0000912057-01-534953.txt : 20011018
0000912057-01-534953.hdr.sgml : 20011018
ACCESSION NUMBER: 0000912057-01-534953
CONFORMED SUBMISSION TYPE: 497
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011010
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BRINSON FUNDS INC
CENTRAL INDEX KEY: 0000886244
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-68628
FILM NUMBER: 1755777
BUSINESS ADDRESS:
STREET 1: 209 S LASALLE ST
CITY: CHICAGO
STATE: IL
ZIP: 60604-1795
BUSINESS PHONE: 8001482430
MAIL ADDRESS:
STREET 1: 209 S LASALLE ST
CITY: CHICAGO
STATE: IL
ZIP: 60604-1795
497
1
a2060304z497.txt
497
PAINEWEBBER HIGH INCOME FUND
Dear Shareholder:
Enclosed is a Notice of a Special Meeting of Shareholders (the "Meeting") of
the PaineWebber High Income Fund (the "PaineWebber Fund"), which is a series of
Brinson Managed Investments Trust (the "PaineWebber Trust"). The Meeting has
been called for November 8, 2001 at 10:00 a.m. Eastern time at 1285 Avenue of
the Americas, 14th Floor, New York, New York 10019-6028. The accompanying
Prospectus/Proxy Statement describes a proposal being presented for your
consideration and requests your prompt attention and vote via the enclosed proxy
card or by telephone or via the Internet.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD!
This Meeting is critically important. You are being asked to consider and
approve an Agreement and Plan of Reorganization that would result in your shares
of the PaineWebber Fund being exchanged for those of the High Yield Fund (the
"Brinson Fund"), a series of The Brinson Funds (the "Brinson Trust"). If the
shareholders of the PaineWebber Fund approve the proposal, the Brinson Fund will
acquire substantially all of the assets of the PaineWebber Fund and you will
receive shares of the Brinson Fund equal in value to your investment in shares
of the PaineWebber Fund. You would no longer be a shareholder of the PaineWebber
Fund and, instead, you would be a shareholder of the Brinson Fund.
The Brinson Fund has an investment objective and investment policies that
are substantially similar (but not identical) to those of the PaineWebber Fund,
as described in the Prospectus/Proxy Statement. The Brinson Fund, like the
PaineWebber Fund, is sponsored by an entity belonging to the UBS Asset
Management business group. The transaction is being proposed in order to enhance
the distribution of fund shares by eliminating redundant investment products
sponsored by members of the same organization. The transaction is also being
proposed for the purpose of creating a larger fund with a better opportunity for
sustainable positive results. A larger fund should be better able to obtain
certain savings and lower costs for its shareholders.
Please take the time to review the entire Prospectus/Proxy Statement and
vote NOW! Whether or not you plan to attend the Meeting, please vote your shares
by mail, by telephone or via the Internet. If you determine at a later date that
you wish to attend this Meeting, you may revoke your proxy and vote in person.
Thank you for your prompt attention and participation.
Very truly yours,
/s/ Brian M. Storms
Brian M. Storms
PRESIDENT
PAINEWEBBER HIGH INCOME FUND
(A SERIES OF BRINSON MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET, NEW YORK, NY 10019-6114
-------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 8, 2001
-------------------
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of PaineWebber High Income Fund (the "PaineWebber Fund"), a series of
Brinson Managed Investments Trust (the "PaineWebber Trust"), has been called by
the Board of Trustees of the PaineWebber Trust and will be held at 1285 Avenue
of the Americas, 14th Floor, New York, New York, 10019-6028, on November 8, 2001
at 10:00 a.m. Eastern time. The Meeting is being called for the following
purpose:
1. For shareholders of the PaineWebber Fund to vote on an Agreement and
Plan of Reorganization between the PaineWebber Trust, on behalf of
the PaineWebber Fund, and The Brinson Funds (the "Brinson Trust"),
on behalf of High Yield Fund (the "Brinson Fund"), that provides
for: (i) the acquisition of substantially all of the assets and
liabilities of the PaineWebber Fund in exchange for shares of the
Brinson Fund; (ii) the PRO RATA distribution of shares of the
Brinson Fund to the shareholders of the PaineWebber Fund; and
(iii) the liquidation and dissolution of the PaineWebber Fund.
The transaction contemplated by the Agreement and Plan of Reorganization is
described in the attached Prospectus/Proxy Statement. A copy of the form of the
Agreement and Plan of Reorganization is attached as Exhibit A to the
Prospectus/Proxy Statement.
Shareholders of record of the PaineWebber Fund as of the close of business
on September 14, 2001 are entitled to notice of, and to vote at, the Meeting or
any adjournment thereof. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
VOTE YOUR SHARES BY RETURNING THE PROXY CARD BY MAIL IN THE ENCLOSED POSTAGE-
PAID ENVELOPE OR BY VOTING BY TELEPHONE OR VIA THE INTERNET. YOUR VOTE IS
IMPORTANT.
By Order of the Board of Trustees,
AMY R. DOBERMAN
SECRETARY
October 8, 2001
TO SECURE THE LARGEST POSSIBLE REPRESENTATION AND TO SAVE THE EXPENSE OF FURTHER
MAILINGS, PLEASE MARK YOUR PROXY CARD, SIGN IT, AND RETURN IT IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
PREFER, YOU MAY INSTEAD VOTE BY TELEPHONE OR VIA THE INTERNET. YOU MAY REVOKE
YOUR PROXY AT ANY TIME AT OR BEFORE THE MEETING OR VOTE IN PERSON IF YOU ATTEND
THE MEETING.
Rule 497(b)
File No. 333-68628
PROSPECTUS/PROXY STATEMENT
SEPTEMBER 28, 2001
-------------------
ACQUISITION OF THE ASSETS OF
PAINEWEBBER HIGH INCOME FUND
(A SERIES OF BRINSON MANAGED INVESTMENTS TRUST)
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
(800) 647-1568
BY AND IN EXCHANGE FOR SHARES OF
HIGH YIELD FUND
(A SERIES OF THE BRINSON FUNDS)
209 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60604-1295
(800) 647-1568
-------------------
This Prospectus/Proxy Statement solicits proxies to be voted at a Special
Meeting of Shareholders (the "Meeting") of PaineWebber High Income Fund (the
"PaineWebber Fund"), a series of Brinson Managed Investments Trust (the
"PaineWebber Trust"), to approve or disapprove an Agreement and Plan of
Reorganization (the "Agreement and Plan"). If shareholders of the PaineWebber
Fund vote to approve the Agreement and Plan, the net assets of the PaineWebber
Fund will be acquired by the High Yield Fund (the "Brinson Fund"), a series of
The Brinson Funds (the "Brinson Trust"), in exchange for shares of the Brinson
Fund.
The Meeting will be held at 1285 Avenue of the Americas, 14th Floor, New
York, New York 10019-6028, on November 8, 2001 at 10:00 a.m. Eastern time. The
Board of Trustees of the PaineWebber Trust, on behalf of the PaineWebber Fund,
is soliciting these proxies. This Prospectus/Proxy Statement will first be sent
to shareholders on or about October 8, 2001.
If the shareholders of the PaineWebber Fund vote to approve the Agreement
and Plan, shareholders of each class of the PaineWebber Fund (Class A, Class B,
Class C and Class Y) will receive shares of the equivalent class of the Brinson
Fund (Class A, Class B, Class C or Class Y) equal in value to their investment
in the PaineWebber Fund. The PaineWebber Fund will then be liquidated.
The Brinson Fund's investment objective is to provide its investors with
high current income, along with capital growth, when consistent with high
current income. Similarly, the PaineWebber Fund's investment objective is to
provide its investors with high income.
This Prospectus/Proxy Statement gives the information about Brinson Fund
shares that you should know before investing. You should retain it for future
reference. A Statement of Additional Information, dated September 28, 2001,
relating to this Prospectus/Proxy Statement, contains more information about the
Brinson Fund, the PaineWebber Fund and the proposed reorganization and has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated
herein by reference. You can request a free copy of the Statement of Additional
Information by calling 1-800-647-1568, or writing to the Brinson Fund at 209
South LaSalle Street, Chicago, Illinois 60604-1295.
The Annual Report to shareholders of the Brinson Fund for the fiscal year
ended June 30, 2001 (the "Brinson Fund Annual Report") is incorporated by
reference and accompanies this Prospectus/Proxy Statement, and is intended to
provide you with information about the Brinson Fund.
The Prospectus of the PaineWebber Fund (the "PaineWebber Fund Prospectus")
and the Statement of Additional Information of the PaineWebber Fund (the
"PaineWebber Fund SAI"), each dated March 31, 2001, have been filed with the SEC
and are incorporated by reference into this Prospectus/Proxy Statement. The
Annual Report to Shareholders of the PaineWebber Fund, dated November 30, 2000,
has also been filed with the SEC and is incorporated herein by reference
("PaineWebber Fund Annual Report"). You can request a free copy of any of these
documents described above by calling 1-800-647-1568, or by writing to the
PaineWebber Fund at 51 West 52nd Street, New York, New York 10019-6114.
LIKE ALL MUTUAL FUNDS, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY.
MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
ii
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
PAGE
----
COVER PAGES....................................... Cover
SUMMARY........................................... 2
What is the purpose of the proposal?............ 2
How will the shareholder voting be handled?..... 3
What are the general tax consequences of the
Transaction?.................................. 3
COMPARISONS OF SOME IMPORTANT FEATURES............ 3
How do the investment objectives and policies of
the Funds compare?............................ 3
What are the risks of an investment in the
Funds?........................................ 4
Who manages the Funds?.......................... 4
What are the fees and expenses of each Fund and
what might they be after the Transaction?..... 5
Where can I find more financial information
about the Funds?.............................. 7
What are other key features of the Funds?....... 7
Administrative, Transfer Agency, Accounting
and Custody Services......................... 7
Distribution Services and Rule 12b-1 Plans.... 8
Purchase, Exchange and Redemption
Procedures................................... 9
Dividends, Distributions and Taxes............ 11
REASONS FOR THE TRANSACTION....................... 11
INFORMATION ABOUT THE TRANSACTION................. 13
How will the Transaction be carried out?........ 13
Who will pay the expenses of the Transaction?... 13
What are the tax consequences of the
Transaction?.................................. 13
What should I know about Brinson Fund Shares?... 13
How do shareholder rights and obligations of the
Funds compare?................................ 14
What are the capitalizations of the Funds and
what might the capitalization be after the
Transaction?.................................. 15
COMPARISON OF INVESTMENT OBJECTIVES AND
POLICIES........................................ 16
Are there any significant differences between
the investment objectives and policies of the
Funds?........................................ 16
What are the risk factors associated with
investments in the Funds?..................... 18
How do the investment restrictions of the Funds
differ?....................................... 19
VOTING INFORMATION................................ 20
How many votes are necessary to approve the
Agreement and Plan?........................... 20
How do I ensure my vote is accurately
recorded?..................................... 20
Can I revoke my proxy?.......................... 20
What other matters will be voted upon at the
Meeting?...................................... 20
Who is entitled to vote?........................ 21
What other solicitations will be made?.......... 21
INFORMATION ABOUT THE BRINSON FUND................ 21
INFORMATION ABOUT THE PAINEWEBBER FUND............ 21
INFORMATION ABOUT EACH FUND....................... 22
PRINCIPAL HOLDERS OF SHARES....................... 22
1
SUMMARY
This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in the
rest of this Prospectus/Proxy Statement, including the Agreement and Plan
(attached as Exhibit A), "Additional Information Regarding the Brinson Fund"
(attached as Exhibit B) and the Brinson Fund Annual Report (included as
Exhibit C).
WHAT IS THE PURPOSE OF THE PROPOSAL?
The Board of Trustees of the PaineWebber Trust has approved an Agreement and
Plan for the PaineWebber Fund and recommends that shareholders of the
PaineWebber Fund vote to approve the Agreement and Plan. If shareholders of the
PaineWebber Fund approve the Agreement and Plan, the Fund's net assets will be
transferred to the Brinson Fund in exchange for an equal value of shares of the
Brinson Fund. These shares of the Brinson Fund will then be distributed to the
PaineWebber Fund's shareholders. As illustrated in the following chart,
shareholders of each class of the PaineWebber Fund will receive shares of the
equivalent class of the Brinson Fund equal in value to their investment in the
PaineWebber Fund.(1) Shareholders of:
Class A shares of the PaineWebber Fund will receive Class A shares of the Brinson Fund
("PaineWebber Fund Class A Shares") ("Brinson Fund Class A Shares")
Class B shares of the PaineWebber Fund will receive Class B shares of the Brinson Fund
("PaineWebber Fund Class B Shares") ("Brinson Fund Class B Shares")
Class C shares of the PaineWebber Fund will receive Class C shares of the Brinson Fund
("PaineWebber Fund Class C Shares") ("Brinson Fund Class C Shares")
Class Y shares of the PaineWebber Fund will receive Class Y shares of the Brinson Fund
("PaineWebber Fund Class Y Shares") ("Brinson Fund Class Y Shares")
The PaineWebber Fund will then be liquidated. As a result of the proposed
transaction, you will cease to be a shareholder of the PaineWebber Fund and you
will become a shareholder of the Brinson Fund. This exchange will occur on a
date agreed to between the PaineWebber Trust and the Brinson Trust. This
proposed transaction is referred to in this Prospectus/Proxy Statement as the
"Transaction."
The Brinson Fund is a series of the Brinson Trust, an investment company
that is advised by Brinson Partners, Inc. The Brinson Fund has an investment
objective and investment polices that are similar, but not identical, to those
of the PaineWebber Fund. The investment adviser for the Brinson Fund and the
investment adviser for the PaineWebber Fund are both indirect wholly owned
subsidiaries of UBS AG.
For the reasons set forth below under "Reasons for the Transaction," the
Board of Trustees of the PaineWebber Trust ("PaineWebber Trustees") has
concluded that the Transaction is in the best interests of the shareholders of
the PaineWebber Fund. The PaineWebber Trustees also concluded that no dilution
in value would result to the shareholders of the PaineWebber Fund as a result of
the Transaction.
THE BOARD OF TRUSTEES OF THE PAINEWEBBER TRUST RECOMMENDS THAT YOU VOTE TO
APPROVE THE AGREEMENT AND PLAN.
-------------------
(1) The shares of the Brinson Fund currently designated as Class N shares and
Class I shares will be redesignated as Class A shares and Class Y shares,
respectively, effective October 29, 2001. For clarity of presentation in this
Prospectus/Proxy Statement, Class N shares will be referred to as Brinson Fund
Class A Shares and Class I shares will be referred to as Brinson Fund Class Y
Shares.
2
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares at the close of business on September 14, 2001
(the "Record Date") will be entitled to vote at the Meeting, and will be
entitled to one vote for each full share and a fractional vote for each
fractional share that they hold. To approve the reorganization of the
PaineWebber Fund into the Brinson Fund, a majority (as defined under the
Investment Company Act of 1940, as amended (the "1940 Act")) of the outstanding
voting shares of the PaineWebber Fund must be voted in favor of the Agreement
and Plan.
Please vote by proxy as soon as you receive this Prospectus/Proxy Statement.
You may cast your vote by completing and signing the enclosed proxy card or by
telephone or via the Internet. If you return your signed proxy card or vote by
telephone or via the Internet, your votes will be officially cast at the Meeting
by the persons appointed as proxies. You can revoke your proxy or change your
voting instructions at any time until the vote is taken at the Meeting. For more
details about shareholder voting, see the "Voting Information" section of this
Prospectus/Proxy Statement.
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?
It is expected that shareholders of the PaineWebber Fund will not recognize
any gain or loss for federal income tax purposes as a result of the exchange of
their shares for shares of the Brinson Fund. You should, however, consult your
tax advisor regarding the effect, if any, of the Transaction in light of your
individual circumstances. You should also consult your tax advisor about state
and local tax consequences of the Transaction, if any, because the information
about tax consequences in this document relates to the federal income tax
consequences only. For further information about the tax consequences of the
Transaction, see "Information About the Transaction -- What are the tax
consequences of the Transaction?"
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS COMPARE?
The PaineWebber Fund and the Brinson Fund have substantially similar
investment objectives. The Brinson Fund seeks to provide its investors with high
current income, along with capital growth, when consistent with high current
income. The PaineWebber Fund seeks to provide its investors with high income.
Both the PaineWebber Fund's objective and the Brinson Fund's objective are
fundamental, which means they cannot be changed without shareholder approval.
The Brinson Fund will invest in securities that its manager expects will
appreciate in value as a result of declines in long-term interest rates or
favorable developments affecting the business or prospects of the issuer that
may improve the issuer's financial condition and credit rating. While both Funds
may invest in securities not paying current income, the PaineWebber Fund is
limited to investing 25% of its total assets in such securities.
Both Funds try to achieve their objectives by primarily investing their
assets in high yield, lower-rated (and therefore high risk) debt securities
issued by U.S. and foreign companies. High yield, lower-rated securities are
those securities rated Ba or below by Moody's Investors Service, Inc.
("Moody's") or BB or below by Standard & Poor's Ratings Group
("S&P-Registered Trademark-"). The Brinson Fund normally must invest at least
80% of its assets in fixed income securities rated Ba or lower by Moody's or BB
or lower by S&P-Registered Trademark-. The PaineWebber Fund invests at least 65%
of its assets in high yield corporate bonds that are rated B or better by
Moody's or S&P-Registered Trademark-. Therefore, one current difference between
the Funds is that the Brinson Fund is required to invest a larger percentage of
its assets in high yield debt securities than does the PaineWebber Fund. The
PaineWebber Fund, however, if it did not reorganize with the Brinson Fund, would
be required under a new rule promulgated by the SEC to adopt a similar 80%
policy in order to be considered a "high income" fund. Currently, more than 80%
of each Fund's assets are invested in high yield debt securities. The Brinson
Fund is also permitted to invest to a greater extent in debt securities rated
below B; the PaineWebber Fund may not invest more than 35% of its total assets
in such securities. A greater investment in lower-rated debt securities by the
Brinson Fund would expose the Brinson Fund to the risks
3
associated with such securities to a greater degree. The PaineWebber Fund,
however, is permitted to invest slightly more of its assets in foreign
securities. Both Funds are permitted to invest in debt securities of any
maturity length.
For further information about the investment objectives and policies of the
Funds, see "Comparison of Investment Objectives and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, an investment in the PaineWebber Fund and the
Brinson Fund involves risks. There can be no guarantee against losses resulting
from an investment in either Fund, nor can there be any assurance that a Fund
will achieve its investment objective. The risks associated with an investment
in each of the Funds are substantially similar and include those risks
associated with the credit quality of debt security issuers, changes in interest
rates, market conditions, and investments in foreign securities. To the extent
the Brinson Fund may invest more of its assets in high yield debt securities,
especially those debt securities rated below B, an investment in that Fund may
be exposed to greater credit risks. However, the Brinson Fund is not currently
investing to a greater extent than the PaineWebber Fund in such high yield debt
securities. To the extent the PaineWebber Fund invests more of its assets in
foreign securities than the Brinson Fund, it has greater exposure to the risks
associated with those investments than the Brinson Fund. Furthermore, the
portfolio turnover rate for the PaineWebber Fund can, at times, exceed 100%,
which may increase transaction costs for that Fund.
For further information about the investment objectives and policies of the
Funds, see "Comparison of Investment Objectives and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of the Brinson Fund is the
responsibility of the Board of Trustees of the Brinson Trust ("Brinson
Trustees"). The Brinson Trustees elect officers who are responsible for the
day-to-day operations of the Fund.
Brinson Partners, Inc. ("Brinson Partners"), a Delaware corporation, is the
investment adviser to the Brinson Fund. Brinson Partners is an investment
management firm, managing as of June 30, 2001, $370.3 billion in assets,
primarily for institutional pension and profit sharing funds. Brinson Partners
was organized in 1989 when it acquired the institutional asset management
business of The First National Bank of Chicago and First Chicago Investment
Advisors, N.A. Brinson Partners and its predecessor entities have managed both
U.S. and non-U.S. investment portfolios since 1974 and global investment
portfolios since 1982. Brinson Partners and Brinson Advisors, Inc. ("Brinson
Advisors"), the investment advisor for the PaineWebber Fund and administrator
for the PaineWebber Fund and Brinson Fund, are both indirect wholly owned
subsidiaries of UBS AG. UBS AG, with headquarters in Zurich, Switzerland, is an
internationally diversified organization with operations in many aspects of the
financial services industry. The address of Brinson Partners is 209 South
LaSalle Street, Chicago, Illinois 60604-1295.
Pursuant to an investment advisory agreement relating to the Brinson Fund,
Brinson Partners is entitled to receive from the Brinson Fund an investment
advisory fee equal on an annual basis to 0.60% of the average daily net assets
of the Fund. Brinson Partners has contracted to waive its fees and reimburse
certain expenses so that the total operating expenses of the Brinson Fund,
exclusive of 12b-1 fees, do not exceed 0.70% of the average daily net assets of
each class of the Brinson Fund.
Brinson Partners, pursuant to a sub-advisory agreement, employs Brinson
Partners (NY), Inc. ("Brinson (NY)") to serve as the Brinson Fund's sub-advisor.
Brinson (NY) is located at 10 East 50th Street, New York, New York 10022. Like
Brinson Partners, Brinson (NY) is a subsidiary of UBS AG and an affiliate of
Brinson Advisors. As of June 30, 2001, Brinson (NY) had approximately
$14.3 billion in assets under management.
4
Subject to Brinson Partners' control and supervision and the direction of
the Brinson Trustees and the Brinson Trust's officers, Brinson (NY) is
responsible for (i) managing the investment and reinvestment of the Brinson
Fund's portfolio that Brinson Partners designates from time to time, including
placing orders for the purchase and sale of portfolio securities; and
(ii) furnishing Brinson Partners with investment recommendations, asset
allocation advice, research and other investment services. Brinson Partners pays
Brinson (NY) a portion of the fee it receives under its investment advisory
agreement at the rate of 0.10% of the Brinson Fund's daily net assets.
Investment decisions for the Brinson Fund are made by management teams at
Brinson Partners and Brinson (NY). No member of any investment management team
is primarily responsible for making recommendations for portfolio purchases.
The management of the business and affairs of the PaineWebber Fund is the
responsibility of the PaineWebber Trustees. The PaineWebber Trustees elect
officers who are responsible for the day-to-day operations of the PaineWebber
Fund.
Brinson Advisors, formerly known as Mitchell Hutchins Asset Management Inc.,
is the investment manager and administrator of the PaineWebber Fund. As of
June 30, 2001, Brinson Advisors was the investment advisor or sub-advisor of 23
investment companies with 57 separate series and aggregate assets of
approximately $63.8 billion.
Pursuant to an investment advisory agreement for the PaineWebber Fund,
Brinson Advisors is entitled to receive a fee for advisory and administrative
services at the annual rate of 0.50% of the PaineWebber Fund's average daily net
assets.
Brinson Advisors has delegated daily management of the assets of the
PaineWebber Fund to Massachusetts Financial Services Company ("MFS"), pursuant
to a sub-advisory agreement. MFS is located at 500 Boylston Street, Boston,
Massachusetts 02116. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which, in turn, is an indirect wholly owned subsidiary
of Sun Life Financial Services of Canada, Inc. Brinson Advisors pays MFS a
portion of the fee it receives under its investment advisory agreement at the
rate of 0.45% of the PaineWebber Fund's average daily net assets.
Robert J. Manning and John Addeo are the portfolio managers for the
PaineWebber Fund responsible for the day-to-day management of the Fund.
Mr. Manning has been employed in the investment management area of MFS since
1984. Mr. Addeo, a vice president of MFS, has been employed in the investment
management area of MFS since 1998. Prior to joining MFS, Mr. Addeo was a vice
president in the high yield department at Eaton Vance from 1997 to 1998, and a
vice president in the high yield department of Keystone Investments from 1995 to
1997. Robert J. Manning and John Addeo have held their PaineWebber Fund
responsibilities since October 10, 2000.
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?
The following tables describe the fees and expenses that you may pay if you
buy and hold shares of the Funds. The sales charge structures of the Funds are
similar, but not identical. The operating expenses shown for the PaineWebber
Fund are based on expenses incurred during the PaineWebber Fund's most recent
fiscal year ending November 30, 2000. The operating expenses shown for the
Class A Shares (formerly designated as Class N Shares) and Class Y Shares
(formerly designated as Class I Shares) of the Brinson Fund, before and after
the Transaction, are based on expenses incurred during the Brinson Fund's most
recent fiscal year ending June 30, 2001, but have been restated to reflect the
fees that will be in effect at the time the Transaction is consummated. The
Class B Shares and Class C Shares of the Brinson Fund are new classes of shares
and the operating expenses shown for these classes of shares, before and after
the Transaction, are based on estimated expenses for the Brinson Fund's current
fiscal year.
5
FEES AND EXPENSES FOR THE BRINSON FUND AND THE PAINEWEBBER FUND
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
MAXIMUM SALES MAXIMUM SALES CHARGE MAXIMUM CONTINGENT
CHARGE (LOAD) (LOAD) ON PURCHASES DEFERRED SALES CHARGE (LOAD) EXCHANGE
FUND NAMES & CLASSES OF SHARES (AS A % OF OFFERING PRICE) (AS A % OF OFFERING PRICE) (AS A % OF OFFERING PRICE) FEE
------------------------------ -------------------------- -------------------------- ---------------------------- --------
PAINEWEBBER FUND
Class A..................... 4.00% 4.00% None None
Class B..................... 5.00% None 5.00% None
Class C..................... 0.75% None 0.75% None
Class Y..................... None None None None
BRINSON FUND
Class A..................... 4.50% 4.50% None None
Class B..................... 5.00% None 5.00% None
Class C..................... 1.75% 1.00% 0.75% None
Class Y..................... None None None None
BRINSON FUND AFTER TRANSACTION
Class A..................... 4.50% 4.50% None None
Class B..................... 5.00% None 5.00% None
Class C..................... 1.75% 1.00% 0.75% None
Class Y..................... None None None None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
FUND NAMES & MANAGEMENT DISTRIBUTION AND OTHER TOTAL ANNUAL FUND MANAGEMENT FEE WAIVERS NET
CLASSES OF SHARES FEES SERVICE (12B-1) FEES EXPENSES OPERATING EXPENSES & EXPENSE REIMBURSEMENT EXPENSES
----------------- ---------- -------------------- -------- ------------------ ----------------------- --------
PAINEWEBBER FUND
Class A................ 0.50% 0.25% 0.25% 1.00% None 1.00%
Class B................ 0.50% 1.00% 0.27% 1.77% None 1.77%
Class C................ 0.50% 0.75% 0.25% 1.50% None 1.50%
Class Y................ 0.50% None 0.24% 0.74% None 0.74%
BRINSON FUND(1)
Class A................ 0.60% 0.25% 0.27%(2) 1.12% 0.17% 0.95%
Class B................ 0.60% 1.00% 0.27%(2) 1.87% 0.17% 1.70%
Class C................ 0.60% 0.75% 0.27%(2) 1.62% 0.17% 1.45%
Class Y................ 0.60% None 0.27%(2) 0.87% 0.17% 0.70%
BRINSON FUND AFTER
TRANSACTION(1)
Class A................ 0.60% 0.25% 0.24%(2) 1.09% 0.14% 0.95%
Class B................ 0.60% 1.00% 0.24%(2) 1.84% 0.14% 1.70%
Class C................ 0.60% 0.75% 0.24%(2) 1.59% 0.14% 1.45%
Class Y................ 0.60% None 0.24%(2) 0.84% 0.14% 0.70%
-------------------
(1) Brinson Partners has irrevocably contracted to permanently waive its fees
and reimburse certain expenses so that total operating expenses of the
Brinson Fund, exclusive of 12b-1 fees, do not exceed 0.70% of each class of
shares of the Brinson Fund. On August 28, 2001, the Brinson Trustees
approved the submission of a proposal to shareholders of the Brinson Fund
that would eliminate the permanent fee waiver and expense reimbursement
arrangement. If the proposal is approved by shareholders, the permanent fee
waiver and expense reimbursement will be replaced by a one-year contractual
fee waiver and expense reimbursement at the current rate as described
above.
(2) Includes an administration fee of 0.075% paid by the Brinson Fund to
Brinson Advisors.
EXAMPLES:
The following Examples are intended to help you compare the cost of
investing in the PaineWebber Fund with the cost of investing in the Brinson
Fund. The Examples assume that you invest $10,000 in each
6
Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. Each Example also assumes that your investment has a 5%
return each year.(1) These are examples only, and do not represent future
expenses, which may be greater or less than those shown below.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
PAINEWEBBER FUND
Class A..................... $498 $706 $ 930 $1,576
Class B (assuming sale of
all shares at end of
period)................... 680 857 1,159 1,694
Class B (assuming no sale of
shares)................... 180 557 959 1,694
Class C (assuming sale of
all shares at end of
period)................... 228 474 818 1,791
Class C (assuming no sale of
shares)................... 153 474 818 1,791
Class Y..................... 76 237 411 981
BRINSON FUND (BEFORE AND AFTER
TRANSACTION)
Class A..................... $543 $739 $ 952 $1,564
Class B (assuming sale of
all shares at end of
period)................... 673 836 1,123 1,166
Class B (assuming no sale of
shares)................... 173 536 923 2,009
Class C (assuming sale of
all shares at end of
period)................... 321 554 884 1,818
Class C (assuming no sale of
shares)................... 246 554 884 1,818
Class Y..................... 72 224 390 871
-------------------
(1) The Funds' actual returns may be greater or less than the hypothetical 5%
return used. The examples for the Brinson Fund reflect net operating
expenses after the contractual fee waivers and expense reimbursements.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
The Brinson Fund Annual Report, which is attached, includes a discussion of
that Fund's performance during the past fiscal year and shows per share
information for Brinson Fund Class Y Shares and Brinson Fund Class A Shares for
the last five fiscal years and last three fiscal years, respectively. Brinson
Fund Class B Shares and Brinson Fund Class C Shares are new classes, and
therefore, financial information is not available for these classes.
The PaineWebber Fund Prospectus, PaineWebber Fund Annual Report and the
PaineWebber Fund's Semi-Annual Report to Shareholders (dated May 31, 2001)
contain further financial information about that Fund. These documents are
available upon request (See "Information About the PaineWebber Fund").
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
ADMINISTRATIVE, TRANSFER AGENCY, ACCOUNTING AND CUSTODY SERVICES. Brinson
Advisors serves as the administrator to both the Brinson Fund (effective as of
November 5, 2001) and the PaineWebber Fund. Under an Administration Contract
with the Brinson Trust, Brinson Advisors provides various administration and
accounting services to the Brinson Fund. These services include administering
the affairs of the Brinson Fund, including supervising and managing all aspects
of the Fund's operations (other than investment advisory activities). For its
services, the Brinson Fund pays Brinson Advisors a fee, computed daily and paid
monthly, at an annual rate of 0.075% of the average daily net assets of the
Brinson Fund. J.P. Morgan Investor Services Company ("J.P. Morgan"), a corporate
affiliate of The Chase Manhattan Bank ("Chase"), provides accounting, portfolio
valuation and certain administrative services to the Brinson Fund pursuant to a
Multiple Services Agreement between the Brinson Trust and Chase. Prior to
November 5, 2001, J.P. Morgan served as the primary administrator and accounting
services agent for the Brinson Fund pursuant to the Multiple Services Agreement.
Brinson Advisors provides administrative services to the PaineWebber Fund
pursuant to an Investment Management and Administration Contract, between
Brinson Advisors and the PaineWebber Trust, on behalf of the PaineWebber Fund.
As administrator, Brinson Advisors is responsible for the supervision of all
aspects of the operations of the PaineWebber Fund. The compensation that Brinson
Advisors receives for providing administrative services to the PaineWebber Fund
is included in the fee that it receives for providing advisory services for the
PaineWebber Fund, which is computed daily and paid monthly, at an annual rate of
0.50% of the PaineWebber Fund's average daily net assets. The PaineWebber Fund
does not pay any additional fee for administrative services.
7
PFPC, Inc. is transfer agent and dividend disbursing agent for both the
Brinson Fund (effective as of August 20, 2001) and the PaineWebber Fund. PFPC,
Inc., a subsidiary of PNC Bank, N.A., is located at 400 Bellevue Parkway,
Wilmington, Delaware 19809. Prior to August 20, 2001, J.P. Morgan served as
transfer agent for the Brinson Fund.
Chase is the custodian of the securities and other assets of the Brinson
Fund. Chase is located at 270 Park Avenue, New York, New York 10017. State
Street Bank and Trust Company, located at 1776 Heritage Drive, North Quincy,
Massachusetts 02171, serves as the custodian for the PaineWebber Fund.
DISTRIBUTION SERVICES AND RULE 12b-1 PLANS. The Brinson Trustees have
appointed Brinson Advisors, effective as of November 5, 2001, to serve as the
principal underwriter of the shares of each class of the Brinson Fund. Brinson
Advisors will offer such shares on a best-efforts basis pursuant to a Principal
Underwriting Contract between the Brinson Trust and Brinson Advisors. Brinson
Advisors also serves as principal underwriter of the shares of each class of the
PaineWebber Fund, and offers such shares on a best-efforts basis pursuant to a
Distribution Contract between the PaineWebber Trust and Brinson Advisors. In
addition to its services in distributing shares of the Brinson Fund and
PaineWebber Fund, Brinson Advisors also provides ongoing shareholder services
for each of the Funds. Brinson Advisors is authorized, under the Brinson Trust's
Principal Underwriting Contract and the PaineWebber Trust's Distribution
Contract, to enter into dealer agreements with other broker-dealers (affiliated
and non-affiliated) with respect to sales of shares of the respective Fund or in
connection with the provision of service activities (a "Qualified Dealer").
Brinson Advisors markets shares of the Brinson Fund and PaineWebber Fund
directly or through a Qualified Dealer. Currently, Brinson Advisors has a dealer
agreement with UBS PaineWebber for the sale of shares of each class of the
PaineWebber Fund. With respect to both the Brinson Fund and the PaineWebber
Fund, when Brinson Advisors receives service fees, distribution fees or sales
charges, it may pay some or all of them to Qualified Dealers.
Until November 5, 2001, Funds Distributor, Inc. ("FDI") serves as the
distributor of the existing classes of shares of the Brinson Fund.
The Brinson Fund and the PaineWebber Fund have each adopted separate
distribution plans or "Rule 12b-1 Plans" for each of the respective Fund's
Class A Shares (a "Class A Plan"), Class B Shares (a "Class B Plan") and
Class C Shares (a "Class C Plan") (collectively, the "Plans"). Under both the
Brinson Fund's Plans and the PaineWebber Fund's Plans, Brinson Advisors is to
receive out of the assets of each class of the respective Fund, 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 of the respective Fund. Brinson
Advisors uses the service fees it receives to compensate dealers and others for
their expenses in connection with providing shareholder services for the Funds,
including the maintenance of shareholder accounts.
In addition to the service fees, the Brinson Fund and the PaineWebber Fund
pay distribution fees to Brinson Advisors pursuant to each Fund's Class B Plan
and Class C Plan. The distribution fees are paid to Brinson Advisors for its
services and expenses in distributing and promoting shares of such classes.
These expenses may include, among others, the preparation, printing and
distribution of advertisements and sales literature; the distribution of
prospectuses and other shareholder materials for sales purposes; the payment of
distribution fees to broker-dealers who enter into dealer agreements with
Brinson Advisors; and the payment of other expenses allocated to Brinson
Advisors' distribution activities. The distribution fees payable under the
Class B Plans and Class C Plans for the Brinson Fund and PaineWebber Fund may
also be used to pay Brinson Advisors for advancing the commission costs to
dealers with respect to the initial sale of such shares.
Under its Class B Plan, the Brinson Fund and PaineWebber Fund, respectively,
each pay Brinson Advisors a distribution fee, accrued daily and payable monthly,
at an annual rate of 0.75% of the average daily net assets of that Fund's
Class B Shares. Pursuant to its Class C Plan, the Brinson Fund and PaineWebber
Fund each pay Brinson Advisors a distribution fee, accrued daily and payable
monthly, at an annual rate of 0.50% of the average daily net assets of that
Fund's Class C Shares.
Because 12b-1 fees are paid out of the assets of a class of a Fund on an
on-going basis, over time these fees will increase the cost of a shareholder's
investment and may cost you more than paying other types of sales charges.
8
Brinson Fund Class Y Shares and PaineWebber Fund Class Y Shares do not have
Rule 12b-1 Plans.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES. Procedures for the purchase,
exchange and redemption of shares of the Brinson Fund and the PaineWebber Fund
are similar. You may refer to the PaineWebber Fund Prospectus, and Exhibit B of
this Prospectus/Proxy Statement entitled, "Additional Information Regarding the
Brinson Fund," for the purchase, exchange, and redemption procedures applicable
to the purchases, exchanges and redemptions of shares of the PaineWebber Fund
and Brinson Fund, respectively. Set forth below is a brief description of the
basic purchase, exchange, and redemption procedures applicable to the shares of
the Funds.
Shares of the Brinson Fund may be purchased directly from the Fund by
contacting its transfer agent, or through brokers, dealers, other financial
intermediaries and financial institutions (bank and bank trust departments) that
have sales agreements with the Brinson Fund (each an "Authorized Dealer"), or
through an intermediary designated by an Authorized Dealer to accept purchase
and redemption orders ("Sub-Designee"). Authorized Dealers may charge
transaction fees for their services in connection with the purchase of shares of
the Funds. These transaction fees are not charged on shares purchased directly
from the Brinson Fund. Shares of the PaineWebber Fund may be purchased through
its transfer agent or, for shareholders who are clients of UBS PaineWebber or a
UBS PaineWebber correspondent firm, through their financial advisor ("Financial
Advisor"). Only specific types of investors are eligible to purchase Brinson
Fund Class Y Shares and PaineWebber Fund Class Y Shares. You may refer to
Exhibit B, "Additional Information Regarding the Brinson Fund," of this
Prospectus/Proxy Statement and the PaineWebber Fund Prospectus for more
information concerning the eligibility requirements for purchasing Class Y
Shares of the Funds.
The minimum initial investment for each class of the PaineWebber Fund and
Class A Shares, Class B Shares and Class C Shares of the Brinson Fund is $1,000,
and each subsequent investment must be at least $100. The minimum initial
investment for the Brinson Fund Class Y Shares is $1,000,000 and each subsequent
investment must be at least $2,500. Both Funds may waive or reduce their
investment minimums for certain investors.
Purchases of Brinson Fund Class A Shares are subject to a maximum front-end
sales charge of 4.50% of the offering price, with reduced sales charges for
purchases of $100,000 or more, and no front-end sales charge imposed on
purchases of $1,000,000 or more. Purchases of $1,000,0000 or more of Brinson
Fund Class A Shares, are, however, subject to a contingent deferred sales charge
("CDSC") of 1.00% for shares redeemed within one year after purchase. Purchases
of PaineWebber Fund Class A Shares are subject to a maximum front-end sales
charge of 4.00% of the offering price, with reduced sales charges for purchases
of $100,000 or more, and no front-end sales charge imposed on purchases of
$1,000,000 or more. The PaineWebber Fund also charges a CDSC of 1.00% on
purchases of PaineWebber Fund Class A Shares of $1,000,0000 or more when shares
are redeemed within one year after purchase.
Purchases of Class B Shares of each Fund are not subject to a sales charge
on purchases, but are subject to a CDSC when shares are sold before the end of a
specified period. Except as discussed below, Brinson Fund Class B Shares are
subject to a CDSC on sales of shares as shown in the table below:
PERCENTAGE (BASED ON AMOUNT OF INVESTMENT)
BY WHICH THE SHARES NET ASSET VALUE IS MULTIPLIED:
------------------------------------------------------------------------------------
IF SHARES ARE SOLD WITHIN: LESS THAN $100,000 $100,000 TO $249,000 $250,000 TO $499,999 $500,000 TO $999,999
-------------------------- ------------------ -------------------- -------------------- --------------------
1st year since purchase....... 5% 3% 3% 2%
2nd year since purchase....... 4% 2% 2% 1%
3rd year since purchase....... 3% 2% 1% None
4th year since purchase....... 2% 1% None None
5th year since purchase....... 2% None None None
6th year since purchase....... 1% None None None
7th year since purchase....... None None None None
The CDSC for the Brinson Fund Class B Shares is calculated by multiplying
the lesser of the net asset value of the shares at the time of purchase or the
net asset value at the time of sale by the applicable percentage shown in the
table above. Brinson Fund Class B Shares automatically convert to Brinson Fund
Class A Shares, which have lower ongoing expenses, after the end of the sixth
year for purchases less than $100,000, after the end of the fourth year for
purchases with a value of at least $100,000 but less than $250,000, after the
end of the third year for purchases with a value of at least $250,000 but less
than
9
$500,000 and after the end of the second year for purchases of at least $500,000
but less than $1 million. However, Brinson Fund Class B Shares acquired in this
Transaction by the shareholders of PaineWebber Fund Class B Shares ("Class B
Transaction Shares") will be subject to the current CDSC schedule for the
PaineWebber Fund Class B Shares that is provided in the table below. Class B
Transaction Shares held longer than six years are not subject to a CDSC and
automatically convert to Brinson Fund Class A Shares, which have lower ongoing
expenses. For purposes of determining the applicable rate of a CDSC and the date
of conversion to Brinson Fund Class A Shares, Class B Transaction Shares will be
considered to have been held since the date of the purchase of the PaineWebber
Fund Class B Shares involved in this Transaction. Class B Transaction Shares and
PaineWebber Fund Class B Shares are subject to a CDSC on sales of shares as
shown in the table below:
PERCENTAGE (BASED ON AMOUNT OF INVESTMENT)
IF SHARES ARE SOLD WITHIN: BY WHICH THE SHARES NET ASSET VALUE IS MULTIPLIED:
-------------------------- --------------------------------------------------
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
The CDSC for the PaineWebber Fund Class B Shares is calculated by
multiplying the lesser of the net asset value of the shares at the time of
purchase or the net asset value at the time of sale by the applicable percentage
described above. PaineWebber Fund Class B Shares held longer than six years are
not subject to a CDSC and automatically convert to PaineWebber Fund Class A
Shares, which have lower ongoing expenses.
Brinson Fund Class C Shares are subject to a front-end sales charge of 1.00%
of the offering price, and a CDSC of 0.75% of the shares' net asset value if the
shares are sold within one year of purchase. The PaineWebber Fund Class C Shares
are not subject to a front-end sales charge, but are subject to a CDSC of 0.75%
of the shares' net asset value if the shares are sold within one year of
purchase. The CDSC for each Fund's Class C Shares is calculated by multiplying
the lesser of the net asset value of the shares at the time of purchase or the
net asset value at the time of sale by 0.75%.
Certain investors and transactions of both the Brinson Fund and PaineWebber
Fund may be subject to reduced or waived sales charges. For a complete
description of sales charges and exemptions from such charges, reference is made
to Exhibit B of this Prospectus/Proxy Statement, "Additional Information
Regarding the Brinson Fund" and the Statement of Additional Information relating
to this Prospectus/ Proxy Statement, as well as the PaineWebber Fund Prospectus
and SAI, which are incorporated by reference herein. The shareholders of the
PaineWebber Fund will not be subject to the sales charges described above in
connection with this Transaction. Brinson Fund Class Y Shares and PaineWebber
Fund Class Y Shares are not subject to a front-end sales charge or a CDSC. It
should be noted that if shareholders do not approve the Transaction, the shares
of the PaineWebber Fund will be subject to a new sales charge structure that
will be applicable to all series of the PaineWebber Trust and the Brinson Trust.
The new sales charges for the PaineWebber Fund Class A Shares, PaineWebber Fund
Class B Shares and PaineWebber Fund Class C Shares would be identical to those
described above for the Brinson Fund Class A Shares, Brinson Fund Class B Shares
and Brinson Fund Class C Shares.
The purchase price of shares of each of the Funds is based on net asset
value ("NAV"), plus any applicable sales charge. The NAV per share for each
class of each of the Funds is calculated as of the close of business on each day
that the New York Stock Exchange ("NYSE") is open (currently, 4:00 p.m. Eastern
time). Purchase orders for shares of each of the Funds received in good form by
the close of regular trading (currently 4:00 p.m., Eastern time) are priced
according to the NAV determined on that day, otherwise they are priced according
to the next determined price per share. Each Fund reserves the right to reject
any purchase request.
10
Shares of each class of the Brinson Fund, except Brinson Fund Class Y
Shares, may be exchanged for shares of the same class of many other funds for
which Brinson Advisors or any of its affiliates serves as principal underwriter.
Class B Transaction Shares may be exchanged for Class B shares of other funds,
but the shares acquired in the exchange will retain the CDSC schedule of the
Class B Transaction Shares, as described above. Shares of each class of the
PaineWebber Fund, except PaineWebber Fund Class Y Shares, may be exchanged for
shares of the same class of many other PaineWebber funds and PACE funds.
Exchanges for both Funds are subject to the initial minimum investment
requirements to the same extent as purchases of shares. Exchanges are not
subject to any sales charges at the time of the exchange. Exchanges are treated
as a redemption and new purchase for federal income tax purposes, and
accordingly, may have tax consequences for the shareholder.
Shares of each class of either Fund may be sold at any time at the NAV
(minus any applicable sales charge) next calculated after the Fund receives the
redemption order in good form. Shareholders of the Brinson Fund can sell their
shares by contacting the Brinson Fund's transfer agent or, if shares are held in
a brokerage account, an Authorized Dealer or Sub-Designee. Each Authorized
Dealer may have its own procedures and requirements for selling shares of the
Brinson Fund and may charge fees. Shareholders of the PaineWebber Fund who are
clients of UBS PaineWebber or one of its correspondent firms may sell their
shares through their Financial Advisor. Otherwise, shares of the PaineWebber
Fund may be sold by contacting the Fund's transfer agent.
For a more complete description of the purchase, exchange and redemption
procedures applicable to the Brinson Fund and PaineWebber Fund, please refer to
Exhibit B, "Additional Information Regarding the Brinson Fund," of this
Prospectus/Proxy Statement and the PaineWebber Fund Prospectus.
DIVIDENDS, DISTRIBUTIONS AND TAXES. The Brinson Fund declares and makes
payment of any income dividends monthly. The Brinson Fund will distribute
substantially all of its capital gains, if any, in December. The PaineWebber
Fund normally declares dividends daily and pays them monthly. The PaineWebber
Fund distributes substantially all of it gains, if any, annually. Both the
Brinson Fund and PaineWebber Fund automatically reinvest distributions in
additional shares of the same class of that Fund, unless the Fund is notified
that the shareholder elects to receive such distributions in cash.
Distributions from both the Brinson Fund and the PaineWebber Fund, whether
received in cash or in additional shares, are generally subject to income tax.
In general, distributions from either Fund are taxable to the shareholder as
either ordinary income or capital gains. Both the Brinson Fund and PaineWebber
Fund notify their shareholders annually of the source and tax status of all Fund
distributions for federal income tax purposes. For more information about the
tax implications of investments in the Brinson Fund and PaineWebber Fund, see
Exhibit B, "Additional Information Regarding the Brinson Fund," of this
Prospectus/Proxy Statement, the PaineWebber Fund Prospectus and SAI, and the
Statement of Additional Information relating to this Prospectus/Proxy Statement.
REASONS FOR THE TRANSACTION
Brinson Advisors has proposed the Transaction to combine the PaineWebber
Fund with another fund having a similar investment objective and similar
investment policies, thereby creating a larger fund with a better opportunity
for sustainable positive results. A larger fund should be better able to obtain
certain cost savings for its shareholders. The PaineWebber Fund and the Brinson
Fund are also both sponsored by entities belonging to the UBS Asset Management
business group. The Transaction was also proposed in order to eliminate certain
duplicative costs and to enhance the distribution of fund shares by eliminating
redundant investment products sponsored by members of the same organization.
The Agreement and Plan was presented to the PaineWebber Trustees at a
meeting of the Board. At the meeting, the Board questioned management about the
potential benefits and costs to shareholders of
11
the PaineWebber Fund. In deciding whether to recommend approval of the
Transaction to shareholders, the PaineWebber Trustees considered a number of
factors, including the following:
- Substantial similarities exist between the investment objectives,
policies, and strategies of the Brinson Fund and the PaineWebber Fund.
Thus, the Transaction will enable the PaineWebber Fund shareholders to
continue their current investment programs.
- PaineWebber Fund shareholders will not pay a sales charge to become
shareholders of the Brinson Fund in connection with the Transaction.
- PaineWebber Fund shareholders will not have to pay any federal income tax
solely as a result of the Transaction.
- Expenses of the Transaction will not be borne by the PaineWebber Fund or
the Brinson Fund.
- Because the proposed Transaction will be effected on the basis of the
relative net asset values of the Brinson Fund and the PaineWebber Fund,
shareholders of the PaineWebber Fund will not experience any dilution in
the value of their investments as a result of the Transaction.
- While the gross expenses of the Brinson Fund are greater than those of
the PaineWebber Fund, the expense ratios of the Brinson Fund, taking into
account the current and proposed contractual fee waivers, are lower than
the expense ratios of the PaineWebber Fund.
- Combining the PaineWebber Fund and the Brinson Fund might enable the
combined entity to obtain certain economies of scale with attendant
savings in cost for the shareholders of the PaineWebber Fund.
- Brinson Partners has experience in managing registered investment
companies and has developed capabilities and resources that could benefit
the shareholders of the PaineWebber Fund. The investment management teams
who are responsible for managing the Brinson Fund are well trained and
experienced in selecting investments in the high yield bond sector.
- The availability of high-quality fund administration and shareholder
services.
- It may be detrimental for the PaineWebber Fund to compete for the same
investor assets with the Brinson Fund, each of which is advised, and
would be distributed, by a subsidiary of UBS AG.
The PaineWebber Trustees did not assign relative weights to the foregoing
factors or deem any one of them to be controlling in and of itself.
The PaineWebber Trustees concluded that the Transaction is in the best
interests of the shareholders of the PaineWebber Fund and that no dilution of
value would result for the shareholders of the PaineWebber Fund from the
Transaction. The PaineWebber Trustees, including a majority of the Trustees who
are not interested persons of the PaineWebber Fund, then decided to approve the
Agreement and Plan and to recommend that shareholders of the PaineWebber Fund
vote to approve the Transaction.
The Brinson Trustees also determined that the Transaction was in the best
interests of the Brinson Fund and its shareholders and that no dilution would
result to those shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF THE PAINEWEBBER
TRUST, ON BEHALF OF THE PAINEWEBBER FUND, RECOMMENDS THAT YOU VOTE FOR THE
AGREEMENT AND PLAN.
If the shareholders of the PaineWebber Fund do not approve the Agreement and
Plan, the PaineWebber Trustees may consider other possible courses of action,
including liquidation and dissolution of the PaineWebber Fund.
12
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Agreement and Plan. You should read the actual
Agreement and Plan. It is attached as Exhibit A and incorporated herein by
reference.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of the PaineWebber Fund approve the Agreement and Plan,
the Transaction will take place after various conditions are satisfied by the
PaineWebber Trust, on behalf of the PaineWebber Fund, and by the Brinson Trust,
on behalf of the Brinson Fund, including the delivery of certain documents. The
PaineWebber Trust and the Brinson Trust will agree on the specific date for the
actual Transaction to take place (the "Closing"). If the shareholders of the
PaineWebber Fund do not approve the Agreement and Plan, the Transaction will not
take place.
If the shareholders of the PaineWebber Fund approve the Agreement and Plan,
the PaineWebber Fund will deliver to the Brinson Fund substantially all of its
assets, subject to its liabilities, at the Closing. In exchange, the PaineWebber
Trust, on behalf of the PaineWebber Fund, will receive Brinson Fund Class A
Shares, Brinson Fund Class B Shares, Brinson Fund Class C Shares and Brinson
Fund Class Y Shares to be distributed PRO RATA by the PaineWebber Fund to its
shareholders in the corresponding classes in complete liquidation and
dissolution of the PaineWebber Fund. The value of the assets to be delivered to
the Brinson Fund shall be the value of such net assets computed as of the close
of business of the NYSE (normally 4:00 p.m. Eastern time) on the last business
day prior to the Closing (the "Valuation Date").
The stock transfer books of the PaineWebber Fund will be permanently closed
as of the Valuation Date. The PaineWebber Fund will accept requests for
redemption only if received in proper form before that time. Requests received
after that time will be considered requests to redeem shares of the Brinson
Fund.
To the extent permitted by law, the PaineWebber Trust and the Brinson Trust
may agree to amend the Agreement and Plan without shareholder approval. They may
also agree to terminate and abandon the Transaction at any time before or, to
the extent permitted by law, after the approval of shareholders of the
PaineWebber Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
Brinson Advisors will pay all expenses in connection with the Transaction.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Internal Revenue Code
of 1986, as amended. Based on certain assumptions made and representations to be
received from the PaineWebber Trust, on behalf of the PaineWebber Fund, and from
the Brinson Trust, on behalf of the Brinson Fund, it is expected that Stradley,
Ronon, Stevens & Young, LLP will provide a legal opinion that, for federal
income tax purposes, (i) shareholders of the PaineWebber Fund will not recognize
any gain or loss as a result of the exchange of their shares of the PaineWebber
Fund for shares of the Brinson Fund and (ii) the Brinson Fund and its
shareholders will not recognize any gain or loss upon receipt of the PaineWebber
Fund's assets.
You should consult your tax advisor regarding the effect, if any, of the
Transaction in light of your individual circumstances. You should also consult
your tax advisor about the state and local tax consequences, if any, of the
Transaction because this discussion only relates to the federal income tax
consequences.
WHAT SHOULD I KNOW ABOUT THE BRINSON FUND SHARES?
If the Transaction is approved, full and fractional shares of the Brinson
Fund will be issued without the imposition of a sales charge or other fee to
shareholders of the PaineWebber Fund in accordance with the
13
procedures described above. When issued, each share will be duly and validly
issued, fully paid, nonassessable and fully transferable. All shares have
noncumulative voting rights. This gives holders of more than 50% of the shares
voting the ability to elect all of the members of the Brinson Trustees. If this
happens, holders of the remaining shares voting will not be able to elect any
trustees.
A shareholder of a class of shares of the Brinson Fund will receive a PRO
RATA share of all distributions arising from the Brinson Fund's assets
attributable to the class of shares owned by the shareholder and, upon redeeming
shares, will receive the portion of the Brinson Fund's net assets attributable
to the class of shares owned by the shareholder represented by the redeemed
shares.
The shares of the Brinson Fund will be recorded to each shareholder's
account on the books of the Brinson Fund's transfer agent. The Brinson Fund does
not issue share certificates.
HOW DO SHAREHOLDER RIGHTS AND OBLIGATIONS OF THE FUNDS COMPARE?
While the Brinson Trust and PaineWebber Trust are different entities
organized under the laws of different states and governed by different
organizational documents, the Transaction will not result in material
differences in shareholder rights.
The Brinson Trust is organized as a Delaware business trust and governed by
an Agreement and Declaration of Trust. Under its Agreement and Declaration of
Trust, the Brinson Trust has an unlimited number of authorized shares of
beneficial interest with each share having a par value of $.001. The PaineWebber
Trust is organized as a Massachusetts business trust and governed by an Amended
and Restated Declaration of Trust (the "Declaration of Trust"). Pursuant to its
Declaration of Trust, the PaineWebber Trust has an unlimited number of
authorized shares of beneficial interest with each share having a par value of
$.001 per share. The Brinson Trustees and the PaineWebber Trustees (the
"Boards") may, without shareholder approval, divide the authorized shares of the
applicable Trust into an unlimited number of separate portfolios or series
("series"). The Boards may also, without shareholder approval, divide the series
into two or more classes of shares. The Brinson Trust currently consists of
eighteen series, including the Brinson Fund. Each series of the Brinson Trust,
including the Brinson Fund, will offer four classes of shares (designated
Class A Shares, Class B Shares, Class C Shares and Class Y Shares). The
PaineWebber Trust is currently divided into three series, two of such series,
including the PaineWebber Fund, are currently being offered to the public. Each
series of the PaineWebber Trust, including the PaineWebber Fund, offers four
classes of shares (designated Class A Shares, Class B Shares, Class C Shares and
Class Y Shares). The Brinson Trust and each series of the Brinson Trust, as well
as the PaineWebber Trust and each series of the PaineWebber Trust, will continue
indefinitely until terminated.
With respect to a series of shares of the Brinson Trust and the PaineWebber
Trust, shares of the same class have equal dividend, distribution, liquidation
and voting rights, and fractional shares have those rights proportionately. Each
series or class bears its own expenses related to its distribution of shares
(and other expenses such as transfer agency, shareholder service and
administration expenses). Generally, shares of the Brinson Trust will be voted
in the aggregate without differentiation between separate series or classes;
provided however, if a matter only affects certain series or classes, then only
shares of such affected series or classes shall be voted in the aggregate.
Shares of the PaineWebber Trust generally are voted by individual series,
except: (i) when required by the 1940 Act to be voted in the aggregate and not
by individual series; and (ii) when the PaineWebber Trustees have determined
that the matter affects only the interests of one or more classes, then only
shares of such affected classes shall be entitled to vote.
Under relevant state law and the Agreement and Declaration of Trust of the
Brinson Trust, and the Declaration of Trust of the PaineWebber Trust, annual
meetings of shareholders are not required to be held. Generally, each Trust
calls shareholder meetings only when specifically required by federal law or its
governing state law. Shareholders representing one-tenth (10%) or more of the
outstanding shares entitled to vote on a matter may cause each Trust to call a
shareholder meeting. With respect to the Brinson Trust, a shareholder meeting
need not be called upon the request of shareholders entitled to cast less than a
14
majority of all votes entitled to be cast at such meeting to consider any matter
that is substantially the same as a matter voted on at any shareholder meeting
held during the preceding twelve months.
Under Delaware law and the Brinson Trust's Agreement and Declaration of
Trust, shareholders of the Brinson Fund are not held personally liable for the
obligations of the Brinson Trust or Brinson Fund. In contrast, Massachusetts law
does not include an express provision limiting the personal liability of
shareholders of a Massachusetts business trust. Therefore, shareholders of the
PaineWebber Fund could potentially be liable for the obligations of the
PaineWebber Trust and PaineWebber Fund despite a provision in the PaineWebber
Trust's Declaration of Trust that limits shareholder liability.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION BE
AFTER THE TRANSACTION?
The following table sets forth, as of June 30, 2001, the separate
capitalizations of the Brinson Fund and the PaineWebber Fund, and the estimated
capitalization of the Brinson Fund as adjusted to give effect to the proposed
Transaction. The final capitalization of the Brinson Fund is likely to be
different when the Transaction is consummated.
BRINSON FUND
CLASS A BRINSON FUND
(FORMERLY PAINEWEBBER FUND CLASS A
CLASS N) CLASS A AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (ESTIMATED)
------------ ---------------- -----------------
Net assets......................... $1,000 $89,548,445 $89,549,445
Total shares outstanding........... 127 24,760,685 11,378,583
Net asset value per share.......... $7.87 $3.62 $7.87
BRINSON FUND
BRINSON FUND PAINEWEBBER FUND CLASS B
CLASS B CLASS B AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (ESTIMATED)
------------ ---------------- -----------------
Net assets......................... $0 $24,762,647 $24,762,647
Total shares outstanding........... 0 6,852,536 3,136,295
Net asset value per share.......... N/A $3.61 $7.90
BRINSON FUND
BRINSON FUND PAINEWEBBER FUND CLASS C
CLASS C CLASS C AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (ESTIMATED)
------------ ---------------- -----------------
Net assets......................... $0 $25,271,509 $25,271,509
Total shares outstanding........... 0 6,978,294 3,200,745
Net asset value per share.......... N/A $3.62 $7.90
BRINSON FUND
CLASS Y BRINSON FUND
(FORMERLY PAINEWEBBER FUND CLASS Y
CLASS I) CLASS Y AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (ESTIMATED)
------------ ---------------- -----------------
Net assets......................... $54,559,659 $381,277 $54,940,936
Total shares outstanding........... 6,910,214 105,495 6,958,504
Net asset value per share.......... $7.90 $3.61 $7.90
15
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
This section describes the key investment policies of the Brinson Fund and
the PaineWebber Fund and certain noteworthy differences between the investment
objectives and policies of the Funds. For a more complete description of the
Brinson Fund's investment policies and risks, you should read "Additional
Information Regarding the Brinson Fund," which is attached to this
Prospectus/Proxy Statement as Exhibit B.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT OBJECTIVES AND
POLICIES OF THE FUNDS?
The Brinson Fund and the PaineWebber Fund have similar investment
objectives. The PaineWebber Fund seeks to provide its investors with high
income. As its investment objective, the Brinson Fund seeks to provide its
investors with high current income, along with capital growth, when consistent
with high current income. Both Funds may also invest in non-income producing
securities. The investment objectives for both Funds are considered fundamental
policies. Policies or restrictions that are deemed fundamental may not be
changed without the approval of the lesser of (i) a majority of the outstanding
shares of the Fund, or (ii) 67% or more of the shares represented at a meeting
of shareholders at which the holders of more than 50% of the outstanding shares
are represented. Policies or investment restrictions of a Fund that are
non-fundamental may be changed by its Board of Trustees without shareholder
approval.
PRINCIPAL INVESTMENTS. Under normal market conditions both Funds seek to
achieve their investment objectives by investing primarily in high yield,
lower-rated bonds.
DEBT SECURITIES. Bonds, notes, and commercial paper are types of debt
securities. Debt securities generally represent a loan of money by the purchaser
of the securities to the issuer. The issuer pays the investor a fixed or
variable rate of interest and normally must repay the amount borrowed on or
before maturity. Debt securities are rated by various investment services for
their credit quality. These ratings represent the opinions of the ratings
services with respect to the issuer's ability to pay interest and repay
principal. Those ratings below the top four categories (Ba or below by Moody's
or BB or below by S&P-Registered Trademark-) are below investment grade and the
securities with such ratings are considered to be lower-quality. These
lower-quality debt securities carry higher risk and are often called "high yield
bonds" or "junk bonds."
The PaineWebber Fund normally invests at least 65% of its total assets in
high yield income-producing corporate bonds rated, at the time of purchase, B or
higher by Moody's or S&P-Registered Trademark-, or comparably rated by another
rating agency or, if unrated, are considered to be of comparable quality by its
sub-adviser. The Brinson Fund must normally invest at least 80% of its assets in
fixed income securities rated Ba or lower by Moody's or BB or lower by
S&P-Registered Trademark-. Therefore, the Brinson Fund is currently required to
invest a larger percentage of its assets in high yield debt securities than the
PaineWebber Fund. However, the PaineWebber Fund, like the Brinson Fund,
currently has more than 80% of its assets invested in high yield debt
securities. In addition, the PaineWebber Fund, if it does not reorganize with
the Brinson Fund, will be required pursuant to a new rule promulgated by the SEC
to adopt a similar 80% policy in order to be considered a "high income" fund.
Additionally, the Brinson Fund may invest to a greater extent than the
PaineWebber Fund in debt securities with ratings below B. The PaineWebber Fund
may not invest more than 35% of its assets in debt securities with ratings below
B, while the Brinson Fund has no such limit. Currently, neither Fund uses its
full investment authority with respect to investments in debt securities rated
below B. As of June 30, 2001, the Brinson Fund had 10.70% of its assets invested
in debt securities rated below B and the PaineWebber Fund had 13.58% of its
assets invested in such securities.
Both Funds invest primarily in corporate bonds. The PaineWebber Fund,
however, considers equity securities (including common stocks and rights and
warrants for equity securities) that are attached to corporate bonds or are part
of a unit including corporate bonds as part of its 65% investment in income-
producing corporate bonds, so long as the corporate bonds meet its quality
requirements. In addition to corporate bonds, both Funds invest to a lesser
extent in other debt securities. These debt securities may include, among
others, zero coupon bonds, delayed interest securities, payment-in-kind
securities, asset-
16
backed securities, mortgage-backed securities and other mortgage-related
securities. Both Funds may also engage in when-issued and delayed delivery
transactions.
EQUITY SECURITIES. Both Funds are also permitted to invest in equity
securities. Both Funds may invest in a company's common stock and preferred
stock. Each Fund may also invest in convertible securities and warrants.
Convertible securities are debt securities that may be converted into or
exchanged for common stock of a company within a particular period of time at a
specified price. Warrants are securities that give the holder the right to
purchase a specified amount of a company's common stock at a specified price at
a future date.
FOREIGN INVESTMENTS. Both Funds may invest in the securities of foreign
issuers, although the PaineWebber Fund is permitted to do so to a greater extent
than the Brinson Fund. The PaineWebber Fund may invest up to 35% of its net
assets in securities of foreign companies and governments, including securities
that are U.S. dollar denominated but whose value is linked to the value of
foreign currencies. No more than 10% of the PaineWebber Fund's assets may,
however, be invested in securities of foreign issuers that are denominated and
traded in currencies other than the U.S. dollar. The Brinson Fund's investment
in the securities of foreign companies and governments is limited to 25% of its
total assets. The foreign investments for both Funds may include securities of
issuers in emerging markets countries. Neither Fund currently invests in the
securities of non-U.S. issuers to a significant extent.
DERIVATIVES. Derivative securities are those securities whose values are
dependent upon the performance of one or more securities, indices or currencies.
The PaineWebber Fund may (but is not required to) use derivatives as part of its
investment strategy or to help manage portfolio risks. The PaineWebber Fund may
engage in the following types of derivative transactions: (i) options on
securities, securities indices and foreign currencies; (ii) securities index
futures contracts, foreign currency futures contracts and interest rate futures
contracts; (iii) options on futures contracts; and (iv) swaps. The PaineWebber
Fund may also engage in forward currency contracts. The PaineWebber Fund may
enter into transactions involving one or more types of derivatives under which
the full value of its portfolio is at risk. Under normal circumstances, however,
the PaineWebber Fund's use of derivatives will place at risk a much smaller
portion of its assets. The Brinson Fund is permitted to engage in the same types
of options, futures and options on futures transactions as the PaineWebber Fund
and enter into forward foreign currency contracts. The Brinson Fund is not
permitted to invest in swaps and does not intend to engage in options
transactions. While the Brinson Fund is permitted to invest in futures contracts
and enter into forward foreign currency contracts, its use of these types of
derivatives is not a principal investment strategy.
CASH AND CASH EQUIVALENTS. Each Fund may invest a portion of its assets in
short-term debt securities (including repurchase agreements and reverse
repurchase agreements) of corporations, the U.S. government and its agencies and
instrumentalities, and banks and finance companies, which may be denominated in
any currency. The Funds may also invest a portion of their assets in shares
issued by money market mutual funds and similar private investment vehicles.
Both Funds may invest in these cash and cash equivalent instruments for a
variety of reasons, including for temporary or defensive purposes, to reinvest
cash collateral from securities lending activities and as part of their normal
investment programs.
Under the terms of an exemptive order issued by the SEC, the Brinson Fund
may invest its cash (i) held for temporary defensive purposes; (ii) not invested
pending investment in securities; (iii) set aside to cover an obligation or
commitment of the Fund to purchase securities or other assets at a later date;
and (iv) to be invested on a strategic management basis, in the U.S. Cash
Management Prime Fund series of the Brinson Supplementary Trust in an amount up
to 25% of its total assets. The U.S. Cash Management Prime Fund series of the
Brinson Supplementary Trust is a private money market fund for which Brinson
17
Partners serves as investment adviser and, therefore, is an affiliate of the
Brinson Fund. The Brinson Trustees also serve as the Trustees of the Brinson
Supplementary Trust.
TEMPORARY DEFENSIVE INVESTMENTS. In order to protect themselves against
adverse market conditions, both Funds may take a temporary defensive position by
investing up to 100% of their total assets in cash or cash equivalents. When a
Fund invests for defensive purposes, it may be unable to achieve its investment
objective.
PORTFOLIO TURNOVER. The PaineWebber Fund may engage in frequent trading in
order to achieve its investment objective. Frequent trading can result in
portfolio turnover in excess of 100%. Frequent trading may increase the portion
of a Fund's capital gains that are realized for tax purposes in any given year.
This may increase a Fund's taxable distributions in that year. Frequent trading
also may increase the portion of a Fund's realized capital gains that are
considered "short-term" for tax purposes. Shareholders will pay higher taxes on
distributions that represent short-term capital gains than they would pay on
distributions that represent long-term capital gains. Frequent trading also may
result in higher fund expenses due to transaction costs. The PaineWebber Fund
does not restrict the frequency of trading in order to limit expenses or the tax
effect that the Fund's distributions may have on shareholders. Although the
Brinson Fund generally intends to purchase securities for long-term investment,
portfolio turnover rates are not a factor in making buy and sell decisions. The
portfolio turnover rate of the Brinson Fund may, but is not expected to, exceed
100%.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in the Funds involves risks. There is no
assurance that either Fund will meet its investment objective. The achievement
of a Fund's objective depends upon market conditions generally, and on the
investment manager's analytical and portfolio management skills. As with most
investments in mutual funds, the best results are generally achieved when an
investment in a Fund is held for a number of years.
The risks of investing in the Funds are substantially similar. The principal
differences are that the PaineWebber Fund's greater flexibility to invest in
foreign securities and futures and options potentially exposes the Fund to
greater risks than the Brinson Fund. The Brinson Fund could, however,
potentially be exposed to greater credit risk than the PaineWebber Fund if it
chooses to invest to the full extent of its investment authority with respect to
lower-quality debt securities. The investment risks for the Funds are described
below.
CREDIT RISK. Credit risk is the most significant risk for the Funds. This
is the risk that the issuer of a security, or the counterparty to a contract,
will default or not make principal or interest payments when they are due. Even
if an issuer does not default on a payment, a bond's value may decline if the
market believes that the issuer has become less able, or less willing, to make
payments on time.
Debt securities rated below investment grade -- BB or below by
S&P-Registered Trademark- or Ba or below by Moody's -- are especially
susceptible to credit risk. Issuers of debt securities in those ratings
categories, also called "high yield bonds" or "junk bonds," are at greater risk
of default or may otherwise be unable to honor a financial obligation. These
securities are considered to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure. Because the Brinson
Fund is required to invest a larger percentage of its assets in high yield
securities and may invest to a greater extent in those high yield securities
rated below B by Moody's and S&P-Registered Trademark-, the Brinson Fund may
have potentially greater exposure to high yield bond risk than the PaineWebber
Fund. Currently, however, both Funds normally invest at least 80% of their
assets in high yield securities, and the Brinson Fund does not invest more of
its assets in securities rated below B than the PaineWebber Fund.
INTEREST RATE RISK. Changing interest rates may adversely affect the value
of a debt security. With fixed income securities, such as those in which the
Funds invest, an increase in prevailing interest rates
18
typically causes the value of fixed income securities to fall, while declines in
prevailing interest rates may produce an increase in the market value of fixed
income securities. Changes in interest rates will affect the value of
longer-term fixed income securities more than shorter-term securities and higher
quality securities more than lower quality securities.
MARKET RISK. The value of a Fund's investments will fluctuate as the stock
and bond markets fluctuate. Market risk may affect a single issuer, industry or
section of the economy, or it may affect the market as a whole. Stocks and other
equity securities generally fluctuate in value more than bonds. Therefore, to
the extent the PaineWebber Fund invests more of its assets in equity securities,
such as preferred stocks, than the Brinson Fund, it is exposed to greater equity
market risk.
FOREIGN INVESTING AND EMERGING MARKETS. The value of a Fund's investments
in foreign securities may go down because of unfavorable foreign government
actions, political instability or the absence of accurate information about
foreign issuers. Also, a decline in the value of foreign currencies relative to
the U.S. dollar will reduce the value of securities denominated in those
currencies. Also, foreign securities are sometimes less liquid and harder to
sell and to value than securities of U.S. issuers. Investments in foreign
government bonds involve special risks because a Fund may have limited legal
recourse in the event of default. Each of these risks is more severe for
securities of issuers in emerging market countries than for issuers in more
developed countries. Because the PaineWebber Fund can invest up to 35% of its
assets in foreign securities, as compared to 25% for the Brinson Fund, these
risks may be greater for the PaineWebber Fund. The PaineWebber Fund, like the
Brinson Fund, does not typically use its full investment authority with respect
to investment in foreign securities.
PREPAYMENT RISK. Issuers may prepay fixed rate obligations when interest
rates fall, forcing a Fund to re-invest the proceeds from the original
obligation in obligations with lower interest rates.
DERIVATIVES RISK. Options, futures contracts, options on futures, forward
currency contracts and swaps are examples of derivatives. The value of a Fund's
investment in derivatives may rise or fall more rapidly than other investments.
For some derivatives, it is possible for a Fund to lose more than the amount it
invested in the derivative. The use of derivatives may not succeed for various
reasons, including unexpected changes in the value of the derivatives or the
assets underlying them. Also, if a Fund uses derivatives as a hedge, the hedge
will not succeed if the changes in the values of the derivatives are not matched
by opposite changes in the values of the assets being hedged.
HOW DO THE INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
The Funds' investment restrictions are substantially similar except as
discussed above or noted below.
The Funds have similar fundamental investment restrictions with respect to
borrowing, which permit them to borrow up to 33 1/3% of their total assets. The
PaineWebber Fund's restriction permits the Fund to borrow up to an additional 5%
of its total assets (not including the amount borrowed) for temporary or
emergency purposes.
The Funds have different policies regarding short sales. The Brinson Fund's
policy, unlike that of the PaineWebber Fund, is fundamental. The Brinson Fund
may engage in any type of short sale transaction to the extent permitted by the
1940 Act and any rule or order thereunder, or SEC staff interpretation thereof.
The PaineWebber Fund's non-fundamental policy limits the Fund to selling short
"against the box" and maintaining short positions in connection with its use of
financial options and futures, forward and spot currency contracts.
The Funds' restrictions regarding lending are nearly identical, except that
the Brinson Fund's restriction states that the Fund may also make loans to
affiliated investment companies to the extent permitted by the 1940 Act or any
exemptions granted by the SEC therefrom.
19
The PaineWebber Fund has a non-fundamental restriction that prohibits it
from investing more than 10% of its net assets in illiquid securities. The
Brinson Fund has a non-fundamental policy that limits its investments in such
securities to no more than 15% of its net assets.
Finally, the PaineWebber Fund has a non-fundamental investment restriction
prohibiting it from purchasing 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 and derivative instruments. The Brinson Fund does not have a
stated restriction in this regard.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?
Provided that a quorum is present, the approval of the Agreement and Plan
requires the affirmative vote of the lesser of (i) more than 50% of the
outstanding voting securities of the PaineWebber Fund; or (ii) 67% or more of
the voting securities of the PaineWebber Fund present at the Meeting, if the
holders of more than 50% of the Fund's outstanding voting securities are present
or represented by proxy. Each shareholder will be entitled to one vote for each
full share, and a fractional vote for each fractional share, of the PaineWebber
Fund held on the Record Date. If sufficient votes to approve the proposal are
not received by the date of the Meeting, the Meeting may be adjourned to permit
further solicitations of proxies. The holders of a majority of shares of the
PaineWebber Fund voted at the Meeting present in person or by proxy (whether or
not sufficient to constitute quorum) may adjourn the Meeting.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at the Meeting, but will not be treated
as votes cast and, therefore, will not be counted for purposes of determining
whether the matters to be voted upon at the Meeting have been approved or
counted for purposes of approving an adjournment. Accordingly, abstentions and
broker non-votes will have the same effect as a vote against the approval of the
Agreement and Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You may attend the Meeting and vote in person. You may also vote by
completing and signing the attached proxy card and mailing it in the enclosed
postage paid envelope. A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN
AND DATE THE PROXY BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN
FAVOR OF THE AGREEMENT AND PLAN AND IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT
UPON ANY UNEXPECTED MATTERS THAT COME BEFORE THE MEETING OR ADJOURNMENT OF THE
MEETING. You may also vote your shares by telephone or via the Internet. To vote
in this manner, you will need the 14-digit "control" number that appears on your
proxy card. You may vote by telephone by calling 800-597-7836. If votes are
recorded by telephone, the PaineWebber Fund or its agents will use procedures
designed to allow shareholders to authorize the voting of their shares in
accordance with their instructions, and to confirm that shareholders'
instructions have been properly recorded. To vote via the Internet, please
access https://vote.proxy-direct.com.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to the PaineWebber Fund expressly revoking your proxy, by signing
and forwarding to the PaineWebber Fund a later-dated proxy, or by attending the
Meeting and voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of the PaineWebber Trust does not intend to bring any
matters before the Meeting other than the Transaction described in this
Prospectus/Proxy Statement. It is not aware of any other matters to be brought
before the Meeting by others. If any other matter legally comes before the
Meeting, proxies for which discretion has been granted will be voted in
accordance with the views of management.
20
WHO IS ENTITLED TO VOTE?
Only shareholders of record of the PaineWebber Fund at the close of business
on the Record Date will be entitled to vote at the meeting. The number of shares
outstanding as of the Record Date for the PaineWebber Fund and each of its
classes is listed below:
SHARES OUTSTANDING
PaineWebber Fund.................................. 131,724,598.12
PaineWebber Fund Class A Shares................... 84,398,513.37
PaineWebber Fund Class B Shares................... 23,504,869.06
PaineWebber Fund Class C Shares................... 23,478,293.38
PaineWebber Fund Class Y Shares................... 342,922.31
WHAT OTHER SOLICITATIONS WILL BE MADE?
The PaineWebber Fund will request broker-dealer firms, custodians, nominees
and fiduciaries to forward proxy material to the beneficial owners of the shares
held of record by such persons. Brinson Advisors may reimburse broker-dealer
firms, custodians, nominees and fiduciaries for their reasonable expenses
incurred in connection with such proxy solicitation. In addition to
solicitations by mail, officers and employees of the PaineWebber Trust and
Brinson Advisors, without additional or special compensation, may conduct
additional solicitations by telephone and via the Internet. The PaineWebber
Trust has engaged Georgeson Shareholder Communications, a proxy solicitation
firm, to assist in the solicitation of proxies for the Meeting, which is
expected to cost approximately $14,000. The costs of such solicitations, and any
such additional solicitations of any adjourned session, will be borne by Brinson
Advisors.
INFORMATION ABOUT THE BRINSON FUND
Information about the Brinson Fund is included in Exhibit B, "Additional
Information Regarding the Brinson Fund" and the Brinson Fund Annual Report,
which is incorporated by reference and accompanies this Prospectus/Proxy
Statement. Additional information about the Brinson Fund is also contained in
the Statement of Additional Information dated September 28, 2001 relating to
this Prospectus/Proxy Statement, which is incorporated by reference herein. You
may request a free copy of this Statement of Additional Information, which has
been filed with the SEC, by calling 1-800-647-1568 or by writing to the Brinson
Fund at: 209 South LaSalle Street, Chicago, Illinois 60604-1295.
This Prospectus/Proxy Statement, which constitutes part of a Registration
Statement filed by the Brinson Trust with the SEC under the Securities Act of
1933, as amended, omits certain of the information contained in the Registration
Statement. Reference is hereby made to the Registration Statement and to the
exhibits thereto for further information with respect to the Brinson Fund and
the shares it offers. Statements contained herein concerning the provisions of
documents are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.
INFORMATION ABOUT THE PAINEWEBBER FUND
Information about the PaineWebber Fund is included in its current Prospectus
dated March 31, 2001, Annual Report to Shareholders dated November 30, 2000,
Statement of Additional Information dated March 31, 2001, and the Statement of
Additional Information dated September 28, 2001 relating to this
Prospectus/Proxy Statement, each of which is incorporated by reference herein.
Additional financial information about the PaineWebber Fund is also included in
its Semi-Annual Report to Shareholders dated May 31, 2001. You may request free
copies of these documents, which have been filed with the SEC, by calling
1-800-647-1568 or by writing to the PaineWebber Fund at: 51 West 52nd Street,
New York, New York 10019-6114.
21
INFORMATION ABOUT EACH FUND
The Funds file proxy materials, reports, and other information with the SEC
in accordance with the informational requirements of the Securities Exchange Act
of 1934 and the 1940 Act. These materials can be inspected and copied at: the
public reference facilities maintained by the SEC at Room 1200, 450 Fifth Street
N.W., Washington, DC 20549. Also, copies of such material can be obtained from
the Public Reference Branch, SEC, 450 Fifth Street, N.W., Washington, DC 20549,
at prescribed rates or from the SEC's Internet site at http:\\www.sec.gov. To
request information regarding the Funds, you may also send an e-mail to the SEC
at publicinfo@sec.gov.
PRINCIPAL HOLDERS OF SHARES
On the Record Date, the officers and Trustees of the PaineWebber Trust, as a
group, owned less than 1% of the outstanding voting shares of any class of the
PaineWebber Fund.
To the best knowledge of the PaineWebber Fund, as of the Record Date, no
person, except as set forth in the table below, owned of record or beneficially
5% or more of the outstanding shares of any class of the PaineWebber Fund.
CLASS NAME AND ADDRESS OF ACCOUNT SHARE AMOUNT PERCENTAGE OF CLASS PERCENTAGE OF FUND
----- --------------------------- ------------ ------------------- ------------------
Class Y UBS PaineWebber Inc. FBO
PaineWebber Cust
Gertrude A. Tormey
c/o Brinson Advisors, Inc.
51 West 52nd Street
New York, NY 10019-6114....... 142,210.75 41.47% 0.11%
Class Y UBS PaineWebber Inc. FBO
PaineWebber Cust
Jerry M. Zeigler
c/o Brinson Advisors, Inc.
51 West 52nd Street
New York, NY 10019-6114....... 35,688.27 10.40% N/A
Class Y UBS PaineWebber Inc. FBO
The Sue H. Schumann Trust
Sue H. Schumann and Louis A
Schumann Jr. Trustees
c/o Brinson Advisors, Inc.
51 West 52nd Street
New York, NY 10019-6114....... 21,292.42 6.20% N/A
On the Record Date, the officers and trustees of the Brinson Trust, as a
group, owned less than 1% of the outstanding shares of any class of the Brinson
Fund.
22
To the best knowledge of the Brinson Fund, as of the Record Date, no person,
except as set forth in the table below, owned of record or beneficially 5% or
more of the outstanding voting shares of any class of the Brinson Fund.
CLASS NAME AND ADDRESS OF ACCOUNT SHARE AMOUNT PERCENTAGE OF CLASS PERCENTAGE OF FUND
----- --------------------------- ------------ ------------------- ------------------
Class A Brinson Partners, Inc.
Seed Money Account
209 S. LaSalle Street
Chicago, IL 60604-1219........ 127.36 100% N/A
Class Y BBH & Co. Cust.
FBO AFP Cuprum
525 Washington Blvd
Jersey City, NJ 07310-1606.... 1,649,005.58 24.99% 24.15%
Class Y Brown Brothers Harriman
Cust. For AFP Provida
59 Wall Street
New York, NY 10005-2808....... 363,012.58 5.50% 5.32%
Class Y UBS
Omnibus Reinvest Account
UBST 30-A
10 E 50th Street
New York, NY 10022-6831....... 2,377,561.41 36.04% 34.82%*
Class Y State Street Bank & Trust Co.
TRST the UBS Savings &
Investment Plan
105 Rosemont Road
Westwood, MA 02090-2318....... 333,195.92 5.05% 4.88%
Class Y Charles Schwab & Co. Inc.
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122.. 407,968.99 6.18% 5.97%
23
CLASS NAME AND ADDRESS OF ACCOUNT SHARE AMOUNT PERCENTAGE OF CLASS PERCENTAGE OF FUND
----- --------------------------- ------------ ------------------- ------------------
UBS PaineWebber FBO
Investment John H. Phelan
Funds Class** Wynne H. Phelan
1702 Brun St.
Houston, TX 77019-5711........ 11,731.62 5.08% N/A
UBS Blush and Co
Investment PO Box 976
Funds Class** New York, NY 10268-0976....... 26,418.55 11.44% 0.39%
UBS PaineWebber FBO
Investment James R. Sulat
Funds Class** 150 Tobin Clark Drive
Hillsborough, CA 94010-7444... 25,018.12 10.83% 0.37%
UBS PaineWebber FBO
Investment G.L. Winninghan TTEE for the
Funds Class** Jack Florence Ferman
Charitable Trust
20720 Ventura Blvd Ste 300.... 84,423.97 36.55% 1.24%
UBS PFPC Trust Company
Investment David J. Nash
Funds Class** 1060 5th Ave
New York, NY 10128-0104....... 18,457.18 7.99% 0.27%
UBS PJ Mechanical Corp
Investment Employee Pension Plan
Funds Class** 135 W 18th Street
New York, NY 10011-4104....... 14,896.47 6.45% 0.22%
-------------------
* Person deemed to control the Brinson Fund within the meaning of the 1940
Act. Note that this person possesses the ability to control the outcome of
matters submitted for the vote of shareholders of the Fund.
** The Brinson Fund's UBS Investment Funds Class will be eliminated on October
26, 2001.
24
EXHIBITS TO COMBINED
PROXY STATEMENT AND PROSPECTUS
EXHIBIT
-------
A..... Agreement and Plan of Reorganization between
Brinson Managed Investments Trust (on behalf of
PaineWebber High Income Fund) and The Brinson
Funds (on behalf of High Yield Fund)
B..... Additional Information Regarding the Brinson Fund
C..... Annual Report to Shareholders of the High Yield
Fund, for the fiscal year ended June 30, 2001
25
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, made as of this 14th day of September,
2001, by and between The Brinson Funds (the "Trust"), a business trust created
under the laws of the State of Delaware, with its principal place of business at
209 South LaSalle Street, Chicago, Illinois 60604-1295, on behalf of its series,
the High Yield Fund (the "Brinson Fund"), and Brinson Managed Investments Trust
(the "PaineWebber Trust"), a business trust created under the laws of the
Commonwealth of Massachusetts, with its principal place of business at 51 West
52nd Street, New York, New York 10019-6114, on behalf of its series, PaineWebber
High Income Fund (the "PaineWebber Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of Reorganization")
will consist of (i) the acquisition by the Trust on behalf of the Brinson Fund
of substantially all of the property, assets and goodwill of the PaineWebber
Fund, in exchange solely for shares of beneficial interest, $0.001 par value, of
(a) Brinson High Yield Fund-Class A shares ("Brinson Fund Class A Shares"),
(b) Brinson High Yield Fund-Class B shares ("Brinson Fund Class B Shares"),
(c) Brinson High Yield Fund-Class C shares ("Brinson Fund Class C Shares"), and
(d) Brinson High Yield Fund-Class Y shares ("Brinson Fund Class Y Shares"), and
the assumption by the Trust on behalf of the Brinson Fund of all of the
liabilities of the PaineWebber Fund; (ii) the distribution of (a) Brinson Fund
Class A Shares to the shareholders of Class A shares of the PaineWebber Fund
("PaineWebber Fund Class A Shares"), (b) Brinson Fund Class B Shares to the
shareholders of Class B shares of the PaineWebber Fund ("PaineWebber Fund
Class B Shares"), (c) Brinson Fund Class C Shares to the shareholders of
Class C shares of the PaineWebber Fund ("PaineWebber Fund Class C Shares"), and
(d) Brinson Fund Class Y Shares to the shareholders of Class Y shares of the
PaineWebber Fund ("PaineWebber Fund Class Y Shares"), according to their
respective interests in complete liquidation of the PaineWebber Fund; and
(iii) the dissolution of the PaineWebber Fund as soon as practicable after the
closing (as referenced in Section 3, hereof, hereinafter called the "Closing"),
all upon and subject to the terms and conditions of this Agreement and Plan of
Reorganization ("Agreement") hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the premises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS AND LIABILITIES, LIQUIDATION AND DISSOLUTION OF
THE PAINEWEBBER FUND
(a) Subject to the terms and conditions of this Agreement, and in reliance
on the representations and warranties of the Trust herein contained, and in
consideration of the delivery by the Trust of the number of its shares of
beneficial interest of the Brinson Fund hereinafter provided, the PaineWebber
Trust, on behalf of the PaineWebber Fund, agrees that it will sell, convey,
transfer and deliver to the Trust, on behalf of the Brinson Fund, at the Closing
provided for in Section 3, all of the liabilities, debts, obligations and duties
of any nature, whether accrued, absolute, contingent or otherwise
("Liabilities") and the assets of the PaineWebber Fund as of the close of
business (which hereinafter shall be, unless otherwise noted, the regular close
of business of the New York Stock Exchange, Inc. ("NYSE")) ("Close of Business")
on the valuation date (as defined in Section 3 hereof, hereinafter called the
"Valuation Date"), free and clear of all liens, encumbrances, and claims
whatsoever (other than shareholders' rights of redemption and such restrictions
as might arise under the Securities Act of 1933, as amended (the "1933 Act"),
with respect to privately placed or otherwise restricted securities that the
PaineWebber Fund may have acquired in the ordinary course of business), except
for cash, bank deposits, or cash equivalent
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securities in an estimated amount necessary (1) to pay the PaineWebber Fund's
costs and expenses of carrying out this Agreement (including, but not limited
to, fees of counsel and accountants, and expenses of its liquidation and
dissolution contemplated hereunder), which costs and expenses shall be
established on the books of the PaineWebber Fund as liability reserves, (2) to
discharge all of the PaineWebber Fund's Liabilities on its books at the Close of
Business on the Valuation Date including, but not limited to, its income
dividends and capital gains distributions, if any, payable for any period prior
to, and through, the Close of Business on the Valuation Date, and excluding
those liabilities and obligations that would otherwise be discharged at a later
date in the ordinary course of business, and (3) to pay such contingent
liabilities as the trustees of the PaineWebber Trust shall reasonably deem to
exist against the PaineWebber Fund, if any, at the Close of Business on the
Valuation Date, for which contingent and other appropriate liability reserves
shall be established on the books of the PaineWebber Fund (hereinafter "Net
Assets"). The PaineWebber Trust, on behalf of the PaineWebber Fund, shall also
retain any and all rights that it may have over and against any person that may
have accrued up to and including the Close of Business on the Valuation Date.
The PaineWebber Trust agrees to use commercially reasonable efforts to identify
all of the PaineWebber Fund's Liabilities prior to the Valuation Date and to
discharge all such known Liabilities on or prior to the Valuation Date.
(b) Subject to the terms and conditions of this Agreement, and in reliance
on the representations and warranties of the PaineWebber Trust herein contained,
and in consideration of such sale, conveyance, transfer, and delivery, the Trust
agrees at the Closing to assume the Liabilities, on behalf of the Brinson Fund,
and to deliver to the PaineWebber Fund: (i) the number of Brinson Fund Class A
Shares, determined by dividing the net asset value per share of Brinson Fund
Class A Shares as of the Close of Business on the Valuation Date by the net
asset value per share of PaineWebber Fund Class A Shares as of Close of Business
on the Valuation Date, and multiplying the result by the number of outstanding
shares of the PaineWebber Fund Class A Shares as of Close of Business on the
Valuation Date; (ii) the number of Brinson Fund Class B Shares, determined by
dividing the net asset value per share of Brinson Fund Class B Shares as of
Close of Business on the Valuation Date by the net asset value per share of
PaineWebber Fund Class B Shares as of Close of Business on the Valuation Date,
and multiplying the result by the number of outstanding shares of PaineWebber
Fund Class B Shares as of Close of Business on the Valuation Date; (iii) the
number of Brinson Fund Class C Shares, determined by dividing the net asset
value per share of Brinson Fund Class C Shares as of Close of Business on the
Valuation Date by the net asset value per share of PaineWebber Fund Class C
Shares as of Close of Business on the Valuation Date, and multiplying the result
by the number of outstanding shares of PaineWebber Fund Class C Shares as of
Close of Business on the Valuation Date; and (iv) the number of Brinson Fund
Class Y Shares, determined by dividing the net asset value per share of Brinson
Fund Class Y Shares as of Close of Business on the Valuation Date by the net
asset value per share of PaineWebber Fund Class Y Shares as of Close of Business
on the Valuation Date, and multiplying the result by the number of outstanding
shares of PaineWebber Fund Class Y Shares as of Close of Business on the
Valuation Date. All such values shall be determined in the manner and as of the
time set forth in Section 2 hereof.
(c) As soon as practicable following the Closing, the PaineWebber Fund
shall dissolve and distribute pro rata to its shareholders of record as of the
Close of Business on the Valuation Date, the shares of beneficial interest of
the Brinson Fund received by the PaineWebber Fund pursuant to this Section 1.
Such dissolution and distribution shall be accomplished by the establishment of
accounts on the share records of the Brinson Fund of the type and in the amounts
due such shareholders pursuant to this Section 1 based on their respective
holdings of shares of the PaineWebber Fund as of the Close of Business on the
Valuation Date. Fractional shares of beneficial interest of the Brinson Fund
shall be carried to the third decimal place. No certificates representing shares
of beneficial interest of the Brinson Fund will be issued to shareholders of the
PaineWebber Fund.
(d) At the Closing, each shareholder of record of the PaineWebber Fund as
of the record date (the "Distribution Record Date") with respect to any unpaid
dividends and other distributions that were
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declared prior to the Closing, including any dividend or distribution declared
pursuant to Section 9(e) hereof, shall have the right to receive such unpaid
dividends and distributions with respect to the shares of the PaineWebber Fund
that such person had on such Distribution Record Date.
2. VALUATION
(a) The value of the PaineWebber Fund's Net Assets to be acquired by the
Brinson Fund hereunder shall be computed as of the Close of Business on the
Valuation Date, using the valuation procedures set forth in the PaineWebber
Fund's currently effective prospectus and statement of additional information.
(b) The net asset value of a share of beneficial interest of the Brinson
Fund Class A Shares, the Brinson Fund Class B Shares, the Brinson Fund Class C
Shares and the Brinson Fund Class Y Shares shall be determined to the nearest
full cent as of the Close of Business on the Valuation Date, using the valuation
procedures set forth in the Brinson Fund's currently effective prospectus and
statement of additional information.
(c) The net asset value of a share of beneficial interest of the
PaineWebber Fund Class A Shares, PaineWebber Fund Class B Shares, PaineWebber
Fund Class C Shares, and PaineWebber Fund Class Y Shares shall be determined to
the nearest full cent as of the Close of Business on the Valuation Date, using
the valuation procedures as set forth in the PaineWebber Fund's currently
effective prospectus and statement of additional information.
3. CLOSING AND VALUATION DATE
The Valuation Date shall be November 23, 2001, or such later date as the
parties may mutually agree. The Closing shall take place at the principal office
of Brinson Advisors, Inc., 51 West 52nd Street, New York, New York 10019-6114,
at approximately 10:00 a.m. Eastern time on the first business day following the
Valuation Date. Notwithstanding anything herein to the contrary, in the event
that on the Valuation Date (a) the NYSE shall be closed to trading or trading
thereon shall be restricted, or (b) trading or the reporting of trading on such
exchange or elsewhere shall be disrupted so that, in the judgment of the Trust
or PaineWebber Trust, accurate appraisal of the value of the net assets of the
PaineWebber Fund or the Brinson Fund is impracticable, the Valuation Date shall
be postponed until the first business day after the day when trading shall have
been fully resumed without restriction or disruption, reporting shall have been
restored and accurate appraisal of the value of the net assets of the
PaineWebber Fund and the Brinson Fund is practicable in the judgment of the
Trust and PaineWebber Trust. The PaineWebber Trust shall have provided for
delivery as of the Closing of those Net Assets of the PaineWebber Fund to be
transferred to the Brinson Fund's custodian, The Chase Manhattan Bank, 4 Chase
Metrotech Center, Brooklyn, New York 11245. Also, the PaineWebber Trust shall
deliver at the Closing a list of names and addresses of the shareholders of
record of PaineWebber Fund Class A Shares, PaineWebber Fund Class B Shares,
PaineWebber Fund Class C Shares and PaineWebber Fund Class Y Shares, and the
number of shares of beneficial interest of such classes owned by each such
shareholder, indicating thereon which such shares are represented by outstanding
certificates and which by book-entry accounts, all as of the Close of Business
on the Valuation Date, certified by its transfer agent, or by its President or
Vice President to the best of their knowledge and belief. The Trust shall issue
and deliver a certificate or certificates evidencing the shares of the Brinson
Fund to be delivered at the Closing to said transfer agent registered in such
manner as the PaineWebber Trust may request, or provide evidence satisfactory to
the PaineWebber Trust that such shares of beneficial interest of the Brinson
Fund have been registered in an open account on the books of the Brinson Fund in
such manner as the PaineWebber Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE PAINEWEBBER TRUST
The PaineWebber Trust represents and warrants to the Trust that:
(a) The PaineWebber Trust is a business trust created under the laws of the
Commonwealth of Massachusetts on November 21, 1986, and is validly existing and
in good standing under the laws of that
A-3
Commonwealth. The PaineWebber Trust, of which the PaineWebber Fund is a
diversified separate series, is duly registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. Such registration is in full force and effect as of the date hereof and
will be in full force and effect as of the Closing and all of its shares sold
have been sold pursuant to an effective registration statement filed under the
1933 Act, except for any shares sold pursuant to the private offering exemption
for the purpose of raising the required initial capital.
(b) The PaineWebber Trust is authorized to issue an unlimited number of
shares of beneficial interest of the PaineWebber Fund, $0.001 par value. Each
outstanding share of the PaineWebber Fund is duly and validly issued, fully
paid, non-assessable and has full voting rights and, except for any such shares
sold pursuant to the private offering exemption for purposes of raising the
required initial capital, is fully transferable.
(c) The financial statements appearing in the PaineWebber Fund Annual
Report to Shareholders for the fiscal year ended November 30, 2000, audited by
Ernst & Young, LLP, copies of which have been delivered to the Trust, fairly
present the financial position of the PaineWebber Fund as of the date indicated,
and the results of its operations for the period indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) The books and records of the PaineWebber Fund made available to the
Trust and/or its counsel are true and correct in all material respects and
contain no material omissions with respect to the business and operations of the
PaineWebber Fund.
(e) The statement of assets and liabilities to be furnished by the
PaineWebber Trust as of the Close of Business on the Valuation Date for the
purpose of determining the number of shares of beneficial interest of the
Brinson Fund to be issued pursuant to Section 1 hereof will accurately reflect
the Net Assets of the PaineWebber Fund and outstanding shares of beneficial
interest, as of such date, in conformity with generally accepted accounting
principles applied on a consistent basis.
(f) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in subsection (e) above, free and clear of all liens or encumbrances
of any nature whatsoever except such restrictions as might arise under the 1933
Act with respect to privately placed or otherwise restricted securities that it
may have acquired in the ordinary course of business and such imperfections of
title or encumbrances as do not materially detract from the value or use of the
assets subject thereto, or materially affect title thereto.
(g) The PaineWebber Trust has the necessary power and authority to conduct
its business and the business of the PaineWebber Fund as such businesses are now
being conducted.
(h) The PaineWebber Trust is not a party to or obligated under any
provision of its Amended and Restated Declaration of Trust, Restated By-laws, or
any material contract or any other material commitment or obligation, and is not
subject to any order or decree that would be violated by its execution of or
performance under this Agreement and Plan of Reorganization.
(i) The PaineWebber Trust has full power and authority to enter into and
perform its obligations under this Agreement, subject to approval of the Plan of
Reorganization by the PaineWebber Fund's shareholders. Except as provided in the
immediately preceding sentence, the execution, delivery and performance of this
Agreement have been duly and validly authorized, executed and delivered by it,
and this Agreement constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms, subject as to enforcement
to the effect of bankruptcy, insolvency, reorganization, arrangement among
creditors, moratorium, fraudulent transfer or conveyance, and other similar laws
of general applicability relating to or affecting creditor's rights and to
general equity principles.
A-4
(j) Neither the PaineWebber Trust nor the PaineWebber Fund is under the
jurisdiction of a Court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
(k) The PaineWebber Trust does not have any unamortized or unpaid
organizational fees or expenses that are allocable to the PaineWebber Fund.
(l) The PaineWebber Fund has since its inception satisfied, will at the
Closing satisfy, and consummation of the transactions contemplated by this
Agreement will not cause it to fail to satisfy, for any period, the requirements
of Subchapter M of the Code relating to qualification as a regulated investment
company.
(m) The PaineWebber Trust, or its agents, (i) holds a valid Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United States Withholding
(or other appropriate series of Form W-8, as the case may be), or Form W-9,
Request for Taxpayer Identification Number and Certification, for each
PaineWebber Fund shareholder of record, which Form W-8 or Form W-9 can be
associated with reportable payments made by the PaineWebber Fund to such
shareholder, and/or (ii) has otherwise timely instituted the appropriate backup
withholding procedures with respect to such shareholder as provided by
Section 3406 of the Code.
5. REPRESENTATIONS AND WARRANTIES BY THE TRUST
The Trust represents and warrants to the PaineWebber Trust that:
(a) The Trust is a business trust created under the laws of the State of
Delaware on December 1, 1993, and is validly existing and in good standing under
the laws of that State. The Trust, of which the Brinson Fund is a diversified
separate series of shares, is duly registered under the 1940 Act, as an open-
end management investment company, such registration is in full force and effect
as of the date hereof or will be in full force and effect as of the Closing and
all of its shares sold have been sold pursuant to an effective registration
statement filed under the 1933 Act, except for any shares sold pursuant to the
private offering exemption for the purpose of raising the required initial
capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.001 par value, of the Brinson Fund. Each outstanding
share of the Brinson Fund is fully paid, non-assessable and has full voting
rights and, except for any shares sold pursuant to the private offering
exemption for purposes of raising the required initial capital, is fully
transferable. The shares of beneficial interest of the Brinson Fund to be issued
pursuant to Section 1 hereof will, upon their issuance, be duly and validly
issued and fully paid and non-assessable, fully transferable and have full
voting rights.
(c) At the Closing, each class of shares of beneficial interest of the
Brinson Fund to be issued pursuant to this Agreement will be eligible for
offering to the public in those states of the United States and jurisdictions in
which the corresponding class of shares of the PaineWebber Fund are presently
eligible for offering to the public, and there are an unlimited number of shares
registered under the 1933 Act such that there is a sufficient number of such
shares to permit the transfers contemplated by this Agreement to be consummated.
(d) The statement of assets and liabilities of the Brinson Fund to be
furnished by the Trust as of the Close of Business on the Valuation Date for the
purpose of determining the number of shares of beneficial interest of the
Brinson Fund to be issued pursuant to Section 1 hereof will accurately reflect
the net assets of the Brinson Fund and outstanding shares of beneficial
interest, as of such date, in conformity with generally accepted accounting
principles applied on a consistent basis.
(e) At the Closing, the Trust will have good and marketable title to all of
the securities and other assets shown on the statement of assets and liabilities
referred to in subsection (d) above, free and clear of all liens or encumbrances
of any nature whatsoever, except such restrictions as might arise under the 1933
Act with respect to privately placed or otherwise restricted securities that it
may have acquired in the
A-5
ordinary course of business and such imperfections of title or encumbrances as
do not materially detract from the value or use of the assets subject thereto,
or materially affect title thereto.
(f) The Trust has the necessary power and authority to conduct its business
and the business of the Brinson Fund as such businesses are now being conducted.
(g) The Trust is not a party to or obligated under any provision of its
Agreement and Declaration of Trust, By-laws, or any material contract or any
other material commitment or obligation, and is not subject to any order or
decree that would be violated by its execution of or performance under this
Agreement
(h) The Trust has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement have been duly and validly authorized, executed and delivered by
it, and this Agreement constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms, subject to enforcement to
the effect of bankruptcy, insolvency, reorganization, arrangements among
creditors, moratorium, fraudulent transfer or conveyance, and other similar laws
of general applicability relating to or affecting creditors rights and to
general equity principles.
(i) Neither the Trust nor the Brinson Fund is under the jurisdiction of a
Court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
(j) The books and records of the Brinson Fund made available to the
PaineWebber Trust and/or its counsel are true and correct in all material
respects and contain no material omissions with respect to the business and
operations of the Brinson Fund.
(k) The Brinson Fund has since its inception satisfied, will at the Closing
satisfy, and consummation of the transactions contemplated by this Agreement
will not cause it to fail to satisfy, for any period, the requirements of
Subchapter M of the Code relating to qualification as a regulated investment
company.
6. REPRESENTATIONS AND WARRANTIES BY THE PAINEWEBBER TRUST AND THE TRUST
The PaineWebber Trust and the Trust each represents and warrants to the
other that:
(a) There are no legal, administrative or other proceedings or
investigations against it, or, to its knowledge, threatened against it, that
would materially affect its financial condition or its ability to consummate the
transactions contemplated by this Agreement. It is not charged with, or to its
knowledge, threatened with, any violation or investigation of any possible
violation of any provisions of any federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(b) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(c) It has duly and timely filed, on behalf of the PaineWebber Fund or the
Brinson Fund, as appropriate, all Tax (as defined below) returns and reports
(including information returns), which are required to be filed by such
PaineWebber Fund or Brinson Fund, and all such returns and reports accurately
state the amount of Tax owed for the periods covered by the returns, or, in the
case of information returns, the amount and character of income required to be
reported by such PaineWebber Fund or Brinson Fund. On behalf of the PaineWebber
Fund or the Brinson Fund, as appropriate, it has paid or made provision and
properly accounted for all Taxes (as defined below) due or properly shown to be
due on such returns and reports. The amounts set up as provisions for Taxes in
the books and records of the PaineWebber Fund or Brinson Fund, as appropriate,
as of the Close of Business on the Valuation Date will, to the extent required
by generally accepted accounting principles, be sufficient for the payment of
all Taxes of any kind, whether accrued, due, absolute, contingent or otherwise,
which were or which may be payable by the PaineWebber Fund or Brinson Fund, as
appropriate, for any periods or fiscal years prior to and including the Close of
Business on the Valuation Date, including all Taxes imposed before or after the
Close of Business on the Valuation Date that are attributable to any such period
or fiscal year. No return
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filed by it, on behalf of the PaineWebber Fund or Brinson Fund, as appropriate,
is currently being audited by the Internal Revenue Service or by any state or
local taxing authority. As used in this Agreement, "Tax" or "Taxes" means all
federal, state, local and foreign (whether imposed by a country or political
subdivision or authority thereunder) income, gross receipts, excise, sales, use,
value added, employment, franchise, profits, property, ad valorem or other
taxes, stamp taxes and duties, fees, assessments or charges, whether payable
directly or by withholding, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (foreign
or domestic) with respect thereto. To its knowledge, there are no levies, liens
or encumbrances relating to Taxes existing, threatened or pending with respect
to the assets of the PaineWebber Fund or Brinson Fund, as appropriate.
(d) All information provided to the PaineWebber Trust by the Trust, and by
the PaineWebber Trust to the Trust, for inclusion in, or transmittal with, the
Combined Proxy Statement and Prospectus with respect to this Agreement pursuant
to which approval of the PaineWebber Fund shareholders will be sought, shall not
contain any untrue statement of a material fact, or omit to state a material
fact required to be stated in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(e) Except in the case of the PaineWebber Trust with respect to the
approval of the PaineWebber Fund's shareholders of the Agreement, no consent,
approval, authorization or order of any court or governmental authority, or of
any other person or entity, is required for the consummation of the transactions
contemplated by this Agreement, except as may be required by the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, or
state securities laws or Delaware or Massachusetts business trust laws
(including, in the case of each of the foregoing, the rules and regulations
thereunder).
7. COVENANTS OF THE PAINEWEBBER TRUST
(a) The PaineWebber Trust covenants to operate the business of the
PaineWebber Fund as presently conducted between the date hereof and the Closing.
(b) The PaineWebber Trust undertakes that the PaineWebber Fund will not
acquire the shares of beneficial interest of the Brinson Fund for the purpose of
making distributions thereof other than to the PaineWebber Fund's shareholders.
(c) The PaineWebber Trust covenants that by the Closing, all of the
PaineWebber Fund's federal and other Tax returns and reports required by law to
be filed on or before such date shall have been filed and all federal and other
Taxes shown as due on said returns shall have either been paid or adequate
liability reserves shall have been provided for the payment of such Taxes.
(d) The PaineWebber Trust will at the Closing provide the Trust with a copy
of the shareholder ledger accounts, including, without limitation, the name,
address and taxpayer identification number of each shareholder of record, the
number of shares held by each shareholder, the dividend reinvestment elections
applicable to each shareholder, and the backup withholding and nonresident alien
withholding certifications, notices or records on file with the PaineWebber
Trust with respect to each shareholder, for all shareholders of record of the
PaineWebber Fund shares as of the Close of Business on the Valuation Date, who
are to become shareholders of the Brinson Fund as a result of the transfer of
assets that is the subject of this Agreement, certified by its transfer agent or
its President or its Vice President to the best of their knowledge and belief.
(e) The PaineWebber Trust agrees to mail to each shareholder of record
entitled to vote at the meeting of shareholders at which action on this
Agreement is to be considered, in sufficient time to comply with requirements as
to notice thereof, a Combined Proxy Statement and Prospectus that complies in
all material respects with the applicable provisions of Section 14(a) of the
1934 Act, and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
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(f) The PaineWebber Trust shall supply to the Trust, at the Closing, the
statement of the assets and liabilities described in Section 4(e) of this
Agreement in conformity with the requirements described in such Section.
8. COVENANTS OF THE TRUST
(a) The Trust covenants that the shares of beneficial interest of the
Brinson Fund to be issued and delivered to the PaineWebber Fund pursuant to the
terms of Section 1 hereof shall have been duly authorized as of the Closing and,
when so issued and delivered, shall be registered under the 1933 Act, duly and
validly issued, and fully paid and non-assessable, and no shareholder of the
Brinson Fund shall have any statutory or contractual preemptive right of
subscription or purchase in respect thereof.
(b) The Trust covenants to operate the business of the Brinson Fund as
presently conducted between the date hereof and the Closing.
(c) The Trust covenants that by the Closing, all of the Brinson Fund's
federal and other tax returns and reports required by law to be filed on or
before such date shall have been filed and all federal and other taxes shown as
due on said returns shall have either been paid or adequate liability reserves
shall have been provided for the payment of such taxes.
(d) The Trust shall supply to the PaineWebber Trust, at the Closing, the
statement of assets and liabilities described in Section 5(d) of this Agreement
in conformity with the requirements described in such Section.
(e) The Trust will file with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form N-14 under the
1933 Act ("Registration Statement"), relating to the shares of beneficial
interest of the Brinson Fund issuable hereunder, and will use its best efforts
to provide that such Registration Statement becomes effective as promptly as
practicable. At the time such Registration Statement becomes effective, it
(i) will comply in all material respects with the applicable provisions of the
1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations
promulgated thereunder; and (ii) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of the PaineWebber Fund's
shareholders' meeting, and at the Closing, the prospectus and statement of
additional information included in the Registration Statement will not contain
an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
9. CONDITIONS PRECEDENT TO BE FULFILLED BY THE PAINEWEBBER TRUST AND THE TRUST
The obligations of the PaineWebber Trust and the Trust to effectuate this
Agreement and the Plan of Reorganization hereunder shall be subject to the
following respective conditions:
(a) That (1) all the representations and warranties of the other party
contained herein shall be true and correct in all material respects as of the
Closing with the same effect as though made as of and at such date; (2) the
other party shall have performed all obligations required by this Agreement to
be performed by it at or prior to the Closing; and (3) the other party shall
have delivered to such party a certificate signed by the President or Vice
President and by the Secretary or equivalent officer to the foregoing effect.
(b) That the other party shall have delivered to such party a copy of the
resolutions approving this Agreement adopted by the other party's Board of
Trustees, certified by the Secretary or equivalent officer.
(c) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted nor threatened to
institute any proceeding seeking to enjoin the consummation of the
reorganization contemplated hereby under Section 25(c) of the 1940 Act, and no
other legal, administrative or other proceeding shall be instituted or
threatened that would materially and
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adversely affect the financial condition of either party or would prohibit the
transactions contemplated hereby.
(d) That this Agreement and the Plan of Reorganization and the transactions
contemplated hereby shall have been approved by the appropriate action of the
shareholders of the PaineWebber Fund at an annual or special meeting or any
adjournment thereof.
(e) That the PaineWebber Fund shall have declared a distribution or
distributions prior to the Valuation Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders
(i) all of its ordinary income and all of its capital gain net income, if any,
for the period from the close of its last fiscal year to the Close of Business
on the Valuation Date, and (ii) any undistributed ordinary income and capital
gain net income from any prior period. Capital gain net income has the meaning
given such term by Section 1222(9) of the Code.
(f) That prior to or at the Closing, the PaineWebber Trust and the Trust
shall receive an opinion from Stradley, Ronon, Stevens & Young, LLP ("Stradley
Ronon") to the effect that, provided the acquisition contemplated hereby is
carried out in accordance with this Agreement, the laws of the State of Delaware
and the Commonwealth of Massachusetts, and in accordance with customary
representations provided by the PaineWebber Trust and the Trust in certificates
delivered to Stradley Ronon:
(1) The acquisition by the Brinson Fund of substantially all of the
assets and the assumption of the liabilities of the PaineWebber
Fund in exchange solely for the Brinson Fund shares to be issued
pursuant to Section 1 hereof, followed by the distribution by the
PaineWebber Fund to its shareholders of the Brinson Fund shares in
complete liquidation of the PaineWebber Fund, will qualify as a
reorganization within the meaning of Section 368(a)(1) of the Code,
and the Brinson Fund and the PaineWebber Fund will each be a "party
to the reorganization" within the meaning of Section 368(b) of the
Code;
(2) No gain or loss will be recognized by the PaineWebber Fund upon the
transfer of substantially all of its assets to and the assumption
of the liabilities by the Brinson Fund in exchange solely for the
voting shares of the Brinson Fund (to be issued in accordance with
Section 1 hereof) under Section 361(a) and Section 357(a) of the
Code;
(3) No gain or loss will be recognized by the Brinson Fund upon the
receipt by it of substantially all of the assets and the assumption
of the liabilities of the PaineWebber Fund in exchange solely for
the voting shares of the Brinson Fund (to be issued in accordance
with Section 1 hereof) under Section 1032(a) of the Code;
(4) No gain or loss will be recognized by the PaineWebber Fund upon the
distribution of the Brinson Fund shares to the PaineWebber Fund
shareholders in accordance with Section 1 hereof in liquidation of
the PaineWebber Fund under Section 361(c)(1) of the Code;
(5) The basis of the assets of the PaineWebber Fund received by the
Brinson Fund will be the same as the basis of such assets to the
PaineWebber Fund immediately prior to the exchange under
Section 362(b) of the Code;
(6) The holding period of the assets of the PaineWebber Fund received
by the Brinson Fund will include the period during which such
assets were held by the PaineWebber Fund under Section 1223(2) of
the Code;
(7) No gain or loss will be recognized by the shareholders of the
PaineWebber Fund upon the exchange of their shares in the
PaineWebber Fund for the voting shares (including fractional shares
to which they may be entitled) of the Brinson Fund (to be issued in
accordance with Section 1 hereof) under Section 354(a) of the Code;
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(8) The basis of the Brinson Fund shares received by the PaineWebber
Fund shareholders in accordance with Section 1 hereof (including
fractional shares to which they may be entitled) will be the same
as the basis of the shares of the PaineWebber Fund exchanged
therefor under Section 358(a)(1) of the Code;
(9) The holding period of the Brinson Fund shares received by the
PaineWebber Fund's shareholders in accordance with Section 1 hereof
(including fractional shares to which they may be entitled) will
include the holding period of the PaineWebber Fund's shares
surrendered in exchange therefor, provided that the PaineWebber
Fund shares were held as a capital asset on the date of the
Reorganization under Section 1223(l) of the Code; and
(10) The Brinson Fund will succeed to and take into account as of the
date of the transfer (as defined in Section 1.381(b)-1(b) of the
regulations issued by the United States Treasury (the "Treasury
Regulations")) the items of the PaineWebber Fund described in
Section 381(c) of the Code, subject to the conditions and
limitations specified in Sections 381, 382, 383 and 384 of the
Code, and the Treasury Regulations.
(g) That the Trust shall have received an opinion in form and substance
reasonably satisfactory to it from Kirkpatrick & Lockhart, LLP ("Kirkpatrick &
Lockhart"), counsel to the PaineWebber Trust, to the effect that, subject in all
respects to the effects of bankruptcy, insolvency, arrangement among creditors,
moratorium, fraudulent transfer or conveyance, and other similar laws of general
applicability relating to or affecting creditor's rights and to general equity
principles:
(1) The PaineWebber Trust was created as a business trust under the laws
of the Commonwealth of Massachusetts on November 21, 1986, and is
validly existing and in good standing under the laws of the
Commonwealth of Massachusetts;
(2) The PaineWebber Trust is authorized to issue an unlimited number of
shares of beneficial interest, $0.001 par value, of the PaineWebber
Trust and of the PaineWebber Fund. Assuming that the initial shares
of beneficial interest of the PaineWebber Fund were issued in
accordance with the 1940 Act, and the Amended and Restated
Declaration of Trust and Revised By-laws of the PaineWebber Trust,
and that all other such outstanding shares of the PaineWebber Fund
were sold, issued and paid for in accordance with the terms of the
PaineWebber Fund prospectus in effect at the time of such sales,
each such outstanding share is duly and validly issued, fully paid,
non-assessable, and except for any shares sold pursuant to the
private offering exemption for purposes of raising the required
initial capital, is fully transferable and has full voting rights;
(3) The PaineWebber Trust is an open-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in the PaineWebber Fund's currently effective
prospectus, such counsel does not know of any material suit, action,
or legal or administrative proceeding pending or threatened against
the PaineWebber Trust, the unfavorable outcome of which would
materially and adversely affect the PaineWebber Trust or the
PaineWebber Fund;
(5) To such counsel's knowledge, no consent, approval, authorization or
order of any court, governmental authority or agency is required for
the consummation by the PaineWebber Trust of the transactions
contemplated by this Agreement, except such as have been obtained
under the 1933 Act, the 1934 Act, the 1940 Act, and Massachusetts
laws (including, in the case of each of the foregoing, the rules and
regulations thereunder) and such as may be required under state
securities laws;
(6) Neither the execution, delivery nor performance of this Agreement by
the PaineWebber Trust violates any provision of its Amended and
Restated Declaration of Trust, its Revised
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By-laws, or the provisions of any agreement or other instrument,
known to such counsel to which the PaineWebber Trust is a party or
by which the PaineWebber Trust is otherwise bound; and
(7) This Agreement has been duly and validly authorized, executed and
delivered by the PaineWebber Trust and represents the legal, valid
and binding obligation of the PaineWebber Trust and is enforceable
against the PaineWebber Trust in accordance with its terms.
In giving the opinions set forth above, Kirkpatrick & Lockhart may state
that it is relying on certificates of the officers of the PaineWebber Trust with
regard to matters of fact and certain certifications and written statements of
governmental officials with respect to the good standing of the PaineWebber
Trust.
(h) That the PaineWebber Trust shall have received an opinion in form and
substance reasonably satisfactory to it from Stradley Ronon, counsel to the
Trust, to the effect that, subject in all respects to the effects of bankruptcy,
insolvency, arrangement among creditors, moratorium, fraudulent transfer or
conveyance, and other similar laws of general applicability relating to or
affecting creditor's rights and to general equity principles:
(1) The Trust was created as a business trust under the laws of the
State of Delaware on December 1, 1993, and is validly existing and
in good standing under the laws of the State of Delaware;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.001 par value. Assuming that the initial
shares of beneficial interest of the Brinson Fund were issued in
accordance with the 1940 Act and the Trust's Agreement and
Declaration of Trust and By-laws, and that all other such
outstanding shares of the Brinson Fund were sold, issued and paid
for in accordance with the terms of the Brinson Fund's prospectus in
effect at the time of such sales, each such outstanding share is
duly and validly issued, fully paid, non-assessable, freely
transferable and has full voting rights;
(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
(4) Except as disclosed in the Brinson Fund's currently effective
prospectus, such counsel does not know of any material suit, action,
or legal or administrative proceeding pending or threatened against
the Trust, the unfavorable outcome of which would materially and
adversely affect the Trust or the Brinson Fund;
(5) The shares of beneficial interest of the Brinson Fund to be issued
pursuant to the terms of Section 1 hereof have been duly authorized
and, when issued and delivered as provided in this Agreement, will
have been duly and validly issued and fully paid and will be non-
assessable by the Trust or the Brinson Fund, and to such counsel's
knowledge, no shareholder has any preemptive right to subscription
or purchase in respect thereof;
(6) To such counsel's knowledge, no consent, approval, authorization or
order of any court, governmental authority or agency is required for
the consummation by the Trust of the transactions contemplated by
this Agreement, except such as have been obtained under the 1933
Act, the 1934 Act, the 1940 Act, and Delaware laws (including, in
the case of each of the foregoing, the rules and regulations
thereunder and such as may be required under state securities laws);
(7) Neither the execution, delivery nor performance of this Agreement by
the Trust violates any provision of its Agreement and Declaration of
Trust, its By-laws, or the provisions of any
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agreement or other instrument, known to such counsel to which the
Trust is a party or by which the Trust is otherwise bound; and
(8) This Agreement has been duly and validly authorized, executed and
delivered by the Trust and represents the legal, valid and binding
obligation of the Trust and is enforceable against the Trust in
accordance with its terms.
In giving the opinions set forth above, Stradley Ronon may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact and certain certifications and written statements of governmental officials
with respect to the good standing of the Trust.
(i) That the Trust's Registration Statement with respect to the shares of
beneficial interest of the Brinson Fund to be delivered to the PaineWebber
Fund's shareholders in accordance with Section 1 hereof shall have become
effective, and no stop order suspending the effectiveness of the Registration
Statement or any amendment or supplement thereto, shall have been issued prior
to the Closing or shall be in effect at the Closing, and no proceedings for the
issuance of such an order shall be pending or threatened on that date.
(j) That the shares of beneficial interest of the Brinson Fund to be
delivered in accordance with Section 1 hereof shall be eligible for sale by the
Trust with each state commission or agency with which such eligibility is
required in order to permit the shares lawfully to be delivered to each
PaineWebber Fund shareholder.
(k) That at the Closing, the PaineWebber Trust, on behalf of the
PaineWebber Fund, transfers to the Brinson Fund aggregate Net Assets of the
PaineWebber Fund comprising at least 90% in fair market value of the total net
assets and 70% in fair market value of the total gross assets recorded on the
books of the PaineWebber Fund at the Close of Business on the Valuation Date.
10. BROKERAGE FEES AND EXPENSES; OTHER AGREEMENTS
(a) The PaineWebber Trust and the Trust each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection with
the transaction provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Agreement, whether or not consummated, shall be borne by Brinson Advisors, Inc.
(c) Any other provision of this Agreement to the contrary notwithstanding,
any liability of the PaineWebber Trust under this Agreement with respect to any
series of the PaineWebber Trust, or in connection with the transactions
contemplated herein with respect to any series of the PaineWebber Trust, shall
be discharged only out of the assets of that series of the PaineWebber Trust,
and no other series of the PaineWebber Trust shall be liable with respect
thereto.
(d) Any other provision of this Agreement to the contrary notwithstanding,
any liability of the Trust under this Agreement with respect to any series of
the Trust, or in connection with the transactions contemplated herein with
respect to any series of the Trust, shall be discharged only out of the assets
of that series of the Trust, and no other series of the Trust shall be liable
with respect thereto.
11. INDEMNIFICATION BY THE PAINEWEBBER TRUST AND THE PAINEWEBBER FUND
The PaineWebber Trust and the PaineWebber Fund hereby agree to indemnify and
hold the Trust and the Brinson Fund and each of them harmless from all loss,
liability and expense (including reasonable counsel fees and expenses in
connection with the contest of any claim) which the Trust or the Brinson Fund
may incur or sustain by reason of the fact that (i) the Trust or the Brinson
Fund shall be required to pay any obligation of the PaineWebber Trust or the
PaineWebber Fund, whether consisting of Tax deficiencies or otherwise, based
upon a claim or claims against the PaineWebber Trust or the PaineWebber Fund
which were omitted or not fully reflected in the financial statements to be
delivered to the Trust in connection
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with the Closing; (ii) any representations or warranties made by the PaineWebber
Trust in Sections 4 or 6 hereof should prove to be false or erroneous in any
material respect; (iii) any covenant has been breached in any material respect;
or (iv) any claim is made alleging that (a) the Combined Proxy Statement and
Prospectus delivered to the shareholders of the PaineWebber Fund in connection
with this transaction, or (b) the Registration Statement on Form N-14 of which
such Combined Proxy Statement and Prospectus forms a part, included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except insofar as such claim is based on written
information furnished to the PaineWebber Trust by the Trust, its investment
adviser or distributor.
12. INDEMNIFICATION BY THE TRUST AND THE BRINSON FUND
The Trust and the Brinson Fund hereby agree to indemnify and hold the
Trustees of the PaineWebber Trust and the PaineWebber Fund harmless from all
loss, liability and expenses (including reasonable counsel fees and expenses in
connection with the contest of any claim) which the PaineWebber Trust or the
PaineWebber Fund may incur or sustain by reason of the fact that (i) any
representations or warranties made by the Trust in Sections 5 or 6 hereof should
prove false or erroneous in any material respect; (ii) any covenant has been
breached by the Trust or the Brinson Fund in any material respect; or (iii) any
claim is made alleging that (a) the Combined Proxy Statement and Prospectus
delivered to the shareholders of the PaineWebber Fund in connection with this
transaction or (b) the Registration Statement on Form N-14 of which such
Combined Proxy Statement and Prospectus forms a part, included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except insofar as such claim is based on written
information furnished to the Trust by the PaineWebber Trust, its investment
adviser or distributor.
13. NOTICE OF CLAIM OF INDEMNIFICATION
In the event that any claim is made against the Trust or the Brinson Fund in
respect of which indemnity may be sought by the Trust or the Brinson Fund from
the PaineWebber Trust, the PaineWebber Fund or the shareholders of the
PaineWebber Fund under Section 11 of this Agreement, or, in the event that any
claim is made against the PaineWebber Trust or the PaineWebber Fund in respect
of which indemnity may be sought by the PaineWebber Trust or the PaineWebber
Fund from the Trust or the Brinson Fund under Section 12 of this Agreement, the
party seeking indemnification (the "Indemnified Party") shall, with reasonable
promptness and before payment of such claim, give written notice of such claim
to the other party (the "Indemnifying Party"). If no objection as to the
validity of the claim is made in writing to the Indemnified Party by the
Indemnifying Party within thirty (30) days after giving notice hereunder, then,
the Indemnified Party may pay such claim and shall be entitled to reimbursement
therefor, pursuant to this Agreement. If, prior to the termination of such
thirty-day period, objection in writing as to the validity of such claim is made
to the Indemnified Party, the Indemnified Party shall withhold payment thereof
until the validity of the claim is established (i) to the satisfaction of the
Indemnifying Party; or (ii) by a final determination of a court of competent
jurisdiction, whereupon the Indemnified Party may pay such claim and shall be
entitled to reimbursement thereof, pursuant to this Agreement and Plan of
Reorganization; or (iii) with respect to any Tax claims, within seven (7)
calendar days following the earlier of (A) an agreement between the PaineWebber
Trust and the Trust that an indemnity amount is payable, (B) an assessment of a
Tax by a taxing authority, or (C) a "determination" as defined in
Section 1313(a) of the Code. For purposes of this Section 13, the term
"assessment" shall have the same meaning as used in Chapter 63 of the Code and
Treasury Regulations thereunder, or any comparable provision under the laws of
the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party shall promptly investigate the claim,
and if it is not satisfied with the validity thereof, the Indemnifying Party
shall conduct the defense against such claim. All costs and expenses incurred by
the Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition to,
and not in limitation of, any other rights the parties may have under applicable
law.
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14. TERMINATION; WAIVER; ORDER
(a) Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated and the Plan of Reorganization abandoned at any
time (whether before or after adoption thereof by the shareholders of the
PaineWebber Fund) prior to the Closing as follows:
(1) by mutual consent of the PaineWebber Trust and the Trust in writing;
(2) by the Trust if any condition precedent to its obligations set forth
in Section 9 has not been fulfilled or waived by the Trust in
writing; or
(3) by the PaineWebber Trust if any condition precedent to its
obligations set forth in Section 9 has not been fulfilled or waived
by the PaineWebber Trust in writing.
(b) If the transactions contemplated by this Agreement have not been
consummated by December 31, 2001, this Agreement shall automatically terminate
on that date, unless a later date is agreed to in writing by both the
PaineWebber Trust and the Trust.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either the PaineWebber Trust or
the Trust or persons who are their trustees, officers, agents or shareholders in
respect of this Agreement.
(d) At any time prior to the Closing, any of the terms or conditions of
this Agreement may be waived by either the PaineWebber Trust or the Trust,
respectively (whichever is entitled to the benefit thereof).
(e) The respective representations, warranties and covenants contained in
Sections 4-8 hereof shall expire with, and be terminated by, the consummation of
the Plan of Reorganization.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Closing and shall impose any terms or conditions
that are determined by action of the Board of Trustees of the PaineWebber Trust
or the Board of Trustees of the Trust to be acceptable, such terms and
conditions shall be binding as if a part of this Agreement without further vote
or approval of the shareholders of the PaineWebber Fund, unless such further
vote is required by applicable law, or by mutual consent of the parties.
15. FINAL TAX RETURNS AND FORMS 1099 OF THE PAINEWEBBER FUND
(a) After the Closing, the PaineWebber Trust shall or shall cause its
agents to prepare any federal, state or local Tax returns, including any
Forms 1099, required to be filed by the PaineWebber Trust with respect to the
PaineWebber Fund's final taxable year ending with its complete liquidation and
for any prior periods or taxable years and shall further cause such Tax returns
and Forms 1099 to be duly filed with the appropriate taxing authorities.
(b) Notwithstanding the provisions of Section 1 hereof, any expenses
incurred by the PaineWebber Trust or the PaineWebber Fund (other than for
payment of Taxes) in connection with the preparation and filing of said Tax
returns and Forms 1099 after the Closing, shall be borne by the PaineWebber Fund
to the extent such expenses have been or should have been accrued by the
PaineWebber Fund in the ordinary course without regard to the Plan of
Reorganization contemplated by this Agreement.
16. COOPERATION AND EXCHANGE OF INFORMATION
The Trust and the PaineWebber Trust will provide each other and their
respective representatives with such cooperation and information as either of
them reasonably may request of the other in filing any Tax returns, amended
return or claim for refund, determining a liability for Taxes or a right to a
refund of Taxes or participating in or conducting any audit or other proceeding
in respect of Taxes. Each party or their
A-14
respective agents will retain for a period of six (6) years following the
Closing all returns, schedules and work papers and all material records or other
documents relating to Tax matters of the PaineWebber Fund and Brinson Fund for
its taxable period first ending after the Closing and for all prior taxable
periods.
17. ENTIRE AGREEMENT AND AMENDMENTS
This Agreement embodies the entire Agreement between the parties and there
are no agreements, understandings, restrictions, or warranties between the
parties other than those set forth herein or herein provided for. This Agreement
may be amended only by mutual consent of the parties in writing. Neither this
Agreement nor any interest herein may be assigned without the prior written
consent of the other party.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts together shall
constitute but one instrument.
19. NOTICES
Any notice, report, or demand required or permitted by any provision of this
Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to the Trust at
209 South LaSalle Street, Chicago, Illinois 60604-1295, Attention: Secretary, or
to the PaineWebber Trust at 51 West 52nd Street, New York, New York 10019-6114,
Attention: Secretary.
20. GOVERNING LAW
This Agreement shall be governed by and carried out in accordance with the
laws of the State of Delaware.
21. EFFECT OF FACSIMILE SIGNATURE
A facsimile signature of an authorized officer of a party hereto on this
Agreement and/or any transfer document shall have the same effect as if executed
in the original by such officer.
IN WITNESS WHEREOF, the Trust and PaineWebber Trust have each caused this
Agreement and Plan of Reorganization to be executed on its behalf by its duly
authorized officers, all as of the day and year first-above written.
Attest: THE BRINSON FUNDS,
on behalf of the HIGH YIELD FUND
By: /s/Paul H. Schubert By: /s/Amy R. Doberman
........................................ ......................................
Title: Treasurer and Principal Title: Vice President and Secretary
Accounting Officer
Attest: BRINSON MANAGED INVESTMENTS TRUST,
on behalf of the PAINEWEBBER HIGH INCOME
FUND
By: /s/Paul H. Schubert By: /s/Amy R. Doberman
........................................ ......................................
Title: Vice President and Treasurer Title: Vice President and Secretary
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EXHIBIT B
ADDITIONAL INFORMATION REGARDING THE BRINSON FUND
Unless otherwise defined in this Exhibit B, all capitalized terms have the
meanings set forth in the Prospectus/Proxy Statement.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
FUND OBJECTIVES
The Brinson Fund seeks to provide high current income, along with capital
growth, when consistent with high current income.
PRINCIPAL INVESTMENT STRATEGIES
The Brinson Fund invests in a portfolio of higher-yielding, lower-rated debt
securities issued by domestic and foreign companies. Under normal conditions, at
least 80% of the Brinson Fund's net assets are invested in fixed income
securities that provide higher yields and are lower-rated.
Lower-rated bonds are bonds rated in the lower rating categories of Moody's
and S&P, including securities rated Ba or lower by Moody's or BB or lower by
S&P. Securities rated in these categories are considered to be of poorer quality
and predominantly speculative.
The Brinson Fund will invest in securities that Brinson (NY) expects will
appreciate in value as a result of declines in long-term interest rates or
favorable developments affecting the business or prospects of the issuer which
may improve the issuer's financial condition and credit rating. Up to 25% of the
Brinson Fund's total assets may be invested in foreign securities, which may
include securities of issuers in emerging markets.
PRINCIPAL RISKS
An investment in the Brinson Fund is not guaranteed; you may lose money by
investing in the Fund. The other principal risks presented by an investment in
the Brinson Fund are:
- INTEREST RATE RISK -- The risk that changing interest rates may adversely
affect the value of an investment. An increase in prevailing interest rates
typically causes the value of fixed income securities to fall, while a decline
in prevailing interest rates may produce an increase in the market value of
fixed income securities. Changes in interest rates will affect the value of
longer-term fixed income securities more than shorter-term securities and
higher quality securities more than lower quality securities.
- CREDIT RISK -- The risk that the issuer of bonds with ratings of BB (S&P) or
Ba (Moody's) or below will default or otherwise be unable to honor a financial
obligation. These securities are considered to be of poor standing and are
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
High yield bonds are more likely to be subject to an issuer's default than
investment grade (higher rated) bonds.
- PREPAYMENT RISK -- The risk that issuers will prepay fixed rate obligations
when interest rates fall, forcing the Fund to re-invest in obligations with
lower interest rates than the original obligations.
- MARKET RISK -- The risk that the market value of the Brinson Fund's
investments will fluctuate as the stock and bond markets fluctuate. Market
risk may affect a single issuer, industry or section of the economy, or it may
affect the market as a whole.
- FOREIGN INVESTING AND EMERGING MARKETS RISKS -- The risk that prices of the
Brinson Fund's investments in foreign securities may go down because of
unfavorable foreign government actions, political instability or the absence
of accurate information about foreign issuers. Also, a decline in the value of
foreign currencies relative to the U.S. Dollar will reduce the value of
securities denominated in those
B-1
currencies. Also, foreign securities are sometimes less liquid and harder to
sell and to value than securities of U.S. issuers. Each of these risks is more
severe for securities of issuers in emerging market countries.
Further discussion of the Brinson Fund's strategies is included in the
section entitled Securities Selection Process. Other risks of investing in the
Brinson Fund, along with further details about some of the risks described
above, are discussed in the Statement of Additional Information for this
Prospectus/ Proxy Statement.
PERFORMANCE
RISK/RETURN BAR CHART AND TABLE
The following bar chart and table reflect performance information for the
Class Y shares of the Brinson Fund, and the table also reflects performance
information for the Class A shares of the Brinson Fund. On October 29, 2001, the
current Class I shares will be redesignated as Class Y shares of the Brinson
Fund and the current Class N shares will be redesignated as Class A shares. For
clarity of presentation in this Exhibit B, the new class designations will be
used.
The bar chart and table give an indication of the Brinson Fund's risks and
performance. The bar chart shows you how the Brinson Fund's performance has
varied from year to year. The table compares the Brinson Fund's performance over
time to that of a broad measure of market performance. WHEN YOU CONSIDER THIS
INFORMATION, PLEASE REMEMBER THAT THE BRINSON FUND'S PAST PERFORMANCE IS NOT
NECESSARILY AN INDICATION OF HOW IT WILL PERFORM IN THE FUTURE.
TOTAL RETURN OF CLASS Y SHARES (FORMERLY CLASS I SHARES) (1998 IS THE BRINSON
FUND'S FIRST FULL CALENDAR YEAR OF OPERATIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CALENDAR YEAR TOTAL RETURN
1998 7.75%
1999 4.85%
2000 -5.18%
Total Return January 1 to June 30, 2001: 1.63%
Best quarter during calendar years shown: Q4 1998: 4.32%
Worst quarter during calendar years shown: Q4 2000: -4.34%
B-2
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 2000
CLASS Y CLASS A
(FORMERLY (FORMERLY MERRILL LYNCH
CLASS CLASS I) CLASS N)* HIGH YIELD
(INCEPTION DATE) (9/30/97) (12/31/98) MASTER INDEX(1)
---------------- --------- ---------- ---------------
One Year........................... -5.18% 5.41% -3.79%
Life of Class Y.................... 2.87% N/A 1.19%
Life of Class A.................... N/A -0.57% -1.15%
-------------------
* The average annual total returns for the Class A shares have been
calculated to reflect the Class A shares' current maximum front-end sales
charge of 4.50%.
(1) The Merrill Lynch High Yield Master Index is the benchmark for the Brinson
Fund, and is an index of publicly placed non-convertible, coupon bearing
U.S. domestic debt with a term to maturity of at least one year.
SECURITIES SELECTION PROCESS
WHAT IS THE INVESTMENT PROCESS USED TO MANAGE THE BRINSON FUND?
Creating a value-added investment portfolio is a three-stage process:
1) Research -- Identifying the Opportunity
2) Portfolio Construction & Risk Control -- Capturing the Opportunity
3) Execution -- Delivering the Portfolio
RESEARCH
The research for the Brinson Fund combines both TOP-DOWN and BOTTOM-UP
analyses. The "top-down," analysis seeks to identify broad economic and market
shaping trends that influence security prices. These encompass both long-term
and short-term economic factors and market-shaping themes, ranging from global
interest rate and inflation estimates to strategic sector and industry
developments. The "bottom-up," analysis includes researching the very specific
factors that affect the cash flows of potential investments around the world.
Importantly, this research is integrated around the world, giving the Brinson
Fund's management team the ability to take advantage of a wide array of
investment opportunities. With more and more companies selling their goods and
services to consumers around the world, the Brinson Fund's management team
believes that a global presence is critical. Research teams are located in all
of the world's major financial markets and utilize a consistent framework for
researching and analyzing investments.
PORTFOLIO CONSTRUCTION & RISK CONTROL
Once the research teams have identified the opportunities, a team of
seasoned investment specialists select securities for the Brinson Fund's
portfolio, taking into account both the potential return as well as the
potential risks inherent in each investment. Because many of the factors that
influence investments are interrelated, understanding how investments behave in
relation to one another is a key part of constructing a sound investment
portfolio. When a new security is considered for inclusion in the Brinson Fund's
portfolio, a detailed analysis of how it will affect the overall portfolio
composition is undertaken. This involves evaluating absolute risk as well as the
risk relative to the Brinson Fund's benchmark. The Brinson Fund has a dedicated
risk analysis team that uses risk analysis tools and techniques to augment the
evaluation of investment risks. Working together with this team, the investment
specialists select investments and determine the weights those investments will
be given within the Brinson Fund's portfolio.
B-3
EXECUTION
The Brinson Fund's management team believes that "Execution supercedes
intention." That is why a great deal of resources is devoted to attempting to
ensure that its investment decisions are implemented quickly and in the most
cost-effective way for the Brinson Fund. The Brinson Fund uses experienced teams
of traders located around the world that have integral knowledge of the markets
in which the Brinson Fund invests. By leveraging global resources, the Brinson
Fund's management team is able to quickly and efficiently access financial
markets around the globe to execute the investment strategies.
IS THERE A CATEGORY WITHIN WHICH THE BRINSON FUND FALLS BASED ON ITS
INVESTMENT STRATEGY?
The Brinson Fund is a fixed income fund that invests primarily in fixed
income or debt securities issued by corporations and government entities.
HOW ARE SECURITIES SELECTED FOR THE BRINSON FUND?
The management team uses an internally developed valuation model for fixed
income securities selections for the Brinson Fund, which quantifies the
management team's return expectations for all of the major bond markets. Inputs
to this model include forecasts of inflation, risk premiums and interest rates.
The credit review process for the Brinson Fund incorporates both a top-down
strategy, which focuses on how macroeconomic forces shape various industry
outlooks, and a bottom-up strategy, looking at specific debt securities, which
relies on a combination of qualitative and quantitative factors. The qualitative
assessment focuses on management strength, market position, competitive
environment and financial flexibility. The quantitative assessment focuses on
historical operating results, calculation of various credit ratios and an
expected future outlook. The Brinson Fund's management team's fixed income
strategies combine judgments about the absolute value of the fixed income
universe and the relative value of issuer sectors, maturity intervals, duration
of securities, quality and coupon segments and specific circumstances facing the
issuers of fixed income securities.
WHAT ARE OTHER INVESTMENT PRACTICES OF THE BRINSON FUND?
CASH AND CASH EQUIVALENTS
The Brinson Fund may invest in cash or cash equivalent instruments,
including units of an affiliated money market fund that is not registered under
the Investment Company Act of 1940. When unusual market conditions warrant, the
Fund may make substantial temporary defensive investments in cash equivalents,
which may affect the Fund's ability to meet its objective. See the Statement of
Additional Information of this Prospectus/Proxy Statement for further
information.
PORTFOLIO TURNOVER
Portfolio turnover rate is not a factor in making buy and sell decisions.
Increased portfolio turnover may result in higher costs for brokerage
commissions, dealer mark-ups and other transaction costs. It may also result in
taxable gains. Higher costs associated with increased portfolio turnover may
offset gains in the Fund's performance. However, it is not expected that the
portfolio turnover for the Brinson Fund will exceed 100%.
WHAT IS A BENCHMARK (OR INDEX) AND HOW IS IT USED?
Benchmarks are indices comprised of securities that serve as standards of
measurement for making risk and performance comparisons to actively managed
investment portfolios. The Brinson Fund's total returns are compared to the
total returns of its benchmark in the Performance section of this Exhibit B. The
benchmark gives the Brinson Fund's shareholders an objective target against
which to judge the management team's performance. The precise selection of a
benchmark is often critical to understanding and evaluating performance. Today,
nearly all institutional investors assign their investment advisors a benchmark
against which the advisor's performance is evaluated.
B-4
The Brinson Fund has adopted the Merrill Lynch High Yield Master Index, a
widely recognized industry benchmark, as the benchmark against which it
evaluates the performance of the Brinson Fund as well as the Fund's management
team.
MANAGING YOUR FUND ACCOUNT
FLEXIBLE PRICING
The Fund offers four classes of shares -- Class A, Class B, Class C and
Class Y. Each class has different sales charges and ongoing expenses.
Shareholders can choose the class that is best for them, based on how much they
plan to invest and how long they plan to hold their shares of the Fund. Class Y
shares are only available to certain types of investors.
The Brinson Fund has adopted separate plans of distribution pertaining to
the Class A, Class B and Class C shares of the Fund under Rule 12b-1 that allow
the Fund to pay service and (for Class B and Class C shares) distribution fees
for the sale of the Fund's shares and services provided to shareholders. Because
the 12b-1 fees for Class B and Class C shares are paid out of the Fund's assets
on an ongoing basis, over time they will increase the cost of a shareholder's
investment and may cost the shareholder more than if he or she paid the
front-end sales charge for Class A shares of the Fund.
CLASS A SHARES
Class A shares of the Brinson Fund have a front-end sales charge that is
included in the offering price of the Class A shares. This sales charge is paid
at the time of purchase and is not invested in the Fund. Class A shares pay an
annual 12b-1 service fee of 0.25% of average net assets, but they pay no 12b-1
distribution fees. The ongoing expenses for Class A shares are lower than for
Class B and Class C shares.
The Class A sales charges for the Brinson Fund are described in the
following table:
CLASS A SALES CHARGES:
SALES CHARGE AS A PERCENTAGE OF:
----------------------------------- REALLOWANCE TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
-------------------- -------------- ------------------- ----------------------------------
Less than $100,000................. 4.50% 4.71% 4.00%
$100,000 to $249,999............... 3.50 3.63 3.00
$250,000 to $499,999............... 2.50 2.56 2.00
$500,000 to $999,999............... 2.00 2.04 1.75
$1,000,000 and over (1)............ None None Up to 1.00 (2)
-------------------
(1) A contingent deferred sales charge of 1% of the lower of the shares'
offering price or the net asset value at the time of sale by the
shareholder is charged on sales of shares made within one year of the
purchase date. Class A shares representing reinvestment of dividends are
not subject to this 1% charge. Withdrawals in the first year after purchase
of up to 12% of the value of the fund account under the Fund's Automatic
Cash Withdrawal Plan are not subject to this charge.
(2) Brinson Advisors pays 1.00% to the dealer for sales of greater than
$1 million but less than $3 million, 0.75% for sales of at least
$3 million but less than $5 million, 0.50% for sales of at least
$5 million but less than $50 million, and 0.25% for sales of $50 million or
more.
SALES CHARGE REDUCTIONS AND WAIVERS. A shareholder may qualify for a lower
sales charge if the shareholder already owns Class A shares of a fund for which
Brinson Advisors or one of its affiliates serves as principal underwriter. A
shareholder can combine the value of Class A shares that are owned in other
funds for which Brinson Advisors or one of its affiliates serves as principal
underwriter and the purchase amount of the Class A shares that the shareholder
is buying.
B-5
A shareholder may also qualify for a lower sales charge if the shareholder's
purchases are combined with those of:
- the shareholder's spouse, parents or children under age 21;
- the shareholder's Individual Retirement Accounts (IRAs);
- certain employee benefit plans, including 401(k) plans;
- a company that the shareholder control;
- a trust that the shareholder created;
- Uniform Transfers to Minors Act/Gifts to Minors Act accounts created by the
shareholder or by a group of investors for the shareholder's children; or
- accounts with the same advisor.
Front-end sales charges on Class A shares will be waived if the shareholder buys
Class A shares with proceeds from redemptions from any registered mutual fund
for which Brinson Advisors or any of its affiliates serves as principal
underwriter if the shareholder:
- Originally paid a front-end sales charge on the shares; and
- Reinvests the money within 60 days of the redemption date.
The Brinson Fund's front-end sales charges will also not apply to purchases of
Class A shares by or through:
- Employees of UBS AG and its subsidiaries and members of the employees'
immediate families; and members of the Board of Directors/Trustees of any
investment company for which Brinson Advisors or any of its affiliates serves
as principal underwriter;
- Trust companies and bank trust departments investing on behalf of their
clients if clients pay the bank or trust company an asset-based fee for trust
or asset management services;
- Retirement plans and deferred compensation plans that have assets of at least
$1 million or at least 25 eligible employees;
- Broker-dealers and other financial institutions (including registered
investment advisers and financial planners) that have entered into a selling
agreement with Brinson Advisors (or otherwise have an arrangement with a
broker-dealer or other financial institution with respect to sales of fund
shares), on behalf of clients participating in a fund supermarket, wrap
program, or other program in which clients pay a fee for advisory services,
executing transactions in Fund shares, or for otherwise participating in the
program;
- Employees of broker-dealers and other financial institutions (including
registered investment advisers and financial planners) that have entered into
a selling agreement with Brinson Advisors (or otherwise having an arrangement
with a broker-dealer or other financial institution with respect to sales of
fund shares), and their immediate family members, as allowed by the internal
policies of their employer;
- Insurance company separate accounts;
- Shareholders of the Class N shares of any Brinson fund who held such shares at
the time they were redesignated as Class A shares;
- Reinvestment of capital gains distributions and dividends;
-------------------
* UBS PaineWebber is a service mark of UBS AG.
B-6
- College savings plans qualified under Section 529 of the Internal Revenue Code
whose sponsors or administrators have entered into an agreement with Brinson
Advisors or any of its affiliates to perform advisory or administrative
services;
- A UBS PaineWebber Financial Advisor who was formerly employed as an investment
executive with a competing brokerage firm, and
- the shareholder was the Financial Advisor's client at the competing
brokerage firm;
- within 90 days of buying shares in the fund, the shareholder sells
shares of one or more mutual funds that were principally underwritten
by the competing brokerage firm or its affiliates, and the shareholder
either paid a sales charge to buy those shares, pays a contingent
deferred sales charge when selling them or held those shares until the
contingent deferred sales charge was waived; and
- the shareholder purchases an amount that does not exceed the total
amount of money the shareholder received from the sale of the other
mutual fund.
FOR A DISCUSSION ON THE QUALIFICATION FOR A WAIVER OF THE DEFERRED SALES
CHARGE ON SALES OF CLASS A SHARES SEE "DEFERRED SALES CHARGE WAIVERS" ON PAGE
B-9.
CLASS B SHARES
Class B shares of the Brinson Fund have a contingent deferred sales charge.
When Class B shares are purchased, 100% of the purchase is invested in fund
shares. However, a shareholder may have to pay a deferred sales charge when the
shareholder sells fund shares, depending on how long the shareholder owned the
shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If Class B shares are held for the period specified below, they will
automatically convert to Class A shares of the Fund. Class A shares have lower
ongoing expenses.
If Class B shares are sold before the end of the specified period, a
shareholder will pay a deferred sales charge. The Brinson Fund calculates the
deferred sales charge by multiplying the lesser of the net asset value of the
Class B shares at the time of purchase or the net asset value at the time of
sale by the percentage shown in the applicable table. Class B shares purchased
(not acquired in the Transaction) will be subject to a deferred sales charge at
the time of redemption at the percentage shown below:
PERCENTAGE (BASED ON AMOUNT OF INVESTMENT) BY
WHICH THE SHARES' NET ASSET VALUE IS MULTIPLIED:
----------------------------------------------------
LESS THAN $100,000 TO $250,000 TO $500,000 TO
IF SHARES ARE SOLD WITHIN: $100,000 $249,000 $499,999 $999,999
-------------------------- ---------- ----------- ----------- -----------
1st year since purchase............. 5% 3% 3% 2%
2nd year since purchase............. 4% 2% 2% 1%
3rd year since purchase............. 3% 2% 1% None
4th year since purchase............. 2% 1% None None
5th year since purchase............. 2% None None None
6th year since purchase............. 1% None None None
7th year since purchase............. None None None None
Class B shares automatically convert to Class A shares after the end of the
sixth year if a shareholder purchases less than $100,000, after the end of the
fourth year for purchases with a value of at least $100,000 but less than
$250,000, after the end of the third year if a shareholder purchases shares with
a value of at least $250,000 but less than $500,000 and after the end of the
second year if a shareholder purchases $500,000 but less than $1 million. TO
QUALIFY FOR THE LOWER DEFERRED SALES CHARGE AND SHORTER CONVERSION
B-7
SCHEDULE, A SHAREHOLDER MUST MAKE THE INDICATED INVESTMENT AS A SINGLE
PURCHASE.Class B shares acquired in the Transaction by the shareholders of
PaineWebber Fund Class B Shares ("Class B Transaction Shares") will be subject
to a deferred sales charge on redemptions of Class B Transaction Shares at the
same rates that applied for the PaineWebber Fund Class B Shares. For purposes of
determining the applicable rate of a deferred sales charge and the date of
conversion to Class A shares, Class B Transaction Shares will be considered to
have been held since the date of the purchase of the PaineWebber Fund Class B
Shares involved in the Transaction. Class B Transaction Shares are subject to a
deferred sales charge at the time of redemption at the percentage shown below:
PERCENTAGE (BASED ON AMOUNT OF
INVESTMENT) BY WHICH THE SHARE NET
IF SHARES ARE SOLD WITHIN: ASSET VALUE IS MULTIPLIED:
-------------------------- ----------------------------------
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
The Brinson Fund will not impose the deferred sales charge on Class B shares
purchased by reinvesting dividends or on withdrawals in any year of up to 12% of
the value of Class B shares under the Automatic Cash Withdrawal Plan.
To minimize the deferred sales charge, the Brinson Fund will assume that a
shareholder is selling:
- First, Class B shares representing reinvested dividends, and
- Second, Class B shares that the shareholder has owned the longest.
FOR A DISCUSSION ON THE QUALIFICATION FOR A WAIVER OF THE DEFERRED SALES
CHARGE ON SALES OF CLASS B SHARES, SEE "DEFERRED SALES CHARGE WAIVERS" ON PAGE
B-9.
CLASS C SHARES
Class C shares have a front-end sales charge that is included in the
offering price of the Class C shares, as described in the following table. This
sales charge is not invested in the Fund.
SALES CHARGE AS A
PERCENTAGE OF REALLOWANCE TO
------------------------------- SELECTED DEALERS
NET AMOUNT AS PERCENTAGE OF
OFFERING PRICE INVESTED OFFERING PRICE
-------------- ---------- ----------------
1.00% 1.01% 1.00%
Class C shares pay an annual 12b-1 distribution fee of 0.50% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that a
shareholder will pay the 12b-1 fees for as long as the shareholder owns Class C
shares.
Class C shares also have a contingent deferred sales charge of 0.75%
applicable if a shareholder sells the shares within one year of the date the
shares were purchased. The Brinson Fund calculates the deferred sales charge on
sales of Class C shares by multiplying 0.75% by the lesser of the net asset
value of the Class C shares at the time of purchase or the net asset value at
the time of sale. The Brinson Fund will not impose the deferred sales charge on
Class C shares representing reinvestment of dividends or on
B-8
withdrawals in the first year after purchase, of up to 12% of the value of
Class C shares under the Automatic Cash Withdrawal Plan.
SALES CHARGE WAIVERS. A shareholder may qualify for a waiver of the
front-end sales charge for Class C shares if the shareholder buys Class C shares
through a UBS PaineWebber Financial Advisor who was formerly employed as an
investment executive with a competing brokerage firm, and:
- the shareholder was the Financial Advisor's client at the competing brokerage
firm;
- within 90 days of buying shares in the Brinson Fund, the shareholder sells
shares of one or more mutual funds that were principally underwritten by the
competing brokerage firm or its affiliates, and the shareholder either paid a
sales charge to buy those shares, pays a contingent deferred sales charge when
selling them or held those shares until the contingent deferred sales charge
was waived; and
- the shareholder purchases an amount that does not exceed the total amount of
money the shareholder received from the sale of the other mutual fund.
IF SHAREHOLDER IS ELIGIBLE FOR A COMPLETE WAIVER OF THE SALES CHARGE ON BOTH
CLASS A SHARES AND CLASS C SHARES, THE SHAREHOLDER SHOULD PURCHASE THE CLASS A
SHARES. CLASS A SHARES HAVE LOWER ONGOING EXPENSES AND ARE GENERALLY NOT SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE WHEN THEY ARE SOLD.
FOR A DISCUSSION ON THE QUALIFICATION FOR A WAIVER OF THE DEFERRED SALES
CHARGE ON SALES OF CLASS C SHARES, SEE "DEFERRED SALES CHARGE WAIVERS" BELOW.
DEFERRED SALES CHARGE WAIVERS
CLASS A, CLASS B AND CLASS C SHARES
A shareholder may qualify for a complete waiver of the deferred sales charge
for Class A, Class B or Class C shares. The deferred sales charge will be waived
for sales of Class A, Class B and Class C shares for:
- Redemptions of Class A shares by former holders of Class N shares;
- Exchanges between funds for which Brinson Advisors or one of its affiliates
serves as principal underwriter, if purchasing the same class of shares;
- Redemptions following the death or disability of the shareholder or beneficial
owner;
- Tax-free returns of excess contributions from employee benefit plans;
- Distributions from employee benefit plans, including those due to plan
termination or plan transfer;
- Redemptions made in connection with the Automatic Cash Withdrawal Plan (see
"Automatic Cash Withdrawal Plan" in the SAI), provided that such redemptions:
- are limited annually to no more than 12% of the original account value;
- are made in equal monthly amounts, not to exceed 1% per month; and
- the minimum account value at the time the Automatic Cash Withdrawal Plan
was initiated was no less than $5,000; and
- Redemptions of shares purchased through retirement plans.
NOTE ON SALES CHARGE WAIVERS FOR CLASS A, CLASS B AND CLASS C SHARES
If a shareholder thinks that he or she qualifies for any of the sales charge
waivers, the shareholder may need to provide documentation to Brinson Advisors
or the Brinson Fund. For more information, a shareholder should contact his or
her investment professional or correspondent firm or call
B-9
1-800-647-1568. For more information on the Brinson Fund's Automatic Cash
Withdrawal Plan, see the Statement of Additional Information of this
Prospectus/Proxy Statement.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares.
The following shareholders are eligible to purchase Class Y shares:
- Shareholders of the Class I shares of any Brinson fund who held such
shares as of the date the shares were redesignated Class Y shares;
- Retirement plans with 5,000 or more eligible employees or $100 million or
more in plan assets;
- Retirement plan platforms/programs that include Fund shares if the
platform/program covers plan assets of at least $100 million;
- Trust companies and bank trust departments purchasing shares on behalf of
their clients in a fiduciary capacity;
- Banks, registered investment advisers and other financial institutions
purchasing fund shares for their clients as part of a discretionary asset
allocation model; and
- Other investors as approved by the Brinson Trust's Board of Trustees.
Class Y shares do not pay ongoing 12b-1 distribution or service fees. The
ongoing expenses for Class Y shares are the lowest of all the classes.
BUYING SHARES
Shares of the Brinson Fund may be purchased through an investment
professional at a broker-dealer or other financial institution with which
Brinson Advisors has a selected dealer agreement to sell the Brinson Fund or
through the Brinson Fund's transfer agent.
If a shareholder wishes to invest in other funds for which Brinson Advisors
or any of its affiliates serves as principal underwriter, the shareholder can do
so by:
- Contacting an investment professional (if the shareholder has an account at
UBS PaineWebber or at another financial institution that has entered into a
selected dealer agreement with Brinson Advisors);
- Buying shares through the transfer agent as described below; or
- Opening an account by exchanging shares from another fund for which Brinson
Advisors or any of its affiliates serves as principal underwriter.
The Brinson Fund and Brinson Advisors reserve the right to reject a purchase
order or suspend the offering of shares.
THROUGH FINANCIAL INSTITUTIONS/PROFESSIONALS
As mentioned above, the Brinson Fund has entered into one or more sales
agreements with brokers, dealers or other financial intermediaries ("Service
Providers"), as well as with financial institutions (banks and bank trust
departments) (each an "Authorized Dealer"). The Authorized Dealer, or
intermediaries designated by the Authorized Dealer (a "Sub-designee"), may in
some cases, be authorized to accept purchase and redemption orders that are in
"good form" on behalf of the Brinson Fund. The Brinson Fund will be deemed to
have received a purchase or redemption order when the Authorized Dealer or Sub-
designee accepts the order. Such orders will be priced at the Brinson Fund's net
asset value next computed after such order is accepted by the Authorized Dealer
or Sub-designee. These Authorized Dealers may charge the investor a transaction
fee or other fee for their services at the time of purchase. These fees would
not be otherwise charged if the shares were purchased directly from the Fund. It
is the responsibility
B-10
of such Authorized Dealers or Sub-designees to promptly forward purchase orders
with payments to the Brinson Fund.
Brinson Partners, or its affiliates, may, from their own resources,
compensate Service Providers for services performed with respect to the Brinson
Fund's Class Y shares. These services may include marketing, shareholder
servicing, recordkeeping and/or other services. When these service arrangements
are in effect, they are generally made available to all qualified Service
Providers.
MINIMUM INVESTMENTS
Class A, Class B and Class C shares:
To open an account................................ $ 1,000
To add to an account.............................. $ 100
Class Y shares:
To open an account................................ $1,000,000
To add to an account.............................. $ 2,500
The Brinson Fund may waive or reduce these amounts for:
- Employees of Brinson Advisors or its affiliates; or
- Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Funds' automatic investment plan.
In addition, the Brinson Fund will waive the minimum investment amounts for
Class Y shares for:
- Shareholders who owned Class I shares of the Brinson Fund prior to their
redesignation as Class Y shares;
- Retirement plans with 5,000 or more eligible employees in the plan or
$100 million in plan assets; or
- Retirement plans offered through a common platform that have an aggregate
$100 million in plan assets.
MARKET TIMERS. The interests of the Brinson Fund's long-term shareholders
and their ability to manage their investments may be adversely affected when
their shares are repeatedly bought and sold in response to short-term market
fluctuations -- also known as "market timing." When large dollar amounts are
involved, the Brinson Fund may have difficulty implementing long-term investment
strategies, because it cannot predict how much cash it will have to invest.
Market timing also may force the Brinson Fund to sell portfolio securities at
disadvantageous times to raise the cash needed to buy a market timer's Fund
shares. These factors may hurt the Fund's performance and its shareholders. When
Brinson Advisors believes frequent trading would have a disruptive effect on the
ability to manage the Brinson Fund's investments, Brinson Advisors and the
Brinson Fund may reject purchase orders and exchanges into the Fund by any
person, group or account that Brinson Advisors believes to be a market timer.
SELLING SHARES
Shares of the Brinson Fund may be sold at any time. If a shareholder owns
more than one class of shares, it should be specified which class is to be sold.
If a shareholder does not, the Brinson Fund will assume that the shareholder
wants to sell shares in the following order: Class A, then Class C, then
Class B and last, Class Y.
If a shareholder wants to sell shares that were purchased recently, the
Brinson Fund may delay payment until it verifies that it has received good
payment.
B-11
For a shareholder that holds shares in a brokerage account, shares may be
sold by contacting an investment professional, or an Authorized Dealer or
Sub-designee, for more information. Important note: Each institution or
professional may have its own procedures and requirements for selling shares and
may charge fees.
If shares of the Brinson Fund were purchased through the transfer agent,
shares may be sold as explained below.
If a shareholder sells Class A shares and then repurchases Class A shares of
the Brinson Fund within 365 days of the sale, the shareholder can reinstate his
or her account without paying a sales charge.
The Brinson Fund reserves the right to pay redemptions "in kind" (i.e.,
payment in securities rather than cash) if the investment the shareholder is
redeeming is large enough to affect the Fund's operations (for example, if it
represents more than $250,000 or 1% of the Fund's assets). In these cases,
shareholders may incur brokerage costs converting the securities to cash.
It costs the Fund money to maintain shareholder accounts. Therefore, the
Brinson Fund reserves the right to repurchase all shares in any account that has
a net asset value of less than $500. If the Brinson Fund elects to do this with
a shareholder's account, it will notify the shareholder that he or she can
increase the amount invested to $500 or more within 60 days. The Brinson Fund
will not repurchase shares in accounts that fall below $500 solely because of a
decrease in the Brinson Fund's net asset values.
EXCHANGING SHARES
A shareholder may exchange Class A, Class B or Class C shares of the Brinson
Fund for shares of the same class of many other funds for which Brinson Advisors
or any of its affiliates serves as principal underwriter. A shareholder may not
exchange Class Y shares.
A shareholder will not pay either a front-end sales charge or a deferred
sales charge when the shares are exchanged. However, a shareholder may have to
pay a deferred sales charge if the shareholder later sells the shares acquired
in the exchange. A fund will use the date of the original share purchase to
determine whether a shareholder must pay a deferred sales charge when the
shareholder sells the shares of the fund acquired in the exchange. Class B
shares of other funds acquired in an exchange for Class B Transaction Shares
will retain the deferred sales charge schedule described above for Class B
Transaction Shares.
Other Brinson funds may have different minimum investment amounts. A
shareholder may not be able to exchange shares if the exchange is not as large
as the minimum investment amount in the other fund.
A shareholder may exchange shares of one fund for shares of another fund
only after the first purchase has settled and the first fund has received
payment from the shareholder.
A shareholder that purchased shares through a financial institution may
exchange shares by placing an order with that institution. Shares purchased
through the transfer agent may be exchanged as described below.
The Brinson Fund may modify or terminate the exchange privilege at any time.
TRANSFER AGENT
If a shareholder wishes to invest in the Brinson Fund through its transfer
agent, PFPC Inc., an application can be obtained by calling 1-800-647-1568. The
shareholder must complete and sign the application and mail it, along with a
check to the transfer agent.
B-12
A shareholder may also sell or exchange shares by writing to the Brinson
Fund's transfer agent. The letter must include:
- The shareholder's name and address;
- The shareholder's account number;
- The name of the Fund whose shares are being sold, and if shares are being
exchanged, the name of the Fund whose shares are being purchased;
- The dollar amount or number of shares to be sold and/or exchanged; and
- A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The Funds will not accept
signature guarantees that are not part of these programs.
Applications to purchase shares (along with a check), and letters requesting
redemptions of shares or exchanges of shares through the transfer agent should
be mailed to:
PFPC Inc.
Attention: Brinson Mutual Funds
P. O. Box 8950
Wilmington, DE 19899.
PRICING AND VALUATION
The price at which a shareholder may buy, sell or exchange Fund shares is
based on net asset value per share. The Brinson Fund calculates net asset value
on days that the New York Stock Exchange ("NYSE") is open. The Brinson Fund
calculates net asset value separately for each class as of the close of regular
trading on the NYSE (generally, 4:00 p.m., Eastern time). The NYSE normally is
not open, and the Fund does not price its shares, on most national holidays and
on Good Friday.
The price for buying, selling or exchanging shares of the Brinson Fund will
be based on the net asset value (adjusted for any applicable sales charges) that
is next calculated after the Brinson Fund receives the order in good form. If a
shareholder places an order through a broker, the shareholder's investment
professional is responsible for making sure that the order is promptly sent to
the Brinson Fund.
The Brinson Fund calculates its net asset value based on the current market
value of its portfolio securities. The Brinson Fund normally obtains market
values for its securities from independent pricing services that use reported
last sales prices, current market quotations or valuations from computerized
"matrix" systems that derive values based on comparable securities. If a market
value is not available from an independent pricing source for a particular
security, that security is valued at a fair value determined by or under the
direction of the board of trustees. The Brinson Fund normally uses the amortized
cost method to value bonds that will mature in 60 days or less.
Foreign securities are valued at their closing prices on the exchange on
which they are traded. The resulting values are converted from the local
currency into U.S. Dollars using current exchange rates. Foreign securities may
trade in their local markets on weekends or other days when the Brinson Fund
does not price its shares. Therefore, the net asset value of the Brinson Fund
may change on days when shareholders will not be able to buy or sell their Fund
shares.
B-13
MANAGEMENT
INVESTMENT ADVISOR
Brinson Partners, Inc. ("Brinson Partners" or the "Advisor"), a Delaware
corporation located at 209 South LaSalle Street, Chicago, IL 60604-1295, is an
investment advisor registered with the U.S. Securities and Exchange Commission.
As of June 30, 2001, Brinson Partners had over $370.3 billion in assets under
management.
Brinson Partners is an indirect wholly owned subsidiary of UBS AG, and a
member of the UBS Asset Management Division.
SUB-ADVISOR
The Advisor employs its affiliate Brinson Partners (NY), Inc. ("Brinson
(NY)") to serve as sub-advisor to the Brinson Fund. Brinson (NY) is also a
subsidiary of UBS AG. As of June 30, 2001, Brinson (NY) had approximately
$14.3 billion in assets under management. Brinson (NY) is located at 10 East
50th Street, New York, NY.
Subject to the Advisor's control and supervision, Brinson (NY) is
responsible for managing the investment and reinvestment of that portion of the
Brinson Fund's portfolio that the Advisor designates from time to time,
including placing orders for the purchase and sale of portfolio securities.
Brinson (NY) also furnishes the Advisor with investment recommendations, asset
allocation advice, research and other investment services subject to the
direction of the Trust's Board and officers.
PORTFOLIO MANAGEMENT
Investment decisions for the Brinson Fund are made by investment management
teams at Brinson Partners and Brinson (NY). No member of any investment
management team is primarily responsible for making recommendations for
portfolio purchases.
ADVISORY FEES
The investment advisory fees payable to Brinson Partners, before fee
waivers, by the Brinson Fund during its last fiscal year was 0.60% of the
average net assets of the Brinson Fund. The Advisor has irrevocably agreed to
waive its fees and reimburse certain expenses so that the total operating
expenses of the Brinson Fund do not exceed 0.70% of the average net assets of
the Fund, with the exception of 12b-1 expenses of the Class A, Class B and
Class C shares. On August 28, 2001, the Brinson Trustees approved the submission
of a proposal to shareholders of the Brinson Fund that would eliminate this
permanent fee waiver and expense reimbursement. If the proposal is approved by
shareholders, the permanent fee waiver and expense reimbursement arrangement
will be replaced by a one-year contractual fee waiver and expense reimbursement
at the current rate.
The Advisor pays Brinson (NY) a portion of the fee the Advisor receives
under its investment advisory agreement with the Brinson Fund at the rate of
0.10% of the Brinson Funds daily net assets. See the Statement of Additional
Information of this Prospectus/Proxy Statement for further information.
ADMINISTRATOR
Effective November 5, 2001, Brinson Advisors, Inc., located at 51 West 52nd
Street, New York, NY 10019-6114, is the administrator of the Brinson Fund.
Brinson Advisors, Inc. is an indirect wholly owned asset management subsidiary
of UBS AG. The Brinson Fund pays Brinson Advisors, Inc. at the annual contract
rate of 0.075% of its average daily net assets for administrative services.
B-14
DIVIDENDS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Income dividends are normally declared, and paid, by the Brinson Fund
monthly. Capital gains, if any, are distributed in December. The amount of any
distributions will vary, and there is no guarantee the Brinson Fund will pay
either income dividends or capital gain distributions.
Classes with higher expenses are expected to have lower income dividends.
For example, Class B and Class C shares are expected to have the lowest
dividends of the Brinson Fund's shares, while Class Y shares are expected to
have the highest.
A shareholder will receive income dividends and capital gain distributions
in additional shares of the same class of the Brinson Fund unless the
shareholder notifies his or her investment professional or the Brinson Fund in
writing that the shareholder elects to receive them in cash. Distribution
options may be changed at any time by requesting a change in writing. Dividends
and distributions are reinvested on the reinvestment date at the net asset value
determined at the close of business on that date.
If a shareholder invests in the Brinson Fund shortly before the Fund makes a
distribution, the shareholder could receive a portion of the investment back in
the form of a taxable distribution.
TAXES
In general, if a shareholder is a taxable investor, Fund distributions are
taxable to the shareholder as either ordinary income or capital gains. This is
true whether distributions are reinvested in additional Fund shares or received
in cash. For federal income tax purposes, Fund distributions of short-term
capital gains are taxable to a shareholder as ordinary income, Fund
distributions of long-term capital gains are taxable to a shareholder as
long-term capital gains no matter how long the shareholder has owned the shares.
Every January, shareholders will receive a statement that shows the tax status
of the distributions received for the previous year.
By law, the Brinson Fund must withhold a portion of a shareholder's taxable
distributions and redemption proceeds unless the shareholder:
- provides his/her/its correct social security or taxpayer identification
number,
- certifies that this number is correct,
- certifies that the shareholder is not subject to backup withholding, and
- certifies that he/she/it is a U.S. person (including a U.S. resident alien).
The Brinson Fund also must withhold if the IRS instructs it to do so.
When a shareholder sells shares in the Brinson Fund, the shareholder may
realize a capital gain or loss. For tax purposes, an exchange of Fund shares for
shares of a different Brinson or PACE Fund is the same as a sale.
Fund distributions and gains from the sale of Fund shares generally are
subject to state and local taxes. Any foreign taxes the Brinson Fund pays on its
investments may be passed through to shareholders as foreign tax credits.
Non-U.S. investors may be subject to U.S. withholding or estate tax, and are
subject to special U.S. tax certification requirements. A shareholder should
consult a tax advisor about the federal, state, local or foreign tax
consequences of an investment in the Brinson Fund.
B-15
PLEASE SIGN, DATE AND RETURN
YOUR PROXY TODAY.
Please detach at perforation before mailing.
PROXY SPECIAL MEETING OF SHAREHOLDERS OF PROXY
PAINEWEBBER HIGH INCOME FUND-NOVEMBER 8, 2001
THIS PROXY IS BEING SOLICITED FOR THE BOARD OF TRUSTEES OF BRINSON MANAGED
INVESTMENTS TRUST, ON BEHALF OF ITS SERIES, PAINEWEBBER HIGH INCOME FUND, AND
RELATES TO THE PROPOSAL INDICATED BELOW. The undersigned hereby revokes all
previous proxies for his shares and appoints as proxies Scott H. Griff and
Victoria Drake, and each of them (with the power of substitution) to vote for
the undersigned all shares of beneficial interest of the undersigned in the
Painewebber High Income Fund at the Special Meeting of Shareholders to be held
at 10:00 a.m., Eastern Time, on November 8, 2001 at 1285 Avenue of the Americas,
14th Floor, New York, New York 10019, and any adjournment thereof ("Meeting"),
with all the power the undersigned would have if personally present. The shares
represented by this card will be voted as instructed. UNLESS INDICATED TO THE
CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE "FOR" PROPOSAL 1
RELATING TO THE REORGANIZATION OF THE PAINEWEBBER HIGH INCOME FUND INTO THE HIGH
YIELD FUND, A SERIES OF THE BRINSON FUNDS. IF ANY OTHER MATTERS PROPERLY COME
BEFORE THE SPECIAL MEETING ABOUT WHICH THE PROXIES WERE NOT AWARE PRIOR TO THE
TIME OF SOLICITATION, AUTHORIZATION IS GIVEN TO THE PROXIES TO VOTE IN THEIR
DISCRETION.
VOTE VIA THE INTERNET:
VOTE VIA THE TELEPHONE:
CONTROL NUMBER:
NOTE: IF SHARES ARE HELD BY AN
INDIVIDUAL, SIGN YOUR NAME EXACTLY
AS IT APPEARS ON THIS CARD. IF
SHARES ARE HELD JOINTLY, EITHER
PARTY MAY SIGN, BUT THE NAME OF THE
PARTY SIGNING SHOULD CONFORM EXACTLY
TO THE NAME SHOWN ON THIS CARD. IF
SHARES ARE HELD BY A CORPORATION,
PARTNERSHIP OR SIMILAR ACCOUNT, THE
NAME AND THE CAPACITY OF THE
INDIVIDUAL SIGNING SHOULD BE
INDICATED UNLESS IT IS REFLECTED IN
THE FORM OF REGISTRATION. FOR
EXAMPLE: "ABC CORP., JOHN DOE,
TREASURER."
---------------------------------------------
SIGNATURE
---------------------------------------------
SIGNATURE (IF HELD JOINTLY)
, 2001
--------------------------------------
DATE
PLEASE MARK YOUR VOTE ON THE REVERSE SIDE OF THIS CARD.
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY.
Please detach at perforation before mailing.
Please date and sign the reverse side of this proxy and return it promptly in
the enclosed envelope. This proxy will not be voted unless it is dated and
signed exactly as instructed.
When properly signed, the proxy will be voted as instructed below. If no
instruction is given for a proposal, voting will be made "For" that proposal.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
FOR AGAINST ABSTAIN
1. To approve an Agreement and Plan of Reorganization / / / / / /
between Brinson Managed Investments Trust, on behalf of
its series, PaineWebber High Income Fund (the
"PaineWebber Fund"), and The Brinson Funds, on behalf of
its series, High Yield Fund (the "Brinson Fund"), that
provides for the acquisition of substantially all of the
assets, subject to the liabilities, of the PaineWebber
Fund in exchange for shares of the Brinson Fund, the
distribution of such shares to the shareholders of the
PaineWebber Fund, and the complete liquidation and
dissolution of the PaineWebber Fund.
PLEASE DATE AND SIGN THE REVERSE SIDE OF THIS CARD.
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
THE BRINSON FUNDS
DATED SEPTEMBER 28, 2001
Acquisition of the Assets of the
PAINEWEBBER HIGH INCOME FUND
(a series of Brinson Managed Investments Trust)
By and in exchange for shares of the
HIGH YIELD FUND
(a series of The Brinson Funds)
This Statement of Additional Information ("SAI") relates
specifically to the proposed acquisition (the "Transaction") of substantially
all of the assets, subject to the liabilities, of the PaineWebber High Income
Fund (the "PaineWebber Fund"), a series of Brinson Managed Investments Trust
(the "PaineWebber Trust"), for shares of High Yield Fund (the "Brinson Fund"
or the "Series"), a series of The Brinson Funds (the "Brinson Trust").
This SAI also includes the following documents, which are attached to
and legally considered to be a part of this SAI:
1. Annual Report of the Brinson Fund for the fiscal year ended
June 30, 2001.
2. Annual Report of the PaineWebber Fund for the fiscal year
ended November 30, 2000.
3. Pro Forma Financial Statements reflecting the financial
situation of the Brinson Fund following the Transaction as
if the Transaction had taken place on June 30, 2001.
This SAI is not a Prospectus; you should read this SAI in
conjunction with the Prospectus/Proxy Statement dated September 28, 2001,
relating to the Transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800-647-1568 or by writing to the Brinson Fund at 209
South LaSalle Street, Chicago, Illinois 60604-1295.
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE BRINSON TRUST.......................................................................3
Diversified Status.......................................................................................3
General Definitions......................................................................................3
INVESTMENT STRATEGIES.............................................................................................4
INVESTMENTS RELATING TO THE SERIES................................................................................4
Cash and Cash Equivalents................................................................................4
Repurchase Agreements....................................................................................5
Reverse Repurchase Agreements............................................................................5
Borrowing................................................................................................5
Loans of Portfolio Securities............................................................................6
Futures..................................................................................................6
Options..................................................................................................7
Index Options...........................................................................................10
Special Risks of Options on Indices.....................................................................10
Rule 144A and Illiquid Securities.......................................................................11
Investment Company Securities...........................................................................11
Other Investments.......................................................................................12
Equity Securities.......................................................................................12
Exchange-Traded Index Securities........................................................................12
Eurodollar Securities...................................................................................12
Foreign Securities......................................................................................12
Forward Foreign Currency Contracts......................................................................13
Non-Deliverable Forwards................................................................................13
Options on Foreign Currencies...........................................................................14
Short Sales.............................................................................................15
Lower Rated Debt Securities.............................................................................15
Pay-In-Kind Bonds.......................................................................................16
Convertible Securities..................................................................................16
When-Issued Securities..................................................................................17
Mortgage-Backed Securities and Mortgage Pass-Through Securities.........................................17
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs")..................................................................................19
Dollar Rolls............................................................................................20
Other Mortgage-Backed Securities........................................................................20
Asset-Backed Securities.................................................................................21
Zero Coupon and Delayed Interest Securities.............................................................22
Emerging Markets Investments............................................................................23
Risks of Investing in Emerging Markets..................................................................25
SECONDARY RISKS..................................................................................................26
INVESTMENT RESTRICTIONS..........................................................................................26
MANAGEMENT OF THE TRUST..........................................................................................27
Trustees and Officers...................................................................................28
Compensation Table......................................................................................30
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..............................................................31
INVESTMENT ADVISORY, PRINCIPAL UNDERWRITING AND OTHER SERVICE ARRANGEMENTS.......................................32
Advisor.................................................................................................32
Sub-Advisor.............................................................................................33
Administrative, Accounting and Custody Services.........................................................34
Principal Underwriting Arrangements.....................................................................35
Prior Distribution Arrangements.........................................................................37
1
Transfer Agency Services................................................................................38
Independent Auditors....................................................................................38
Legal Counsel...........................................................................................38
Personal Trading Policies...............................................................................38
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS.................................................................38
Portfolio Turnover......................................................................................40
SHARES OF BENEFICIAL INTEREST....................................................................................40
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND OTHER SERVICES.........................41
Sales Charge Reductions and Waivers.....................................................................41
Automatic Cash Withdrawal Plan..........................................................................43
Individual Retirement Accounts..........................................................................43
Transfer of Accounts....................................................................................43
Transfer of Securities..................................................................................44
CONVERSION OF CLASS B SHARES.....................................................................................44
NET ASSET VALUE..................................................................................................44
TAXATION.........................................................................................................46
Additional Information on Distributions and Taxes.......................................................46
Distributions...........................................................................................46
Investments in Foreign Securities.......................................................................47
Taxes...................................................................................................47
PERFORMANCE CALCULATIONS.........................................................................................50
Total Return............................................................................................51
Yield...................................................................................................51
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS.........................................................52
CORPORATE DEBT RATINGS --- APPENDIX A...........................................................................A-1
SECONDARY RISKS --- APPENDIX B..................................................................................B-1
PRO FORMA FINANCIAL STATEMENTS..................................................................................C-1
2
GENERAL INFORMATION ABOUT THE BRINSON TRUST
The Brinson Trust currently offers shares of the following eighteen
series, representing separate portfolios of investments: U.S. Bond Fund, High
Yield Fund, U.S. Balanced Fund, U.S. Equity Fund, U.S. Value Equity Fund,
U.S. Large Cap Growth Fund, U.S. Large Cap Equity Fund, U.S. Small Cap Equity
Fund, U.S. Small Cap Growth Fund, U.S. Real Estate Equity Fund, Global
Balanced Fund (formerly Global Fund), Global Equity Fund, Global Technology
Fund, Global Biotech Fund, Global Bond Fund, Emerging Markets Debt Fund,
Emerging Markets Equity Fund and International Equity Fund (formerly, Global
(Ex-U.S.) Equity Fund). As of October 29, 2001, the Brinson Trust will offer
four classes of shares for each series: the Brinson Fund-Class A (the "Class
A shares," prior to October 29, 2001, designated as the Brinson Fund-Class
N), Brinson Fund-Class B (the "Class B shares"), Brinson Fund-Class C (the
"Class C shares") and Brinson Fund-Class Y (the "Class Y shares," prior to
October 29, 2001, designated as the Brinson Fund-Class I). Class A shares
have a front-end sales charge, a contingent deferred sales charge ("CDSC") in
the first year of ownership, and are subject to annual 12b-1 plan expenses of
0.25% of average daily net assets of the respective series. Class B shares
have a CDSC and are subject to annual 12b-1 distribution fees of 0.75% of
average daily net assets, as well as annual 12b-1 plan expenses of 0.25% of
average daily net assets. Class C shares have a front-end sales charge and a
CDSC and are subject to annual 12b-1 distribution fees of 0.75% of average
daily net assets, as well as annual 12b-1 plan expenses of 0.25% of average
daily net assets. Class Y shares, which are designed primarily for
institutional investors, have no sales charges and are not subject to annual
12b-1 plan expenses. The Brinson Trust was organized as a Delaware business
trust on December 1, 1993.
DIVERSIFIED STATUS
The Brinson Fund is "diversified," as that term is defined in the
Investment Company Act of 1940, as amended (the "Act").
GENERAL DEFINITIONS
As used throughout this SAI, the following terms shall have the
meanings listed:
"Act" shall mean the Investment Company Act of 1940, as amended.
"Administrator" or "Brinson Advisors" shall mean Brinson Advisors,
Inc., which, as of November 5, 2001, serves as the Series' administrator.
"Advisor" or "Brinson Partners" shall mean Brinson Partners, Inc.,
which serves as the Series' investment advisor.
"Board" shall mean the Board of Trustees of the Trust.
"Brinson Fund" or "Series" shall mean the High Yield Fund.
"Brinson Trust" or "Trust" shall mean The Brinson Funds, an open-end
management investment company registered under the Act.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Moody's" shall mean Moody's Investors Services, Inc.
3
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's Ratings Group.
"Sub-Advisor" shall mean Brinson Partners (NY), Inc., f/k/a UBS Asset
Management (New York), Inc., which serves as the sub-advisor to the Series.
"Underwriter" or "Brinson Advisors" shall mean Brinson Advisors, Inc.,
which serves as the Series' underwriter.
"1933 Act" shall mean the Securities Act of 1933, as amended.
INVESTMENT STRATEGIES
The following discussion of investment techniques and instruments
supplements and should be read in conjunction with the investment objective and
policies set forth in the Prospectus/Proxy Statement. The investment practices
described below, except for the discussion of percentage limitations with
respect to portfolio loan transactions and borrowing, are not fundamental and
may be changed by the Board without the approval of the shareholders.
INVESTMENTS RELATING TO THE SERIES
CASH AND CASH EQUIVALENTS
The Series may invest a portion of its assets in short-term debt
securities (including repurchase agreements and reverse repurchase agreements)
of corporations, the U.S. government and its agencies and instrumentalities and
banks and finance companies, which may be denominated in any currency. The
Series may also invest a portion of its assets in shares issued by money market
mutual funds. When unusual market conditions warrant, the Series may make
substantial temporary defensive investments in cash equivalents up to a maximum
of 100% of its net assets. Cash equivalent holdings may be in any currency
(although such holdings may not constitute "cash or cash equivalents" for tax
diversification purposes under the Code). When the Series invests for defensive
purposes, it may affect the attainment of the Series' investment objective.
Under the terms of an exemptive order issued by the SEC, the Series may
invest cash (i) held for temporary defensive purposes; (ii) not invested pending
investment in securities; (iii) that is set aside to cover an obligation or
commitment of the Series to purchase securities or other assets at a later date;
(iv) to be invested on a strategic management basis (i-iv are herein referred to
as "Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Series' securities lending
program, in the series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained Brinson Partners to manage its
investments. The Trustees of the Trust also serve as Trustees of the Brinson
Supplementary Trust. The Supplementary Trust Series invests in U.S. dollar
denominated money market instruments having a dollar-weighted average maturity
of 90 days or less, and operates in accordance with Rule 2a-7 under the Act. The
Series' investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Series' total assets. In the event that
Brinson Partners waives 100% of its investment advisory fee with respect to the
Series, as calculated monthly, then the Series will be unable to invest in the
Supplementary Trust Series until additional investment advisory fees are owed by
the Series.
4
REPURCHASE AGREEMENTS
When the Series enters into a repurchase agreement, it purchases
securities from a bank or broker-dealer which simultaneously agrees to
repurchase the securities at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. As a result, a
repurchase agreement provides a fixed rate of return insulated from market
fluctuations during the term of the agreement. The term of a repurchase
agreement generally is short, possibly overnight or for a few days, although it
may extend over a number of months (up to one year) from the date of delivery.
Repurchase agreements are considered under the Act to be collateralized loans by
the Series to the seller secured by the securities transferred to the Series.
Repurchase agreements will be fully collateralized and the collateral will be
marked-to-market daily. The Series may not enter into a repurchase agreement
having more than seven days remaining to maturity if, as a result, such
agreement, together with any other illiquid securities held by the Series, would
exceed 15% of the value of the net assets of the Series.
Repurchase agreements are securities for purposes of the tax
diversification requirements that must be met for pass-through treatment under
the Code. Accordingly, the Series will limit the value of its repurchase
agreements on each of the quarterly testing dates to ensure compliance with
Subchapter M of the Code.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve sales of portfolio securities of
the Series to member banks of the Federal Reserve System or securities dealers
believed creditworthy, concurrently with an agreement by the Series to
repurchase the same securities at a later date at a fixed price which is
generally equal to the original sales price plus interest. The Series retains
record ownership and the right to receive interest and principal payments on the
portfolio securities involved. In connection with each reverse repurchase
transaction, the Series will direct its custodian bank to place cash, U.S.
government securities, equity securities and/or investment and non-investment
grade debt securities in a segregated account of the Series in an amount equal
to the repurchase price. Any assets held in any segregated accounts maintained
by the Series with respect to any reverse repurchase agreements, when-issued
securities, options, futures, forward contracts or other derivative transactions
shall be liquid, unencumbered and marked-to-market daily (any such assets held
in a segregated account are referred to in this SAI as "Segregated Assets"), and
such Segregated Assets shall be maintained in accordance with pertinent
positions of the SEC.
A reverse repurchase agreement involves the risk that the market value
of the securities retained by the Series may decline below the price of the
securities the Series has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Series' use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Series' obligation to
repurchase the securities. Reverse repurchase agreements are considered
borrowings by the Series and as such, are subject to the same investment
limitations.
BORROWING
The Series may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Series will not borrow money in
excess of 33 1/3% of the value of its total assets. The Series has no intention
of increasing its net income through borrowing. Any borrowing will be done from
a bank with the required asset coverage of at least 300%. In the event that such
asset coverage shall at any time fall below 300%, the Series shall, within three
days thereafter (not including Sundays or holidays), or such longer period as
the SEC may prescribe by rules and regulations, reduce the amount of
5
its borrowings to such an extent that the asset coverage of such borrowings
shall be at least 300%. The Series will not pledge more than 10% of its net
assets, or issue senior securities as defined in the Act, except for notes to
banks and reverse repurchase agreements.
LOANS OF PORTFOLIO SECURITIES
The Series may lend portfolio securities to qualified broker-dealers
and financial institutions pursuant to agreements provided: (1) the loan is
secured continuously by collateral marked-to-market daily and maintained in an
amount at least equal to the current market value of the securities loaned; (2)
the Series may call the loan at any time and receive the securities loaned; (3)
the Series will receive any interest or dividends paid on the loaned securities;
and (4) the aggregate market value of securities loaned will not at any time
exceed 33 1/3% of the total assets of the Series.
Collateral will consist of U.S. and non-U.S. securities, cash
equivalents or irrevocable letters of credit. Loans of securities involve a risk
that the borrower may fail to return the securities or may fail to maintain the
proper amount of collateral. Therefore, the Series will only enter into
portfolio loans after a review of all pertinent factors by the Advisor under the
supervision of the Board, including the creditworthiness of the borrower and
then only if the consideration to be received from such loans would justify the
risk. Creditworthiness will be monitored on an ongoing basis by the Advisor.
FUTURES
The Series may enter into contracts for the purchase or sale for future
delivery of securities and indices. The Series may also enter into contracts for
the purchase or sale for future delivery of foreign currencies.
A purchase of a futures contract means the acquisition of a contractual
right to obtain delivery to the Series of the securities or foreign currency
called for by the contract at a specified price during a specified future month.
When a futures contract is sold, the Series incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified price on a specified date during a specified future month. The Series
may enter into futures contracts and engage in options transactions related
thereto to the extent that not more than 5% of the Series' total assets are
required as futures contract margin deposits and premiums on options, and may
engage in such transactions to the extent that obligations relating to such
futures and related options on futures transactions represent not more than 25%
of the Series' total assets.
When the Series enters into a futures transaction, it must deliver to
the futures commission merchant selected by the Series an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Series to, or drawn by the Series from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract. The Series
may also effect futures transactions through futures commission merchants who
are affiliated with the Advisor or the Series in accordance with procedures
adopted by the Board.
The Series will enter into futures transactions on domestic exchanges
and, to the extent such transactions have been approved by the Commodity Futures
Trading Commission for sale to customers in the United States, on foreign
exchanges. In addition, the Series may sell stock index futures in anticipation
of or during a market decline to attempt to offset the decrease in market value
of its common stocks that might otherwise result; and it may purchase such
contracts in order to offset increases in the cost of common stocks that it
intends to purchase. Unlike other futures contracts, a stock index futures
6
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract.
While futures contracts provide for the delivery of securities,
deliveries usually do not occur. Contracts are generally terminated by entering
into offsetting transactions.
The Series may enter into futures contracts to protect against the
adverse affects of fluctuations in security prices, interest or foreign exchange
rates without actually buying or selling the securities or foreign currency. For
example, if interest rates are expected to increase, the Series might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the debt securities owned by
the Series. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of the futures contracts to the
Series would increase at approximately the same rate, thereby keeping the net
asset value of the Series from declining as much as it otherwise would have.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Series could take
advantage of the anticipated rise in value of debt securities without actually
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Series could then buy debt securities on the cash
market. The Series may also enter into futures contracts as a low cost method
for gaining exposure to a particular securities market without directly
investing in those securities.
To the extent that market prices move in an unexpected direction, the
Series may not achieve the anticipated benefits of futures contracts or may
realize a loss. For example, if the Series is hedged against the possibility of
an increase in interest rates which would adversely affect the price of
securities held in its portfolio and interest rates decrease instead, the Series
would lose part or all of the benefit of the increased value which it has
because it would have offsetting losses in its futures position. In addition, in
such situations, if the Series had insufficient cash, it may be required to sell
securities from its portfolio to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the rising market. The Series may be required to sell securities at a
time when it may be disadvantageous to do so.
OPTIONS
The Series may purchase and write call or put options on foreign or
U.S. securities and indices and enter into related closing transactions, but
will only engage in option strategies for non-speculative purposes. The Series
may also purchase exchange-listed call options on particular market segment
indices to achieve temporary exposure to a specific industry.
The Series may invest in options that are either listed on U.S. or
recognized foreign exchanges or traded over-the-counter. Certain
over-the-counter options may be illiquid. Thus, it may not be possible to close
options positions and this may have an adverse impact on the Series' ability to
effectively hedge its securities. The Series has been notified by the SEC that
it considers over-the-counter options to be illiquid. Accordingly, the Series
will only invest in such options to the extent consistent with its 15% limit on
investments in illiquid securities.
PURCHASING CALL OPTIONS - The Series may purchase call options on
securities to the extent that premiums paid by the Series do not aggregate more
than 20% of the Series' total assets. When the Series purchases a call option,
in return for a premium paid by the Series to the writer of the option, the
Series obtains the right to buy the security underlying the option at a
specified exercise price at any time during the term of the option. The writer
of the call option, who receives the premium upon writing the option,
7
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. The advantage of purchasing call
options is that the Series may alter portfolio characteristics and modify
portfolio maturities without incurring the cost associated with transactions.
The Series may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. The
Series will realize a profit from a closing sale transaction if the price
received on the transaction is more than the premium paid to purchase the
original call option; the Series will realize a loss from a closing sale
transaction if the price received on the transaction is less than the premium
paid to purchase the original call option.
Although the Series will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the result that the Series would have
to exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Series may expire without any value
to the Series, in which event the Series would realize a capital loss which will
be short-term unless the option was held for more than one year.
COVERED CALL WRITING - The Series may write covered call options from
time to time on such portions of its portfolio, without limit, as Brinson
Partners determines is appropriate in seeking to achieve the Series' investment
objective. The advantage to the Series of writing covered calls is that the
Series receives a premium which is additional income. However, if the security
rises in value, the Series may not fully participate in the market appreciation.
During the option period for a covered call option, the writer may be
assigned an exercise notice by the broker-dealer through whom such call option
was sold, requiring the writer to deliver the underlying security against
payment of the exercise price. This obligation is terminated upon the expiration
of the option or upon entering a closing purchase transaction. A closing
purchase transaction, in which the Series, as writer of an option, terminates
its obligation by purchasing an option of the same series as the option
previously written, cannot be effected once the option writer has received an
exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Series to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Series may realize a
net gain or loss from a closing purchase transaction depending upon whether the
net amount of the original premium received on the call option is more or less
than the cost of effecting the closing purchase transaction. Any loss incurred
in a closing purchase transaction may be partially or entirely offset by the
premium received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part by a decline in the market value of the underlying security.
If a call option expires unexercised, the Series will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is
8
exercised, the Series will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The Series will write call options only on a covered basis, which means
that the Series will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Series would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold. The
exercise price of a call option may be below, equal to or above the current
market value of the underlying security at the time the option is written.
PURCHASING PUT OPTIONS - The Series may only purchase put options to
the extent that the premiums on all outstanding put options do not exceed 20% of
the Series' total assets. The Series will, at all times during which it holds a
put option, own the security covered by such option. With regard to the writing
of put options, the Series will limit the aggregate value of the obligations
underlying such put options to 50% of its total assets.
A put option purchased by the Series gives it the right to sell one of
its securities for an agreed price up to an agreed date. The Series intends to
purchase put options in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
the Series to protect unrealized gains in an appreciated security in its
portfolio without actually selling the security. If the security does not drop
in value, the Series will lose the value of the premium paid. The Series may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such sale will result in a net gain or loss
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid on the put option which is sold.
The Series may sell a put option purchased on individual portfolio
securities. Additionally, the Series may enter into closing sale transactions. A
closing sale transaction is one in which the Series, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
WRITING PUT OPTIONS - The Series may also write put options on a
secured basis which means that the Series will maintain in a segregated account
with its custodian Segregated Assets in an amount not less than the exercise
price of the option at all times during the option period. The amount of
Segregated Assets held in the segregated account will be adjusted on a daily
basis to reflect changes in the market value of the securities covered by the
put option written by the Series. Secured put options will generally be written
in circumstances where Brinson Partners wishes to purchase the underlying
security for the Series' portfolio at a price lower than the current market
price of the security. In such event, the Series would write a secured put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Series may wish to terminate
the obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Series may not, however, effect
such a closing transaction after it has been notified of the exercise of the
option.
9
INDEX OPTIONS
The Series may purchase exchange-listed call options on fixed income
indices and sell such options in closing sale transactions for hedging purposes.
The Series may purchase call options on broad market indices to temporarily
achieve market exposure when the Series is not fully invested.
In addition, the Series may purchase put options on stock and fixed
income indices and sell such options in closing sale transactions for hedging
purposes. The Series may purchase put options on broad market indices in order
to protect its fully invested portfolio from a general market decline. Put
options on market segments may be bought to protect the Series from a decline in
value of heavily weighted industries in the Series' portfolio. Put options on
fixed income indices may also be used to protect the Series' investments in the
case of a major redemption.
The Series may also write (sell) put and call options on fixed income
indices. While the option is open, the Series will maintain a segregated account
with its custodian in an amount equal to the market value of the option.
Options on indices are similar to regular options except that an option
on an index gives the holder the right, upon exercise, to receive an amount of
cash if the closing level of the index upon which the option is based is greater
than (in the case of a call) or lesser than (in the case of a put) the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple (the "multiplier"). The indices on which
options are traded include both U.S. and non-U.S. markets.
SPECIAL RISKS OF OPTIONS ON INDICES
The Series' purchases of options on indices will subject it to the
risks described below.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular security, whether the
Series will realize gain or loss on the purchase of an option on an index
depends upon movements in the level of prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by the Series of options on indices is
subject to Brinson Partners' ability to predict correctly the direction of
movements in the market generally or in a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of a substantial number of
securities included in the index is interrupted causing the trading of options
on that index to be halted. If a trading halt occurred, the Series would not be
able to close out options which it had purchased and the Series may incur losses
if the underlying index moved adversely before trading resumed. If a trading
halt occurred and restrictions prohibiting the exercise of options were imposed
through the close of trading on the last day before expiration, exercises on
that day would be settled on the basis of a closing index value that may not
reflect current price information for securities representing a substantial
portion of the value of the index.
If the Series holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall "out-of-the-money," the Series will be required to
pay the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Series may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising the
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely
10
because the cutoff times for index options may be earlier than those fixed for
other types of options and may occur before definitive closing index values are
announced.
RULE 144A AND ILLIQUID SECURITIES
The Series may invest in securities that are exempt under Rule 144A
from the registration requirements of the 1933 Act. Those securities purchased
under Rule 144A are traded among qualified institutional investors.
The Board has instructed Brinson Partners to consider the following
factors in determining the liquidity of a security purchased under Rule 144A:
(i) the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although having delegated
the day-to-day functions, the Board will continue to monitor and periodically
review the Advisor's selection of Rule 144A securities, as well as the Advisor's
determinations as to their liquidity. Investing in securities under Rule 144A
could have the effect of increasing the level of the Series' illiquidity to the
extent that qualified institutional buyers become, for a time, uninterested in
purchasing these securities. After the purchase of a security under Rule 144A,
however, the Board and Brinson Partners will continue to monitor the liquidity
of that security to ensure that the Series has no more than 15% of its net
assets in illiquid securities.
The Series will limit investments in securities of issuers which the
Series are restricted from selling to the public without registration under the
1933 Act to no more than 15% of the Series' net assets, excluding restricted
securities eligible for resale pursuant to Rule 144A that have been determined
to be liquid pursuant to a policy and procedures adopted by the Trust's Board
which includes continuing oversight by the Board.
If Brinson Partners determines that a security purchased in reliance on
Rule 144A which was previously determined to be liquid, is no longer liquid and,
as a result, the Series' holdings of illiquid securities exceed the Series' 15%
limit on investment in such securities, Brinson Partners will determine what
action shall be taken to ensure that the Series continue to adhere to such
limitation, including disposing of illiquid assets which may include such Rule
144A securities.
INVESTMENT COMPANY SECURITIES
Subject to the provisions of any exemptive orders issued by the SEC (as
described in following paragraphs), securities of other investment companies may
be acquired by the Series to the extent that such purchases are consistent with
the Series' investment objective and restrictions and are permitted under the
Act. The Act requires that, as determined immediately after a purchase is made,
(i) not more than 5% of the value of the Series' total assets will be invested
in the securities of any one investment company, (ii) not more than 10% of the
value of the Series' total assets will be invested in securities of investment
companies as a group and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Series. Certain exceptions to
these limitations may apply. As a shareholder of another investment company, the
Series would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the expenses that the Series would bear in connection
with its own operations.
The Series may invest in securities issued by other registered
investment companies advised by Brinson Partners pursuant to exemptive relief
granted by the SEC. The Series will invest in portfolios of
11
the Brinson Relationship Funds only to the extent that the Advisor determines
that such investments are a more efficient means for the Series to gain exposure
to an asset class than by investing directly in individual securities.
OTHER INVESTMENTS
The Board may, in the future, authorize the Series to invest in
securities other than those listed in this SAI and in the Series' Prospectus,
provided such investment would be consistent with the Series' investment
objective and that it would not violate any of the Series' fundamental
investment policies or restrictions.
EQUITY SECURITIES
The Series may invest in a broad range of equity securities of U.S. and
non-U.S. issuers, including common stocks of companies or closed-end investment
companies, preferred stocks, debt securities convertible into or exchangeable
for common stock, securities such as warrants or rights that are convertible
into common stock and sponsored or unsponsored American, European and Global
depositary receipts ("Depositary Receipts"). The issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States. The Series expects its U.S. equity investments to emphasize large
and intermediate capitalization companies. The equity markets in the non-U.S.
component of the Series will typically include available shares of larger
capitalization companies. Capitalization levels are measured relative to
specific markets, thus large, intermediate and small capitalization ranges vary
country by country.
EXCHANGE-TRADED INDEX SECURITIES
Subject to the limitations on investment in investment company
securities and its own investment objective, the Series may invest in
exchange-traded index securities that are currently operational and that may be
developed in the future. Exchange-traded index securities generally trade on the
American Stock Exchange or New York Stock Exchange and are subject to the risks
of an investment in a broadly based portfolio of common stocks, including the
risk that the general level of stock prices may decline, thereby adversely
affecting the value of the investment. These securities generally bear certain
operational expenses. To the extent the Series invests in these securities, the
Series must bear these expenses in addition to the expenses of its own
operation.
EURODOLLAR SECURITIES
The Series may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
FOREIGN SECURITIES
Investors should recognize that investing in foreign issuers involves
certain considerations, including those set forth in the Prospectus/Proxy
Statement, which are not typically associated with investing in U.S. issuers.
Since the stocks of foreign companies are frequently denominated in foreign
currencies, and since the Series may temporarily hold uninvested reserves in
bank deposits in foreign currencies, the Series will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies. The
investment policies of the Series permit it to enter into forward foreign
currency
12
exchange contracts, futures and options in order to hedge portfolio holdings and
commitments against changes in the level of future currency rates.
FORWARD FOREIGN CURRENCY CONTRACTS
The Series may purchase or sell currencies and/or engage in forward
foreign currency transactions in order to expedite settlement of portfolio
transactions and to manage currency risk.
Forward foreign currency contracts are traded in the inter-bank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement and no
commissions are charged at any stage for trades. The Series will account for
forward contracts by marking-to-market each day at current forward contract
values.
The Series will only enter into forward contracts to sell, for a fixed
amount of U.S. dollars or other appropriate currency, an amount of foreign
currency, to the extent that the value of the short forward contract is covered
by the underlying value of securities denominated in the currency being sold.
Alternatively, when the Series enters into a forward contract to sell an amount
of foreign currency, the Series' custodian or sub-custodian will place
Segregated Assets in a segregated account of the Series in an amount not less
than the value of the Series' total assets committed to the consummation of such
forward contracts. If the additional Segregated Assets placed in the segregated
account decline, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Series' commitments with respect to such contracts.
NON-DELIVERABLE FORWARDS
The Series may, from time to time, engage in non-deliverable forward
transactions to manage currency risk. A non-deliverable forward is a transaction
that represents an agreement between the Series and a counterparty (usually a
commercial bank) to buy or sell a specified (notional) amount of a particular
currency at an agreed upon foreign exchange rate on an agreed upon future date.
Unlike other currency transactions, there is no physical delivery of the
currency on the settlement of a non-deliverable forward transaction. Rather, the
Series and the counterparty agree to net the settlement by making a payment in
U.S. dollars or another fully convertible currency that represents any
differential between the foreign exchange rate agreed upon at the inception of
the non-deliverable forward agreement and the actual exchange rate on the agreed
upon future date. Thus, the actual gain or loss of a given non-deliverable
forward transaction is calculated by multiplying the transaction's notional
amount by the difference between the agreed upon forward exchange rate and the
actual exchange rate when the transaction is completed.
When the Series enters into a non-deliverable forward transaction, the
Series' custodian will place Segregated Assets in a segregated account of the
Series in an amount not less than the value of the Series' total assets
committed to the consummation of such non-deliverable forward transaction. If
the additional Segregated Assets placed in the segregated account decline in
value or the amount of the Series' commitment increases because of changes in
currency rates, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of the
Series' commitments under the non-deliverable forward agreement.
Since the Series generally may only close out a non-deliverable forward
with the particular counterparty, there is a risk that the counterparty will
default on its obligation under the agreement. If the counterparty defaults, the
Series will have contractual remedies pursuant to the agreement related to the
transaction, but there is no assurance that contract counterparties will be able
to meet their obligations pursuant to such agreements or that, in the event of a
default, the Series will succeed in pursuing
13
contractual remedies. The Series thus assumes the risk that it may be delayed or
prevented from obtaining payments owed to it pursuant to non-deliverable forward
transactions.
In addition, where the currency exchange rates that are the subject of
a given non-deliverable forward transaction do not move in the direction or to
the extent anticipated, the Series could sustain losses on the non-deliverable
forward transaction. The Series' investment in a particular non-deliverable
forward transaction will be affected favorably or unfavorably by factors that
affect the subject currencies, including economic, political and legal
developments that impact the applicable countries, as well as exchange control
regulations of the applicable countries. These risks are heightened when a
non-deliverable forward transaction involves currencies of emerging market
countries because such currencies can be volatile and there is a greater risk
that such currencies will be devalued against the U.S. dollar or other
currencies.
OPTIONS ON FOREIGN CURRENCIES
The Series also may purchase and write put and call options on foreign
currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to
manage the Series' exposure to changes in currency exchange rates. The Series
may purchase and write options on foreign currencies for hedging purposes in a
manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Series may purchase put options on the foreign
currency. If the dollar price of the currency does decline, the Series will have
the right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
dollar price of such securities, the Series may purchase call options on such
currency.
The purchase of such options could offset, at least partially, the
effects of the adverse movement in exchange rates. As in the case of other types
of options, however, the benefit to the Series to be derived from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Series could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Series may write options on foreign currencies for the same types
of hedging purposes. For example, where the Series anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates, it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in the value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the
14
amount of the premium. Through the writing of options on foreign currencies, the
Series also may be required to forego all or a portion of the benefit which
might otherwise have been obtained from favorable movements in exchange rates.
The Series may write covered call options on foreign currencies. A call
option written on a foreign currency by the Series is "covered" if the Series
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian bank) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Series has a call on
the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written, or (b) is greater than the exercise price of
the call written if the difference is maintained by the Series in Segregated
Assets in a segregated account with its custodian bank.
With respect to writing put options, at the time the put is written,
the Series will establish a segregated account with its custodian bank
consisting of Segregated Assets in an amount equal in value to the amount the
Series will be required to pay upon exercise of the put. The account will be
maintained until the put is exercised, has expired, or the Series has purchased
a closing put of the same series as the one previously written.
SHORT SALES
The Series may from time to time sell securities short. In the event
that the Advisor anticipates that the price of a security will decline, it may
sell the security short and borrow the same security from a broker or other
institution to complete the sale. The Series will only enter into short sales
for hedging purposes. The Series will incur a profit or a loss, depending upon
whether the market price of the security decreases or increases between the date
of the short sale and the date on which the Series must replace the borrowed
security. All short sales will be fully collateralized and the Series will not
sell securities short if immediately after and as a result of the short sale,
the value of all securities sold short by the Series exceeds 25% of its total
assets. The Series will also limit short sales of any one issuer's securities to
2% of its total assets and to 2% of any one class of the issuer's securities.
Short sales represent an aggressive trading practice with a high risk/return
potential, and short sales involve special considerations. Risks of short sales
include that possible losses from short sales may be unlimited (e.g., if the
price of a stock sold short rises), whereas losses from direct purchases of
securities are limited to the total amount invested, and the Series may be
unable to replace a borrowed security sold short.
LOWER RATED DEBT SECURITIES
Fixed income securities rated lower than Baa by Moody's or BBB by S&P
are below investment grade and are considered to be of poor standing and
predominantly speculative. Such securities ("lower rated securities") are
commonly referred to as "junk bonds" and are subject to a substantial degree of
credit risk. Lower rated securities may be issued as a consequence of corporate
restructurings, such as leveraged buy-outs, mergers, acquisitions, debt
recapitalizations or similar events. Also, lower rated securities are often
issued by smaller, less creditworthy companies or by highly leveraged (indebted)
firms, which are generally less able than more financially stable firms to make
scheduled payments of interest and principal. The risks posed by securities
issued under such circumstances are substantial.
In the past, the high yields from lower rated securities have more than
compensated for the higher default rates on such securities. However, there can
be no assurance that diversification will protect the Series from widespread
bond defaults brought about by a sustained economic downturn, or that yields
will continue to offset default rates on lower rated securities in the future.
Issuers of these securities are
15
often highly leveraged, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. 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 the issuer is significantly
greater for the holders of lower rated securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer. Further, an
economic recession may result in default levels with respect to such securities
in excess of historic averages.
The value of lower-rated securities will be influenced not only by
changing interest rates, but also by the bond market's perception of credit
quality and the outlook for economic growth. When economic conditions appear to
be deteriorating, lower rated securities may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market for lower
rated securities may become thin and market liquidity may be significantly
reduced. Even under normal conditions, the market for lower rated securities may
be less liquid than the market for investment grade corporate bonds. There are
fewer securities dealers in the high yield market and purchasers of lower rated
securities are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced market liquidity, lower rated
securities prices may become more volatile and the Series' ability to dispose of
particular issues when necessary to meet the Series' liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer may be adversely affected.
Lower rated securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Series. If a call
were exercised by the issuer during a period of declining interest rates, the
Series likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Series and any
dividends to investors.
Besides credit and liquidity concerns, prices for lower rated
securities may be affected by legislative and regulatory developments. For
example, from time to time, Congress has considered legislation to restrict or
eliminate the corporate tax deduction for interest payments or to regulate
corporate restructurings such as takeovers or mergers. Such legislation may
significantly depress the prices of outstanding lower rated securities. A
description of various corporate debt ratings appears in Appendix A to this SAI.
Securities issued by foreign issuers rated below investment grade
entail greater risks than higher rated securities, including risk of untimely
interest and principal payment, default, price volatility and may present
problems of liquidity and valuation.
PAY-IN-KIND BONDS
The Series may invest in pay-in-kind bonds. Pay-in-kind bonds are
securities that pay interest through the issuance of additional bonds. The
Series will be deemed to receive interest over the life of such bonds and may be
treated for federal income tax purposes as if interest were paid on a current
basis, although no cash interest payments are received by the Series until the
cash payment date or until the bonds mature.
CONVERTIBLE SECURITIES
The Series may invest in convertible securities which generally offer
lower interest or dividend yields than non-convertible debt securities of
similar quality. The value of convertible securities may reflect changes in the
value of the underlying common stock. Convertible securities entail less credit
risk
16
than the issuer's common stock because they rank senior to common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to convert. The provisions of any convertible
security determine its ranking in a company's capital structure. In the case of
subordinated convertible debentures, the holder's claims on assets and earnings
are subordinated to the claims of other creditors and are senior to the claims
of preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claim on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
WHEN-ISSUED SECURITIES
The Series may purchase securities offered on a "when-issued" or
"forward delivery" basis. When so offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued or forward delivery
securities take place at a later date. During the period between purchase and
settlement, no payment is made by the purchaser to the issuer and no interest on
the when-issued or forward delivery security accrues to the purchaser. While
when-issued or forward delivery securities may be sold prior to the settlement
date, it is intended that the Series will purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Series makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of when-issued or forward delivery securities may be
more or less than the purchase price. The Advisor does not believe that the
Series' net asset value or income will be adversely affected by its purchase of
securities on a when-issued or forward delivery basis. The Series will establish
a segregated account in which it will maintain Segregated Assets equal in value
to commitments for when-issued or forward delivery securities. The Segregated
Assets maintained by the Series with respect to any when-issued or forward
delivery securities shall be liquid, unencumbered and marked-to-market daily,
and such Segregated Assets shall be maintained in accordance with pertinent SEC
positions.
MORTGAGE-BACKED SECURITIES AND MORTGAGE PASS-THROUGH SECURITIES
The Series may also invest in mortgage-backed securities, which are
interests in pools of mortgage loans, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations as further described
below. The Series may also invest in debt securities which are secured with
collateral consisting of mortgage-backed securities (see "Collateralized
Mortgage Obligations") and in other types of mortgage-related securities.
The timely payment of principal and interest on mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
("GNMA") is backed by GNMA and the full faith and credit of the U.S. government.
These guarantees, however, do not apply to the market value of the Series'
shares. Also, securities issued by GNMA and other mortgage-backed securities may
be purchased at a premium over the maturity value of the underlying mortgages.
This premium is not guaranteed and would be lost if prepayment occurs.
Mortgage-backed securities issued by U.S. government agencies or
instrumentalities other than GNMA are not "full faith and credit" obligations.
Certain obligations, such as those issued by the Federal Home Loan Bank are
supported by the issuer's right to borrow from the U.S. Treasury, while others
such as those issued by Fannie Mae, formerly known as the Federal National
Mortgage Association ("FNMA"), are supported only by the credit of the issuer.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and reduce returns. The Series may agree to
purchase or sell these securities with payment and delivery taking place at a
17
future date. A decline in interest rates may lead to a faster rate of repayment
of the underlying mortgages and expose the Series to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Series, the prepayment right of mortgagors may limit the increase in net asset
value of the Series because the value of the mortgage-backed securities held by
the Series may not appreciate as rapidly as the price of noncallable debt
securities.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-backed securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payments dates
regardless of whether or not the mortgagor actually makes the payment.
Any discount enjoyed on the purchases of a pass-through type
mortgage-backed security will likely constitute market discount. As the Series
receives principal payments, it will be required to treat as ordinary income an
amount equal to the lesser of the amount of the payment or the "accrued market
discount." Market discount is to be accrued either under a constant rate method
or a proportional method. Pass-through type mortgage-backed securities purchased
at a premium to face will be subject to a similar rule requiring recognition of
an offset to ordinary interest income, an amount of premium attributable to the
receipt of principal. The amount of premium recovered is to be determined using
a method similar to that in place for market discount. The Series may elect to
accrue market discount or amortize premium notwithstanding the amount of
principal received but such election will apply to all bonds held and thereafter
acquired unless permission is granted by the Commissioner of the Internal
Revenue Service to change such method.
The principal governmental guarantor of mortgage-related securities is
GNMA, which is a wholly owned U. S. government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages which are insured by the Federal Housing Authority or
guaranteed by the Veterans Administration. These guarantees, however, do not
apply to the market value or yield of mortgage-backed securities or to the value
of the Series' shares. Also, GNMA securities often are purchased at a premium
over the maturity value of the underlying mortgages. This premium is not
guaranteed and should be viewed as an economic offset to interest to be earned.
If prepayments occur, less interest will be earned and the value of the premium
paid will be lost.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. government) include Fannie Mae and Freddie Mac (formerly
known as the Federal Home Loan Mortgage Corporation). Fannie Mae is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation of the Secretary of Housing and Urban Development.
Fannie Mae purchases conventional (i.e., not insured or guaranteed by any
government agency) mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by Fannie Mae are guaranteed as to timely payment
of principal and interest by Fannie Mae but are not backed by the full faith and
credit of the U.S. government.
18
Freddie Mac is a corporate instrumentality of the U.S. government and
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. Freddie Mac issues Participation Certificates ("PCs")
which represent interests in conventional mortgages from Freddie Mac's national
portfolio. Freddie Mac guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the U.S. government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance guarantees are issued by governmental entities,
private insurers and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Series' investment quality
standards. There can be no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee or guarantees,
even if through an examination of the loan experience and practices of the
originators/servicers and poolers, the Advisor determines that the securities
meet the Series' quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS")
A CMO is a debt security on which interest and prepaid principal are
paid, in most cases, semi-annually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, Freddie Mac, or Fannie Mae and their
income streams. Privately-issued CMOs tend to be more sensitive to interest
rates than Government-issued CMOs.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payments of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B and C Bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
19
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities.
Most if not all newly-issued debt securities backed by pools of real
estate mortgages will be issued as regular and residual interests in REMICs
because, as of January 1, 1992, new CMOs which do not make REMIC elections will
be treated as "taxable mortgage pools," a wholly undesirable tax result. Under
certain transition rules, CMOs in existence on December 31, 1991 are unaffected
by this change. The Series will purchase only regular interests in REMICs. REMIC
regular interests are treated as debt of the REMIC and income/discount thereon
must be accounted for on the "catch-up method," using a reasonable prepayment
assumption under the original issue discount rules of the Code.
CMOs and REMICs issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. Yields on
privately-issued CMOs, as described above, have been historically higher than
yields on CMOs issued or guaranteed by U.S. government agencies. However, the
risk of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government. Such instruments also tend to be more
sensitive to interest rates than U.S. government-issued CMOs. The Series will
not invest in subordinated privately-issued CMOs. For federal income tax
purposes, the Series will be required to accrue income on CMOs and REMIC regular
interests using the "catch-up" method, with an aggregate prepayment assumption.
DOLLAR ROLLS
The Series may enter into dollar rolls in which the Series sells
securities and simultaneously contracts to repurchase substantially similar
securities on a specified future date. In the case of dollar rolls involving
mortgage-backed securities, the mortgage-backed securities that are purchased
typically will be of the same type and will have the same or similar interest
rate and maturity as those sold, but will be supported by different pools of
mortgages. The Series forgoes principal and interest paid during the roll period
on the securities sold in a dollar roll, but the Series is compensated by the
difference between the current sales price and the price for the future purchase
as well as by any interest earned on the proceeds of the securities sold. The
Series could also be compensated through receipt of fee income. The Series
intends to enter into dollar rolls only with government securities dealers
recognized by the Federal Reserve Board, or with member banks of the Federal
Reserve. The Trust does not believe the Series' obligations under dollar rolls
are senior securities and accordingly, the Series, as a matter of
non-fundamental policy, will not treat dollar rolls as being subject to its
borrowing or senior securities restrictions. In addition to the general risks
involved in leveraging, dollar rolls are subject to the same risks as repurchase
and reverse repurchase agreements.
OTHER MORTGAGE-BACKED SECURITIES
The Advisor expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Advisor will, consistent
with the Series' investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
20
ASSET-BACKED SECURITIES
The Series may invest a portion of its assets in debt obligations known
as "asset-backed securities." Asset-backed securities are securities that
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool or pools of similar
assets (e.g., receivables on home equity and credit loans and receivables
regarding automobile, credit card, mobile home and recreational vehicle loans,
wholesale dealer floor plans and leases). The Series will not invest in
asset-backed securities with remaining effective maturities of less than
thirteen months.
Such receivables are securitized in either a pass-through or a
pay-through structure. Pass-through securities provide investors with an income
stream consisting of both principal and interest payments in respect of the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, which are collateralized
by the various receivables and in which the payments on the underlying
receivables provide that the Series pay the debt service on the debt obligations
issued. The Series may invest in these and other types of asset-backed
securities that may be developed in the future.
The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided. Such asset-backed securities are subject to the same
prepayment risks as mortgage-backed securities. For federal income tax purposes,
the Series will be required to accrue income on pay-through asset-backed
securities using the "catch-up" method, with an aggregate prepayment assumption.
The credit quality of most asset-backed securities depends primarily on
the credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or any
other affiliated entities, and the amount and quality of any credit support
provided to the securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-backed securities may be classified as
"pass-through certificates" or "collateralized obligations."
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payment, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payments of the obligations on at
least some 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. The Series will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Due to the shorter maturity of the collateral backing such securities,
there is less of a risk of substantial prepayment than with mortgage-backed
securities. Such asset-backed securities do, however, involve certain risks not
associated with mortgage-backed securities, including the risk that security
interests cannot be adequately, or in many cases, ever, established. In
addition, with respect to credit card receivables, a number of state and federal
consumer credit laws give debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the outstanding balance. In the case of
automobile
21
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing such receivables due
to the large number of vehicles involved in a typical issuance and technical
requirements under state laws. Therefore, recoveries on repossessed collateral
may not always be available to support payments on the securities.
Examples of credit support 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 "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 exceeds that required to make
payments of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical credit
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
ZERO COUPON AND DELAYED INTEREST SECURITIES
The Series may invest in zero coupon or delayed interest securities
which pay no cash income until maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and are sold at
substantial discounts from their value at maturity. When held to maturity or
cash payment date, the entire income of such securities, which consists of
accretion of discount, comes from the difference between the purchase price and
their value at maturity or cash payment date. The discount varies depending on
the time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and the perceived credit quality of the issuer.
The discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity or cash payment date of the security approaches. The
market prices of zero coupon and delayed interest securities are generally more
volatile and more likely to respond to changes in interest rates than the market
prices of securities having similar maturities and credit qualities that pay
interest periodically.
Zero coupon securities are subject to greater market value fluctuations
from changing interest rates than debt obligations of comparable maturities
which make current distributions of interest (cash). Zero coupon convertible
securities offer the opportunity for capital appreciation as increases (or
decreases) in market value of such securities closely follow the movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks as they usually are issued with short maturities (15 years or less) and
are issued with options and/or redemption features exercisable by the holder of
the obligation entitling the holder to redeem the obligation and receive a
defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has
22
stated that for federal tax and securities purposes, in its opinion, purchasers
of such certificates, such as the Series, most likely will be deemed the
beneficial holder of the underlying U.S. government securities. The Series will
not treat such privately stripped obligations to be U.S. government securities
for the purpose of determining if the Series is "diversified," or for any other
purpose, under the Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the U.S. Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Series will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the U.S. Treasury
sells itself. These stripped securities are also treated as zero coupon
securities with original issue discount for tax purposes.
EMERGING MARKETS INVESTMENTS
The Series may invest up to 25% of its total assets in securities of
foreign issuers, which may include securities of issuers in emerging markets.
The Series may invest in equity securities of issuers in emerging markets, or
securities with respect to which the return is derived from the equity
securities of issuers in emerging markets. The Series also may invest in fixed
income securities of emerging market issuers, including government and
government-related entities (including participation in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. The Series also may invest in debt
securities of corporate issuers in developing countries.
The Series' investments in emerging market government and
government-related securities may consist of: (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries (including
participation in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries and (iii) interests in issuers
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the entities described above.
The Series may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Bulgaria, Brazil,
Costa Rica, Jordan, Mexico, Nigeria, the Philippines, Poland, Uruguay, Panama,
Peru and Venezuela. Brady Bonds have been issued only in recent years, and for
that reason do not have a very long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in over-the-counter
secondary markets. Dollar-denominated, collateralized Brady Bonds, which may be
23
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
Bonds in which the Series invests will not be subject to restructuring
arrangements or to requests for a new credit which may cause the Series to
suffer a loss of interest or principal in any of its holdings.
The Series may invest a portion of its assets in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of sovereign debt obligations. This type of restructuring involves the deposit
with, or purchase by, an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities ("Structured Securities")
backed by, or representing interests in, the underlying instruments. The cash
flow of the underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Securities of the type in which the Series
anticipates investing typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. The Series
is permitted to invest in a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities. Thus, investments by the Series in Structured Securities will be
limited by the Series' prohibition on investing more than 15% of its net assets
in illiquid securities.
The Series may invest in fixed rate and floating rate loans ("Loans")
arranged through private negotiations between an issuer of sovereign debt
obligations and one or more financial institutions ("Lenders"). The Series'
investments in Loans are expected in most instances to be in the form of a
participation in loans ("Participation") and assignments of all or a portion of
Loans ("Assignments") from third parties. The Series will have the right to
receive payments of principal, interest and any fees to which they are entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In the event of the insolvency of the
Lender selling a Participation, the Series may be treated as a general creditor
of the Lender and may not benefit from any set-off between the Lender and the
borrower. Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender with
respect to the Participations. Even under such a structure, in the event of the
Lender's insolvency, the Lender's servicing of the Participation may be delayed
and the assignability of the Participation may be impaired. The Series will
acquire the Participations only if the Lender interpositioned between the Series
and the borrower is determined by the Advisor to be creditworthy.
When the Series purchases Assignments from Lenders, it will acquire
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Series as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
24
The Series also may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities and limited partnerships. Investing in such unlisted emerging market
equity securities, including investments in new and early stage companies, may
involve a high degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
The Series' investments in emerging market securities will at all times
be limited by the Series' prohibition on investing more than 15% of its net
assets in illiquid securities.
RISKS OF INVESTING IN EMERGING MARKETS
There are additional risks inherent in investing in less developed
countries which are applicable to the Series. The Series considers a country to
be an "emerging market" if it is defined as an emerging or developing economy by
any one of the following: the International Bank for Reconstruction and
Development (i.e., the World Bank), the International Finance Corporation, or
the United Nations or its authorities. An emerging market security is a security
issued by a government or other issuer that, in the opinion of the Advisor, has
one or more of the following characteristics: (i) the principal trading market
of the security is an emerging market; (ii) the primary revenue of the issuer
(at least 50%) is generated from goods produced or sold, investments made, or
services performed in an emerging market country; or (iii) at least 50% of the
assets of the issuer are situated in emerging market countries.
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices on these exchanges tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries. Further,
investments by foreign investors are subject to a variety of restrictions in
many emerging countries. Countries such as those in which the Series may invest
have historically experienced and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations or currency
depreciation, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Additional factors which may
influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international agencies and
the political constraints to which a government debtor may be subject.
The ability of a foreign government or government-related issuer to
make timely and ultimate payments on its external debt obligations will be
strongly influenced by the issuer's balance of payments, including export
performance, its access to international credits and investments, fluctuations
in interest rates and the extent of its foreign reserves. A country whose
exports are concentrated in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to fluctuations in international
prices of these commodities or imports. To the extent that a country receives
payment for its exports in currencies other than dollars, its ability to make
debt payments denominated in dollars could be adversely affected. If a foreign
government or government-related issuer cannot generate sufficient earnings from
foreign trade to service its external debt, it may need to depend on continuing
loans and aid from foreign governments, commercial banks, and multilateral
organizations, and inflows of foreign investment. The commitment on the part of
these foreign governments, multilateral organizations and others to make such
disbursements may be conditioned on the government's implementation of economic
reforms and/or economic performance and the timely service of its obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may curtail the willingness of such
third parties to lend funds, which may further impair the issuer's ability or
25
willingness to service its debts in a timely manner. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a governmental issuer to obtain
sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental issuer may default on its
obligations. If such a default occurs, the Series may have limited effective
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting country itself, and the
ability of the holder of foreign government and government-related debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government and government-related debt obligations in the event of default under
their commercial bank loan agreements.
The issuers of the government and government-related debt securities in
which the Series expects to invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign government and government-related debt securities may be
requested to participate in the restructuring of such obligations and to extend
further loans to their issuers. There can be no assurance that the Brady Bonds
and other foreign government and government-related debt securities in which the
Series may invest will not be subject to similar defaults or restructuring
arrangements which may adversely affect the value of such investments.
Furthermore, certain participants in the secondary market for such debt may be
directly involved in negotiating the terms of these arrangements and may
therefore have access to information not available to other market participants.
Payments to holders of the high yield, high risk, foreign debt
securities in which the Series may invest may be subject to foreign withholding
and other taxes. Although the holders of foreign government and
government-related debt securities may be entitled to tax gross-up payments from
the issuers of such instruments, there is no assurance that such payments will
be made.
SECONDARY RISKS
The principal risks of investing in the Series are described in Exhibit
B of the Prospectus/Proxy Statement. The secondary risks of investing in the
Series are described in Appendix B hereto.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies
and may not be changed without the approval of a majority of the outstanding
voting securities (as defined in the Act) of the Series. Unless otherwise
indicated, all percentage limitations listed below apply to the Series only at
the time of the transaction. Accordingly, if a percentage restriction is adhered
to at the time of investment, a later increase or decrease in the percentage
which results from a relative change in values or from a change in the Series'
total assets will not be considered a violation.
The Series may not:
26
(i) Purchase the securities of any one issuer (other than the U.S.
government or any of its agencies or instrumentalities or
securities of other investment companies) if immediately after
such investment (a) more than 5% of the value of the Series'
total assets would be invested in such issuer or (b) more than
10% of the outstanding voting securities of such issuer would
be owned by the Series, except that up to 25% of the value of
the Series' total assets may be invested without regard to
such 5% and 10% limitations;
(ii) Purchase or sell real estate, except that the Series may
purchase or sell securities of real estate investment trusts;
(iii) Purchase or sell commodities, except that the Series may
purchase or sell currencies, may enter into futures contracts
on securities, currencies and other indices or any other
financial instruments, and may purchase and sell options on
such futures contracts;
(iv) Issue securities senior to the Series' presently authorized
shares of beneficial interest, except that this restriction
shall not be deemed to prohibit the Series from (a) making any
permitted borrowings, loans, mortgages or pledges, (b)
entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or
(c) making short sales of securities to the extent permitted
by the Act and any rule or order thereunder, or SEC staff
interpretations thereof;
(v) Make loans to other persons, except (a) through the lending of
its portfolio securities, (b) through the purchase of debt
securities, loan participations and/or engaging in direct
corporate loans in accordance with its investment objective
and policies and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan. The Series may also make
loans to affiliated investment companies to the extent
permitted by the Act or any exemptions therefrom that may be
granted by the SEC;
(vi) Borrow money, except that the Series may borrow money from
banks to the extent permitted by the Act, or to the extent
permitted by any exemptions therefrom which may be granted by
the SEC, or for temporary or emergency purposes and then in an
amount not exceeding 33 1/3% of the value of the Series' total
assets (including the amount borrowed);
(vii) Concentrate (invest more than 25% of its net assets) in
securities of issuers in a particular industry (other than
securities issued or guaranteed by the U.S. government or any
of its agencies); and
(viii) Act as an underwriter, except to the extent the Series may be
deemed to be an underwriter when disposing of securities it
owns or when selling its own shares.
MANAGEMENT OF THE TRUST
The Trust is a Delaware business trust. Under Delaware law, the Board
has overall responsibility for managing the business and affairs of the Trust.
The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Series.
The Trustees and executive officers of the Trust, along with their
principal occupations over the past five years and their affiliations, if any,
with Brinson Partners, are listed below.
27
TRUSTEES AND OFFICERS
POSITION WITH
NAME AGE THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
---- --- --------- -------------------------------------------
Walter E. Auch 80 Trustee Retired; prior thereto, Chairman and CEO of Chicago Board of
6001 N. 62nd Place Options Exchange 1979-1986; Trustee of the Trust since May,
Paradise Valley, AZ 85253 1994; Trustee, Brinson Relationship Funds since 1994; Trustee,
Brinson Supplementary Trust since 1997; Director, Thomson
Asset Management Corp. since 1987; Director, Fort Dearborn
Income Securities, Inc. 1987-1995; Director, Smith Barney VIP
Fund since 1991; Director, SB Advisers since 1992; Director,
SB Trak since 1992; Director, Banyan Realty Trust since 1988;
Director, Banyan Land Fund II since 1988; Director, Banyan
Mortgage Investment Fund since 1989; and Director, Express
America Holdings Corp. since 1992, and Nicholas/Applegate
Funds and Legend Properties, Inc.; Director, Geotek
Industries, Inc. 1987-1998.
Frank K. Reilly 65 Chairman and Professor, University of Notre Dame since 1982; Trustee of the
College of Business Trustee Trust since 1993; Trustee, Brinson Relationship Funds since
Administration 1994; Trustee, Brinson Supplementary Trust since 1997;
University of Director of The Brinson Funds, Inc. 1992-1993; Director, Fort
Notre Dame Dearborn Income Securities, Inc. since 1993; Director,
Notre Dame, IN 46556-0399 Greenwood Trust Company since 1993; and Director, Dean Witter
Trust, FSB since 1996.
Edward M. Roob 66 Trustee Retired; prior thereto, Senior Vice President, Daiwa
841 Woodbine Lane Securities America Inc. 1986-1993; Trustee of the Trust since
Northbrook, IL 60002 1995; Trustee, Brinson Relationship Funds since 1995; Trustee,
Brinson Supplementary Trust since 1997; Director, Fort
Dearborn Income Securities, Inc. since 1993; Director, Brinson
Trust Company since 1993; Committee Member, Chicago Stock
Exchange since 1993.
Brian M. Storms* 46 Trustee and President (since 1999) and Chief Executive Officer (since
51 W. 52nd Street President 2000), Brinson Advisors, Inc.; President, Prudential
New York, NY 10019 Investments 1996-1999; President, Prudential mutual fund,
annuity and managed money businesses 1996-1998; Trustee of the
Trust since 2001; Trustee, Brinson Relationship Funds since
2001; Trustee, Brinson Supplementary Trust since 2001.
* Mr. Storms is an "interested person" of the Trust, as that term is defined in
the Act.
28
POSITION WITH OFFICER
NAME AGE THE TRUST SINCE PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
---- --- --------- ------- -------------------------------------------
Carolyn M. Burke* 33 Vice 1995 Director, Brinson Partners, Inc. since 1997; Associate,
President Brinson Partners, Inc. 1995-1996; Vice President of the Trust
since 2000; Secretary, Treasurer and Principal Accounting
Officer of the Trust 1997-2001; Assistant Secretary of the
Trust 1996-1997; Vice President of Brinson Relationship Funds
since 2000; Secretary, Treasurer and Principal Accounting
Officer of Brinson Relationship Funds, 2000-2001; Vice
President of Brinson Supplementary Trust since 2000;
Secretary, Treasurer and Principal Accounting Officer of
Brinson Supplementary Trust, 2000-2001.
Amy R. 39 Vice President 2001 Executive Director and the General Counsel, Brinson
Doberman** and Secretary Advisors, Inc. since 2000; General Counsel, Aeltus
Investment Management, Inc. 1996-2000; previously,
Assistant Chief Counsel, Division of Investment
Management, SEC; Vice President and Secretary of 22
investment companies for which Brinson Advisors, UBS
PaineWebber or one of their affiliates serves as
investment advisor.
Paul H. 38 Treasurer 2001 Executive Director and the Head of the Mutual Fund Finance
Schubert*** and Department, Brinson Advisors, Inc. since 1997; First Vice
Principal President and Senior Manager of Mutual Fund Finance
Accounting Department, Brinson Advisors, Inc. 1994-1997; Treasurer and
Officer Principal Accounting Officer of the Trust since 2001;
Treasurer and Principal Accounting Officer of Brinson
Relationship Funds since 2001; Treasurer and Principal
Accounting Officer of Brinson Supplementary Trust since 2001;
Vice President and Treasurer of 22 investment companies for
which Brinson Advisors, UBS PaineWebber or one of their
affiliates serves as investment advisor.
David E. Floyd* 32 Assistant 1998 Associate Director, Brinson Partners, Inc. since 1998;
Secretary Associate, Brinson Partners, Inc., 1994-1998; Assistant Trust
Officer, Brinson Trust Company since 1993; Assistant Secretary
of the Trust since 1998; Assistant Secretary, Brinson
Relationship Funds since 1998; Assistant Secretary, Brinson
Supplementary Trust since 1998.
Mark F. Kemper* 43 Assistant 1999 Director, Brinson Partners, Inc. since 1993; Secretary,
Secretary Brinson Partners, Inc. since 1999; Assistant Secretary,
Brinson Partners, Inc. 1993-1999; Assistant Secretary, Brinson
Trust Company since 1993; Secretary, UBS Brinson since 1998;
Assistant Secretary, Brinson Holdings, Inc. 1993-1998;
Assistant Secretary of the Trust since 1999; Assistant
Secretary, Brinson Relationship Funds since 1999; Assistant
Secretary, Brinson Supplementary Trust since 1999.
------------
* This person's business address is Brinson Partners, Inc., 209 South
LaSalle Street, Chicago, IL 60604-1295.
29
** This person's business address is Brinson Advisors, Inc., 51 West 52nd
Street, New York, NY 10019-6114.
*** This person's business address is Brinson Advisors, Inc., Newport
Center III, 499 Washington Blvd., 14th Floor, Jersey City, NJ 07310-1998.
COMPENSATION TABLE
TRUSTEES
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM TRUST FOR FISCAL YEAR TRUST AND FUND COMPLEX
NAME AND POSITION HELD ENDED JUNE 30, 2001 PAID TO TRUSTEES(1)
---------------------- ------------------- ----------------
Walter E. Auch, Trustee $21,600 $49,200
6001 N. 62nd Place
Paradise Valley, AZ 85253
Frank K. Reilly, Trustee $21,600 $61,800
College of Business Administration
University of Notre Dame
Notre Dame, IN 46556-0399
Edward M. Roob, Trustee $21,600 $62,500
841 Woodbine Lane
Northbrook, IL 60002
(1) This amount represents the aggregate amount of compensation paid to the
Trustees for (a) service on the Board for the Trust's most recently completed
fiscal year; and (b) service on the Board of Trustees of three other investment
companies managed by Brinson Partners for the fiscal year ended June 30, 2001,
with respect to Messrs. Reilly and Roob, and two other companies managed by
Brinson Partners for the fiscal year ended June 30, 2001, with respect to Mr.
Auch. During this period, the Trust had thirteen operating series. Mr. Storms
did not receive any compensation from the Trust for the fiscal year ended June
30, 2001.
No officer or Trustee of the Trust who is also an officer or employee
of Brinson Partners receives any compensation from the Trust for services to the
Trust. The Trust pays each Trustee who is not affiliated with Brinson Partners a
fee of $6,000 per year, plus $300 per series per meeting, and reimburses each
Trustee and officer for out-of-pocket expenses in connection with travel and
attendance at Board meetings.
The Board has an Audit Committee, which has the responsibility, among
other things, to (i) recommend the selection of the Trust's independent
auditors, (ii) review and approve the scope of the independent auditors' audit
activity, (iii) review the audited financial statements, and (iv) review with
such independent auditors the adequacy of the series' basic accounting system
and the effectiveness of the series' internal controls. The Audit Committee met
once during the fiscal year ended June 30, 2001. There is no separate nominating
or investment committee. Items pertaining to these committees are submitted to
the full Board.
30
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 31, 2001, the officers and Trustees, unless otherwise noted,
as a group owned less than 1% of the outstanding equity securities of the Trust
and of each class of equity securities of the Trust.
As of July 31, 2001, the following persons owned, of record or
beneficially, more than 5% of the outstanding voting shares of the Brinson
Fund-Class Y (formerly, Brinson Fund-Class I), Brinson Fund-Class A (formerly,
Brinson Fund-Class N) or UBS Investment Funds class of shares of the Series, as
applicable:
PERCENTAGE OF PERCENTAGE OF
NAME & ADDRESS OF BENEFICIAL AND RECORD OWNERS CLASS SERIES
---------------------------------------------- ----- ------
BRINSON FUND-CLASS Y
*+UBS AG 39.75% 38.27%
New York, NY
*+BBH & Co. 26.33% 25.35%
Jersey City, NJ
Brown Brothers Harriman 5.80% 5.58%
New York, NY
State Street Bank & Trust Co. 5.31% 5.11%
New York, NY
BRINSON FUND-CLASS A
*Brinson Partners, Inc. 100.00% N/A
Chicago, IL
BRINSON FUND-INVESTMENT FUNDS CLASS
*PaineWebber 34.93% 1.30%
Woodland Hills, CA
Blush and Co. 10.93% 0.41%
New York, NY
PaineWebber 10.35% 0.38%
Hillsborough, CA
David J. Nash 7.64% 0.28%
New York, NY
PJ Mechanical Corp 6.16% 0.23%
New York, NY
* Person deemed to control the class within the meaning of the Act. Note that
such persons possess the ability to control the outcome of matters
submitted for the vote of shareholders of that class.
+ Person deemed to control the Series within the meaning of the Act. Note
that such persons possess the ability to control the outcome of matters
submitted for the vote of shareholders of that Series.
31
Any person who owns beneficially, either directly or through one or
more controlled companies, more than 25% of the voting securities of the Trust
is presumed to control the Trust under the provisions of the Act. Note that a
controlling person possesses the ability to control the outcome of matters
submitted for shareholder vote of the Trust or a particular Series.
INVESTMENT ADVISORY, PRINCIPAL UNDERWRITING
AND OTHER SERVICE ARRANGEMENTS
ADVISOR
Brinson Partners, a Delaware corporation, is an investment management
firm, managing as of June 30, 2001, $370.3 billion, primarily for institutional
pension and profit sharing funds. Brinson Partners and its predecessor entities
have managed domestic and international investment assets since 1974 and global
investment assets since 1982. Brinson Partners is a wholly owned subsidiary of
UBS AG ("UBS") and a member of the UBS Asset Management Division. UBS Asset
Management has offices worldwide in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. UBS, headquartered
in Zurich, Switzerland, is an internationally diversified organization with
operations in many areas of the financial services industry. UBS was formed by
the merger of Union Bank of Switzerland and Swiss Bank Corporation in June 1998.
Brinson Partners also serves as the investment advisor to two other
investment companies, The Brinson Relationship Funds and Fort Dearborn Income
Securities, Inc., and as a sub-advisor to the Vision Group of Funds and two
funds within the Brinson Advisors family of funds.
Pursuant to its investment advisory agreement (the "Agreement") with
the Trust, on behalf of the Series, Brinson Partners receives from the Series
a monthly fee at an annual rate of 0.60% multiplied by the average daily net
assets of the Series for providing investment advisory services. Brinson
Partners is responsible for paying its expenses. The Series pays the
following expenses: (1) the fees and expenses of the Trust's disinterested
Trustees; (2) the salaries and expenses of any of the Trust's officers or
employees who are not affiliated with Brinson Partners; (3) interest
expenses; (4) taxes and governmental fees; (5) brokerage commissions and
other expenses incurred in acquiring or disposing of portfolio securities;
(6) the expenses of registering and qualifying shares for sale with the SEC
and with various state securities commissions; (7) auditing and legal costs;
(8) insurance premiums; (9) fees and expenses of the Trust's custodian,
administrative and transfer agent and any related services; (10) expenses of
obtaining quotations of the Series' portfolio securities and of pricing the
Series' shares; (11) expenses of maintaining the Trust's legal existence and
of shareholders' meetings; (12) expenses of preparation and distribution to
existing shareholders of reports, proxies and prospectuses; and (13) fees and
expenses of membership in industry organizations.
General expenses of the Trust (such as costs of maintaining corporate
existence, legal fees, insurance, etc.) will be allocated among the series of
the Trust in proportion to their relative net assets. Expenses which relate
exclusively to a particular series, such as certain registration fees, brokerage
commissions and other portfolio expenses, will be borne directly by that series.
The Agreement permits the Advisor to engage the services of
sub-advisors to assist in managing the assets of the Series.
The Advisor has agreed to waive its fees and reimburse expenses to
the extent that total operating expenses exceed 0.70% of the Series' average
daily net assets, without regard to any 12b-1 Plan expenses.
32
Advisory fees accrued to Brinson Partners from the Series were as
follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1999* JUNE 30, 2000 JUNE 30, 2001
-------------- ------------- -------------
Gross Advisory Fees Earned By Advisor $173,302 $336,440 $317,198
Net Advisory Fees Paid After Fee Waiver $137,039 $248,712 $227,248
Fund Expenses Paid By Advisor $36,263 $87,728 $89,950
* Effective December 19, 1998, and as further discussed below, UBS High Yield
Bond Fund was reorganized into the Series. Fees for the Brinson Fund reflect
fees paid during the period from January 1, 1999 through June 30, 1999. The
Series initially had a fiscal year ending on December 31. At the February
22, 1999 Board of Trustees' meeting, the Board of Trustees of the Trust
voted to change the fiscal year end of the Series to June 30.
Prior to the reorganization of the UBS High Yield Bond Fund (the "UBS
Fund") into the Series, the UBS Fund invested substantially all of its
investable assets in a corresponding portfolio of UBS Investor Portfolios Trust
(the "UBS Portfolio"). Under the investment advisory agreement of the UBS
Portfolio with the New York office of UBS, as the successor to the New York
Branch of the Union Bank of Switzerland ("UBS-NY"), UBS-NY was entitled to a
monthly fee of 0.45% of the UBS Portfolio's average daily net assets. UBS-NY
agreed to waive its fees and reimburse the UBS Fund and the UBS Portfolio to the
extent that the UBS Fund's total operating expenses (including its share of the
UBS Portfolio's expenses) exceeded 0.90% of the UBS Fund's average daily net
assets on an annual basis.
Advisory fees accrued to UBS-NY for the UBS Fund for the period January
1, 1998 through December 18, 1998 were as follows:
JANUARY 1,1998 TO DECEMBER 18, 1998
-----------------------------------
Gross Advisory Fees Earned By UBS-NY $71,860
Net Advisory Fees Paid After Fee Waiver $ 0
Fund Expenses Paid By UBS-NY $117,430
Under a sub-advisory agreement with UBS Brinson, Inc., as the successor
to UBS Asset Management (New York), Inc. (the "Prior Sub-Advisor"), UBS-NY paid
the Prior Sub-Advisor a monthly fee of the UBS Portfolio's average daily net
assets as follows: 0.25% of the first $25 million; 0.20% of the next $25
million; and 0.15% over $50 million.
UBS-NY was responsible for paying the Prior Sub-Advisor its fees. For
the period January 1, 1998 to December 18, 1998, UBS-NY did not pay any fees to
the Prior Sub-Advisor on behalf of the UBS Portfolio.
SUB-ADVISOR
The Advisor has entered into a sub-advisory agreement with Brinson
(NY), Inc., f/k/a UBS Asset Management (New York), Inc. (the "Sub-Advisor"), 10
East 50th Street, New York, New York, on behalf of the Series. The Sub-Advisor
is an affiliate of the Advisor. Under the direction of the Advisor, the
Sub-Advisor is responsible for managing the investment and reinvestment of that
portion of the Series' portfolio that the Advisor designates from time to time.
The Sub-Advisor had previously served as
33
advisor to the UBS Portfolio. The Sub-Advisor furnishes the Advisor with
investment recommendations, asset allocation advice, research and other
investment services subject to the direction of the Trust's Board and officers.
The Advisor pays the Sub-Advisor 0.10% of the fee it receives under its
Agreement with the Series. The Adviser paid the Sub-Advisor $52,866 for its
services to the Series for the fiscal year ended June 30, 2001.
ADMINISTRATIVE, ACCOUNTING AND CUSTODY SERVICES
ADMINISTRATIVE AND ACCOUNTING SERVICES. Effective November 5, 2001,
Brinson Advisors, with its principal office located at 51 West 52nd Street, New
York, New York 10019-6114, serves as the Series' administrator. Brinson Advisors
is an indirect wholly owned asset management subsidiary of UBS. Brinson Advisors
is an affiliate of the Advisor.
As administrator, Brinson Advisors supervises and manages all
aspects (other than investment advisory activities) of the Trust's
operations. Under the Administration Contract, Brinson Advisors will not be
liable for any error of judgement or mistake of law or for any loss suffered
by the Series, the Trust or any of its shareholders in connection with the
performance of the Administration Contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Brinson
Advisors in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Administration Contract terminates
automatically upon its assignment and is terminable at any time without
penalty by the Board or by vote of the holders of a majority of a Series'
outstanding voting securities, on 60 days' written notice to Brinson
Advisors, or by Brinson Advisors on 60 days' written notice to the Trust.
J.P. Morgan Investors Services Co. ("J.P. Morgan") (formerly named Chase
Global Funds Services Company) provides accounting, portfolio valuation and
certain administrative services for the Series under a Multiple Services
Agreement between the Trust and The Chase Manhattan Bank ("Chase"). J.P.
Morgan is located at 73 Tremont Street, Boston, MA 02108-3913 and is a
corporate affiliate of Chase.
The Series pays a fee to Brinson Advisors that is computed daily and
paid monthly at an annual rate of 0.075% of average daily net assets of the
Series. This fee is the same amount that was previously paid to J.P. Morgan as
the Trust's administrator.
Until November 5, 2001, J.P. Morgan served as administrator, accounting
and portfolio valuation agent, and transfer agent under a Multiple Services
Agreement, which also included the custodian services performed by Chase. For
the fiscal years ended June 30, 2001 and June 30, 2000, the Series paid $396 and
$1,087, respectively, to J.P. Morgan for administration, accounting, portfolio
valuation and transfer agency services.
For the period October 1, 1998 through June 30, 1999, aggregate fees
paid to J.P. Morgan for administration, accounting, portfolio valuation and
transfer agency services for the Series were $418. For the period December 19,
1998 through December 31, 1998, the Series did not pay any fees to J.P. Morgan
for these services.
Prior to the reorganization of the UBS Fund into the Trust in
December, 1998, IBT Trust & Custodial Services (Ireland) Limited ("IBT
Ireland") and Investors Bank and Trust Company ("Investors Bank"), 200
Clarendon Street, Boston, Massachusetts 02116, provided certain
administrative services to the UBS Portfolio and the UBS Fund, respectively,
pursuant to Administration Agreements. For its services under the
Administration Agreements, the UBS Portfolio paid IBT Ireland a fee
calculated daily and paid monthly equal, on an annual basis, to 0.07% of the
UBS Portfolio's first $100 million in average daily net assets and 0.05% of
the assets in excess of $100 million. For its services under the
Administration Agreements, the UBS Fund paid Investors Bank a fee calculated
daily and paid monthly
34
equal, on an annual basis, to 0.065% of the UBS Fund's first $100 million in
average daily net assets and 0.025% of the next $100 million in average daily
net assets. Investors Bank was not paid a fee from a UBS Fund on average
daily net assets in excess of $200 million.
The administrative fees for the period January 1, 1998 through December
18, 1998 paid to IBT Ireland and Investors Bank by the UBS High Yield Bond
Portfolio and the UBS High Yield Bond Fund, respectively, are as follows:
JANUARY 1, 1998 THROUGH
SERIES ADMINISTRATOR DECEMBER 18, 1998
------ ------------- -----------------
UBS High Yield Bond Portfolio* IBT Ireland $16,854
UBS High Yield Bond Fund* Investors Bank $21,515
* Effective on December 19, 1998, UBS High Yield Bond Fund was reorganized
into the Series. The Series initially had fiscal years ending on December
31. At the February 22, 1999 Board of Trustees' meeting, the Board of
Trustees of the Trust voted to change the fiscal year end of the Series to
June 30.
CUSTODY SERVICES. The Chase Manhattan Bank, 270 Park Avenue, New York,
New York 10017 ("Chase") provides custodian services for the securities and cash
of the Series. The custody fee schedule is based primarily on the net amount of
assets held during the period for which payment is being made plus a per
transaction fee for transactions during the period and out-of-pocket expenses.
Chase utilizes foreign sub-custodians under procedures approved by the Board in
accordance with applicable legal requirements.
PRINCIPAL UNDERWRITING ARRANGEMENTS
Brinson Advisors acts as the principal underwriter of each class of
shares of the Series pursuant to a principal underwriting contract with the
Trust ("Principal Underwriting Contract"). The Principal Underwriting Contract
requires Brinson Advisors to use its best efforts, consistent with its other
businesses, to sell shares of the Series. Shares of the Series are offered
continuously. Brinson Advisors enters into dealer agreements with other
broker-dealers (affiliated and non-affiliated) and with other financial
institutions to authorize them to sell Series shares.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of the Series adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Act (each, respectively, a "Class A Plan," "Class B
Plan" and "Class C Plan," and collectively, "Plans"), the Series pays Brinson
Advisors 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, the Series pays Brinson Advisors a distribution fee, accrued daily and
payable monthly, at the annual rate of 0.75% of the average daily net assets of
the class of shares. Under the Class C Plan, the Series pays Brinson Advisors a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.50%
of the average daily net assets of the class of shares. There is no distribution
plan with respect to the Series' Class Y shares and the Series pays no service
or distribution fees with respect to the Class Y shares.
Brinson Advisors uses the service fees under the Plans for Class A,
Class B and Class C shares primarily to pay dealers for shareholder servicing,
currently at the annual rate of 0.25% of the aggregate investment amounts
maintained in the Series by each dealer. Each dealer then compensates its
investment professionals for shareholder servicing that they perform and offsets
its own expenses in servicing and maintaining shareholder accounts.
35
Brinson Advisors uses the distribution fees under the Class B and Class
C Plans to offset the commissions it pays to dealers for selling the Series'
Class B and Class C shares, respectively, and to offset the Series' marketing
costs attributable to such classes, such as the preparation, printing and
distribution of sales literature and advertising and distributing prospectuses
and other shareholder materials to prospective investors. Brinson Advisors may
also use distribution fees to pay additional compensation to dealers and to
offset other costs allocated to Brinson Advisors' distribution activities.
Brinson Advisors receives the proceeds of the initial sales charge paid
when Class A and Class C shares are bought and of the contingent deferred sales
charge paid upon sales of shares. These proceeds also may be used to cover
distribution expenses.
The Plans and the Principal Underwriting Contract specify that the
Series must pay service and distribution fees to Brinson Advisors as
compensation for its service- and distribution-related activities, not as
reimbursement for specific expenses incurred. Therefore, even if Brinson
Advisors' expenses for the Series exceed the service or distribution fees it
receives, the Series will not be obligated to pay more than those fees. On the
other hand, if Brinson Advisors' 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 Brinson Advisors' sole responsibility and not that of the Series.
Annually, the Board reviews the Plans and Brinson Advisors' corresponding
expenses for each class of shares of the Series separately from the Plans and
expenses of the other classes of shares.
Among other things, each Plan provides that (1) Brinson Advisors will
submit to the 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 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 the Series under the Plan
shall not be materially increased without the approval by a majority of the
outstanding voting securities of the relevant class of the Series 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 the Trust.
In reporting amounts expended under the Plans to the Board members, the
Trust allocates to each class of shares of the Series any fees and expenses
incurred by the Trust in connection with the distribution or servicing of such
class of shares under the Plan adopted for such class.
In approving the Class A Plan, the Class B Plan and the Class C Plan,
the Board considered all the features of the distribution system and the
anticipated benefits to the Series and its shareholders. With regard to each
Plan, the Board considered (1) the advantages to the shareholders of economies
of scale resulting from growth in the Series' assets and potential continued
growth, (2) the services provided to the Series and its shareholders by Brinson
Advisors, (3) the services provided by dealers pursuant to each dealer agreement
with Brinson Advisors, and (4) Brinson Advisors' shareholder service-related
expenses and costs and, for Class B and Class C shares, shareholder
service-related and distribution-related expenses and costs. With respect to the
Class B Plan, the Board also recognized that Brinson Advisors' willingness to
compensate dealers without the concomitant receipt by Brinson Advisors of
initial sales charges, was conditioned upon its expectation of being compensated
under the Class B Plan.
With respect to each Plan, the Board considered all compensation that
Brinson Advisors would receive under the Plan and the Principal Underwriting
Contract, including service fees and, as applicable, initial sales charges,
distribution fees and contingent deferred sales charges. The Board also
considered
36
the benefits that would accrue to Brinson Advisors under each Plan, in that
Brinson Advisors would receive service and distribution fees that are calculated
based upon a percentage of the average net assets of the Series, which fees
would increase if the Plans were successful and the Series attained and
maintained significant asset levels.
PRIOR DISTRIBUTION ARRANGEMENTS
Until October 26, 2001, a distribution plan, adopted pursuant to
Rule 12b-1 under the Act, had related to the Trust's UBS Investment Funds
class of shares of the Series (the "UBS Investment Plan"). The Board had also
adopted a separate distribution plan (the "Class N Plan") pursuant to Rule
12b-1 under the Act, for the Series' Brinson Fund-Class N shares (the UBS
Investment Plan and the Class N Plan together, the "Prior Plans"), which was
in place until November 2, 2001. The Prior Plans had permitted the Series to
reimburse Funds Distributor Inc., the Trust's former underwriter ("FDI"),
Brinson Partners and others from the assets of the UBS Investment Funds class
of shares and Brinson Fund-Class N shares with a quarterly fee for services
and expenses incurred in distributing and promoting sales of UBS Investment
Funds class of shares and Brinson Fund-Class N shares, respectively. These
expenses had included, but were not limited to, preparing and distributing
advertisements and sales literature, printing prospectuses and reports used
for sales purposes, and paying distribution and maintenance fees to brokers,
dealers and others in accordance with a selling agreement with the Trust on
behalf of the UBS Investment Funds class of shares and the Brinson Fund-Class
N shares or FDI. In addition, the Series (as well as the Advisor, from the
Advisor's own resources) had made payments directly to FDI for payment to
dealers or others, or directly to others, such as banks, who had assisted in
the distribution of the UBS Investment Funds class of shares or Brinson
Fund-Class N shares or provided services with respect to the UBS Investment
Funds class of shares or Brinson Fund-Class N shares.
UBS, or one of its affiliates, pursuant to a selected dealer agreement,
had provided additional compensation to securities dealers from its own
resources in connection with sales of the UBS Investment Funds class of shares
or Brinson Fund-Class N shares of the Series.
The aggregate distribution fees paid by the Series from the assets of
the UBS Investment Funds class of shares to FDI and others under the UBS
Investment Plan could not exceed 0.90% of a Series' average daily net assets in
any year (0.25% of which were service fees to be paid by the Series to FDI,
dealers and others, for providing personal service and/or maintaining
shareholder accounts). The UBS Investment Plan had provided, however, that the
aggregate distribution fees for the Series could not exceed 0.85% for the 2001
fiscal year.
The aggregate distribution fees paid by the Series from the assets of
the respective Brinson Fund-Class N shares to FDI and others under the Class N
Plan could not exceed 0.25% of a Series' average daily net assets in any year.
The UBS Investment Plans did not apply to the Brinson Fund-Class I or
the Brinson Fund-Class N shares of each Series and those shares were not
included in calculating the UBS Investment Plans' respective fees. The Class N
Plan did not apply to the Brinson Fund-Class I or the UBS Investment Funds class
of shares of each Series and those shares were not included in calculating the
Class N Plan's fees.
The quarterly fees paid to FDI under the Plans were subject to the
review and approval by the Trust's Trustees who were not "interested persons" of
the Advisor or FDI (as defined in the Act) and who could reduce the fees or
terminate the Plans at any time.
37
Amounts spent on behalf of the UBS Investment Funds and Class N Shares
pursuant to the Plans during the fiscal year ended June 30, 2001 are set forth
below:
------------------------------------------------------------------------------------------------------------------------------
COMPENSATION
COMPENSATION COMPENSATION TO UBS SALES
CLASS PRINTING TO UNDERWRITERS TO DEALERS PERSONNEL ADVERTISING OTHER
------------------------------------------------------------------------------------------------------------------------------
UBS Investment Fund $0.00 $0.00 $0.00 $19,256.63 $0.00 $0.00
------------------------------------------------------------------------------------------------------------------------------
Class N $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
TRANSFER AGENCY SERVICES
Effective August 20, 2001, PFPC Inc. ("PFPC"), a subsidiary of PNC
Bank, N.A., serves as the Trust's transfer and dividend disbursing agent. It
is located at 400 Bellevue Parkway, Wilmington, DE 19809.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, are the independent auditors of
the Trust.
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania, is
legal counsel to the Trust and its independent trustees.
PERSONAL TRADING POLICIES
The Trust, Brinson Partners, Brinson Advisors and the Sub-Advisor have
each adopted a Code of Ethics under Rule 17j-1 of the Act. Each Code of Ethics
establishes standards by which certain personnel covered by the rule may invest
in securities that may be purchased or held by the Series but prohibits
fraudulent, deceptive or manipulative conduct in connection with that personal
investing.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brinson Partners is responsible for decisions to buy and sell
securities for the Series and for the placement of the Series' portfolio
business and the negotiation of commissions, if any, paid on such transactions.
Subject to the direction of Brinson Partners, the Sub-Advisor is responsible for
decisions to buy and sell securities and for the placement of portfolio business
and the negotiation of commissions, if any, paid on such transactions, for the
portion of the Series' assets that the Sub-Advisor manages. Portfolio
transactions placed by the Sub-Advisor may be effected through Brinson Partners'
or the Sub-Advisor's trading desk. Fixed income securities in which the Series
invests are traded in the over-the-counter market. These securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission, although the bid/ask spread quoted on
securities includes an implicit profit to the dealers. In over-the-counter
transactions, orders are placed directly with a principal market-maker unless a
better price and execution can be obtained by using a broker. Brokerage
commissions are paid on transactions in listed securities, futures contracts and
options thereon. Brinson Partners and the Sub-Advisor are responsible for
effecting portfolio transactions and will do so in a manner deemed fair and
reasonable to the Series.
38
The primary consideration in all portfolio transactions will be prompt
execution of orders in an efficient manner at the most favorable price. However,
subject to policies established by the Board of the Trust, the Series may pay a
broker-dealer a commission for effecting a portfolio transaction for the Series
in excess of the amount of commission another broker-dealer would have charged
if Brinson Partners or the Sub-Advisor determines in good faith that the
commission paid was reasonable in relation to the brokerage or research services
provided by such broker-dealer, viewed in terms of that particular transaction
or such firm's overall responsibilities with respect to the clients, including
the Series, as to which Brinson Partners or the Sub-Advisor exercises investment
discretion. In selecting and monitoring broker-dealers and negotiating
commissions, Brinson Partners and the Sub-Advisor consider the firm's
reliability, the quality of its execution services on a continuing basis and its
financial condition. Brinson Partners and the Sub-Advisor may also consider the
sale of shares of the Series and other funds that they advise as a factor in the
selection of brokers or dealers to effect transactions for the Series, subject
to the Brinson Partners and Sub-Advisor's duties to seek best execution. When
more than one firm is believed to meet these criteria, preference may be given
to brokers who provide research or statistical material or other services to the
Series, to Brinson Partners or to the Sub-Advisor. Such services include advice,
both directly and in writing, as to the value of the securities; the
advisability of investing in, purchasing or selling securities; and the
availability of securities, or purchasers or sellers of securities, as well as
analyses and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy and the performance of accounts. This allows
Brinson Partners and the Sub-Advisor to supplement their own investment research
activities and obtain the views and information of others prior to making
investment decisions. Brinson Partners and the Sub-Advisor are of the opinion
that, because this material must be analyzed and reviewed by their staff, the
receipt and use of such material does not tend to reduce expenses but may
benefit the Series by supplementing the Advisor's and the Sub-Advisor's
research.
Brinson Partners and the Sub-Advisor effect portfolio transactions for
other investment companies and advisory accounts. Research services furnished by
dealers through whom the Series effects its securities transactions may be used
by Brinson Partners or the Sub-Advisor in servicing all of their accounts; not
all such services may be used in connection with the Series. In the opinion of
Brinson Partners and the Sub-Advisor, it is not possible to measure separately
the benefits from research services to each of the accounts (including the
Series). Brinson Partners and the Sub-Advisor will attempt to equitably allocate
portfolio transactions among the Series and others whenever concurrent decisions
are made to purchase or sell securities by the Series and another. In making
such allocations between the Series and others, the main factors to be
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for recommending investments to the Series
and the others. In some cases, this procedure could have an adverse effect on
the Series. In the opinion of Brinson Partners and the Sub-Advisor, however, the
results of such procedures will, on the whole, be in the best interest of each
of the clients.
When buying or selling securities, the Series may pay commissions to
brokers who are affiliated with the Advisor, the Sub-Advisor or the Series. The
Series may purchase securities in certain underwritten offerings for which an
affiliate of the Series, the Advisor or the Sub-Advisor may act as an
underwriter. The Series may effect future transactions through, and pay
commissions to, futures commission merchants who are affiliated with the
Advisor, the Sub-Advisor or the Series in accordance with procedures adopted by
the Board.
The Series did not incur brokerage commissions during its last three
fiscal years. For the fiscal years ended June 30, 1999, 2000 and 2001, the Trust
and the Advisor had no agreements or understandings with a broker or otherwise
causing brokerage transactions or commissions for research services.
39
PORTFOLIO TURNOVER
The Series is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Act, when changes in circumstances or
conditions make such a move desirable in light of the Series' investment
objective. The Series will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Series'
investment objective.
The Series does not intend to use short-term trading as a primary means
of achieving its investment objective. The rate of portfolio turnover shall be
calculated by dividing (a) the lesser of purchases and sales of portfolio
securities for the particular fiscal year by (b) the monthly average of the
value of the portfolio securities owned by the Series during the particular
fiscal year. Such monthly average shall be calculated by totaling the values of
the portfolio securities as of the beginning and end of the first month of the
particular fiscal year and as of the end of each of the succeeding eleven months
and dividing the sum by 13.
Under normal circumstances, the portfolio turnover rate for the Series
may exceed 100%, and in some years, 200%. High portfolio turnover rates (over
100%) may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Series and ultimately by
the Series' shareholders. In addition, high portfolio turnover may result in
increased short-term capital gains, which, when distributed to shareholders, are
treated as ordinary income.
The portfolio turnover rate of the Series for the fiscal years ended
June 30, 2000 and June 30, 2001 was 73% and 87%, respectively.
SHARES OF BENEFICIAL INTEREST
As of November 5, 2001, the Trust will offer four classes of shares
for the Series: the Brinson Fund-Class A (the Class A shares) (formerly known
as the Brinson Fund-Class N shares), Brinson Fund-Class B (the Class B
shares), Brinson Fund-Class C (the Class C shares), and Brinson Fund-Class Y
(the Class Y shares) (formerly known as the Brinson Fund-Class I shares). The
Series is authorized to issue an unlimited number of shares of beneficial
interest with a $0.001 par value per share. Each share of beneficial interest
represents an equal proportionate interest in the assets and liabilities of
the Series and has identical voting, dividend, redemption, liquidation, and
other rights and preferences as the other classes of the Series, except that
only the Class A shares may vote on any matter affecting the Class A Plan.
Similarly, only Class B shares and Class C shares may vote on matters that
affect only the Class B Plan and Class C Plan. No class may vote on matters
that affect only another class. Under Delaware law, the Trust does not
normally hold annual meetings of shareholders. Shareholders' meetings may be
held from time to time to consider certain matters, including changes to the
Series' fundamental investment objective and fundamental investment policies,
changes to the Trust's investment advisory agreements and the election of
Trustees when required by the Act. When matters are submitted to shareholders
for a vote, shareholders are entitled to one vote per share with
proportionate voting for fractional shares. The shares of the Series do not
have cumulative voting rights or any preemptive or conversion rights, and the
Trustees have authority, from time to time, to divide or combine the shares
of the Series into a greater or lesser number of shares so affected. In the
case of a liquidation of the Series, each shareholder of the Series will be
entitled to share, based upon the shareholder's percentage share ownership,
in the distribution out of assets, net of liabilities, of the Series. No
shareholder is liable for further calls or assessment by the Series.
On any matters affecting only one series of the Trust or class of the
Series, only the shareholders of that series or class are entitled to vote. On
matters relating to the Trust but affecting the series
40
differently, separate votes by the affected series or classes are required. With
respect to the submission to shareholder vote of a matter requiring separate
voting by a series or class, the matter shall have been effectively acted upon
with respect to any series or class if a majority of the outstanding voting
securities of that series or class votes for the approval of the matter,
notwithstanding that: (1) the matter has not been approved by a majority of the
outstanding voting securities of any other series or class; and (2) the matter
has not been approved by a majority of the outstanding voting securities of the
Trust.
The Trustees of the Trust do not intend to hold annual meetings of
shareholders of the Series. The SEC, however, requires the Trustees to promptly
call a meeting for the purpose of voting upon the question of removal of any
Trustee when requested to do so by not less than 10% of the outstanding
shareholders of the respective series. In addition, subject to certain
conditions, shareholders of each series may apply to the series to communicate
with other shareholders to request a shareholders' meeting to vote upon the
removal of a Trustee or Trustees.
Prior to October 29, 2001, the Trust is authorized to issue
interests in the Series in three classes of shares: the Brinson Fund-Class I,
the Brinson Fund-Class N and the UBS Investment Funds class of shares. At the
meeting of the Board of Trustees held on May 21, 2001, the Board approved:
(i) the establishment and creation of the Class B shares and Class C shares
of the Series; (ii) the redesignation of the Class I shares of the Series as
the Class Y shares of the Series; and (iii) the abolishment and liquidation
of the UBS Investment Funds class of shares of the Series. The Board approved
the redesignation of the Class N shares of the Series as the Class A shares
of the Series, effective October 29, 2001. Accordingly, effective October 29,
2001, Class I shares of the Series will be redesignated as Class Y shares of
the Series and Class N Shares of the Series will be redesignated as Class A
Shares of the Series. Effective October 26, 2001, the UBS Investment Fund
class of shares of the Series will be liquidated, and all outstanding UBS
Investment Funds shares will be redeemed. Prior to October 29, 2001, Class B
and Class C shares of the Series will not be offered by the Trust.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION AND OTHER
SERVICES
SALES CHARGE REDUCTIONS AND WAIVERS
LETTER OF INTENT. A shareholder may qualify for a reduced sales charge
when the shareholder buys Class A shares, as described in the Prospectus/Proxy
Statement. At any time, a shareholder may file with the Trust a signed
shareholder application with the Letter of Intent section completed. After the
Letter of Intent is filed, each additional investment will be entitled to the
sales charge applicable to the level of investment indicated on the Letter of
Intent. Sales charge reductions are based on purchases in more than one fund and
will be effective only after notification to Brinson Advisors that the
investment qualifies for a discount. A shareholder's holdings in certain fund
shares acquired up to 90 days before the day the Letter of Intent is filed will
be counted towards completion of the Letter of Intent and will be entitled to a
retroactive downward adjustment in the sales charge. Such adjustment will be
made by the purchase of additional shares in an equivalent amount.
Five percent (5%) of the amount of the total intended purchase will be held by
the transfer agent in escrow until the shareholder fulfills the Letter of
Intent. If, at the end of the 13-month period, the shareholder has not met the
terms of the Letter of Intent, an amount of shares equal to the difference owed
will be deducted from his or her account. In the event of a total redemption of
the account before fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the balance
will be forwarded to the shareholder.
If the Letter of Intent contemplated by the purchases are not completed within
the 13-month period, there will be an upward adjustment of the sales charge,
depending on the amount actually purchased during the period. The upward
adjustment will be paid with shares redeemed from your account.
RIGHT OF ACCUMULATION/CUMULATIVE QUANTITY DISCOUNT. A purchaser of
Class A shares may qualify for a cumulative quantity discount by combining a
current purchase (or combined purchases as described above) with certain
other Class A shares already owned in funds for which Brinson Advisors or any
of its affiliates serves as principal underwriter. To determine if a
shareholder qualifies for a reduced front-end sales charge, the amount of the
shareholder's current purchase is added to the cost or current value,
whichever is higher, of the shareholder's other Class A shares as well as
those Class A shares of the shareholder's spouse and children under the age
of 21. If the shareholder is the sole owner of a company, the company
accounts may also be added, including retirement plan accounts invested in
Class A shares of the funds. Companies with one or more retirement plans may
add together the total plan assets invested in Class A shares of the funds to
determine the front-end sales charge that applies.
To qualify for the cumulative quantity discount on a purchase through a
financial institution, when each purchase is made the investor or institution
must provide Brinson Advisors with sufficient information to verify that the
purchase qualifies for the privilege or discount.
WAIVERS OF CONTINGENT DEFERRED 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.
PAYMENTS BY BRINSON ADVISORS -- CLASS Y SHARES. Class Y shares are
sold without sales charges and do not pay ongoing 12b-1 distribution or
service fees. As principal underwriter of the Class Y shares, Brinson
Advisors may, from time to time, make payments out of its own resources to
dealers who sell Class Y shares of funds for which Brinson Advisors or any of
its affiliates serves as principal underwriter to shareholders who buy $10
million or more at any one time.
41
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in
Exhibit B of the Prospectus/Proxy Statement, shares of the Series may be
exchanged for shares of the corresponding class of other series of the Trust
and many other Funds for which Brinson Advisors or one of its affiliates
serves as principal underwriter. Class Y shares are not eligible for exchange.
Shareholders will receive at least 60 days' notice of any termination
or material modification of the exchange privilege, except no notice need be
given if, under extraordinary circumstances, either redemptions are suspended
under the circumstances described below or the Series temporarily delays or
ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the Series' investment objective, policies and
restrictions.
The Trust will satisfy redemption requests in cash to the fullest
extent feasible, so long as such payments would not, in the opinion of Brinson
Partners or the Board, result in the necessity of the Series selling assets
under disadvantageous conditions and to the detriment of the remaining
shareholders of the Series. Pursuant to the Trust's Agreement and Declaration of
Trust, payment for shares redeemed may be made either in cash or in-kind, or
partly in cash and partly in-kind. Under unusual circumstances, when the Board
deems it in the best interest of the Series' shareholders, the Trust may make
payment for shares repurchased or redeemed in whole or in part in securities of
the Series taken at current values. With respect to such redemptions in kind,
the Trust has made an election pursuant to Rule 18f-1 under the Act. This will
require the Trust to redeem in cash at a shareholder's election in any case
where the redemption involves less than $250,000 (or 1% of the Series' net asset
value at the beginning of each 90-day period during which such redemptions are
in effect, if that amount is less than $250,000), during any 90-day period for
any one shareholder. Should payment be made in securities, the redeeming
shareholder may incur brokerage costs in converting such securities to cash.
In-kind payments to non-affiliated shareholders need not constitute a
cross-section of the Series' portfolio. Where a shareholder has requested
redemption of all or a part of the shareholder's investment and where the Series
computes such redemption in-kind, the Series will not recognize gain or loss for
federal tax purposes on the securities used to compute the redemption, but the
shareholder will recognize gain or loss equal to the difference between the fair
market value of the securities received and the shareholder's basis in the
Series shares redeemed. Pursuant to redemption in-kind procedures adopted by the
Board on behalf of the Series, the Trust is permitted to pay redemptions in-kind
to shareholders that are affiliated persons of the Series by nature of a greater
than 5% ownership interest in the Series.
The Series 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 the Series 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 the Series' portfolio at the time.
FINANCIAL INSTITUTIONS. The Series may authorize financial institutions
or their agents, to accept on the Series' behalf purchase and redemption orders
that are in "good form" in accordance with the policies of those institutions.
The Series will be deemed to have received these purchase and redemption orders
when such an institution or its agent accepts them. Like all customer orders,
these orders will be priced based on a Series' net asset value next computed
after receipt of the order by the service organizations or their agents.
42
AUTOMATIC CASH WITHDRAWAL PLAN
The automatic cash withdrawal plan allows investors to set up
monthly, quarterly (March, June, September and December), semi-annual (June
and December) or annual (December) withdrawals from their Brinson mutual fund
accounts. Minimum balances and withdrawals vary according to the class of
shares:
o Class A and Class C shares. Minimum value of Series shares is $5,000; minimum
withdrawals of $100.
o Class B shares. Minimum value of Series shares is $10,000; minimum monthly,
quarterly, and semi-annual and annual withdrawals of $100, $200, $300 and
$400, respectively.
Withdrawals under the automatic cash withdrawal plan will not be
subject to a contingent deferred sales charge if the investor withdraws no
more than 12% of the value of the Series account when the shareholder signed
up for the plan (for Class B shares, annually; for Class A and Class C
shares, during the first year under the plan). Shareholders who elect to
receive dividends or other distributions in cash may not participate in the
plan.
An investor's participation in the automatic cash withdrawal plan
will terminate automatically if the "Initial Account Balance" (a term that
means the value of the Series account at the time the shareholder elects to
participate), less aggregate redemptions made other than pursuant to the
automatic cash withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of the Series concurrent with
withdrawals are ordinarily disadvantageous to shareholders because of tax
liabilities and, for Class A and Class C shares, initial sales charges. On or
about the 20th of a month for monthly, quarterly and semi-annual plans,
Brinson Advisors will arrange for redemption by the Series of sufficient
Series shares to provide the withdrawal payments specified by participants in
the automatic cash withdrawal plan. The payments generally are mailed
approximately five Business Days (defined under "Net Asset Value") after the
redemption date. Withdrawal payments should not be considered dividends, but
redemption proceeds. If periodic withdrawals continually exceed reinvested
dividends and other distributions, a shareholder's investment may be
correspondingly reduced. A shareholder may change the amount of the automatic
cash withdrawal or terminate participation in the automatic cash withdrawal
plan at any time without charge or penalty by written instructions with
signatures guaranteed to Brinson Advisors or the Series' transfer agent,
PFPC. Instructions to participate in the plan, change the withdrawal amount
or terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by PFPC.
Shareholders may request the forms needed to establish a automatic cash
withdrawal plan from their investment professionals or PFPC at 1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-directed IRAs are available in which purchases of shares of
Brinson and PACE 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 Class A, Class B, Class C or Class Y shares of
the Series in a brokerage account transfer their brokerage accounts to
another firm, the Series shares will be moved to an account with PFPC.
However, if the other firm has entered into a selected dealer agreement with
Brinson Advisors relating to the Series, the shareholder may be able to hold
Series shares in an account with the other firm.
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TRANSFER OF SECURITIES
At the discretion of the Trust, investors may be permitted to
purchase Series shares by transferring securities to the Series that meet the
Series' investment objective and policies. Securities transferred to the
Series will be valued in accordance with the same procedures used to
determine the Series' net asset value at the time of the next determination
of net asset value after such acceptance. Shares issued by the Series in
exchange for securities will be issued at net asset value per share of the
Series determined as of the same time. All dividends, interest, subscription,
or other rights pertaining to such securities shall become the property of
the Series and must be delivered to the Series by the investor upon receipt
from the issuer. Investors who are permitted to transfer such securities will
be required to recognize a gain or loss on such transfer and pay tax thereon,
if applicable, measured by the difference between the fair market value of
the securities and the investors' basis therein. Securities will not be
accepted in exchange for shares of the Series unless: (1) such securities
are, at the time of the exchange, eligible to be included in the Series'
portfolio and current market quotations are readily available for such
securities; (2) the investor represents and warrants that all securities
offered to be exchanged are not subject to any restrictions upon their sale
by the Series under the 1933 Act, or under the laws of the country in which
the principal market for such securities exists, or otherwise; and (3) the
value of any such security (except U.S. government securities) being
exchanged, together with other securities of the same issuer owned by the
Series, will not exceed 5% of the Series' net assets immediately after the
transaction.
CONVERSION OF CLASS B SHARES
Class B shares of the Series will automatically convert to Class A
shares of the Series, 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 "Net Asset Value") of the month in which the sixth anniversary
of the initial issuance of those 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 the date of issuance the original Class B
shares of the fund that were exchanged (directly or through the Series of
exchanges) for the Series' Class B shares. 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 of the
Series, or of those of other funds for which Brinson Advisors serves as
investment advisor or investment manager, are 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.
NET ASSET VALUE
The net asset value per share is calculated separately for each class
of the Series. The net asset value per share of a class of the Series is
computed by dividing the value of the assets related to that class of the
Series, less the liabilities related to that class, by the number of shares of
the class of the Series outstanding.
Each class of the Series will bear pro rata all of the common expenses
of the Series. The net asset values of all outstanding shares of each class of
the Series will be computed on a pro rata basis for each outstanding share based
on the proportionate participation in the Series represented by the value of
shares of the Series. All income earned and expenses incurred by the Series will
be borne on a pro rata basis by each outstanding share of a class, based on each
class' percentage in the Series represented by the value of such shares of such
classes, except that none of the shares of a class will incur any of the
expenses under the 12b-1 plan of another class.
44
Portfolio securities are valued and net asset value per share is
determined as of the close of regular trading on the NYSE, which currently is
4:00 p.m. Eastern time on each day the NYSE is open for trading. The Series
reserves the right to change the time at which purchases, redemptions or
exchanges are priced if the NYSE closes at a time other than 4:00 p.m. Eastern
time or if an emergency exists. The NYSE is open for trading on every day (each
such day a "Business Day") except Saturdays, Sundays and the following holidays:
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (day observed), Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and on the preceding Friday or subsequent Monday when any of these
holidays falls on a Saturday or Sunday, respectively.
Portfolio securities listed on a national or foreign securities
exchange are valued on the basis of the last sale on the date the valuation is
made. Securities that are not traded on a particular day or an exchange, are
valued at either (a) the bid price or (b) a valuation within the range
considered best to represent value in the circumstances. Price information on
listed securities is generally taken from the closing price on the exchange
where the security is primarily traded. Other portfolio securities which are
traded in the over-the-counter market are valued at the bid price as long as the
bid price, in the opinion of the Advisor, continues to reflect the value of the
security. Valuations of fixed income and equity securities may be obtained from
a pricing service and/or broker-dealers when such prices are believed to reflect
the fair value of such securities. Use of a pricing service and/or
broker-dealers has been approved by the Board.
Futures contracts are valued at their daily quoted settlement price on
the exchange on which they are traded. Forward foreign currency contracts are
valued daily using the mean between the bid and asked forward points added to
the current exchange rate and an unrealized gain or loss is recorded. The Series
realizes a gain or loss upon settlement of the contracts. Swaps will be priced
at fair value based on (1) swap prices provided by broker-dealers; (2) values,
or estimates of values, of the applicable equity indices and foreign rates
underlying the contracts; and (3) consideration of other relevant factors. A
fund's obligation under a swap agreement will be accrued daily (offset by any
amounts owing to the portfolio) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by the maintenance of a segregated account
consisting of segregated assets. For valuation purposes, foreign securities
initially expressed in foreign currency values will be converted into U.S.
dollar values using WM/Reuters closing spot rates as of 4:00 p.m. London time.
Securities with a remaining maturity of 60 days or less are valued at amortized
cost, which approximates market value. Fixed income securities having a
remaining maturity of over 60 days are valued at market price. Debt securities
are valued on the basis of prices provided by a pricing service, or at the bid
price where readily available, as long as the bid price, in the opinion of the
Advisor, continues to reflect the value of the security. Redeemable securities
issued by open-end investment companies are valued using their respective net
asset values for purchase orders placed at the close of the NYSE. Securities
(including over-the-counter options) for which market quotations are not readily
available and other assets are valued at their fair value as determined in good
faith by or under the direction of the Trustees.
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the NYSE and
values of foreign futures and options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closings of such exchanges and securities markets and the
closing of the NYSE which will not be reflected in the computation of the net
asset value of the Series. If an event materially affecting the value of such
foreign securities occurs during such period, then such securities will be
valued at fair value as determined in good faith by or under the direction of
the Board. Where a foreign securities market remains open at the time that the
Series values its portfolio securities, or closing prices of securities from
that market may not be retrieved because of local time differences or other
difficulties in obtaining such prices at that time, last
45
sale prices in such market at a point in time most practicable to timely
valuation of the Series may be used.
Due to the specific distribution expenses and other costs that will be
allocable to each class, the dividends paid to each class, and related
performance, of the Series may vary. The per share net asset value of the Class
B shares and the Class C shares will generally be lower than that of the Class A
shares and Class Y shares of the Series because of the higher expenses borne by
the Class B shares and Class C shares. It is expected, however, that the net
asset value per share of the two classes will tend to converge immediately after
the payment of dividends, which will differ by approximately the amount of the
service and distribution expenses differential among the classes.
TAXATION
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
2001 TAX ACT. On June 7, 2001, President Bush signed into law the
Economic Growth and Tax Relief Reconciliation Act of 2001. This Tax Act includes
provisions that significantly reduce individual income tax rates, provide for
marriage penalty relief, eliminate phase-outs of the standard deduction and
personal exemptions, provide additional savings incentives for individuals
(generally by increasing the maximum annual contribution limits applicable to
retirement and education savings programs) and provide for limited estate, gift
and generation-skipping tax relief. While these provisions have important tax
impacts on individual shareholders in the Series, their impact on the taxation
of the Series are limited (as discussed in the following paragraphs).
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Series receives income
generally in the form of dividends and interest on its investments. This income,
less expenses incurred in the operation of the Series, constitutes the Series'
net investment income from which dividends may be paid to you. If you are a
taxable investor, any income dividends the Series pays are taxable to you as
ordinary income.
DISTRIBUTIONS OF CAPITAL GAINS.
CAPITAL GAIN DISTRIBUTIONS. The Series may realize capital gains and
losses on the sale or other disposition of its portfolio securities.
Distributions from net short-term capital gains are taxable to you as ordinary
income. Distributions from net long-term capital gains are taxable to you as
long-term capital gains, regardless of how long you have owned your shares in
the Series. Any net capital gains realized by the Series generally are
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the Series.
TAXATION OF FIVE YEAR GAINS
SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in the 10
or 15% individual income tax bracket, capital gain distributions generally are
subject to a maximum rate of tax of 10%. However, if you receive distributions
from the Series' sale of securities held for more than five years, these gains
are subject to a maximum rate of tax of 8%. The Series will inform you in
January of the portion of any capital gain distributions you received for the
previous year that were five year gains qualifying for this reduced rate of tax.
SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a higher
individual income tax bracket (25, 28, 33 or 35% when fully phased-in in the
year 2006), capital gain distributions are generally subject to a
46
maximum rate of tax of 20%. BEGINNING IN THE YEAR 2006, any distributions from
the Series' sale of securities purchased after January 1, 2001 and held for more
than five years will be subject to a maximum rate of tax of 18%.
INVESTMENTS IN FOREIGN SECURITIES
PASS-THROUGH OF FOREIGN TAX CREDITS. The Series may be subject to
foreign withholding taxes on income from certain foreign securities. This, in
turn, could reduce the Series' income dividends paid to you. If more than 50% of
the Series' total assets at the end of a fiscal year is invested in foreign
securities, the Series may elect to pass through to you your pro rata share of
foreign taxes paid by the Series. If this election is made, the Series may
report more taxable income to you than it actually distributes. You will then be
entitled either to deduct your share of these taxes in computing your taxable
income, or to claim a foreign tax credit for these taxes against your U.S.
federal income tax (subject to limitations for certain shareholders). The Series
will provide you with the information necessary to complete your personal income
tax return if it makes this election.
EFFECT OF FOREIGN DEBT INVESTMENTS AND HEDGING ON DISTRIBUTIONS. Most
foreign exchange gains realized on the sale of debt securities are treated as
ordinary income by the Series. Similarly, foreign exchange losses realized on
the sale of debt securities generally are treated as ordinary losses. These
gains when distributed are taxable to you as ordinary income, and any losses
reduce the Series' ordinary income otherwise available for distribution to you.
This treatment could increase or decrease the Series' ordinary income
distributions to you, and may cause some or all of the Series' previously
distributed income to be classified as a return of capital. A return of capital
generally is not taxable to you, but reduces the tax basis of your shares in the
Series. Any return of capital in excess of your basis, however, is taxable as a
capital gain.
PFIC SECURITIES. The Series may invest in securities of foreign
entities that could be deemed for tax purposes to be passive foreign investment
companies (PFICs). When investing in PFIC securities, the Series may
mark-to-market these securities and recognize any gains at the end of its fiscal
and excise (described below) tax years. Deductions for losses are allowable only
to the extent of any current or previously recognized gains. These gains
(reduced by allowable losses) are treated as ordinary income that the Series is
required to distribute, even though it has not sold the securities.
INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS. The
Series will inform you of the amount of your income dividends and capital gain
distributions at the time they are paid, and will advise you of their tax status
for federal income tax purposes shortly after the close of each calendar year.
If you have not owned your Series shares for a full year, the Series may
designate and distribute to you, as ordinary income or capital gains, a
percentage of income that may not be equal to the actual amount of each type of
income earned during the period of your investment in the Series. Distributions
declared in December but paid in January are taxable to you as if paid in
December.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Series has
elected to be treated as a regulated investment company under Subchapter M of
the Code. The Series has qualified as a regulated investment company for its
most recent fiscal year, and intends to continue to qualify during the current
fiscal year. As a regulated investment company, the Series generally will pay no
federal income tax on the income and gains it distributes to you. The Board
reserves the right not to elect or maintain regulated investment company status
for the Series if the Board determines this course of action to be beneficial to
shareholders. In that case, the Series would be subject to federal, and possibly
state,
47
corporate taxes on its taxable income and gains, and distributions to you would
be taxed as ordinary income dividends to the extent of the Series' earnings and
profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS. To avoid federal excise taxes,
the Code requires the Series to distribute to you by December 31 of each year,
at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar
year;
o 98% of its capital gain net income earned during the twelve
month period ending October 31; and
o 100% of any undistributed amounts of these categories of
income or gain from the prior year.
The Series intends to declare and pay these distributions in December
(or to pay them in January, in which case you must treat them as received in
December), but can give no assurances that its distributions will be sufficient
to eliminate all taxes.
REDEMPTION OF SHARES
REDEMPTIONS. Redemptions (including redemptions in kind) and exchanges
of Series shares are taxable transactions for federal and state income tax
purposes. If you redeem your Series shares, or exchange them for shares of a
different Brinson or PACE fund, the Internal Revenue Service requires you to
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, any gain or loss that you realize is a capital gain or loss
and is long-term or short-term, generally depending on how long you have owned
your shares.
TAXATION OF FIVE YEAR GAINS.
o SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in
the 10 or 15% individual income tax bracket, gains from the
redemption of your Series shares generally are subject to a
maximum rate of tax of 10%. However, if you have held your
shares for more than five years, these gains are subject to a
maximum rate of tax of 8%.
o SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a
higher individual income tax bracket (25, 28, 33 or 35% when
fully phased-in), gains from the redemption of your Series
shares generally are subject to a maximum rate of tax of 20%.
BEGINNING IN THE YEAR 2006, any gains from the sale of Series
shares purchased after January 1, 2001, and held for more than
five years will be subject to a maximum rate of tax of 18%.
You may, however, elect to mark your Series shares to market
as of January 2, 2001. If you make this election, any Series
shares that you acquired before this date also will be
eligible for the 18% maximum rate of tax, beginning in 2006.
However, in making the election, you are required to pay tax
on any appreciation in the value of your Series shares as of
January 2, 2001, and to restart your holding period in the
shares as of that date. The election does not apply to Series
shares redeemed on or before January 2, 2002.
REDEMPTIONS AT A LOSS WITHIN SIX MONTHS OF PURCHASE. Any loss incurred
on the redemption or exchange of shares held for six months or less is treated
as a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Series on those shares.
48
WASH SALES. All or a portion of any loss that you realize on the
redemption of your Series shares is disallowed to the extent that you buy other
shares in the Series (through reinvestment of dividends or otherwise) within 30
days before or after your share redemption. Any loss disallowed under these
rules is added to your tax basis in the new shares.
DEFERRAL OF BASIS. If you redeem some or all of your shares in the
Series, and then reinvest the redemption proceeds in the Series or in another
Brinson or PACE fund within 90 days of buying the original shares, the sales
charge that might otherwise apply to your reinvestment may be reduced or
eliminated. In reporting any gain or loss on your redemption, all or a portion
of the sales charge that you paid for your original shares in the Series is
excluded from your tax basis in the shares sold and added to your tax basis in
the new shares.
U.S. GOVERNMENT SECURITIES. The income earned on certain U.S.
government securities is exempt from state and local personal income taxes if
earned directly by you. States also grant tax-free status to mutual fund
dividends paid to you from interest earned on these securities, subject in some
states to minimum investment or reporting requirements that must be met by the
Series. The income on Series investments in certain securities, such as
repurchase agreements, commercial paper and federal agency-backed obligations
(e.g., Government National Mortgage Association (GNMA) or Fannie Mae
securities), generally does not qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. For corporate
shareholders, it is anticipated that a portion of the dividends paid by the
Series will qualify for the dividends-received deduction. You may be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay. The dividends-received deduction is available only
with respect to dividends designated by the Series as qualifying for this
treatment. Qualifying dividends generally are limited to dividends of domestic
corporations. All dividends (including the deducted portion) are included in
your calculation of alternative minimum taxable income.
INVESTMENT IN COMPLEX SECURITIES. The Series may invest in complex
securities that could require it to adjust the amount, timing and/or tax
character (ordinary or capital) of gains and losses it recognizes on these
investments. This, in turn, could affect the amount, timing and/or tax character
of income distributed to you.
For example,
DERIVATIVES. To the extent the Series invests in certain options,
futures, forwards or foreign currency contracts, it could be required to
mark-to-market these contracts and realize any unrealized gains and losses at
its fiscal year end even though it continues to hold the contracts. Under these
rules, gains or losses on the contracts generally would be treated as 60%
long-term and 40% short-term gains or losses, but gains or losses on certain
foreign currency contracts would be treated as ordinary income or losses. In
determining its net income for excise tax purposes, the Series also would be
required to mark-to-market these contracts annually as of October 31 (for
capital gain net income) and December 31 (for taxable ordinary income), and to
realize and distribute any resulting income and gains.
CONSTRUCTIVE SALES. The Series' entry into a short sale transaction or
an option or other contract could be treated as the "constructive sale" of an
"appreciated financial position," causing it to realize gain, but not loss, on
the position.
TAX STRADDLES. The Series' investment in options, futures, forwards, or
foreign currency contracts in connection with certain hedging transactions could
cause it to hold offsetting positions in securities. If the Series' risk of loss
with respect to specific securities in its portfolio is substantially diminished
by the fact that it holds other securities, the Series could be deemed to have
entered into a tax "straddle" or to
49
hold a "successor position" that would require any loss realized by it to be
deferred for tax purposes. Under proposed regulations issued by the Internal
Revenue Service, securities acquired as part of a "hedging transaction" may not
be treated as a capital asset, and any gain or loss on the sale of these
securities would be treated as ordinary income (rather than capital gain) or
loss. These regulations, if ultimately adopted and deemed applicable to the
Series, could apply to any offsetting positions entered into by the Series to
reduce its risk of loss.
SECURITIES PURCHASED AT DISCOUNT. The Series may invest in securities
issued or purchased at a discount, such as zero coupon, step-up or
payment-in-kind (PIK) bonds, that could require it to accrue and distribute
income not yet received. If it invests in these securities, the Series could be
required to sell securities in its portfolio that it otherwise might have
continued to hold in order to generate sufficient cash to make these
distributions.
Each of the investments described above is subject to special tax rules
that could affect the amount, timing and/or tax character of income realized by
the Series and distributed to you.
PERFORMANCE CALCULATIONS
From time to time, performance information, such as yield or total
return, may be quoted in advertisements or in communications to present or
prospective shareholders. Performance quotations represent the Series' past
performance and should not be considered as representative of future results.
The current yield will be calculated by dividing the net investment income
earned per share by the Series during the period stated in the advertisement
(based on the average daily number of shares entitled to receive dividends
outstanding during the period) by the maximum net asset value per share on the
last day of the period and annualizing the result on a semi-annual compounded
basis. The Series' total return may be calculated on an annualized and aggregate
basis for various periods (which periods will be stated in the advertisement).
Average annual return reflects the average percentage change per year in value
of an investment in the Series. Aggregate total return reflects the total
percentage change over the stated period.
To help investors better evaluate how an investment in the Series might
satisfy their investment objectives, advertisements regarding the Series may
discuss yield or total return as reported by various financial publications.
Advertisements may also compare yield or total return to other investments,
indices and averages. The following publications, benchmarks, indices and
averages may be used: Lipper Mutual Fund Performance Analysis; Lipper Fixed
Income Analysis; Lipper Mutual Fund Indices; Morgan Stanley Indices; Lehman
Brothers Treasury Index; Salomon Smith Barney Indices; Dow Jones Composite
Average or its component indices; Standard & Poor's 500 Stock Index or its
component indices; Wilshire Indices; The New York Stock Exchange composite or
component indices; CDA Mutual Fund Report; Weisenberger-Mutual Funds Panorama
and Investment Companies; Mutual Fund Values and Mutual Fund Service Book,
published by Morningstar, Inc.; comparable portfolios managed by the Advisor;
and financial publications, such as Business Week, Kiplinger's Personal Finance,
Financial World, Forbes, Fortune, Money Magazine, The Wall Street Journal,
Barron's, et al., which rate fund performance over various time periods.
The principal value of an investment in the Series will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than their
original cost. Any fees charged by banks or other institutional investors
directly to their customer accounts in connection with investments in shares of
the Series will not be included in the Series' calculations of yield or total
return.
Performance information for the various classes of shares of the Series
will vary due to the effect of expense ratios on the performance calculations.
50
TOTAL RETURN
Current yield and total return quotations used by the Series (and
classes of shares) are based on standardized methods of computing performance
mandated by rules adopted by the SEC. As the following formula indicates, the
average annual total return is determined by multiplying a hypothetical initial
purchase order of $1,000 by the average annual compound rate of return
(including capital appreciation/depreciation and dividends and distributions
paid and reinvested) for the stated period less any fees charged to all
shareholder accounts and annualizing the result. The calculation assumes that
all dividends and distributions are reinvested at the net asset value on the
reinvestment dates during the period. The quotation assumes the account was
completely redeemed at the end of each period and deduction of all applicable
charges and fees. According to the SEC formula:
P(1+T)/n/=ERV
where:
P = a hypothetical initial payment of $1,000,
T = average annual total return,
n = number of years,
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion
thereof).
Based upon the foregoing calculations, the average annual total return
for the Brinson Fund-Class Y shares (formerly Brinson Fund-Class I shares) of
the Series, for the one-year period ended June 30, 2001 and the period September
30, 1997 (performance inception date) through June 30, 2001 was -1.83% and
2.93%, respectively.*
* This Series was reorganized as a series of the Trust on December 18,
1998. The average annual total return calculations also reflect the
performance of the Series while it was a series of the UBS Private
Investor Funds, Inc.
Based on the foregoing calculations, the average annual total return
for the Brinson Fund-Class A shares (formerly Brinson Fund-Class N shares) of
the Series, for the one-year period ended June 30, 2001 and the period December
31, 1998 (commencement of operations) through June 30, 2001 was -2.28% and
0.09%, respectively.
YIELD
As indicated below, current yield is determined by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30-day base periods. According to the SEC formula:
51
Yield = 2[(a-b + 1)/6/ - 1
------------------
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield of the Series may be calculated by dividing the net
investment income per share earned by the Series during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis. The Series' net investment income
per share earned during the period is based on the average daily number of
shares outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS
The Series' financial statements for the fiscal year ended June 30,
2001 and the reports thereon of August 3, 2001, which are contained in the
Series' Annual Report dated June 30, 2001 (as filed with the SEC on August 29,
2001, pursuant to Section 30(b) of the Act and Rule 30b2-1 thereunder (Accession
Number 0000912057-01-530762)) are incorporated herein by reference.
52
CORPORATE DEBT RATINGS APPENDIX A
MOODY'S INVESTORS SERVICE, INC. DESCRIBES CLASSIFICATIONS OF CORPORATE BONDS AS
FOLLOWS:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates the security is in the higher end of its
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates a ranking toward the lower end of the category.
A-1
STANDARD & POOR'S RATINGS GROUP DESCRIBES CLASSIFICATIONS OF CORPORATE BONDS AS
FOLLOWS:
AAA - This is the highest rating assigned by Standard & Poor's Ratings
Group to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong and in the majority of
instances they differ from the AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but presently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC - Debt rated CCC has a current identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest or repay principal.
CC - The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default, or is expected to default upon maturity
or payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
SECONDARY RISKS APPENDIX B
Below are descriptions of the secondary risks of investing in the Series.
DEFINITIONS OF RISKS
COUNTERPARTY RISK
The risk that when the Series engages in repurchase, reverse repurchase,
derivative, when-issued, forward commitment, delayed settlement and securities
lending transactions with another party, it relies on the other party to
consummate the transaction and is subject to the risk of default by the other
party. Failure of the other party to complete the transaction may cause the
Series to incur a loss or to miss an opportunity to obtain a price believed to
be advantageous.
DERIVATIVE RISK
The risk that downward price changes in a security may result in a loss greater
than the Series' investment in the security. This risk exists through the use of
certain securities or techniques that tend to magnify changes in an index or
market.
FOREIGN COUNTRY AND CURRENCY RISKS
The risk that prices of the Series' investments in foreign securities may go
down because of unfavorable foreign government actions, political instability
or the absence of accurate information about foreign issuers. Also, a decline
in the value of foreign currencies relative to the U.S. Dollar will reduce
the value of securities denominated in those currencies. Foreign securities
are sometimes less liquid and harder to value than securities of U.S.
issuers. These risks are more severe for securities of issuers in emerging
market countries.
The World Bank and other international agencies consider a country to be an
"emerging markets" country on the basis of such factors as trade initiatives,
per capita income and level of industrialization. Emerging market countries
generally include every nation in the world except the U.S., Canada, Japan,
Australia, New Zealand and most nations located in Western Europe.
GEOGRAPHIC CONCENTRATION RISK
The risk that if the Series has most of its investments in a single country or
region, its portfolio will be more susceptible to factors adversely affecting
issuers located in that country or region than would a more geographically
diverse portfolio of securities.
PREPAYMENT RISK
The risk that issuers will prepay fixed rate obligations when interest rates
fall, forcing the Series to re-invest in obligations with lower interest rates
than the original obligations.
B-1
PRO FORMA FINANCIAL STATEMENTS
BRINSON HIGH YIELD FUND
PAINEWEBBER HIGH INCOME FUND
PROFORMA PORTFOLIO OF INVESTMENTS
JUNE 30, 2001 (UNAUDITED)
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
Bonds -- 88.43%
U.S. Corporate Bonds -- 84.02%
Acetex Corp.
$1,650,000 8.375%, due 02/01/08 $ 1,509,750 $ 1,509,750
300,000 9.750%, due 10/01/03 $ 298,875 298,875
Adelphia Communications Corp.
400,000 7.875%, due 05/01/09 353,000 353,000
270,000 10.875%, due 10/01/10 273,375 273,375
Advances PCS
100,000 8.500%, due 04/01/08 102,000 102,000
AES Corp.
350,000 9.375%, due 09/15/10 353,500 353,500
Ainsworth Lumber Co., Ltd.
160,000 12.500%, due 07/15/07 147,200 147,200
AirGate PCS, Inc. (c)
500,000 0.000%, due 10/01/09 290,000 290,000
Airplane Pass Through Trust (g)
4,938,500 10.880%, due 05/15/19 3,308,795 3,308,795
Alamosa Delaware, Inc.
300,000 12.500%, due 02/01/11 270,000 270,000
Alamosa PCS Holdings, Inc. (c)
150,000 0.000%, due 02/15/10 69,000 69,000
Allbritton Communications Co.
250,000 9.750%, due 11/30/07 256,875 256,875
Allbritton Communications Co., Series B
250,000 8.875%, due 02/01/08 248,750 248,750
Allegiance Telecom Inc.
1,190,000 12.880%, due 05/15/08 1,047,200 1,047,200
Alliance Gaming Corp.
350,000 10.000%, due 08/01/07 346,500 346,500
Allied Waste North America
350,000 7.875%, due 01/01/09 342,125 342,125
3,000,000 10.00%, due 08/01/019 3,082,500 3,082,500
American Eco Corp.
5,500,000 9.630%, due 05/15/08 (d), (e) 55,000 55,000
American Mobile Satellite Corp.
182,000 12.250%, due 04/01/08 38,220 38,220
American Restaurant Group, Inc., Series B
300,000 11.500%, due 02/15/03 285,000 285,000
American Standard, Inc.
1,000,000 7.380%, due 02/01/08 987,500 987,500
American Tower Corp.
350,000 9.375%, due 02/01/09 326,375 326,375
Ameristar Casino, Inc.
C-1
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
300,000 10.750%, due 02/15/09 313,500 313,500
Amkor Technology, Inc.
150,000 9.250%, due 02/15/08 141,000 141,000
Argo Tech Corp.,
1,500,000 8.630%, due 10/01/07 1,342,500 1,342,500
Argosy Gaming Co.
550,000 10.750%, due 06/01/09 591,250 591,250
Atlantic Express Transportation Corp. (g)
2,398,000 10.750%, due 02/01/04 1,462,780 1,462,780
Aztar Corp.
1,555,000 8.875%, due 05/15/07 557,775 1,012,500 1,570,275
B&G Foods, Inc.
400,000 9.625%, due 08/01/07 338,000 338,000
Ball Corp.
1,000,000 8.250%, due 08/01/08 1,010,000 1,010,000
Bally Total Fitness Corp., Series D
500,000 9.875%, due 10/15/07 496,250 496,250
BE Aerospace, Inc.
160,000 8.875%, due 05/01/11 158,400 158,400
2,000,000 9.500%, due 11/01/08 2,020,000 2,020,000
Bear Island Paper Co. LLC
375,000 10.000%, due 12/01/07 352,500 352,500
Belden & Blake Corp.
515,000 9.875%, due 06/15/07 419,725 419,725
Benedek Communications Corp. (g)
2,000,000 13.250%, due 05/15/06 1,120,000 1,120,000
Blount Inc. (g)
2,250,000 13.000%, due 08/01/09 1,350,000 1,350,000
Boyd Gaming Corp.
15,000 9.500%, due 0715/07 14,550 14,550
Buckeye Cellulose Corp.
1,000,000 8.500%, due 12/15/05 992,500 992,500
Buckeye Technologies Inc.
1,860,000 8.000%, due 10/15/10 1,757,700 1,757,700
Building Materials Corp.
350,000 7.750%, due 07/15/05 213,500 213,500
Calpine Canada Energy Finance Ulc
250,000 8.500%, due 05/01/08 243,740 243,740
Century Communications Corp. (c)
300,000 0.000%, due 01/15/08 140,250 140,250
Chancellor Media Corp.
1,500,000 8.000%, due 11/01/08 1,560,000 1,560,000
Charter Communications Holdings
150,000 0.000%, due 04/01/11 (c) 102,750 102,750
2,500,000 8.250%, due 04/01/07, 144A 2,337,500 2,337,500
150,000 10.000%, due 05/15/11 152,250 152,250
250,000 10.750%, due 10/01/09 263,125 263,125
500,000 10.000%, due 04/01/09 507,500 507,500
Chesapeake Energy Corp.
250,000 7.875%, due 03/15/04 248,125 248,125
250,000 8.125%, due 04/01/11 233,750 233,750
CMS Energy Corp.
300,000 8.500%, due 04/15/11 291,378 291,378
C-2
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
Coast Hotels and Casinos, Inc.
370,000 9.500%, due 04/01/09 378,325 378,325
Coaxial Communications of Central Ohio, Inc.
425,000 10.000%, due 08/15/06 422,875 422,875
Collins & Alkman Corp.
400,000 11.500%, due 04/15/06 378,000 378,000
Constellation Brands, Inc.
275,000 8.000%, due 02/15/08 274,312 274,312
Cross Timbers Oil Co.
300,000 8.750%, due 11/01/09 306,750 306,750
Crown Castle International Corp.
630,000 0.000%, due 05/15/11 (c) 392,175 392,175
150,000 9.000%, due 05/15/11 132,750 132,750
150,000 9.375%, due 08/01/11 135,375 135,375
850,000 10.75%, due 08/01/11 807,500 807,500
CSC Holdings, Inc.
175,000 7.625%, due 04/01/11 166,951 166,951
350,000 7.625%, due 07/15/18 315,311 315,311
175,000 8.125%, due 07/15/09 173,768 173,768
2,050,000 8.130%, due 08/15/09 2,029,234 2,029,234
Cumulus Media, Inc.
355,000 10.375%, due 07/01/08 353,225 353,225
Dayton Superior Corp.
225,000 13.000%, due 06/15/09 225,000 225,000
Del Monte Corp.
425,000 9.250%, due 05/15/11 433,500 433,500
Delco Remy International, Inc.
200,000 8.625%, due 12/15/07 198,000 198,000
200,000 11.000%, due 05/01/09 208,000 208,000
Desa Int'l Inc., (g)
3,000,000 9.880%, due 12/15/07 1,470,000 1,470,000
Dobson Communications Corp., 144A
200,000 10.875%, due 07/01/10 200,000 200,000
Dobson Sygnet Communications, Inc.
250,000 12.250%, due 12/15/08 252,500 252,500
D.R. Horton, Inc.
2,000,000 8.000%, due 02/01/09 1,920,000 1,920,000
Dura Operating Corp.
375,000 9.000%, due 05/01/09 352,500 352,500
Echostar Dbs Corp.
2,750,000 9.375%, due 02/01/09 735,000 1,950,000 2,685,000
eKabel Hessen
125,000 14.500%, due 09/01/10 96,250 96,250
El Paso Energy Partners
300,000 8.500%, due 06/01/11 300,000 300,000
Exodus Communications, Inc.
100,000 11.250%, due 07/01/08 34,500 34,500
540,000 11.625%, due 07/15/10 (g) 36,225 150,075 186,300
Fairchild Semiconductor Corp.
250,000 10.500%, due 02/01/09 243,750 243,750
Fedders North America
600,000 9.375%, due 08/15/07 534,000 534,000
Felcor Lodging
C-3
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
350,000 8.500%, due 06/01/11 334,250 334,250
Fleming Co., Inc.
75,000 10.125%, due 04/01/08 76,875 76,875
125,000 10.625%, due 07/31/07 128,125 128,125
Four M Corp., Series B
425,000 12.000%, due 06/01/06 Series B 416,500 416,500
Fox Sports Network LLC (c)
500,000 0.000%, due 08/15/07 475,000 475,000
Fresenius Medical Care Capital Trust
300,000 7.875%, due 06/15/11 292,500 292,500
Frontiervision Holdings (c)
275,000 0.000%, due 09/15/07 280,500 280,500
2,000,000 11.000%, due 10/15/06 2,070,000 2,070,000
Gaylord Container Corp.
500,000 9.750%, due 06/15/07 315,000 315,000
GEO Specialty Chemicals
250,000 10.125%, due 08/01/08 240,000 240,000
Global Crossing Holdings, Ltd.
2,000,000 9.500%, due 11/15/09 1,550,000 1,550,000
Globix Corp. (g)
2,000,000 12.500%, due 02/01/10 590,000 590,000
Granite Broadcasting Corp.
200,000 10.375%, due 05/15/05 139,000 139,000
Grey Wolf, Inc.
500,000 8.875%, due 07/01/07 500,000 500,000
Hayes Lemmerz International, Inc.
495,000 8.250%, due 12/15/08 346,500 346,500
HCA - The Healthcare Co.
150,000 7.125%, due 06/01/06 148,013 148,013
1,575,000 7.875%, due 02/01/11 252,035 1,336,594 1,588,629
150,000 8.750%, due 09/01/10 159,194 159,194
HMH Properties, Series B
425,000 7.875%, due 08/01/08 408,000 408,000
1,495,000 8.450%, due 12/01/08 1,450,150 1,450,150
Hollinger International Publishing Corp.
600,000 9.250%, due 02/01/07 251,250 353,500 604,750
Hollywood Casino Corp.
175,000 11.250%, due 05/01/07 184,625 184,625
Horseshoe Gaming Holdings
350,000 8.625%, due 05/15/09 350,000 350,000
Horseshoe Gaming LLC, Series B
150,000 9.375%, due 06/15/07 158,250 158,250
Host Marriot, LP
3,150,000 8.380%, 02/15/06 3,079,125 3,079,125
HS Resources Inc.
825,000 9.250%, due 03/15/06 868,313 868,313
Huntsman Corp., 144A
300,000 9.500%, due 07/01/07 165,000 165,000
2,200,000 10.125%, due 07/01/09 2,167,000 2,167,000
Hyperion Telecommunication Inc., (g)
2,000,000 12.000%, due 11/01/07 1,000,000 1,000,000
IMC Global, Inc.
250,000 10.875%, due 06/01/08 248,750 248,750
C-4
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
Insight Communications, Inc.,144A
660,000 0.000%, due 02/15/11 (c) 372,900 372,900
120,000 10.500%, due 11/01/10 126,600 126,600
Integrated Electrical Services, Inc., Series B
325,000 9.375%, due 02/01/09 318,500 318,500
InterAct Electronic Marketing, Inc., 144A (d),(e),(g)
11,830,824 14.000%, due 08/01/03 118,308 118,308
Interep National Radio Sales, Series B
300,000 10.000%, due 07/01/08 252,000 252,000
Intermedia Communications
240,000 0.000%, due 07/15/07 (c) 211,200 211,200
35,000 8.500%, due 01/15/08 34,300 34,300
International Game Technology
465,000 7.875%, due 05/15/04 470,812 470,812
75,000 8.375%, due 05/15/09 76,875 76,875
Intrawest Corp.
250,000 10.500%, due 02/01/10 260,000 260,000
Iron Mountain, Inc.
100,000 8.625%, due 04/01/13 100,750 100,750
2,400,000 8.750%, due 09/30/09 408,000 2,020,000 2,428,000
Jackson Products, Inc., Series B
350,000 9.500%, due 04/15/05 308,000 308,000
JL French Automotive Casting (g)
3,500,000 11.500%, due 06/01/09 1,277,500 1,277,500
Jorgensen (Earle M.) Co.
885,000 9.500%, due 04/01/05 774,375 774,375
K&F Inudstries Inc.
920,000 9.250%, due 10/15/07 945,300 945,300
Kindercare Learning Center, Inc.
1,000,000 9.500%, due 02/15/09 990,000 990,000
KMC Telecom Holdings Inc. (g)
2,000,000 13.500%, due 05/15/09 380,000 380,000
Knology, Inc. (g)
9,595,000 11.875%, due 10/15/07 3,118,375 3,118,375
Lamar Media Co.
200,000 8.625%, due 09/15/07 204,000 204,000
Leap Wireless International, Inc.
200,000 12.500%, due 04/15/10 132,000 132,000
Level 3 Communications, Inc.
600,000 0.000%, due 12/01/08 (c) 153,000 153,000
1,840,000 9.125%, due 05/01/08, 144A 37,350 726,250 763,600
Levi Straus & Co.
150,000 6.800%, due 11/01/03 133,500 133,500
150,000 11.625%, due 01/15/08 135,000 135,000
Liberty Group Operating
400,000 9.375%, due 02/01/08 280,000 280,000
Lifepoint Hospital Holdings, Inc., Series B
250,000 10.750%, due 05/15/09 272,500 272,500
LIN Holdings Corp. (c)
2,950,000 0.000%, due 03/01/08 351,000 1,962,500 2,313,500
LIN Television Corp.
100,000 8.000%, due 01/15/08 96,500 96,500
Loral Space & Communications Ltd.
C-5
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
200,000 9.500%, due 01/15/06 150,000 150,000
Luigino's, Inc.
375,000 10.000%, due 02/01/06 322,500 322,500
Lyondell Chemical Co., Series B
1,400,000 9.875%, due 05/01/07 397,000 997,500 1,394,500
MacDermid, Inc.
110,000 9.125%, due 07/15/11 110,550 110,550
Mail Well Corp., Series B
500,000 8.750%, due 12/15/08 430,000 430,000
Majestic Star Casino LLC, Series B
550,000 10.875%, due 07/01/06 495,000 495,000
Mandalay Resort Group
2,000,000 9.500%, due 08/01/08 2,080,000 2,080,000
McLeod USA, Inc.
450,000 8.125%, due 02/15/09 238,500 238,500
250,000 9.250%, due 07/15/07 145,000 145,000
Mediacom LLC
300,000 7.875%, due 02/15/11 264,000 264,000
275,000 9.500%, due 01/15/13 264,000 264,000
Metal Management, Inc. (d),(e)
5,125,000 10.000%, due 05/15/08 153,750 153,750
Methanex Corp.
300,000 7.400%, due 08/15/02 298,500 298,500
Metromedia Fiber Network (g)
2,740,000 10.000%, due 11/15/09 91,200 962,500 1,053,700
MGM Grand, Inc.
3,200,000 9.750%, due 06/01/07 213,500 3,195,000 3,408,500
MGM Mirage, Inc.
150,000 8.500%, due 09/15/10 155,597 155,597
Millennium America, Inc.
175,000 9.250%, due 06/15/08 174,125 174,125
Motors & Gears, Inc., Series D
450,000 10.750%, due 11/15/06 448,875 448,875
National Wine & Spirits, Inc.
550,000 10.125%, due 01/15/09 556,875 556,875
Nexstar Finance, Inc., LLC
300,000 12.000%, due 04/01/08 312,000 312,000
Nextel Communications, Inc.
120,000 0.000%, due 09/15/07 (c) 84,750 84,750
20,000 9.375%, due 11/15/09 15,850 15,850
275,000 9.500%, due 02/01/11 215,531 215,531
3,000,000 9.950%, due 02/15/08 1,920,000 1,920,000
Nextel International, Inc., 144A
2,550,000 12.750%, due 04/15/08 (g) 714,000 714,000
850,000 12.750%, due 08/01/10 101,500 145,000 246,500
Nextel Partners, Inc.
400,000 11.000%, due 03/15/10 315,000 315,000
Nextmedia Operating Inc.,144A
150,000 10.750%, due 07/01/11 147,765 147,765
Nextlink Communications Inc., (g)
1,125,000 10.750%, due 06/01/09 360,000 360,000
Nortek, Inc.
1,000,000 9.250%, due 03/15/07 985,000 985,000
C-6
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
450,000 9.875%, due 06/15/11 433,125 433,125
Nortex, Inc.
350,000 9.875%, due 03/01/04 355,075 355,075
Northeast Optic (g)
3,000,000 12.750%, due 08/15/08 840,000 840,000
NTL Communications, Inc., Series B (c)
2,400,000 0.000%, due 10/01/08 176,000 1,320,000 1,496,000
NTL, Inc., Series A (c)
350,000 12.750%, due 04/15/05 252,000 252,000
Nuco2, Inc. (d),(g)
5,000,000 12.000%, due 10/31/04 4,500,000 4,500,000
Orion Refining Corp., 144A (d),(g)
3,307,789 10.000%, due 11/15/04 1,157,726 1,157,726
P&L Coal Holdings, Corp.
74,000 8.880%, due 05/15/08 77,700 77,700
1,612,000 9.630%, due 05/15/08 1,712,750 1,712,750
Pacifica Papers, Inc.
355,000 10.000%, due 03/15/09 374,525 374,525
Packaging Corp. of America
250,000 9.625%, due 04/01/09 265,312 265,312
Pantry, Inc.
475,000 10.250%, due 10/15/07 460,750 460,750
Park Place Entertainment Corp.
2,000,000 8.880%, due 09/15/08 2,060,000 2,060,000
Pathnet, Inc. (g)
6,400,000 12.250%, due 04/15/08 448,000 448,000
Paxson Communications Corp.
2,825,000 11.625%, due 10/01/02 328,250 2,531,250 2,859,500
Pegasus Communications Corp., Series B
100,000 9.750%, due 12/01/06 88,000 88,000
300,000 12.500%, due 08/01/07 297,000 297,000
Pegasus Satellite Communications, Inc. (c)
375,000 0.000%, due 03/01/07 217,500 217,500
Penn National Gaming, Inc.
220,000 11.125%, due 03/01/08 228,800 228,800
Phillips-Van Heusen
325,000 9.500%, due 05/01/08 331,500 331,500
Pioneer Natural Resources Co.
360,000 9.625%, due 04/01/10 394,488 394,488
Plains Resources, Inc.
200,000 10.250%, due 03/15/06 204,000 204,000
Plains Resources, Inc., Series B
300,000 10.250%, due 03/15/06 306,000 306,000
Playtex Products, Inc.
225,000 9.375%, due 06/01/11 228,938 228,938
Pogo Producing Co.
300,000 8.250%, due 04/15/11 300,000 300,000
Potlatch Corp.
225,000 10.000%, due 07/15/11 226,125 226,125
Premire Graphics Inc.
4,250,000 11.500%, due 12/01/05 127,500 127,500
Premier Parks, Inc. (c)
175,000 0.000%, due 04/01/08 141,313 141,313
C-7
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
PRIMEDIA, Inc.
250,000 8.875%, due 05/15/11 231,250 231,250
PSI Net Inc. (g)
500,000 11.000%, due 08/01/09 31,250 31,250
R.B. Falcon Corp.
3,750,000 9.500%, due 12/15/08 4,311,262 4,311,262
R.H. Donnelly, Inc.
315,000 9.125%, due 06/01/08 319,725 319,725
Radio One, Inc.
410,000 8.875%, due 07/01/11 410,000 410,000
Radio Unica Communications Corp. (c)
400,000 0.000%, due 08/01/06 224,000 224,000
RCN Corp.
400,000 10.000%, due 10/15/07 168,000 168,000
Remington Product Co. LLC, Series B
250,000 11.000%, due 05/15/06 242,813 242,813
Repap New Brunswick
150,000 9.000%, due 06/01/04 158,250 158,250
Riverwood International Corp.
335,000 10.250%, due 04/01/06 336,675 336,675
200,000 10.875%, due 04/01/08 192,000 192,000
Salem Communications Corp.
650,000 9.500%, due 10/01/07 663,000 663,000
Samsonite Corp.
600,000 10.750%, due 06/15/08 501,000 501,000
SBA Communications Corp.
390,000 0.000%, due 03/01/08 (c) 312,000 312,000
200,000 10.250%, due 02/01/09 183,000 183,000
Sbarro, Inc.
400,000 11.000%, due 09/15/09 412,500 412,500
Sequa Corp.
125,000 8.875%, due 04/01/08 123,750 123,750
175,000 9.000%, due 08/01/09 174,125 174,125
Simmons, Co.
1,500,000 10.250%, due 03/15/09 1,462,500 1,462,500
Sinclair Broadcast Group
400,000 10.000%, due 09/30/05 402,000 402,000
Six Flags, Inc.
300,000 9.500%, due 02/01/09 299,625 299,625
Snyder Oil Corp.
450,000 8.750%, due 06/15/07 477,000 477,000
Spectrasite Holdings, Inc. (c)
440,000 0.000%, due 07/15/08 236,500 236,500
225,000 0.000%, due 04/15/09 103,500 103,500
2,000,000 10.750%, due 03/15/10 1,680,000 1,680,000
Speedway Motorsports, Inc.
350,000 8.500%, due 08/15/07 357,000 357,000
Station Casinos, Inc.
275,000 8.375%, due 02/15/08 276,031 276,031
105,000 9.750%, due 04/15/07 107,625 107,625
3,245,000 9.875%, due 07/01/10 253,881 3,108,750 3,362,631
Stena AB, (g)
1,500,000 8.750%, due 06/15/07 1,350,000 1,350,000
C-8
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (g)
2,000,000 12.380%, due 06/15/06 1,560,000 1,560,000
Superior National Insurance Group (g)
9,000,000 10.750%, due 12/01/17 (d), (e) - - -
T/SF Communications Corp., Series B
250,000 10.375%, due 11/01/07 240,625 240,625
Team Health, Inc.
375,000 12.000%, due 03/15/09 393,750 393,750
Telecorp PCS Inc. (g)
2,000,000 10.630%, due 06/15/10 1,880,000 1,880,000
Telemundo Holdings, Inc. (g)
1,250,000 11.500%, due 08/15/08 987,500 987,500
Tenet Healthcare Corp.
440,000 7.625%, due 06/01/08 447,150 447,150
3,470,000 8.125%, due 12/01/08 3,578,438 3,578,438
Time Warner Telecom, Inc.
275,000 10.125%, due 02/01/11 247,500 247,500
Tommy Hilfiger U.S.A.
325,000 6.500%, due 06/01/03 315,250 315,250
TransWestern Publishing Co., Series D
350,000 9.625%, due 11/15/07 352,625 352,625
TransWestern Publishing Co., Series E, 144A
200,000 9.625%, due 11/15/07 201,500 201,500
Tele1 Europe B.V. (g)
2,000,000 13.000%, due 05/15/09 1,100,000 1,100,000
Triad Hospitals, Inc.
150,000 8.750%, due 05/01/09 152,625 152,625
Triad Hospitals Holdings, Inc.
229,000 11.000%, due 05/15/09 246,747 246,747
Triton PCS, Inc.
625,000 0.000%, due 05/01/08 (c) 503,906 503,906
100,000 9.375%, due 02/01/11 97,000 97,000
UNISYS Corp.
2,000,000 7.880%, due 04/01/08 1,920,000 1,920,000
US Unwired, Inc. (c)
250,000 0.000%, due 11/01/09 122,813 122,813
Versatel Telecom International, (g)
1,000,000 13.250%, due 05/15/08 380,000 380,000
Viatel, Inc. (g)
700,000 12.500%, due 04/15/08 21,000 21,000
Voicestream Wireless Corp.
267,000 10.375%, due 11/15/09 304,380 304,380
Weirton Steel Corp.
200,000 11.375%, due 07/01/04 60,000 60,000
Westpoint Stevens, Inc. (g)
350,000 7.875%, due 06/15/05 136,500 136,500
Williams Scotsman Inc.
2,000,000 9.880%, due 06/01/07 1,900,000 1,900,000
Willis Corroon Corp.
1,000,000 9.000%, due 02/01/09 1,017,500 1,017,500
Winsloew Furniture, Inc., Series B
190,000 12.750%, due 08/15/07 176,225 176,225
Wiser Oil Co.
C-9
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
500,000 9.500%, due 05/15/07 440,000 440,000
XO Communications, Inc. (c)
712,000 0.000%, due 12/01/09 106,800 106,800
Young Broadcasting, Inc.
350,000 10.000%, due 03/01/11 336,000 336,000
Ziff Davis Media, Inc.
300,000 12.000%, due 07/15/10 165,000 165,000
----------------- ----------------- ----------------
Total U.S. Corporate Bonds 51,101,724 113,965,750 165,067,474
----------------- ----------------- ----------------
International Dollar Bonds -- 4.41%
Callahan Nordrhein-Westfalen, 144A
300,000 0.000%, due 07/15/10 (c) 114,000 114,000
800,000 14.000%, due 07/15/10 164,000 486,000 650,000
COLT Telecom Group (c)
1,550,000 0.000%, due 12/15/06 495,000 980,000 1,475,000
Energis PLC
500,000 9.750%, due 06/15/09 435,000 435,000
Global Crossing Holding Ltd.
550,000 9.500%, due 11/15/09 430,375 430,375
Microcell Telecommunications, Inc., Series B (c)
435,000 0.000%, due 06/01/06 321,900 321,900
Norampac, Inc.
150,000 9.500%, due 02/01/08 156,750 156,750
Ono Finance, PLC
175,000 13.000%, due 05/01/09 134,750 134,750
Rogers Communications, Inc.
250,000 9.125%, due 01/15/06 250,000 250,000
TeleWest Communications PLC
3,000,000 9.625%, due 10/01/06 2,490,000 2,490,000
500,000 11.000%, due 10/01/07 421,250 421,250
Tembec Industries, Inc.
500,000 8.500%, due 02/01/11 510,000 510,000
United Pan-Europe Communications NV, Series B
25,000 0.000%, due 02/01/10 (c) 3,750 3,750
225,000 11.500%, due 02/01/10 84,375 84,375
5,375,000 12.500%, due 08/01/09 (g) 1,182,500 1,182,500
----------------- ----------------- ----------------
Total International Dollar Bonds 3,386,400 5,273,250 8,659,650
----------------- ----------------- ----------------
----------------- ----------------- ----------------
Total Bonds (Cost $246,473,166) 54,488,124 119,239,000 173,727,124
----------------- ----------------- ----------------
Equities--2.52%
1,400 Communications & Power Industries Holding Corp., (b), (d), (f) 211,400 211,400
39,639 Communications & Power Industries Holding Corp., (b), (d), (g) 1,545,921 1,545,921
332,221 Earthwatch Inc. (b) 16,611 16,611
13,700 Electronic Retailing Systems Int'l. (b) 137 137
2,000,000 Fresenius Medical Care Capital Trust II (g) 1,960,000 1,960,000
2,218 ICG Holdings Inc. (b) 22,180 22,180
19,500 InterAct Electronic Marketing, Inc. (b) 195 195
39,000 InterAct Systems Inc. (b) 39,000 39,000
16,995 Knology Inc. (b) 170 170
15,750 McCaw Int'l., Ltd. (b), (g) 313,031 313,031
109,290 Nuco2 Inc. (b), (g) 147,542 147,542
6,000 Olympic Financial Ltd. (b) 60 60
1,556 Orion Refining Corp., (b), (d), (f) 23,340 23,340
C-10
COMBINED BRINSON PAINEWEBBER
NUMBER OF HIGH YIELD HIGH INCOME PROFORMA
SHARES/PAR FUND FUND COMBINED
----------------------------------------------------------------------------------------------------------------------------
79,417 PNV Inc. (b) 794 794
74,223 Packaged Ice, Inc., (b), (f) 159,579 159,579
6,275 Pathnet, Inc. (b), (g) 63 63
75 RCN Corp., (b), (d), (f), (g) 411 411
653,157 Samuels Jewelers Inc., (b), (f) 386,058 386,058
61,644 Song Networks Holding AB (b) 126,370 126,370
26,250 WAM! Network Inc. (b), (g) 263 263
5,428 Wate Systems International, Inc., (b), (d), (f) 5,428 5,428
----------------- ----------------- ----------------
Total Equities (Cost $ 28,116,267) - 4,958,553 4,958,553
----------------- ----------------- ----------------
Warrants (b) -- 0.01%
Dayton Superior Corp., 144A,
225 Expires 06/15/09 2,250 2,250
Leap Wireless International, Inc., 144A,
200 Expires 04/15/10 8,000 8,000
Motient Corp., 144A,
182 Expires 04/01/08 137 137
Pliant Corp., 144A,
160 Expires 06/01/10 16 16
UIH Australia Pacific Inc.
10,000 Expires 05/15/06 2,500 2,500
Winsloew Furniture, Inc., 144A,
190 Expires 08/15/07 1,876 1,876
----------------- ----------------- ----------------
Total Warrants (Cost $13,890) 12,279 2,500 14,779
----------------- ----------------- ----------------
Short-Term Investments --5.79%
Money Market Funds -- 0.04%
69,394 Brinson Supplementary Trust
U.S. Cash Management Prime Fund 69,394 69,394
Government Agency--5.75%
$11,297,000 Federal Home Loan Bank Discount Note 11,297,000 11,297,000
3.94%, due 07/02/01
----------------- ----------------- ----------------
Total Short-Term Investments (Cost $11,366,394) 69,394 11,297,000 11,366,394
----------------- ----------------- ----------------
Total Investments
(Cost $285,969,717) -- 96.75% 54,569,797 135,497,052 190,066,849
Cash and other assets, less liabilities -- 3.25% 1,918,769 4,466,826 6,385,595
----------------- ----------------- ----------------
Net Assets -- 100% 56,488,566 139,963,878 196,452,444
================= ================= ================
(b) Non-income producing security
(c) Step-bonds--coupon rate increases in increments to maturity.
Rate disclosed is as of June 30, 2001. Maturity date disclosed
is the ultimate maturity date.
(d) Illiquid Security: is not actively traded. Securities total
$1,786,500 which represents 0.90% of total net assets
(e) Interest on this bond is in default
(f) Common Stock
(g) Security will be sold prior to reorganization
C-11
BRINSON HIGH YIELD FUND
PAINEWEBBER HIGH INCOME FUND
PROFORMA STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2001 (UNAUDITED)
BRINSON
HIGH PW HIGH
YIELD FUND INCOME FUND ADJUSTMENT COMBINED CONVERSION
------------- ------------ ----------- ------------- -------------
ASSETS
Investments in securities, at value (cost -
$58,588,122, $227,381,595 and $ 285,969,717,
respectively) $54,569,797 $135,497,052 $ - $ 190,066,849
Cash - 2,001,830 - 2,001,830
Receivable for investments sold 690,375 - 690,375
Receivable for shares of beneficial interests sold 108,602 13,337 - 121,939
Dividends and interest receivable 1,344,925 3,197,569 - 4,542,494
Other assets - 23,933 - 23,933
------------ ------------ -------------
Total assets 56,713,699 140,733,721 197,447,420
------------ ------------ -------------
LIABILITIES
Payable for investments purchased 147,765 - - 147,765
Payable for shares of beneficial interest repurchased 4,700 383,933 - 388,633
Payable to affiliates 20,519 66,910 - 87,429
Accrued expenses and other liabilities 52,149 319,000 - 371,149
------------ ------------ -------------
Total liabilities 225,133 769,843 - 994,976
------------ ------------ -------------
NET ASSETS 56,488,566 139,963,878 - 196,452,444
Common Stock/Beneficial interest shares of $0.001
par value outstanding 68,065,237 468,801,196 - 536,866,433
Accumulated undistributed net investment income 1,891,428 664,845 - 2,556,273
Accumulated net realized losses from investment
transactions (9,449,774) (237,617,620) - (247,067,394)
Net unrealized appreciation (depreciation) of
investments (4,018,325) (91,884,543) - (95,902,868)
------------ ------------ -------------
Net assets applicable to shares outstanding $56,488,566 $139,963,878 - $ 196,452,444
============ ============ =============
CLASS I:
Net assets $54,559,659 (54,559,659) - -
------------ ------------ ------------- -----------
Shares outstanding 6,910,214 - (6,910,214) - -
------------ ------------ ------------- -----------
Net asset value and offering price per share $ 7.90 $ - -
============ ============ ============= ===========
CLASS N:
Net assets $ 1,000 $ (1,000) $ - -
------------ ------------ ------------- -----------
Shares outstanding 127 - (127) - -
------------ ------------ ------------- -----------
Net asset value and offering price per share $ 7.87 $ - - -
============ ============ ============= ===========
CLASS UBS:*
Net assets $ 1,927,907 $ - $(1,927,907) - -
------------ ------------ ------------- -----------
Shares outstanding 244,678 - (244,678) - -
------------ ------------ ------------- -----------
Net asset value and offering price per share $ 7.88 $ - -
============ ============ ============= ===========
CLASS A:
Net assets $ - $ 89,548,445 $ 1,000 $ 89,549,445 $89,548,445
------------ ------------ ------------- -----------
Shares outstanding - 24,760,685 127 11,378,583 11,372,653
------------ ------------ ------------- -----------
Net asset and redemption value per share $ - $ 3.62 $ 7.87 $ 7.87
============ ============ ============= ===========
Maximum offering price per share
(net asset value plus sales charge of 4.0% of offering
price) $ - $ 3.77 $ 8.20 $ 8.20
============ ============ ============= ===========
CLASS B:
Net assets $ - $ 24,762,647 - 24,762,647 24,762,647
------------ ------------ ------------- -----------
Shares outstanding - 6,852,536 - 3,136,295 3,136,295
------------ ------------ ------------- -----------
Net asset value and offering price per share $ - $ 3.61 - $ 7.90 7.90
============ ============ ============= ===========
CLASS C:
Net assets $ - $ 25,271,509 - $ 25,271,509 $25,271,509
------------ ------------ ------------- -----------
Shares outstanding - 6,978,294 - 3,200,745 3,200,745
------------ ------------ ------------- -----------
Net asset value and offering price per share $ - $ 3.62 - $ 7.90 7.90
============ ============ ============= ===========
C-12
BRINSON
HIGH PW HIGH
YIELD FUND INCOME FUND ADJUSTMENT COMBINED CONVERSION
------------- ------------ ----------- ------------- -------------
CLASS Y:
Net assets $ - $ 381,277 54,559,659 $ 54,940,936 381,277
------------ ------------ ------------- -----------
Shares outstanding - 105,495 6,910,214 6,958,504 48,290
------------ ------------ ------------- -----------
Net asset value and offering price per share $ - $ 3.61 (2,172,585) $ 7.90 $ 7.90
============ ============ ============= ===========
* UBS CLASS WILL BE LIQUIDATED
See accompanying notes to proforma financial statements
C-13
BRINSON HIGH YIELD FUND
PAINEWEBBER HIGH INCOME FUND
PROFORMA STATEMENT OF OPERATIONS
JUNE 30, 2001 (UNAUDITED)
BRINSON HIGH PW HIGH
YIELD FUND INCOME FUND ADJUSTMENTS COMBINED
---------------- -------------- --------------- ------------
INVESTMENT INCOME:
Interest $ 5,703,323 $ 23,431,945 -- $ 29,135,268
Dividend 0 78,750 -- 78,750
------------ ------------ ------------ ------------
5,703,323 23,510,695 -- 29,214,018
------------ ------------ ------------ ------------
EXPENSES:
Investment advisory and administration 317,198 921,173 184,235 (a) 1,422,606
Shareholder distribution and servicing fees 18,100 884,074 (11,727) (d) 890,447
Transfer agency and service 396 249,554 (570) (b) 249,380
Directors' fees 4,380 14,863 (12,043) (b) 7,200
Legal and audit 44,413 79,215 (50,303) (b) 73,325
Reports and notices to shareholders 38,450 42,322 (12,116) (b) 68,656
Federal and state registration fees 32,974 41,805 (32,974) (b) 41,805
Custody and accounting 3,822 92,117 (91,028) (b) 4,911
Other expenses 28,520 57,992 (29,668) (b) 56,844
------------ ------------ ------------ ------------
488,253 2,383,115 (56,194) 2,815,174
Less: fee waivers and reimbursements from
investment adviser (89,950) -- (180,986)(c) (270,936)
------------ ------------ ------------
Net expenses 398,303 2,383,115 (237,180) 2,544,238
------------ ------------ ------------ ------------
Net investment income 5,305,020 21,127,580 237,180 26,669,780
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT TRANSACTIONS:
Net realized gains (losses) from
investment transactions (5,794,063) (252,307,082) -- (258,101,145)
Net change in unrealized appreciation
(depreciation) of investments (487,323) (110,204,025) -- (110,691,348)
------------ ------------ ------------ ------------
Net realized and unrealized gains (losses)
from investment activities (6,281,386) (362,511,107) -- (368,792,493)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations $ (976,366) $(341,383,527) $ 237,180 $(342,122,713)
============ ============ ============ ============
------------------
(a) Reflects increase in fees resulting from higher fee schedule, before
waivers, of $270,936
(b) Reflects the anticipated savings of the merger.
(c) Reflects increase in waiver due to additional assets
(d) Reflects the liquidation of the UBS Class
See accompanying notes to proforma financial statements
C-14
BRINSON HIGH YIELD FUND
PAINEWEBBER HIGH INCOME FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)
Basis of Presentation:
Subject to the approval of the Plan of Reorganization by the shareholders of
PaineWebber High Income Fund (the "High Income Fund"), Brinson High Yield Fund
(the "High Yield Fund") would acquire substantially all of the assets, subject
to the liabilities, of the High Income Fund in exchange solely for shares of the
High Yield Fund that correspond to the outstanding shares of the High Income
Fund. The number of shares to be received would be based on the relative net
asset value of the High Yield Fund's shares on the effective date of the Plan of
Reorganization and the High Income Fund will be terminated as soon as
practicable thereafter.
The pro forma financial statements reflect the financial position of the High
Yield Fund at June 30, 2001, the High Income Fund at June 30, 2001 and the
combined results of operations of High Yield Fund and High Income Fund
(collectively, the "Fund") as of and for the twelve months ended June 30, 2001.
As a result of the Plan of Reorganization, the investment advisory and
administration agreement fee will increase due to the higher fee schedule, gross
of waivers, of the High Yield Fund. However, after anticipated savings in other
expenses of the Fund, the shareholders of the High Income Fund will not
experience an increase in total expenses. Both the High Income Fund and the High
Yield Fund currently pay Rule 12b-1 distribution or service fees. Other fixed
expenses will be reduced due to the elimination of duplicative expenses. In
addition, the pro forma statement of assets and liabilities has not been
adjusted as a result of the proposed transaction because such adjustment would
not be material. It is estimated that the cost of approximately $184,000
associated with the merger will be paid by Brinson Advisors, Inc. ("Brinson"),
an indirect wholly owned asset management subsidiary of UBS AG and
administrator and distributor of the Fund, so that the High Income Fund and the
High Yield Fund will bear no expenses of the reorganization. These costs are not
included in the pro forma statement of operations.
The pro forma financial statements are presented for the information of the
reader and may not necessarily be representative of what the actual combined
financial statements would have been had the Plan of Reorganization occurred
July 1, 2001. The pro forma financial statements should be read in conjunction
with the historical financial statements of the High Income Fund and High Yield
Fund included in their annual reports dated November 30, 2000 and June 30, 2001,
respectively, and incorporated by reference in the applicable statement of
additional information.
Significant Accounting Policies:
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles that requires the use of management accruals and
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. The following is a summary of significant
accounting policies followed by the Fund.
VALUATION OF INVESTMENTS- Securities for which market quotations are readily
available are valued at the last available sales price on the exchange or market
on which they are principally traded, or lacking any sales, at the last
available bid price on the exchange or market on which such securities are
principally traded. U.S. equity securities traded over-the-counter are valued at
the most recent bid price. Investments in affiliated investment companies are
valued at the daily closing net asset value of the Fund. Debt
C-15
securities are valued at the most recent bid price by using market quotations or
independent pricing services. Securities for which market quotations are not
readily available, including restricted securities, which are subject to
limitations on their sale, are valued at fair value as determined in good faith
by or under the direction of the Trust's Board of Trustees.
C-16
[To be Inserted]
[The Annual Report of the Brinson Fund for the fiscal year ended June 30, 2001
as previously filed via EDGAR is incorporated herein by reference and will be
mailed to any shareholder who requests this SAI.]
[To be Inserted]
[The Annual Report of PaineWebber Fund for the fiscal year ended November 30,
2000 as previously filed via EDGAR is incorporated herein by reference and
will be mailed to any shareholder who requests this SAI.]