes in the key personnel who are either
the portfolio manager(s) of the Fund or senior management of the Sub-Adviser, in
each case prior to or promptly after such change.
8. Services Not Exclusive. The Sub-Adviser may act as an investment
adviser to any other person, firm or corporation, and may perform management and
any other services for any other person, association, corporation, firm or other
entity pursuant to any contract or otherwise, and take any action or do anything
in connection therewith or related thereto, except as prohibited by applicable
law; and no such performance of management or other services or taking of any
such action or doing of any such thing shall be in any manner restricted or
4
<PAGE>
otherwise affected by any aspect of any relationship of the Sub-Adviser to or
with the Trust, Fund or Mitchell Hutchins or deemed to violate or give rise to
any duty or obligation of the Sub-Adviser to the Trust, Fund or Mitchell
Hutchins except as otherwise imposed by law or agreed upon in writing between
the Sub-Adviser and Mitchell Hutchins, the Trust or the Fund.
9. Duration and Termination.
(a) This Agreement shall become effective upon the date first above
written.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from its effective date. Thereafter, if not
terminated, this Agreement shall continue automatically for successive periods
of twelve months each, provided that such continuance is specifically approved
at least annually (i) by a vote of a majority of those trustees of the Trust who
are not parties to this Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by the Board or by vote of a majority of the outstanding voting securities
of the Fund.
(c) Notwithstanding the foregoing, this Agreement may be terminated at
any time, without the payment of any penalty, by vote of the Board or by a vote
of a majority of the outstanding voting securities of the Fund on 60 days'
written notice to the Sub-Adviser. This Agreement may also be terminated,
without the payment of any penalty, by Mitchell Hutchins: (i) upon 120 days'
written notice to the Sub-Adviser; (ii) immediately upon material breach by the
Sub-Adviser of any of the representations and warranties set forth in Paragraph
7 of this Agreement; or (iii) immediately if, in the reasonable judgment of
Mitchell Hutchins, the Sub-Adviser becomes unable to discharge its duties and
obligations under this Agreement, including circumstances such as financial
insolvency of the Sub-Adviser or other circumstances that could adversely affect
the Fund. The Sub-Adviser may terminate this Agreement at any time. without the
payment of any penalty, on 120 days' written notice to Mitchell Hutchins. This
Agreement will terminate automatically in the event of its assignment or upon
termination of the Advisory Contract as it relates to the Fund.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective until approved (i) by a vote of a majority of those trustees of the
Trust who are not parties to this Agreement or interested persons of any such
party, and (ii) by a vote of a majority of the Fund's outstanding voting
securities (unless, in the case of (ii), the Trust receives an SEC order or
no-action letter permitting it to modify the Agreement without such vote).
11. Governing Law. This Agreement shall be construed in accordance with
the 1940 Act and the laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof. To the extent that the applicable laws of
the State of Delaware conflict with the applicable provisions of the 1940 Act,
the latter shall control.
5
<PAGE>
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"affiliated person," interested person," "assignment," "broker," "investment
adviser," "net assets," "sale," "sell" and "security shall have the same meaning
as such terms have in the 1940 Act, subject to such exemption as may be granted
by the SEC by any rule, regulation or order. Where the effect of a requirement
of the federal securities laws reflected in any provision of this Agreement is
made less restrictive by a rule, regulation or order of the SEC, whether of
special or general application, such provision shall be deemed to incorporate
the effect of such rule. regulation or order. This Agreement may be signed in
counterpart.
13. Notices. Any notice herein required is to be in writing and is
deemed to have been given to the Sub-Adviser or Mitchell Hutchins upon receipt
of the same at their respective addresses set forth below.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized signatories as of the date and year first
above written.
MITCHELL HUTCHINS
ASSET MANAGEMENT INC.
1285 Avenue of the Americas
New York, New York 10019
Attest:
By: /s/ Keith A Weller By /s/ Dianne E. O'Donnell
------------------------------- -------------------------------
Name: Keith A. Weller Name: Dianne E. O'Donnell
Title: First Vice President Title: Senior Vice President
SCHRODER CAPITAL MANAGEMENT
INTERNATIONAL INC.
787 Seventh Avenue, 34th Floor
New York, New York 10019
Attn:_________________________
Attest:
By: /s/ Alicia D. Polak By /s/ Sharon Haugh
--------------------------------- ------------------------------
Name: Alicia D. Polak Name: Sharon Haugh
Title: Associate Title: Executive Director
6
<PAGE>
CUSTODIAN CONTRACT
Between
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II
and
STATE STREET BANK AND TRUST COMPANY
Global/Series/Trust
2lE593
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be held by It......................................................1
2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian
in the United States.......................................................................................2
2.1 Holding Investments.............................................................................2
2.2 Delivery of Securities..........................................................................2
2.3 Registration of Securities......................................................................4
2.4 Bank Accounts...................................................................................5
2.5 Availability of Federal Funds...................................................................5
2.6 Collection of Income............................................................................5
2.7 Payment of Fund Monies..........................................................................6
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.............................7
2.9 Appointment of Agents...........................................................................7
2.10 Deposit of Fund Assets in Securities Systems....................................................7
2.11 Fund Assets Held in the custodian's Direct Paper System.........................................8
2.12 Segregated Account..............................................................................9
2.13 Ownership Certificates for Tax Purposes........................................................10
2.14 Proxies........................................................................................10
2.15 Communications Relating to Portfolio Securities................................................10
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the
United States.............................................................................................11
3A. Interim Provisions.............................................................................11
3A.1 Appointment of IFTC and Chase as Sub-Custodian.................................................11
3A.2 Standard of Care; Liability....................................................................11
3A.3 Trust's Responsibility for Rules and Regulations...............................................11
3B. Post-Conversion Provisions.....................................................................12
3B.1 Appointment of Foreign Sub-Custodians..........................................................12
3B.2 Assets to be Held..............................................................................12
3B.3 Foreign Securities Systems.....................................................................12
3B.4 Holding Securities.............................................................................12
3B.5 Agreements with Foreign Banking Institutions...................................................13
3B.6 Access of Independent Accountants of the Fund..................................................13
3B.7 Reports by Custodian...........................................................................13
3B.8 Transactions in Foreign Custody Account........................................................13
3B.9 Liability of Foreign Sub-Custodians............................................................14
3B.10 Liability of Custodian.........................................................................14
3B.11 Reimbursement for Advances.....................................................................14
3B.12 Monitoring Responsibilities....................................................................15
3B.13 Branches of U.S. Banks.........................................................................15
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3B.14 Tax Law........................................................................................15
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund....................................16
5. Proper Instructions.......................................................................................16
6. Actions Permitted without Express Authority...............................................................17
7. Evidence of Authority.....................................................................................17
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net
Asset Value and Net Income................................................................................17
9. Records...................................................................................................18
10. Opinion of Fund's Independent Accountants.................................................................18
11. Reports to Fund by Independent Public Accountants.........................................................18
12. Compensation of Custodian.................................................................................18
13. Responsibility of Custodian...............................................................................19
14. Effective Period, Termination and Amendment...............................................................20
15. Successor Custodian.......................................................................................21
16. Interpretive and Additional Provisions....................................................................21
17. Additional Funds..........................................................................................22
18. Massachusetts Law to Apply................................................................................22
19. Prior Contracts...........................................................................................22
20. Shareholder Communications Election.......................................................................22
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between Mitchell Hutchins/Kidder, Peabody Investment
Trust II, a business trust organized and existing under the laws of
Massachusetts, having its principal place of business at 1285 Avenue of
Americas, New York, New York, 10019 hereinafter called the "Fund", and State
Street Bank and Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in two series,
the Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund and
Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund (such series together
with all other series subsequently established by the Fund and made subject to
this Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be held by It
The Fund hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Fund, including securities which the Fund, on behalf
of the applicable Portfolio desires to be held in places within the United
States ("domestic securities") and securities it desires to be held outside
the United States ("foreign securities") pursuant to the provisions of the
Declaration of Trust. The Fund on behalf of the Portfolio(s) agrees to deliver
to the Custodian all securities and cash of the Portfolios, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Portfolio(s) from time to time, and the
cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund representing interest in the Portfolios,
("Shares") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the
Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only
in accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities
1
<PAGE>
depositories designated in Schedule A hereto but only in accordance with the
provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Investments. The Custodian shall hold and physically
segregate for the account of each Portfolio all non-cash
property, to be held by it in the United States including
all domestic securities owned by such Portfolio, other than
(a) securities which are maintained pursuant to Section 2 10
in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, (each, a "U.S.
Securities System") and (b) commercial paper of an issuer
for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited
and/or maintained in the Direct Paper System of the
Custodian (the "Direct Paper System") pursuant to Section
2.11.
2.2 Delivery of Securities. The Custodian shall release and
deliver domestic securities owned by a Portfolio held by the
Custodian or in a Securities System account of the Custodian
or in the Custodian's Direct Paper book entry system account
("Direct Paper System Account") only upon receipt of Proper
Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Portfolio;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of
Section 2 10 hereof;
4) To the depository agent in connection with tender
or other similar offers for securities of the
Portfolio;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or
otherwise become payable; provided that, in any
such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer
into the name of the Portfolio or into the name of
any nominee or nominees of the Custodian or into
the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to
Article l; or for exchange for a different number
of bonds,
2
<PAGE>
certificates or other evidence representing the
same aggregate face amount or number of units;
provided that, in any such case, the new securities
are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of
the Portfolio, to the broker or its clearing agent,
against a receipt, for examination in accordance
with "street delivery" custom; provided that in any
such case, the Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such securities prior to
receiving payment for such securities except as may
arise from the Custodian's own negligence or
willful misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise
of such warrants, rights or similar securities or
the surrender of interim receipts or temporary
securities for definitive securities; provided
that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of
securities made by the Portfolio, but only against
receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on
behalf of the Portfolio, which may be in the form
of cash or obligations issued by the United States
government, its agencies or instrumentalities,
except that in connection with any loans for which
collateral is to be credited to the Custodian's
account in the book-entry system authorized by the
U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery
of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any
borrowings by the Fund on behalf of the Portfolio
requiring a pledge of assets by the Fund on behalf
of the Portfolio, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of
any agreement among the Fund on behalf of the
Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of
1934 (the "Exchange Act"), and a member of The
National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of
The Options Clearing Corporation and of any
registered national securities exchange, or
3
<PAGE>
of any similar organization or organizations,
regarding escrow or other arrangements in
connection with transactions by the Portfolio of
the Fund;
13) For delivery in accordance with the provisions of
any agreement among the Fund on behalf of the
Portfolio, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or
organizations, regarding account deposits in
connection with transactions by the Portfolio on
the Fund;
14) Upon receipt of instructions from the transfer
agent ("Transfer Agent") for the Fund, for delivery
to such Transfer Agent or to the holders of shares
in connection with distributions in kind, as may be
described from time to time in the currently
effective prospectus and statement of additional
information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only
upon receipt of, in addition to Proper Instructions
from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the
board of Trustees or of the Executive Committee
signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, specifying
the securities of the Portfolio to be delivered,
setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall
be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered
in the name of the Portfolio or in the name of any nominee
of the Fund on behalf of the Portfolio or on any Nominee of
the Custodian which nominee shall be assigned exclusively to
the Portfolio, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other
registered investment companies having the same investment
adviser as the Portfolio, or in the name or nominee name of
an agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on
behalf of the Portfolio under the terms of this Contract
shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its
best efforts only to timely collect income due the Fund on
such securities and to notify the Fund on a best efforts
basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or
exchange offers.
4
<PAGE>
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in
the name of each Portfolio of the Fund, subject only to
draft or order by the Custodian acting pursuant to the terms
of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash
received by it from or for the account of the Portfolio,
other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3
under the Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to its
credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company
Act of l940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company
shall on behalf of each applicable Portfolio be approved by
vote of a majority of the Board of Trustees of the Fund.
Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between
the Fund on behalf of each applicable Portfolio and the
Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund on behalf of a Portfolio, make
federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for
Shares of such Portfolio which are deposited into the
Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all
income and other payments with respect to registered
domestic securities held hereunder to which each Portfolio
shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all
income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items
requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder.
Income due each Portfolio on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the
Portfolio is properly entitled.
5
<PAGE>
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions
from the Fund on behalf of the applicable Portfolio, which
may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options,
futures contracts or options on futures contracts
for the account of the Portfolio but only (a)
against the delivery of such securities or evidence
of title to such options, futures contracts or
options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing
business in the United States or abroad which is
qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been
designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or
in the name of a nominee of the Custodian referred
to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in
the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth
in Section 2.11; (d) in the case of repurchase
agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another
bank, or a broker-dealer which is a member of NASD,
(i) against delivery of the securities either in
certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of
the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with
written evidence of the agreement by the Custodian
to repurchase such securities from the Portfolio or
(e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or
surrender of securities owned by the Portfolio as
set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued
by the Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability
incurred by the Portfolio, including but not
limited to the following payments for the account
of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or
treated as deferred expenses;
5) For the payment of any dividends on Shares of the
Portfolio declared pursuant to the governing
documents of the Fund;
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6) For payment of the amount of dividends received in
respect of securities sold short; and
7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions from the
Fund on behalf of the Portfolio, a certified copy
of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or
persons to whom such payment is to be made
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Contract, in any and every case where payment for purchase
of domestic securities for the account of a Portfolio is
made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so
pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or
times in its discretion appoint (and may at any time remove)
any other bank or trust company which is itself qualified
under the Investment Company Act of 1940, as amended, to act
as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time
to time direct; provided, however, that the appointment of
any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain securities owned by a Portfolio
in a clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities
Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in
accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if
any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio
in a Securities System provided that such
securities are represented in an account
("Account") of the Custodian in the Securities
System which shall not include any assets of the
Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to
securities of the Portfolio which are maintained in
a Securities System shall identify by book-entry
those securities belonging to the Portfolio;
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3) The Custodian shall pay for securities purchased
for the account of the Portfolio upon (i) receipt
of advice from the Securities System that such
securities have been transferred to the Account,
and (ii) the making of an entry on the records; of
the Custodian to reflect such payment and transfer
for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of
the Portfolio upon (i) receipt of advice from the
Securities System that payment for such securities
has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian
to reflect such transfer and payment for the
account of the Portfolio. Copies of all advices
from the Securities System of transfers of
securities for the account of the Portfolio shall
identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian
shall furnish the Fund on behalf of the Portfolio
confirmation on each transfer to or from the
account of the Portfolio in the form of a written
advice or notice and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction
sheets selecting each day's transactions in the
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the
Portfolio with any report obtained by the Custodian
on the Securities System's accounting system,
internal accounting control and procedures for
safeguarding securities deposited in the Securities
System;
5) The Custodian shall have received from the Fund on
behalf of the Portfolio the initial or annual
certificate, as the case may be, required by
Article 14 hereof; and
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to
the Fund for the benefit of the Portfolio for any
loss or damage to the Portfolio resulting from use
of the Securities System by reason of any
negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or
any such agent to enforce effectively such rights
as it may have against the Securities System; at
the election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian with
respect to any claim against the Securities System
or any other person which the Custodian may have as
a consequence of any such loss or damage if and to
the extent that the Portfolio has not been made
whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a
Portfolio in the Direct Paper system of the Custodian
subject to the following provisions:
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1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions from the Fund on behalf of the
Portfolio;
2) The Custodian may keep securities of the Portfolio
in the Direct Paper System only if such securities
are represented in an account ("Account") of the
Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to
securities of the Portfolio which are maintained in
the Direct Paper System shall identify by
book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased
for the account of the Portfolio upon the making of
an entry on the records of the Custodian to reflect
such payment and transfer of securities to the
account of the Portfolio. The Custodian shall
transfer securities sold for the account of the
Portfolio upon the making of an entry on the
records of the Custodian to reflect such transfer
and receipt of payment for the account of the
Portfolio;
5) The Custodian shall furnish the Fund on behalf of
the Portfolio confirmation of each transfer to or
from the account of the Portfolio, in the form or a
written advice or notice, of Direct Paper on the
next business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the
account of the Portfolio; and
6) The Custodian shall provide the Fund on behalf of
the Portfolio with any report on its system of
internal accounting control as the Fund may
reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of
Proper Instructions from the Fund on behalf of each
applicable Portfolio establish and maintain a segregated
account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred
cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof,
(i) in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member
of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the
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Portfolio, (ii) for purposes of segregating cash or
government securities in connection with options purchased,
sold or written by the Portfolio or commodity futures
contracts or options thereon purchased or sold by the
Portfolio, (iii) for the purpose of compliance by the
Portfolio with the procedures required by Investment Company
Act Release No 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of
the applicable Portfolio, a certified copy of a resolution
of the Board of Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with
receipt of income or other payments with respect to domestic
securities of each Portfolio held by it and in connection
with transfers of securities
2.14 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by
the registered holder of such securities, if the securities
are registered otherwise than in the name of the Portfolio
or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Portfolio such
proxies, all proxy soliciting materials and all notices
relating to such securities;
2.15 Communications Relating to Portfolio Securities. Subject to
the provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund for each Portfolio all written
information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations
of rights in connection therewith and notices of exercise of
call and put options written by the Fund on behalf of the
Portfolio and the maturity of futures contracts purchased or
sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With
respect to tender or exchange offers, the Custodian shall
transmit promptly to the Portfolio all written information
received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the
Portfolio desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business
days prior to the date on which the Custodian is to take
such action.
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3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3A. Interim Provisions. The provisions of this Article 3A shall
apply to the duties of the Custodian as they relate to
foreign securities held outside of the United States until
the Custodian and the Fund acknowledge and agree in writing
that the foreign assets of the Fund have been effectively
transferred to foreign sub-custodians in the Custodian's
sub-custodian network. The Custodian and the Fund anticipate
that this transfer shall occur on or before August 30, 1995.
3A.1 Appointment of IFTC and Chase as Sub-Custodian. The
Custodian is authorized and instructed by the Fund to employ
Investors Fiduciary Trust Company ("IFTC") as sub-custodians
for the sole purpose of maintaining in place IFTC's
appointment, at the Fund's request, of Chase Manhattan Bank
N.A. ("Chase") as sub-custodian for the Fund's foreign
securities (including cash incidental to transactions in
such securities) on the terms and conditions set forth in
the Subcustody Contract between IFTC and Chase which is
attached hereto as Exhibit A (the "Subcustody Contract").
IFTC acknowledges that the Subcustody Contract shall remain
in effect with respect to the Fund for the interim period
contemplated above and hereby agrees to continue, for such
interim period, to provide such services to the Fund and in
accordance with such Subcustody Contract as necessary for
foreign custody services to be provided pursuant thereto.
3A.2 Standard of Care; Liability. Notwithstanding anything to the
contrary in this Contract, neither IFIC nor the Custodian
shall be liable to the Fund for any loss, damage, cost,
expense, liability or claim arising out of or in connection
with the maintenance or custody of the Fund's foreign
securities by Chase or by any other banking institution or
securities depository employed pursuant to the terms of the
Subcustody Contract, except that the Custodian shall be
liable for any such loss, damage, expense, liability or
claim directly resulting from the failure of the Custodian
to exercise reasonable care in the performance of its duties
hereunder. At the election of the Fund, the Fund shall be
entitled to be subrogated to the rights of IFTC under the
Subcustody Contract with respect to any claim arising
hereunder against Chase or any other banking institution or
securities depository employed by Chase if and to the extent
that the Fund has not been made whole therefor.
3A.3 Trust's Responsibility for Rules and Regulations. As between
IFTC, the Custodian and the Fund, the Fund shall be solely
responsible to assure that the maintenance of foreign
securities and cash pursuant to the terms of the Subcustody
Contract comply with all applicable rules, regulations,
interpretations and orders of the Securities and Exchange
Commission, and neither IFTC nor the Custodian assumes any
responsibility or makes any representations as to such
compliance.
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3B. Post-Conversion Provisions. The provisions of this Article
3B shall apply to the duties of the Custodian as they relate
to foreign securities held outside of the United States
after the effective date of the transfer of the Fund's
foreign assets from the Chase sub-custodian network to the
Custodian's sub-custodian's network.
3B.1 Appointment of Foreign Sub-Custodians. The Fund hereby
authorizes and instruct the Custodian to employ as
sub-custodians for the Portfolio's securities and other
assets maintained outside the United States the foreign
banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians").
Upon receipt of "Proper Instructions", as defined in Section
5 of this Contract, together with a certified resolution of
the Fund's Board of Trustees, the Custodian and the Fund may
agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and
foreign securities depositories to act as sub-custodian.
Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more
such sub-custodians for maintaining custody of the
Portfolio's assets.
3B.2 Assets to be Held. The Custodian shall limit the securities
and other assets maintained in the custody of the foreign
sub-custodians to: (a) "foreign securities", as defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company
Act of 1940, and (b) cash and cash equivalents in such
amount as the Custodian or the Fund may determine to be
reasonably necessary to effect the Portfolio's foreign
securities transactions. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of
the Fund held by each foreign sub-custodian.
3B.3 Foreign Securities Systems. Except as may otherwise be
agreed upon in writing by the Custodian and the Fund, assets
of the Portfolios shall be maintained in a clearing agency
which acts as a securities depository or in a book-entry
system for the central handling of securities located
outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians
pursuant to the terms hereof (Foreign Securities Systems and
U.S. Securities Systems are collectively referred to herein
as the "Securities Systems"). Where possible, such
arrangements shall include entry into agreements containing
the provisions set forth in Section 3B.5 hereof.
3B.4 Holding Securities. The Custodian may hold securities and
other non-cash property for all of its customers, including
the Fund, with a Foreign Sub-Custodian in a single account
that is identified as belonging to the Custodian for the
benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and
other non-cash property of the Fund which are maintained in
such account shall identify by book-entry those securities
and other non-cash property belonging to the Fund and (ii)
the Custodian shall
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<PAGE>
require that securities and other non-cash property so held
by the Foreign Sub-Custodian be held separately from any
assets of the Foreign Sub-Custodian or of others.
3B.5 Agreements with Foreign Banking Institutions. Each agreement
with a foreign banking institution shall provide that: (a)
the assets of each Portfolio will not be subject to any
right, charge, security interest, lien or claim of any kind
in favor of the foreign banking institution or its creditors
or agent, except a claim of payment for their safe custody
or administration; (b) beneficial ownership for the assets
of each Portfolio will be freely transferable without the
payment of money or value other than for custody or
administration; (c) adequate records will be maintained
identifying the assets as belonging to each applicable
Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent
permitted under applicable law the independent public
accountants for the Fund, will be given access to the books
and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; and (e)
assets of the Portfolios held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or
its agents.
3B.6 Access of Independent Accountants of the Fund. Upon request
of the Fund, the Custodian will use its best efforts to
arrange for the independent accountants of the Fund to be
afforded access to the books and records of any foreign
banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance
of such foreign banking institution under its agreement with
the Custodian.
3B.7 Reports by Custodian. The Custodian will supply to the Fund
from time to time, as mutually agreed upon, statements in
respect of the securities and other assets of the
Portfolio(s) held by foreign sub-custodians, including but
not limited to an identification of entities having
possession of the Portfolio(s) securities and other assets
and advices or notifications of any transfers of securities
to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired
for a Portfolio, the identity of the entity having physical
possession of such securities.
3B.8 Transactions in Foreign Custody Account. (a) Except as
otherwise provided in paragraph (b) of this Section 3B.8,
the provision of Sections 2.2 and 2.7 of this Contract shall
apply, mutatis mutandis to the foreign securities of the
Fund held outside the United States by foreign
sub-custodians.
(b) Notwithstanding any provision of this Contract to
the contrary, settlement and payment for securities
received for the account of each applicable
Portfolio and delivery of securities maintained for
the account of each applicable Portfolio may be
effected in accordance with the customary
established securities trading or securities
processing practices and
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procedures in the jurisdiction or market in which
the transaction occurs, including, without
limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with
the expectation of receiving later payment for such
securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such
entity's nominee to the same extent as set forth in
Section 2.3 of this Contract, and the Fund agrees
to hold any such nominee harmless from any
liability as a holder of record of such securities.
3B.9 Liability of Foreign Sub-Custodians. Each agreement pursuant
to which the Custodian employs a foreign banking institution
as a foreign sub-custodian shall require the institution to
exercise reasonable care in the performance of its duties
and to indemnify, and hold harmless, the Custodian and the
Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the
institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims
against a foreign banking institution as a consequence of
any such loss, damage, cost, expense, liability or claim if
and to the extent that the Fund has not been made whole for
any such loss, damage, cost, expense, liability or claim.
3B.10 Liability of Custodian. The Custodian shall be liable for
the acts or omissions of a foreign banking institution to
the same extent as set forth with respect to sub-custodians
generally in this Contract and, regardless of whether assets
are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of
a U.S. bank as contemplated by paragraph 3B.13 hereof, the
Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization,
expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise
exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3B.10, in delegating custody
duties to State Street London Ltd., the Custodian shall not
be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from
(a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed
hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3B.11 Reimbursement for Advances. If the Fund requires the
Custodian to advance cash or securities for any purpose for
the benefit of a Portfolio including the purchase
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or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure
to act or willful misconduct, any property at any time held
for the account of the applicable Portfolio shall be
security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of such Portfolio's
assets to the extent necessary to obtain reimbursement.
3B.12 Monitoring Responsibilities. The Custodian shall furnish
annually to the Fund, during the month of June, information
concerning the foreign sub-custodians employed by the
Custodian. Such information shall be similar in kind and
scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that
the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of
any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission is
notified by such foreign sub-custodian that there appears to
be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in
accordance with generally accepted U.S. accounting
principles).
3B.13 Branches of U.S. Banks.
(a) Except as otherwise set forth in this Contract, the
provisions hereof shall not apply where the custody
of the Portfolios assets are maintained in a
foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of
this Contract.
(b) Cash held for each Portfolio of the Fund in the
United Kingdom shall be maintained in an interest
bearing account established for the Fund with the
Custodian's London branch, which account shall be
subject to the direction of the Custodian, State
Street London Ltd. or both.
3B.14 Tax Law. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on
the Fund or the Custodian as custodian of the Fund by the
tax law for the United States of America or any state or
political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of jurisdictions other
than those mentioned in
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the above sentence, including responsibility for withholding
and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with
respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such
information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that
Portfolio issued or sold from time to time by the Fund. The Custodian will
provide timely notification to the Fund on behalf of each such Portfolio and
the Transfer Agent of any receipt by it of payments for Shares of such
Portfolio.
From such funds as may be available for the purpose but subject to
the limitations of the Declaration of Trust and any applicable votes of the
Board of Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares of a Portfolio, the Custodian is authorized
upon receipt of instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares,
which checks have been furnished by the Fund to the holder of Shares, when
presented to the Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of
Trustees of the Fund accompanied by a detailed description of procedures
approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian are satisfied
that such procedures afford adequate safeguards for the Portfolios' assets.
For purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires
a segregated asset account in accordance with Section 2.12.
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6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from
the Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses
of handling securities or other similar items
relating to its duties under this Contract, provided
that all such payments shall be accounted for to the
Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities
in definitive form;
3) endorse for collection, in the name of the Portfolio,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details
in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the
Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Trustees pursuant to the Declaration of Trust as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Trustees of the Fund to
keep the books of account of each Portfolio and/or compute the net asset value
per share of the outstanding shares of each Portfolio or, if directed in
writing to do so by the Fund on behalf of the Portfolio, shall itself keep
such books of account and/or compute such net asset value per share. If so
directed, the Custodian shall also calculate daily the net income of the
Portfolio as described in the Fund's currently effective prospectus related to
such Portfolio and shall advise the Fund and the Transfer Agent daily of the
total amounts of such net income and, if instructed in writing by an officer
of the Fund to do so, shall advise the Transfer Agent periodically of the
division of such net income among its various components. The calculations of
the net asset value per share and the daily
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<PAGE>
income of each Portfolio shall be made at the time or times described from
time to time in the Fund's currently effective prospectus related to such
Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and
maintain all records relating to its activities and obligations under this
Contract in such manner as will meet the obligations of the Fund under the
Investment Company Act of 1940, with particular attention to Section 31
thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the
property of the Fund and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authorized officers, employees
or agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each Portfolio and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall
be agreed upon between the Fund and the Custodian, include certificate numbers
in such tabulations.
10. Opinion of Fund's Independent Accountants
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from
year to year favorable opinions from the Fund's independent accountants with
respect to its activities hereunder in connection with the preparation of the
Fund's Form N-1A, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonable require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian
under this Contract; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so
state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund on behalf of each applicable Portfolio and the Custodian.
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13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund
for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct, the Custodian shall be without liability to the Fund for any loss,
liability, claim or expense resulting from or caused by: (i) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, nationalization or expropriation,
imposition of currency controls or restrictions, the interruption, suspension
or restriction of trading on or the closure of any securities market, power or
other mechanical or technological failures or interruptions, computer viruses
or communications disruptions, acts of war or terrorism, riots, revolutions,
work stoppages, natural disasters or other similar events or acts; (ii) errors
by the Fund or the Investment Advisor in their instructions to the Custodian;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the
Custodian's sub-custodian or agent securities purchased or in the remittance
or payment made in connection with securities sold; (v) any delay or failure
of any company, corporation, or other body in charge or registering or
transferring securities in the name of the Custodian, the Fund, the
Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including
non-receipt of bonus, dividends and rights and other accretions or benefits;
(vi) delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System;
and (vii) any provision of any present or future law or regulation or order of
the United States of America, or any state thereof, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take
any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable
for the payment of money or incurring liability of some other form, the Fund
on behalf of
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the Portfolio, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) for the benefit of a Portfolio including the purchase or sale of
foreign exchange or of contracts for foreign exchange or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided,
may be amended at any time by mutual agreement of the parties hereto and may
be terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio,
as required by Rule 17f-4 under the Investment Company Act of 1940, as amended
and that the Custodian shall not with respect to a Portfolio act under Section
2.11 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees has approved
the initial use of the Direct Paper System by such Portfolio; provided
further, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Declaration of Trust, and further provided, that the Fund on behalf of
one or more of the Portfolios may at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or upon the
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be
due as of the date of such termination and shall likewise reimburse the
Custodian for its costs, expenses and disbursements.
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<PAGE>
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the
Portfolios shall be appointed by the Board of Trustees of the Fund, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities of each applicable Portfolio then held by it hereunder and shall
transfer to an account of the successor all of the securities of each such
Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and
other properties held by the Custodian on behalf of each applicable Portfolio
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract on behalf of each applicable Portfolio
and to transfer to an account of such successor custodian all of the
securities of each such Portfolio held in any Securities System. Thereafter,
such bank or trust company shall be the successor of the Custodian under this
Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the fund to procure the certified copy of the vote referred to or
of the Board of Trustees to appoint a successor custodian, the Custodian shall
be entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provisions of the Declaration of Trust of
the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
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<PAGE>
17. Additional Funds
In the event that the Fund establishes one or more series of Shares
in addition to Mitchell Hutchins/Kidder, Peabody Emerging Markets Equity Fund
and Mitchell Hutchins/Kidder, Peabody Municipal Bond Fund with respect to
which it desires to have the Custodian render services as custodian under the
terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such series of Shares
shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to
requesting companies whose securities the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Fund
as consenting to disclosure of this information for all securities owned by
the Fund or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's
name and address for any purpose other than corporate communications. Please
indicate below whether the Fund consents or objects by checking one of the
alternatives below.
YES [ ] The Custodian is authorized to release
the Fund's name, address, and shares
positions.
NO [ ] The Custodian is not authorized to
release the Fund's name, address, and
share positions.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the ______ day of _____________,
199___.
ATTEST MITCHELL HUTCHINS/KIDDER,
PEABODY INVESTMENT TRUST II
_________________________________ By _____________________________
ATTEST STATE STREET BANK AND TRUST
COMPANY
_________________________________ By _____________________________
Executive Vice President
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<PAGE>
Exhibit No. 9
TRANSFER AGENCY AND RELATED SERVICES AGREEMENT
THIS AGREEMENT is made as of , 199 by and between PFPC INC., a
Maryland corporation ("PFPC"), and PAINEWEBBER INVESTMENT TRUST II, a
Massachusetts business trust(the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and related services agent to the Fund's
Portfolios (as hereinafter defined) and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. As Used in this Agreement:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Authorized Person" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors or Trustees ("Board")
to give Oral Instructions and Written Instructions on behalf of the Fund and
listed on the Authorized Persons Appendix attached hereto and made a part
hereof or any amendment thereto as may be received by PFPC. An Authorized
Person's scope of authority may be limited by the Fund by setting forth such
limitation in the Authorized Persons Appendix.
<PAGE>
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "Oral Instructions" mean oral instructions received by
PFPC from an Authorized Person.
(f) "Portfolio" means a series or investment portfolio of
the Fund identified on Annex A hereto, as the same may from time to time be
amended, if the Fund consists of more than one series or investment portfolio;
however, if the Fund does not have separate series or investment portfolios,
then this term shall be deemed to refer to the Fund itself.
(g) "SEC" means the Securities and Exchange Commission.
(h) "Securities Laws" mean the 1933 Act, the 1934 Act, the
1940 Act and the CEA.
(i) "Shares" mean the shares of common stock or beneficial
interest of any series or class of the Fund.
(j) "Written Instructions" mean written instructions signed
by an Authorized Person and received by PFPC. The instructions may be
delivered by hand, mail, tested telegram, cable, telex or facsimile sending
device.
2. Appointment. The Fund hereby appoints PFPC to serve as transfer
agent, registrar, dividend disbursing agent and related services agent to the
Fund, and should the Fund have separate Portfolios, those Portfolios which are
listed on Annex A hereto, in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such services.
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<PAGE>
3. Delivery of Documents. The Fund (or a particular Portfolio, as
appropriate) has provided or, where applicable, will provide PFPC with the
following:
(a) Certified or authenticated copies of the
resolutions of the Fund's Board approving the
appointment of PFPC to provide services to the Fund
and approving this Agreement;
(b) A copy of each executed broker-dealer agreement
with respect to each Fund; and
(c) Copies (certified or authenticated if requested by
PFPC) of any post-effective amendment to the Fund's
registration statement, advisory agreement,
distribution agreement, shareholder servicing
agreement and all amendments or supplements to the
foregoing upon request.
4. Compliance with Rules and Regulations. PFPC undertakes to comply
with all applicable requirements of the Securities Laws and any laws, rules
and regulations of governmental authorities having jurisdiction with respect
to the duties to be performed by PFPC hereunder. Except as specifically set
forth herein, PFPC assumes no responsibility for such compliance by the Fund
or any of its Portfolios.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC shall
act only upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral
Instructions and Written Instructions it receives from an Authorized Person
pursuant to this Agreement. PFPC may assume that any Oral Instruction or
Written Instruction received hereunder is not in any way inconsistent with the
provisions of organizational documents or of any vote, resolution or
proceeding of the Fund's Board or of the Fund's shareholders, unless and until
PFPC receives
3
<PAGE>
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written Instructions by
the close of business on the next day after such Oral Instructions are
received. The fact that such confirming Written Instructions are not received
by PFPC shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an
Authorized Person, PFPC shall incur no liability to the Fund in acting upon
such Oral Instructions or Written Instructions provided that PFPC's actions
comply with the other provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action
it should or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should not take, PFPC
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser or PFPC, at the
option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund, and the advice it receives from counsel, PFPC may rely upon and
follow the advice of counsel. In the event PFPC so relies on the advice of
counsel, PFPC remains liable for any action or omission on the part of
4
<PAGE>
PFPC which constitutes willful misfeasance, bad faith, negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.
(d) Protection of PFPC. PFPC shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from counsel
and which PFPC believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions. Nothing in
this section shall be construed so as to impose an obligation upon PFPC (i) to
seek such directions, advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PFPC's properly taking or not taking
such action. Nothing in this subsection shall excuse PFPC when an action or
omission on the part of PFPC constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
7. Records; Visits. PFPC shall prepare and maintain in complete and
accurate form all books and records necessary for it to serve as transfer
agent, registrar, dividend disbursing agent and related services agent to each
Portfolio, including (a) all those records required to be prepared and
maintained by the Fund under the 1940 Act, by other applicable Securities
Laws, rules and regulations and by state laws and (b) such books and records
as are necessary for PFPC to perform all of the services it agrees to provide
in this Agreement and the appendices attached hereto, including but not
limited to the books and records necessary to effect the conversion of Class B
shares, the calculation of any contingent deferred sales charges and the
calculation of
5
<PAGE>
front-end sales charges. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the property of
the Fund. The Fund and Authorized Persons shall have access to such books and
records in the possession or under the control of PFPC at all times during
PFPC's normal business hours. Upon the reasonable request of the Fund, copies
of any such books and records in the possession or under the control of PFPC
shall be provided by PFPC to the Fund or to an Authorized Person. Upon
reasonable notice by the Fund, PFPC shall make available during regular
business hours its facilities and premises employed in connection with its
performance of this Agreement for reasonable visits by the Fund, any agent or
person designated by the Fund or any regulatory agency having authority over
the Fund.
8. Confidentiality. PFPC agrees to keep confidential all records of
the Fund and information relating to the Fund and its shareholders (past,
present and future), its investment adviser and its principal underwriter,
unless the release of such records or information is otherwise consented to,
in writing, by the Fund prior to its release. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where PFPC
may be exposed to civil or criminal contempt proceedings or when required to
divulge such information or records to duly constituted authorities.
9. Cooperation with Accountants. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
6
<PAGE>
10. Disaster Recovery. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for periodic backup of computer files and data with respect to the
Fund and emergency use of electronic data processing equipment. In the event
of equipment failures, PFPC shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions. PFPC shall have no
liability with respect to the loss of data or service interruptions caused by
equipment failure, provided such loss or interruption is not caused by PFPC's
own willful misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement and provided further that PFPC has
complied with the provisions of this paragraph 10.
11. Compensation. As compensation for services rendered by PFPC
during the term of this Agreement, the Fund will pay to PFPC a fee or fees as
may be agreed to from time to time in writing by the Fund and PFPC.
12. Indemnification.
(a) The Fund agrees to indemnify and hold harmless PFPC and its
affiliates from all taxes, charges, expenses, assessments, penalties, claims
and liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from (i) any
action or omission to act which PFPC takes (a) at the request or on the
direction of or in reliance on the advice of the Fund or (b) upon Oral
Instructions or Written Instructions or (ii) the acceptance, processing and/or
negotiation of checks or other methods utilized for the purchase of Shares.
Neither PFPC,
7
<PAGE>
nor any of its affiliates, shall be indemnified against any liability (or any
expenses incident to such liability) arising out of PFPC's or its affiliates'
own willful misfeasance, bad faith, negligence or reckless disregard of its
duties and obligations under this Agreement. The Fund's liability to PFPC for
PFPC's acceptance, processing and/or negotiation of checks or other methods
utilized for the purchase of Shares shall be limited to the extent of the
Fund's policy(ies) of insurance that provide for coverage of such liability,
and the Fund's insurance coverage shall take precedence.
(b) PFPC agrees to indemnify and hold harmless the Fund from all
taxes, charges, expenses, assessments, penalties, claims and liabilities
arising from PFPC's obligations pursuant to this Agreement (including, without
limitation, liabilities arising under the Securities Laws, and any state and
foreign securities and blue sky laws, and amendments thereto) and expenses,
including (without limitation) reasonable attorneys' fees and disbursements
arising directly or indirectly out of PFPC's or its nominee's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
(c) In order that the indemnification provisions contained in this
Paragraph 12 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim.
The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be
8
<PAGE>
required to indemnify it except with the other party's prior written consent.
(d) The members of the Board of the Fund, its officers and
Shareholders, or of any Portfolio thereof, shall not be liable for any
obligations of the Fund, or any such Portfolio, under this Agreement, and PFPC
agrees that in asserting any rights or claims under this Agreement, it shall
look only to the assets and property of the Fund or the particular Portfolio
in settlement of such rights or claims and not to such members of the Board,
its officers or Shareholders. PFPC further agrees that it will look only to
the assets and property of a particular Portfolio of the Fund, should the Fund
have established separate series, in asserting any rights or claims under this
Agreement with respect to services rendered with respect to that Portfolio and
will not seek to obtain settlement of such rights or claims from the assets of
any other Portfolio of the Fund.
13. Insurance. PFPC shall maintain insurance of the types and in the
amounts deemed by it to be appropriate. To the extent that policies of
insurance may provide for coverage of claims for liability or indemnity by the
parties set forth in this Agreement, the contracts of insurance shall take
precedence, and no provision of this Agreement shall be construed to relieve
an insurer of any obligation to pay claims to the Fund, PFPC or other insured
party which would otherwise be a covered claim in the absence of any provision
of this Agreement.
14. Security.
(a) PFPC represents and warrants that, to the best of its knowledge,
the various procedures and systems which PFPC has implemented with regard to
the safeguarding from loss or damage attributable to fire, theft or any other
cause (including provision for twenty-four hours a day restricted access) of
the Fund's blank checks, certificates, records and other data and
9
<PAGE>
PFPC's equipment, facilities and other property used in the performance of its
obligations hereunder are adequate, and that it will make such changes therein
from time to time as in its judgment are required for the secure performance
of its obligations hereunder. PFPC shall review such systems and procedures on
a periodic basis, and the Fund shall have reasonable access to review these
systems and procedures.
(b) Y2K Compliance. PFPC further represents and warrants that any and
all electronic data processing systems and programs that it uses or retains in
connection with the provision of services hereunder on or before January 1,
1999 will be year 2000 compliant.
15. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on behalf
of the Fund except as specifically set forth herein or as may be specifically
agreed to by PFPC in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder, to act in good faith and
to use its best efforts in performing services provided for under this
Agreement. PFPC shall be liable for any damages arising out of PFPC's failure
to perform its duties under this Agreement to the extent such damages arise
out of PFPC's willful misfeasance, bad faith, negligence or reckless disregard
of such duties.
(b) Without limiting the generality of the foregoing or of
any other provision of this Agreement, PFPC shall not be under any duty or
obligation to inquire into and shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PFPC reasonably believes to be
genuine; or (B) subject to Section 10,
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<PAGE>
delays or errors or loss of data occurring by reason of circumstances beyond
PFPC's control, including acts of civil or military authority, national
emergencies, labor difficulties, fire, flood, catastrophe, acts of God,
insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(c) Notwithstanding anything in this Agreement to the
contrary, neither PFPC nor its affiliates shall be liable to the Fund for any
consequential, special or indirect losses or damages which the Fund may incur
or suffer by or as a consequence of PFPC's or its affiliates' performance of
the services provided hereunder, whether or not the likelihood of such losses
or damages was known by PFPC or its affiliates.
(d) Notwithstanding anything in this Agreement to the
contrary, the Fund shall not be liable to PFPC nor its affiliates for any
consequential, special or indirect losses or damages which PFPC or its
affiliates may incur or suffer by or as a consequence of PFPC's performance of
the services provided hereunder, whether or not the likelihood of such losses
or damages was known by the Fund.
16. Description of Services.
(a) Services Provided on an Ongoing Basis, If Applicable.
(i) Calculate 12b-1 payments to financial
intermediaries, including brokers, and
financial intermediary trail
commissions;
(ii) Develop, monitor and maintain, in
consultation with the Fund, all
systems necessary to implement and
operate the four-tier distribution
system, including Class B conversion
feature, as described in the
registration statement and related
documents
11
<PAGE>
of the Fund, as they may be amended from
time to time;
(iii) Calculate contingent deferred sales
charge amounts upon redemption of Fund
shares and deduct such amounts from
redemption proceeds;
(iv) Calculate front-end sales load amounts
at time of purchase of shares;
(v) Determine dates of Class B conversion
and effect the same;
(vi) Establish and maintain proper
shareholder registrations;
(vii) Review new applications and correspond
with shareholders to complete or
correct information;
(viii) Direct payment processing of checks or
wires;
(ix) Prepare and certify stockholder lists
in conjunction with proxy
solicitations;
(x) Prepare and mail to shareholders
confirmation of activity;
(xi) Provide toll-free lines for direct
shareholder use, plus customer liaison
staff for on-line inquiry response;
(xii) Send duplicate confirmations to
broker-dealers of their clients'
activity, whether executed through the
broker-dealer or directly with PFPC;
(xiii) Provide periodic shareholder lists,
outstanding share calculations and
related statistics to the Fund;
(xiv) Provide detailed data for
underwriter/broker confirmations;
(xv) Prepare and mail required calendar and
taxable year-end tax and statement
information (including forms 1099-DIV
and 1099-B and accompanying
statements);
(xvi) Notify on a daily basis the investment
adviser, accounting agent, and
custodian of fund activity;
12
<PAGE>
(xvii) Perform, itself or through a delegate,
such of the services, whether or not
included within the scope of another
paragraph of this Paragraph 16(a),
specified on Annex B hereto as may be
agreed upon from time to time; and
(xviii) Perform other participating
broker-dealer shareholder services as
may be agreed upon from time to time.
13
<PAGE>
(b) Services Provided by PFPC Under Oral Instructions or Written
Instructions.
(i) Accept and post daily Fund and class
purchases and redemptions;
(ii) Accept, post and perform shareholder
transfers and exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Cancel certificates.
(c) Purchase of Shares. PFPC shall issue and credit an
account of an investor, in the manner described in the Fund's prospectus, once
it receives:
(i) A purchase order;
(ii) Proper information to establish a
shareholder account; and
(iii) Confirmation of receipt or crediting
of funds for such order to the Fund's
custodian.
(d) Redemption of Shares. PFPC shall redeem Shares only if
that function is properly authorized by the Fund's organizational documents or
resolutions of the Fund's Board. Shares shall be redeemed and payment therefor
shall be made in accordance with the Fund's or Portfolio's prospectus.
14
<PAGE>
(i) Broker-Dealer Accounts.
When a broker-dealer notifies PFPC of
a redemption desired by a customer,
and the Fund's or Portfolio's
custodian (the "Custodian") has
provided PFPC with funds, PFPC shall
(a) transfer by Fedwire or other
agreed upon electronic means such
redemption payment to the
broker-dealer for the credit to, and
for the benefit of, the customer's
account or (b) shall prepare and send
a redemption check to the
broker-dealer, made payable to the
broker-dealer on behalf of its
customer.
(ii) Fund-Only Accounts.
If Shares (or appropriate
instructions) are received in proper
form, at the Fund's request Shares may
be redeemed before the funds are
provided to PFPC from the Custodian.
If the recordholder has not directed
that redemption proceeds be wired,
when the Custodian provides PFPC with
funds, the redemption check shall be
sent to and made payable to the
recordholder, unless:
(a) the surrendered certificate is
drawn to the order of an
assignee or holder and transfer
authorization is signed by the
recordholder; or
(b) transfer authorizations are
signed by the
15
<PAGE>
recordholder when Shares are
held in book-entry form.
(e) Dividends and Distributions. Upon receipt of a
resolution of the Fund's Board authorizing the declaration and payment of
dividends and distributions, PFPC shall issue dividends and distributions
declared by the Fund in Shares, or, upon shareholder election, pay such
dividends and distributions in cash, if provided for in the appropriate Fund's
or Portfolio's prospectus. PFPC shall mail to the Fund's shareholders and the
IRS and other appropriate taxing authorities such tax forms, or permissible
substitute forms, and other information relating to dividends and
distributions paid by the Fund (including designations of the portions of
distributions of net capital gain that are 20% rate gain distributions and 28%
rate gain distributions pursuant to IRS Notice 97-64) as are required to be
filed and mailed by applicable law, rule or regulation within the time
required thereby. PFPC shall mail to the Fund's shareholders such tax forms
and other information, or permissible substitute notice, relating to dividends
and distributions paid by the Fund as are required to be filed and mailed by
applicable law, rule or regulation. PFPC shall prepare, maintain and file with
the IRS and other appropriate taxing authorities reports relating to all
dividends above a stipulated amount paid by the Fund to its shareholders as
required by tax or other law, rule or regulation.
(f) Shareholder Account Services.
(i) PFPC will arrange, in accordance with
the appropriate Fund's or Portfolio's
prospectus, for issuance of Shares
obtained through:
- The transfer of funds from
shareholders' accounts at financial
institutions, provided PFPC receives
advance Oral or Written
16
<PAGE>
Instruction of such transfer;
- Any pre-authorized check plan; and
- Direct purchases through broker wire
orders, checks and applications.
(ii) PFPC will arrange, in accordance with
the appropriate Fund's or Portfolio's
prospectus, for a shareholder's:
- Exchange of Shares for shares of
another fund with which the Fund has
exchange privileges;
- Automatic redemption from an account
where that shareholder participates in
a systematic withdrawal plan; and/or
- Redemption of Shares from an account
with a checkwriting privilege.
(g) Communications to Shareholders. Upon timely Written
Instructions, PFPC shall mail all communications by the Fund to its
shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales
of Fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax forms (including substitute forms)
and accompanying information
containing the information required by
paragraph 16(e).
If requested by the Fund, PFPC will receive and tabulate the
proxy cards for the meetings of the Fund's shareholders and supply personnel
to serve as inspectors of election.
17
<PAGE>
(h) Records. PFPC shall maintain those records required by
the Securities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties to be performed by
PFPC hereunder with respect to shareholder accounts or by transfer agents
generally, including records of the accounts for each shareholder showing the
following information:
(i) Name, address and United States
Taxpayer Identification or Social
Security number;
(ii) Number and class of Shares held and
number and class of Shares for which
certificates, if any, have been
issued, including certificate numbers
and denominations;
(iii) Historical information regarding the
account of each shareholder, including
dividends and distributions paid,
their character (e.g. ordinary income,
net capital gain (including 20% rate
gain and 28% rate gain),
exempt-interest, foreign tax-credit
and dividends received deduction
eligible) for federal income tax
purposes and the date and price for
all transactions on a shareholder's
account;
(iv) Any stop or restraining order placed
against a shareholder's account;
(v) Any correspondence relating to the
current maintenance of a shareholder's
account;
(vi) Information with respect to
withholdings; and
(vii) Any information required in order for
the transfer agent to perform any
calculations contemplated or required
by this Agreement.
(i) Lost or Stolen Certificates. PFPC shall place a stop
notice against any certificate reported to be lost or stolen and comply with
all applicable federal regulatory requirements for reporting such loss or
alleged misappropriation. The lost or stolen certificate
18
<PAGE>
will be canceled and uncertificated Shares will be issued to a shareholder's
account only upon:
(i) The shareholder's pledge of a lost instrument bond
or such other appropriate indemnity bond issued by
a surety company approved by PFPC; and
(ii) Completion of a release and indemnification
agreement signed by the shareholder to protect PFPC
and its affiliates.
(j) Shareholder Inspection of Stock Records. Upon a request
from any Fund shareholder to inspect stock records, PFPC will notify the Fund,
and the Fund will issue instructions granting or denying each such request.
Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees and
does hereby release PFPC from any liability for refusal of permission for a
particular shareholder to inspect the Fund's shareholder records.
(k) Withdrawal of Shares and Cancellation of Certificates.
Upon receipt of Written Instructions, PFPC shall cancel
outstanding certificates surrendered by the Fund to reduce the total amount of
outstanding shares by the number of shares surrendered by the Fund.
17. Duration and Termination.
(a) This Agreement shall be effective on the date first written above
and shall continue for a period of three (3) years (the "Initial Term"). Upon
the expiration of the Initial Term, this Agreement shall automatically renew
for successive terms of one (1) year ("Renewal Terms") each provided that it
may be terminated by either party during a Renewal Term upon written notice
given at least ninety (90) days prior to termination. During either the
Initial Term or the Renewal Terms, this Agreement may also be terminated on an
earlier date by either party
19
<PAGE>
for cause.
(b) With respect to the Fund, cause includes, but is not limited to,
(i) PFPC's material breach of this Agreement causing it to fail to
substantially perform its duties under this Agreement. In order for such
material breach to constitute "cause" under this Paragraph, PFPC must receive
written notice from the Fund specifying the material breach and PFPC shall not
have corrected such breach within a 15-day period; (ii) financial difficulties
of PFPC evidenced by the authorization or commencement of a voluntary or
involuntary bankruptcy under the U.S. Bankruptcy Code or any applicable
bankruptcy or similar law, or under any applicable law of any jurisdiction
relating to the liquidation or reorganization of debt, the appointment of a
receiver or to the modification or alleviation of the rights of creditors; and
(iii) issuance of an administrative or court order against PFPC with regard to
the material violation or alleged material violation of the Securities Laws or
other applicable laws related to its business of performing transfer agency
services;
(c) With respect to PFPC, cause includes, but is not limited to, the
failure of the Fund to pay the compensation set forth in writing pursuant to
Paragraph 11 of this Agreement.
(d) Any notice of termination for cause in conformity with
subparagraphs (a), (b) and (c) of this Paragraph by the Fund shall be
effective thirty (30) days from the date of any such notice. Any notice of
termination for cause by PFPC shall be effective 90 days from the date of such
notice.
(e) Upon the termination hereof, the Fund shall pay to PFPC such
compensation as may be due for the period prior to the date of such
termination. In the event that the Fund
20
<PAGE>
designates a successor to any of PFPC's obligations under this Agreement, PFPC
shall, at the direction and expense of the Fund, transfer to such successor
all relevant books, records and other data established or maintained by PFPC
hereunder including, a certified list of the shareholders of the Fund or any
Portfolio thereof with name, address, and if provided, taxpayer identification
or Social Security number, and a complete record of the account of each
shareholder. To the extent that PFPC incurs expenses related to a transfer of
responsibilities to a successor, other than expenses involved in PFPC's
providing the Fund's books and records described in the preceding sentence to
the successors, PFPC shall be entitled to be reimbursed for such extraordinary
expenses, including any out-of-pocket expenses reasonably incurred by PFPC in
connection with the transfer.
(f) Any termination effected pursuant to this Paragraph shall not
affect the rights and obligations of the parties under Paragraph 12 hereof.
(g) Notwithstanding the foregoing, this Agreement shall terminate
with respect to the Fund or any Portfolio thereof upon the liquidation,
merger, or other dissolution of the Fund or Portfolio or upon the Fund's
ceasing to be a registered investment company.
18. Registration as a Transfer Agent. PFPC represents that it is
currently registered with the appropriate federal agency for the registration
of transfer agents, or is otherwise permitted to lawfully conduct its
activities without such registration and that it will remain so registered or
able to so conduct such activities for the duration of this Agreement. PFPC
agrees that it will promptly notify the Fund in the event of any material
change in its status as a registered transfer agent. Should PFPC fail to be
registered with the SEC as a transfer agent at
21
<PAGE>
any time during this Agreement, and such failure to register does not permit
PFPC to lawfully conduct its activities, the Fund may, on written notice to
PFPC, terminate this Agreement upon five days written notice to PFPC.
19. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the
address of the Fund or (c) if to neither of the foregoing, at such other
address as shall have been given by like notice to the sender of any such
notice or other communication by the other party. If notice is sent by
confirming telegram, cable, telex or facsimile sending device during regular
business hours, it shall be deemed to have been given immediately; if sent at
a time other than regular business hours, such notice shall be deemed to have
been given at the opening of the next business day. If notice is sent by
first-class mail, it shall be deemed to have been given three days after it
has been mailed. If notice is sent by messenger, it shall be deemed to have
been given on the day it is delivered. All postage, cable, telegram, telex and
facsimile sending device charges arising from the sending of a notice
hereunder shall be paid by the sender.
20. Amendments. This Agreement, or any term thereof, may be changed
or waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
21. Additional Portfolios. In the event that the Fund establishes one
or more investment series in addition to and with respect to which it desires
to have PFPC render services
22
<PAGE>
as transfer agent, registrar, dividend disbursing agent and related services
agent under the terms set forth in this Agreement, it shall so notify PFPC in
writing, and PFPC shall agree in writing to provide such services, and such
investment series shall become a Portfolio hereunder, subject to such
additional terms, fees and conditions as are agreed to by the parties.
22. Delegation; Assignment.
(a) PFPC may, at its own expense, assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the
Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee)
agrees with PFPC and the Fund to comply with all relevant provisions of the
Securities Laws; and (iii) PFPC and such delegate (or assignee) promptly
provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation (or assignment),
including (without limitation) the capabilities of the delegate (or assignee).
The assignment and delegation of any of PFPC's duties under this subparagraph
(a) shall not relieve PFPC of any of its responsibilities or liabilities under
this Agreement.
(b) PFPC may delegate to PaineWebber Incorporated its obligation to
perform the services described on Annex B hereto. In addition, PFPC may assign
its rights and delegate its other duties hereunder to PaineWebber Incorporated
or Mitchell Hutchins Asset Management Inc. or an affiliated person of either,
provided that (i) PFPC gives the Fund thirty (30) days' prior written notice;
(ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with
all relevant provisions of the Securities Laws;
23
<PAGE>
and (iii) PFPC and such delegate (or assignee) promptly provide such
information as the Fund may request, and respond to such questions as the Fund
may ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee). In assigning its
rights and delegating its duties under this paragraph, PFPC may impose such
conditions or limitations as it determines appropriate including the condition
that PFPC be retained as a sub-transfer agent.
(c) In the event that PFPC assigns its rights and delegates its
duties under this section, no amendment of the terms of this Agreement shall
become effective without the written consent of PFPC.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24
<PAGE>
24. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
25. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their agreement,
if any, with respect to services to be performed and fees payable under this
Agreement.
(b) Captions. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(c) Governing Law. This Agreement shall be deemed to be a
contract made in Delaware and governed by Delaware law, without regard to
principles of conflicts of law.
(d) Partial Invalidity. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any
party to this Agreement shall constitute the valid and binding execution
hereof by such party.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PFPC INC.
By: ____________________________
Title: _________________________
PAINEWEBBER INVESTMENT TRUST II
By: ____________________________
Title:__________________________
26
<PAGE>
ANNEX A
Portfolios
PaineWebber Emerging Markets Equity Fund
27
<PAGE>
AUTHORIZED PERSONS APPENDIX
Name (Type) Signature
___________________ ___________________
___________________ ___________________
___________________ ___________________
___________________ ___________________
___________________ ___________________
___________________ ___________________
28
<PAGE>
ANNEX B
a. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all
shareholder inquiries received by telephone, mail or in-person
regarding the Funds and their accounts
b. Provide timely execution of redemptions, exchanges and non-financial
transactions directed to investment executives and specifically
requested by Fund shareholders
c. Issue checks from proceeds of Fund share redemptions to shareholders
as directed by the shareholders or their agents
d. Process and maintain shareholder account registration information
e. With respect to customer accounts maintained through PaineWebber
Incorporated ("PaineWebber"), review new applications and correspond
with shareholders to complete or correct information
f. Prepare and mail monthly or quarterly consolidated account statements
that reflect PaineWebber Mutual Fund balances and transactions (such
information to be combined with other activity and holdings in
investors' brokerage accounts if this responsibility is delegated to
PaineWebber)
g. Establish and maintain a dedicated service center with sufficient
facilities, equipment and skilled personnel to address all branch
inquiries regarding operational issues and performance
h. Capture, process and mail required tax information to shareholders
and report this information to the Internal Revenue Service
i. Provide the capability to margin PaineWebber Mutual Funds held within
the client's brokerage account (if this responsibility is delegated
to PaineWebber)
j. Prepare and provide shareholder registrations for mailing of proxies,
reports and other communications to shareholders
k. Develop, maintain and issue checks from the PaineWebber systematic
withdrawal plan offered within the client's brokerage account (if
this responsibility is delegated to PaineWebber)
29
<PAGE>
l. Maintain duplicate shareholder records and reconcile those records
with those at the transfer agent (if this responsibility is delegated
to PaineWebber)
m. Process and mail duplicate PaineWebber monthly or quarterly
statements to PaineWebber Investment Executives
n. Establish and maintain shareholder distribution options (i.e.,
election to have dividends paid in cash, rather than reinvested in
Fund shares)
o. Process and mail purchase, redemption and exchange confirmations to
Fund shareholders and PaineWebber Investment Executives
p. Issue dividend checks to shareholders that select cash distributions
to their brokerage account (if this responsibility is delegated to
PaineWebber)
q. Develop and maintain the automatic investment plan offered within the
client's brokerage account (if this responsibility is delegated to
PaineWebber)
r. Provide bank-to-bank wire transfer capabilities related to
transactions in Fund shares
s. Maintain computerized compliance programs for blue sky and
non-resident alien requirements (only with respect to PaineWebber
Cashfund, Inc.)
30
<PAGE>
Exhibit No. 10
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D. C. 20036-1800
Telephone 202-778-9000
February 27, 1998
PaineWebber Investment Trust II
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Investment
Trust II ("Trust"), as to certain matters regarding the issuance of certain
Shares of the Trust. As used in this letter, the term "Shares" means the Class
A, Class B, Class C and Class Y shares of beneficial interest of PaineWebber
Emerging Markets Equity Fund, a series of the Trust, during the time that
Post-Effective Amendment No. 15 to the Trust's Registration Statement on Form
N-1A ("PEA") is effective and has not been superseded by another post-effective
amendment.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the Trust or any series shall look only
to the assets of the Trust for the appropriate series for payment. It also
requires that notice of such disclaimer be given in each note, bond, contract,
certificate undertaking or instrument made or issued by the officers or the
trustees of the Trust on behalf of the Trust. The Declaration of Trust further
provides: (1) for indemnification from the assets of the Trust or the
appropriate series for all loss and expense of any shareholder held personally
liable for the obligations of the Trust or any series by virtue of ownership of
shares of the Trust or such series; and (2) for the Trust or appropriate series
to assume the defense of any claim against the shareholder for any act or
obligation of the Trust or series. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust or series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated
December 19, 1997 on PaineWebber Emerging Markets Equity Fund in this
Registration Statement (Form N-1A No. 33-5071) of PaineWebber Investment Trust
II.
ERNST & YOUNG LLP
New York, New York
February 23, 1998
<PAGE>
Exhibit No. 13
PURCHASE AGREEMENT
Kidder, Peabody Investment Trust II, a business trust organized under
the laws of the Commonwealth of Massachusetts (the "Trust"), and Kidder Peabody
Asset Management, Inc. ("KPAM"), a corporation organized under the laws of the
State of Delaware, agree as follows:
1. Offer and Purchase.
The Trust offers KPAM and KPAM purchases (1) 139 Class A shares, par
value of $.001 per share, (2) 139 Class B shares, par value of $.001 per share,
and (3) 139 Class C shares, par value $.001 per share (collectively, the
"Shares"), of Kidder, Peabody Emerging Markets Equity Fund (the "Fund"), a
series of the Trust, at a price of $12.00 per Share. KPAM acknowledges receipt
of the Shares, and the Trust acknowledges receipt from KPAM of $5,004 in full
payment for the Shares.
2. Representation by KPAM.
KPAM represents and warrants to the Trust that the shares are being
acquired for investment purposes and not with a view to resale or further
distribution.
3. Reduction of Redemption Proceeds.
KPAM agrees that, if any of the Shares are redeemed before five years
after the date of this Agreement by KPAM or by any other holder, the proceeds of
the redemption will be reduced by the unamortized portion of the organization
expenses attributable to the class of shares that has been redeemed in the same
proportion as the number of shares being redeemed bears to the number of initial
shares of the Fund of that class of shares outstanding at the time of the
redemption.
4. Filing of Declaration of Trust.
The Trust represent that a copy of its Declaration of Trust dated as of
August 10, 1992, as amended from time to time (the "Declaration of Trust"), is
on file with the Secretary of the Commonwealth of Massachusetts and with the
Boston City Clerk.
5. Limitation of Liability.
The Trust and KPAM agree that the obligations of the Trust under this
Agreement will not be binding upon any of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the Trust,
individually, but are binding only upon the assets and property of the Trust, as
provided in the Declaration of Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of the Trust, and signed by an
authorized officer of the Trust, acting as such, and neither the authorization
by the Trustees nor the execution and delivery by the officer will be deemed to
have been made by any of them
<PAGE>
individually or to impose any liability on any of them personally, but will
bind only the trust property of the Trust as provided in the Declaration of
Trust. No series of the Trust, including the Fund, will be liable for any
claims against any other series
6. Dates.
The Agreement has been executed by the Trust and KPAM as of November
10, 1993.
KIDDER, PEABODY INVESTMENT TRUST II
By: /s/ Lawrence H. Kaplan
-----------------------------------------
KIDDER PEABODY ASSET MANAGEMENT, INC.
By: /s/ Lawrence H. Kaplan
-----------------------------------------
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890567
<NAME> PAINEWEBBER EMERGING MARKETS EQUITY FUND-CLASS A
<SERIES>
<NUMBER> 001
<NAME> MH/KP INVESTMENT TRUST II
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-1-1997
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