As filed with the Securities and Exchange Commission on April 29, 1997
1933 Act Registration No. ________
1940 Act Registration No. 811-7757
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ________ [ ]
Post-Effective Amendment No. _______ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ______
PAINEWEBBER SELECT FUND
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, Esq.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, Esq.
ALYSSA ALBERTELLI, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of
1940, an indefinite number of shares of beneficial interest is being registered
by this Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PAINEWEBBER SELECT FUND
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PAINEWEBBER SELECT FUND:
Form N-1A Cross Reference Sheet
PART A ITEM NO. AND CAPTION PROSPECTUS CAPTION
--------------------------- ------------------
1. Cover Page Cover Page
2. Synopsis The Select Portfolios at a Glance; Expense
Table
3. Condensed Financial Performance
Information
4. General Description of The Select Portfolios at a Glance;
Registrant Investment Objectives & Policies;
Investment Philosophy & Process; The
Underlying Funds' Investments; General
Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other Cover Page; Flexible Pricing; Dividends
Securities & Taxes; General Information
7. Purchase of Securities Being Flexible Pricing; How to Buy Shares;
Offered Other Services; Determining the Shares'
Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
PART B ITEM NO. AND CAPTION STATEMENT OF ADDITIONAL
INFORMATION CAPTION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Other Information
History
13. Investment Objective and Select Portfolios - Investment Policies
Policies and Restrictions; Underlying Funds -
Investment Policies; Underlying Funds -
Hedging and Other Strategies Using
Derivative Contracts; Portfolio
Transactions
14. Management of the Fund Trustees and Officers; Principal Holders
of Securities
15. Control Persons and Principal Trustees and Officers; Principal Holders
Holders of Securities of Securities
16. Investment Advisory and Investment Advisory and Distribution
Other Services Arrangements
17. Brokerage Allocation Portfolio Transactions
<PAGE>
18. Capital Stock and Other Conversion of Class B Shares; Other
Securities Information
19. Purchase, Redemption and Reduced Sales Charges, Additional
Pricing of Securities Being Exchange and Redemption Information and
Offered Other Services; Valuation of Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution
Arrangements
22. Calculation of Performance Performance Information
Data
23. Financial Statements To Be Supplied
PART C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED April 29, 1997
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PAINEWEBBER SELECT PORTFOLIOS
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
PROSPECTUS - _______________, 1997
- ------------------------------------------------------------------------------
The PaineWebber Select Portfolios seek to achieve their investment objectives by
investing in a number of other PaineWebber mutual funds. The Select Portfolios
are newly organized and have no operating history.
SELECT AGGRESSIVE GROWTH PORTFOLIO seeks long-term capital appreciation
by investing the majority of its assets in aggressive equity mutual
funds.
SELECT GROWTH PORTFOLIO seeks long-term capital appreciation by
investing the majority of its assets in equity mutual funds that invest
in larger, more established companies.
SELECT MODERATE PORTFOLIO seek high total return with low volatility by
investing its assets in a combination of equity and fixed income mutual
funds.
SELECT CONSERVATIVE PORTFOLIO seeks a combination of income and growth,
with preservation of capital as a primary goal, by investing the
majority of its assets in fixed income mutual funds.
This Prospectus concisely sets forth information that a prospective investor
should know about the Select Portfolios before investing. Please read it
carefully and retain a copy of this Prospectus for future reference.
A Statement of Additional Information dated _____________, 1997 has been filed
with the Securities and Exchange Commission and is legally part of this
Prospectus. The Statement of Additional Information can be obtained without
charge, and further inquiries can be made, by contacting an individual Fund,
your investment executive at PaineWebber or one of its correspondent firms or by
calling toll-free 1-800-647-1568.
This Prospectus offers Class A, Class B, Class C and Class Y shares. The Class Y
shares are currently offered for sale only to limited groups of investors. See
"How to Buy Shares."
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE SELECT PORTFOLIOS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED
ANYONE TO PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS
IS NOT AN OFFER TO SELL SHARES OF THE SELECT PORTFOLIOS IN ANY JURISDICTION
WHERE THE SELECT PORTFOLIOS OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE
SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY.
Prospectus Page 1
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
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TABLE OF CONTENTS
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PAGE
The Select Portfolios At A Glance.........................................3
Expense Table.............................................................6
Investment Objectives & Policies.........................................10
Investment Philosophy & process..........................................19
Performance..............................................................20
The Underlying Funds' Investments........................................21
Flexible Pricing(SERVICEMARK)............................................29
How To Buy Shares........................................................33
How To Sell Shares.......................................................35
Other Services...........................................................35
Management...............................................................36
Determining The Shares' Net Asset Value..................................38
Dividends & Taxes........................................................38
General Information......................................................41
Prospectus Page 2
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PaineWebber Aggressive Growth Moderate Conservative
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THE SELECT PORTFOLIOS AT A GLANCE
- --------------------------------------------------------------------------------
The PaineWebber Select Portfolios are managed so that each Select Portfolio can
serve as a complete investment program or as a core part of a larger portfolio.
The Select Portfolios are intended as a simple and efficient approach to helping
investors meet retirement and other long-term goals and are not market timing
vehicles.
Each Select Portfolio invests in a number of PaineWebber mutual funds
("Underlying Funds") suited to the Select Portfolio's particular investment
objective. The allocation of a Select Portfolio's assets among Underlying Funds
is determined by using fundamental and quantitative analysis. The allocation of
each Select Portfolio's assets is adjusted infrequently and only within
predetermined ranges that attempt to maintain broad diversification. As a
result, under normal conditions, there should be no sudden large-scale changes
in the allocation of a Select Portfolio's investments among Underlying Funds
When selling shares, investors should be aware that they may get more or less
for their shares than they originally paid for them. As with any mutual fund,
there is no assurance that the Select Portfolios will achieve their goals.
SELECT AGRESSIVE GROWTH PORTFOLIO
GOAL: To increase the value of an investment by investing the majority of
its assets in aggressive equity mutual funds.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
WHO SHOULD INVEST: Investors in their accumulation years, who can withstand
greater volatility in the equity market in return for potentially high
returns.
SELECT GROWTH PORTFOLIO
GOAL: To increase the value of an investment by investing the majority of
its assets in equity mutual funds consisting of larger, more established
companies.
INVESTMENT OBJECTIVE: Long-term capital appreciation.
WHO SHOULD INVEST: Investors seeking growth of capital and high potential
return, yet who are not willing to withstand the greater volatility
associated with a more aggressive portfolio.
SELECT MODERATE PORTFOLIO
GOAL: To increase the value of an investment by investing its assets in a
combination of equity and fixed income mutual funds.
INVESTMENT OBJECTIVE: High total return with low volatility.
WHO SHOULD INVEST: Investors who may anticipate a time when they will need
income from their investments but currently seek continued growth of capital and
therefore have both growth and preservation of capital as equal investment
goals.
SELECT CONSERVATIVE PORTFOLIO
GOAL: To provide current income and growth by investing the majority of its
assets in fixed income mutual funds.
INVESTMENT OBJECTIVE: Seeks a combination of income and growth, with
preservation of capital as a primary goal.
WHO SHOULD INVEST: Investors who need income from their investments and
want to keep pace with inflation.
RISKS
The performance of a Select Portfolio will directly reflect the investment
performance of the Underlying Funds it holds. As a result, the Select
Portfolios' ability to meet their investment objectives depends on the
allocation of their assets among the various Underlying Funds and the ability of
Prospectus Page 3
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
those Underlying Funds to meet their investment objectives. An investment in a
Select Portfolio is subject to all the risks of an investment directly in the
Underlying Funds it holds. These risks are discussed under "The Underlying
Funds' Investments," and some of the more significant risks are summarized
below. Investors may lose money by investing in a Select Portfolio; an
investment is not guaranteed.
All the Select Portfolios hold Underlying Funds that invest primarily in equity
securities, although the specific Underlying Funds and the percentage of a
Select Portfolio's assets invested varies among the Select Portfolios. Equity
securities historically have shown greater growth potential than other types of
securities, but they have also shown greater volatility. Some Underlying Funds
are subject to the special risks of investing in foreign equity securities,
which include possible adverse political, social and economic developments
abroad and differing characteristics of foreign economies and markets. These
risks are greater with respect to securities of issuers located in emerging
markets.
All the Select Portfolios hold Underlying Funds that invest primarily in bonds,
although the specific Underlying Funds and the percentage of a Select
Portfolio's assets invested in the Underlying Funds varies among the Select
Portfolios. Bonds are subject to interest rate and credit risk. Interest rate
risk is the risk that interest rates will rise and bond prices will fall,
lowering the value of the Underlying Fund's investments. Credit risk is the risk
that adverse changes in economic conditions will affect an issuer's ability to
pay interest and principal. Some Underlying Funds may invest in foreign bonds,
which include possible adverse political, social and economic developments
abroad and differing characteristics of foreign economies and markets. These
risks are greater with respect to securities of issuers located in emerging
markets. Some Underlying Funds may invest in bonds rated below investment grade,
which are subject to greater risks of default or price fluctuation than
investment grade bonds and are considered predominantly speculative.
Each Select Portfolio is a non-diversified fund as defined in the Investment
Company Act of 1940 ("1940 Act"), because it invests in a limited number of
Underlying Funds. However, all the Underlying Funds other than PaineWebber
Global Income Fund and PaineWebber Strategic Income Fund are diversified funds.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser and administrator of the Select Portfolios.
Mitchell Hutchins also is the investment adviser and administrator of the
Underlying Funds other than PaineWebber Cashfund, which it serves as sub-adviser
and sub-administrator. Mitchell Hutchins has appointed sub-advisers for certain
Underlying Funds. PaineWebber serves as investment adviser and administrator for
PaineWebber Cashfund.
MINIMUM INVESTMENT
To open an account, investors must invest $1,000; to add to an account,
investors need only invest $100.
HOW TO PURCHASE SHARES OF THE SELECT PORTFOLIOS
Investors may choose among these classes of shares:
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 4.5% (4% for Select Conservative Portfolio) of the public
offering price. Although investors pay an initial sales charge when they buy
Class A shares, the ongoing expenses for this class are lower than the ongoing
expenses of Class B and Class C shares.
CLASS B SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class B shares. As a result, 100% of their purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
Prospectus Page 4
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
shares. Depending upon how long they own the shares, investors may have to pay a
sales charge when they sell Class B shares. This sales charge is called a
"contingent deferred sales charge" and applies when investors sell their Class B
shares within six years after purchase. After six years, Class B shares convert
to Class A shares, which have lower ongoing expenses and no contingent deferred
sales charge.
CLASS C SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class C shares. As a result, 100% of their purchase is immediately
invested. However, Class C shares have higher ongoing expenses than Class A
shares. A contingent deferred sales charge of 1% (0.75% for Select Conservative
Portfolio) is charged on shares sold within one year of purchase. Class C shares
never convert to another class of shares.
CLASS Y SHARES
The price is the net asset value. Investors do not pay an initial sales charge
when they buy Class Y shares. As a result, 100% of their purchase is immediately
invested. Investors also do not pay a contingent deferred sales charge when they
sell Class Y shares. Class Y shares are currently offered for sale only to a
limited group of investors.
Prospectus Page 5
<PAGE>
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
EXPENSE TABLE
- ------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in the Class A, Class B, Class C and Class Y
shares of the Select Portfolios. Expenses shown below are estimated.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of 4.50%(1) None None None
offering price).........................................
Sales Charge on Reinvested Dividends (as a % of offering None None None None
price)..................................................
Maximum Contingent Deferred Sales Charge (as a % of offering
price or net asset value at the time of sale, whichever None 5% 1%(2) None
is less)................................................
Exchange Fees................................................ None None None None
- -----------------
</TABLE>
(1) 4.00% for Select Conservative Portfolio
(2) 0.75% for Select Conservative Portfolio
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (as a % of average net assets)
SELECT AGGRESSIVE GROWTH PORTFOLIO
<S> <C> <C> <C> <C>
Management Fees.............................................. _.__% _.__% _.__% _.__%
12b-1 Fees................................................... 0.25 1.00 1.00 None
Other Expenses............................................... None None None None
Total Operating Expenses.....................................
SELECT GROWTH PORTFOLIO
Management Fees.............................................. _.__% _.__% _.__% _.__%
12b-1 Fees................................................... 0.25 1.00 1.00 None
Other Expenses............................................... None None None None
Total Operating Expenses.....................................
SELECT MODERATE PORTFOLIO
Management Fees.............................................. _.__% _.__% _.__% _.__%
12b-1 Fees................................................... 0.25 1.00 1.00 None
Other Expenses............................................... None None None None
Total Operating Expenses.....................................
SELECT CONSERVATIVE PORTFOLIO
Management Fees.............................................. _.__% _.__% _.__% _.__%
12b-1 Fees................................................... 0.25 1.00 0.75 None
Other Expenses............................................... None None None None
Total Operating Expenses.....................................
</TABLE>
==============================================================================
CLASS A SHARES: Sales charge waivers and a reduced sales charge purchase
plan are available. Purchases of $1 million or more are not subject to an
initial sales charge. However, if such shares are sold by the shareholder
within one year after purchase, a contingent deferred sales charge of 1% of
the offering price or the net asset value of the shares at the time of sale,
whichever is less, is imposed.
CLASS B SHARES: Sales charge waivers are available. The maximum 5%
contingent deferred sales charge applies to sales of shares during the first
year after purchase. The charge generally declines by 1% annually, reaching
zero after six years.
CLASS C SHARES: If shares are sold by the shareholder within one year after
purchase, a contingent deferred sales charge of 1% (0.75% for Select
Conservative Portfolio) of the offering price or the net asset value of the
shares at the time of sale, whichever is less, is imposed.
CLASS Y SHARES: No initial or contingent deferred sales charge is imposed, nor
are Class Y shares subject to 12b-1 distribution or service fees.
================================================================================
Prospectus Page 6
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
12b-1 distribution fees are asset-based sales charges. Long-term Class
B and Class C shareholders may pay more in direct and indirect sales charges
(including 12b-1 distribution fees) than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. 12b-1 fees have two components, as follows:
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
12b-1 services fees................... 0.25% 0.25% 0.25% None
12b-1 distribution fees............... 0.00% 0.75% 0.75%(1) None
- ------------------------------
(1) 0.50% for Select Conservative Portfolio
For more information, see "Management" and "Flexible Pricing(SERVICEMARK)."
The following table shows the expense ratios applicable to Class Y shareholders
of the Underlying Funds, based on estimated operating expenses for the current
fiscal year. The Select Portfolios invest only in Class Y shares of the
Underlying Funds and, accordingly, pay no sales load or 12b-1 service or
distribution fees in connection with these investments. The Select Portfolios,
however, indirectly bear their pro rata share of the fees and expenses
applicable to Class Y shareholders of the Underlying Funds. As a result, the
investment returns of each Select Portfolio will reflect the expenses of the
Underlying Funds that it holds.
- --------------------------------------------------------------------------------
UNDERLYING PAINEWEBBER FUND EXPENSE RATIO OF CLASS
Y SHARES
- --------------------------------------------------------------------------------
PAINEWEBBER GLOBAL FUNDS
PaineWebber Asia Pacific Growth Fund 2.02%
PaineWebber Emerging Markets Equity Fund 2.19%
PaineWebber Global Equity Fund 1.17%
PaineWebber Global Income Fund 0.96%
PAINEWEBBER STOCK FUNDS
PaineWebber Capital Appreciation Fund 1.33%
PaineWebber Financial Services Growth Fund 1.12%
PaineWebber Growth Fund 1.02%
PaineWebber Growth and Income Fund 0.88%
PaineWebber Small Cap Fund 1.72%
PaineWebber Utility Income Fund 1.19%
PAINEWEBBER ASSET ALLOCATION FUNDS
PaineWebber Balanced Fund 1.09%
PaineWebber Tactical Allocation Fund 0.95%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 0.68%
PaineWebber Investment Grade Income Fund 0.70%
PaineWebber Low Duration U.S. Government Income Fund 0.90%
PaineWebber Strategic Income Fund 1.49%
PaineWebber U.S. Government Income Fund 0.68%
PAINEWEBBER MONEY MARKET FUNDS
PaineWebber Cashfund (1) 0.60%
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(1) PaineWebber Cashfund offers only one class of shares but does not charge
any sales load or 12b-1 service fees or distribution fees.
Prospectus Page 7
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
The following table shows the estimated approximate aggregate expense ratios of
each Select Portfolio (that is, the expense ratios of the Select Portfolio and
those of the Class Y shares of the Underlying Funds), based on a weighted
average of the Class Y expense ratios of the Underlying Funds in which each
Select Portfolio is expected to invest at the commencement of its operations.
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PAINEWEBBER SELECT PORTFOLIO AGGREGATE EXPENSE RATIO
- --------------------------------------------------------------------------------
Select Aggressive Growth Portfolio
Class A
Class B
Class C
Class Y
Select Growth Portfolio
Class A
Class B
Class C
Class Y
Select Moderate Portfolio
Class A
Class B
Class C
Class Y
Select Conservative Portfolio
Class A
Class B
Class C
Class Y
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EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various
costs and expenses incurred as shareholders of a Select Portfolio. These
expenses include the estimated expenses of the Underlying Funds. The assumed 5%
annual return shown in the examples is required by regulations of the Securities
and Exchange Commission ("SEC") applicable to all mutual funds. THESE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES OF A SELECT PORTFOLIO MAY BE MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly,
on a $1,000 investment in a Select Portfolio, assuming a 5% annual return:
SELECT AGGRESSIVE GROWTH PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
Class A......................................................$ $
Class B (Assuming sale of all shares at end of period).......$ $
Class B (Assuming no sale of shares).........................$ $
Class C (Assuming sale of all shares at end of period).......$ $
Class C (Assuming no sale of shares).........................$ $
Class Y......................................................$ $
Prospectus Page 8
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PaineWebber Aggressive Growth Moderate Conservative
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SELECT GROWTH PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
Class A.....................................................$ $
Class B (Assuming sale of all shares at end of period)......$ $
Class B (Assuming no sale of shares)........................$ $
Class C (Assuming sale of all shares at end of period)......$ $
Class C (Assuming no sale of shares)........................$ $
Class Y.....................................................$ $
SELECT MODERATE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
Class A....................................................$ $
Class B (Assuming sale of all shares at end of period).....$ $
Class B (Assuming no sale of shares).......................$ $
Class C (Assuming sale of all shares at end of period).....$ $
Class C (Assuming no sale of shares).......................$ $
Class Y....................................................$ $
SELECT CONSERVATIVE PORTFOLIO
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
Class A.................................................... $ $
Class B (Assuming sale of all shares at end of period)..... $ $
Class B (Assuming no sale of shares)....................... $ $
Class C (Assuming sale of all shares at end of period)..... $ $
Class C (Assuming no sale of shares)....................... $ $
Class Y.................................................... $ $
ASSUMPTIONS MADE IN THE EXAMPLES
o ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain the
same for the years shown.
o CLASS A SHARES: Deduction of the maximum 4.5% (4.0% for the Select
Conservative Portfolio) initial sales charge at the time of purchase.
o CLASS B SHARES: Deduction of the maximum applicable contingent deferred
sales charge at the time of sale, which declines over a period of six
years.
o CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.
Prospectus Page 9
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PaineWebber Aggressive Growth Moderate Conservative
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INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The investment objectives of the Select Portfolios may not be changed without
shareholder approval. Each Select Portfolio seeks to achieve its investment
objective by investing within specified ranges among certain Underlying Funds.
Each Select Portfolio seeks to maintain different allocations between Underlying
Funds that are equity funds and Underlying Funds that are fixed income funds
(including a money market fund) depending on its investment objective.
Mitchell Hutchins allocates investments for each Select Portfolio among
Underlying Funds based on Mitchell Hutchins' outlook for the economy, financial
markets and the relative performance of the Underlying Funds. The board of
trustees of the Select Portfolios has established investment ranges that
designate minimum and maximum percentages for the allocation of each Select
Portfolio's assets between equity funds and fixed income funds and for the
percentage of the Select Portfolio's assets that may be invested in a particular
Underlying Fund.
The two tables that follow show for each Select Portfolio the initial
equity/fixed income fund allocation targets and the investment ranges for the
Underlying Funds.
<TABLE>
<CAPTION>
EQUITY/FIXED INCOME FUND RANGE (% OF EACH SELECT PORTFOLIO'S NET ASSETS)
SELECT PORTFOLIO INVESTMENT OBJECTIVE TARGET RANGE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Select Aggressive Growth Portfolio Long-Term Capital Appreciation
Equity 90% 80%-100%
Fixed Income 10% 0%-20%
Select Growth Portfolio Long-Term Capital Appreciation
Equity 80% 70%-90%
Fixed Income 20% 10%-30%
Select Moderate Portfolio High Total Return with Low
Volatility
Equity 60% 50%-70%
Fixed Income 40% 30%-50%
Select Conservative Portfolio A Combination of Income and
Growth, with Preservation of
Capital as a Primary Goal
Equity 30% 20%-40%
Fixed Income 70% 60%-80%
</TABLE>
Prospectus Page 10
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<TABLE>
<CAPTION>
INVESTMENT RANGE (PERCENT OF EACH SELECT PORTFOLIO'S NET ASSETS)
SELECT
UNDERLYING FUND AGGRESSIVE SELECT SELECT SELECT
GROWTH GROWTH MODERATE CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PAINEWEBBER GLOBAL FUNDS
PaineWebber Asia Pacific Growth Fund 0% - 10%
PaineWebber Emerging Markets Equity Fund 0% - 20%
PaineWebber Global Equity Fund 0% - 20% 0% - 20% 0% - 20%
PaineWebber Global Income Fund 0% - 10% 0% - 20%
PAINEWEBBER STOCK FUNDS
PaineWebber Capital Appreciation Fund 0% - 10% 0% - 10% 0% - 10%
PaineWebber Financial Services Growth Fund 0% - 20% 0% - 10% 0% - 10%
PaineWebber Growth Fund 0% - 10% 0% - 10% 0% - 10%
PaineWebber Growth and Income Fund 20% - 40% 15% - 35% 10% - 30% 5% - 25%
PaineWebber Small Cap Fund 20% - 40% 15% - 35% 0% - 20%
PaineWebber Utility Income Fund 0% - 10% 0% - 10%
PAINEWEBBER ASSET ALLOCATION FUNDS
PaineWebber Balanced Fund 0% - 10% 0% - 10% 0% - 10%
PaineWebber Tactical Allocation Fund 10% - 30% 10% - 30% 5% - 25%
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 0% - 20% 0% - 20%
PaineWebber Investment Grade Income Fund 0% - 10%
PaineWebber Low Duration U.S. Government Income Fund 20% - 40%
PaineWebber Strategic Income Fund 0% - 10% 0% - 20% 15% - 35%
PaineWebber U.S. Government Income Fund 5% - 25% 20% - 40%
PAINEWEBBER MONEY MARKET FUNDS
PaineWebber Cashfund 0% - 20% 0% - 20% 0% - 25% 0% - 30%
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</TABLE>
The Underlying Funds represent a broad spectrum of investment options. The
equity/fixed income ranges and the investment ranges are based on the degree to
which Mitchell Hutchins expects the selected Underlying Funds, in combination,
to be appropriate for a Select Portfolio's particular investment objective. If
appreciation or depreciation in the value of an Underlying Fund's shares causes
the percentage of a Select Portfolio's assets invested in that Underlying Fund
to exceed or be less than the applicable investment range, Mitchell Hutchins
will consider whether to reallocate the assets of the Select Portfolio, but is
not required to do so. The particular Underlying Funds in which each Select
Portfolio may invest, the equity/fixed income fund targets and ranges and the
investment ranges applicable to each Underlying Fund may be changed by the
Select Portfolios' board of trustees without shareholder approval.
Each Select Portfolio maintains cash reserves for meeting redemptions, expenses
and in connection with making new investments. The Select Portfolios may invest
these cash reserves in PaineWebber Cashfund or may invest directly in short-term
U.S. government securities, high grade short-term commercial paper and
repurchase agreements. When Mitchell Hutchins believes that unusual market or
economic conditions warrant a defensive posture, each Select Portfolio may
invest up to 100% of its total assets in these securities.
INVESTMENT OBJECTIVES AND POLICIES OF UNDERLYING FUNDS
The following is a concise description of the investment objectives and policies
of the Underlying Funds in which the Select Portfolios may invest. As with any
Prospectus Page 11
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mutual fund, there is no assurance that the Underlying Funds will achieve their
investment objectives. The Statement of Additional Information includes more
information about the investment policies of the Underlying Funds. Those
policies also are described more fully in the prospectus of each Underlying
Fund. No offer is made in this Prospectus of shares of any Underlying Fund.
EQUITY FUNDS. THE FOLLOWING UNDERLYING FUNDS INVEST PRIMARILY IN EQUITY
SECURITIES OR ALLOCATE THEIR ASSETS BETWEEN EQUITY SECURITIES AND FIXED
INCOME SECURITIES.
PAINEWEBBER ASIA PACIFIC GROWTH FUND
PAINEWEBBER EMERGING MARKETS EQUITY FUND
PAINEWEBBER GLOBAL EQUITY FUND
PAINEWEBBER CAPITAL APPRECIATION FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND
PAINEWEBBER GROWTH FUND
PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER SMALL CAP FUND
PAINEWEBBER UTILITY INCOME FUND
PAINEWEBBER BALANCED FUND
PAINEWEBBER TACTICAL ALLOCATION FUND
FIXED INCOME FUNDS. THE FOLLOWING UNDERLYING FUNDS INVEST PRIMARILY IN FIXED
INCOME SECURITIES.
PAINEWEBBER GLOBAL INCOME FUND
PAINEWEBBER HIGH INCOME FUND
PAINEWEBBER INVESTMENT GRADE INCOME FUND
PAINEWEBBER LOW DURATION U.S. GOVERNMENT INCOME FUND
PAINEWEBBER STRATEGIC INCOME FUND
PAINEWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER UTILITY INCOME FUND
PAIN4EWEBBER U.S. GOVERNMENT INCOME FUND
PAINEWEBBER CASHFUND
For purposes of the equity/fixed income fund allocation targets and ranges
applicable to the Select Portfolios, PaineWebber Balanced Fund and PaineWebber
Utility Income Fund are each considered to be an equity fund with respect to 50%
of a Select Portfolio's investment and an income fund with respect to the
remaining 50% of that Select Portfolio's investment.
ASIA PACIFIC GROWTH FUND
Asia Pacific Growth Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objecting by investing primarily in
equity securities of Asia Pacific Region companies. The term "Asia Pacific
Region" means the region located south of the former Soviet Union, east of
Afghanistan and Iran and west of the International Date Line (except Japan). The
Asia Pacific Region countries that currently have established securities markets
and that normally are considered for investment by the Fund include: Australia,
China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, South Korea, Sri Lanka, Taiwan and Thailand. The Fund
may also invest in other Asia Pacific Region countries whose securities markets
become sufficiently established. Except under unusual conditions, the Fund will
invest in companies in a minimum of three, and generally in a larger number of,
Asia Pacific Region countries. Additionally, the Fund expects to invest across a
broad spectrum of industries, including trade, finance, real estate,
transportation, communications, energy, construction, manufacturing, services,
food processing and others. The mix of industries and countries may change over
time as investment opportunities change.
Asia Pacific Growth Fund defines Asia Pacific Region companies as companies:
o that are organized under the laws of countries in the Asia Pacific Region
that now or in the future permit foreign investors to participate in their
stock markets,
o that regardless of where organized, and as determined by the Fund's
sub-adviser, either (A) derive at least 50% of their revenues from goods
produced or sold, investments made or services performed in Asia Pacific
Region countries or (B) maintain at least 50% of their assets in Asia
Pacific Region countries, or
o for which the principal securities trading market is an exchange or
over-the-counter ("OTC") market in the Asia Pacific Region.
Under normal market conditions, Asia Pacific Growth Fund invests at least 65% of
its total assets in equity securities of Asia Pacific Region companies. Most of
the equity securities purchased by the Fund are expected to be traded on a
foreign stock exchange or in a foreign OTC market. When it is consistent with
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PaineWebber Aggressive Growth Moderate Conservative
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its investment objective, the Fund may invest up to 10% of its total assets in
convertible and non-convertible debt securities issued or guaranteed by Asia
Pacific Region issuers, including obligations of sovereign governmental issuers.
Schroder Capital Management International Inc. serves as sub-adviser to Asia
Pacific Growth Fund.
EMERGING MARKETS EQUITY FUND
Emerging Markets Equity Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through investment in a
diversified portfolio consisting primarily of equity securities of issuers in
emerging markets. "Emerging markets" are Malaysia and all markets in all
countries not included in the Morgan Stanley Capital International World Index,
a well known index that reflects developed and developing markets throughout the
world. Under normal conditions, the Fund invests a minimum of 65% of its total
assets in equity securities of issuers located in emerging market countries and
maintains investments in at least three emerging market countries. Issuers are
considered to be located in an emerging market country if: (1) the principal
securities trading market for the issuer is in an emerging market country; (2)
the issuer derives 50% or more of its annual revenue or profit from either goods
produced, sales made, investments made or services performed in emerging market
countries; or (3) the issuer is organized under the laws of an emerging market
country. The Fund's investments will be spread over geographic as well as
economic sectors. Generally, not more than 35% of the Fund's total assets will
be invested in any single country. Under no circumstances will 25% or more of
the Fund's total assets be invested in any single industry. Within each emerging
market, the Fund is diversified through investments in a number of local
companies characterized by attractive valuation relative to expected growth.
Schroder Capital Management International Inc. serves as sub-adviser to
Emerging Markets Equity Fund.
GLOBAL EQUITY FUND
Global Equity Fund's investment objective is long-term growth of capital. The
Fund seeks to achieve this goal by investing primarily in equity securities
issued by companies in foreign countries, as well as in the United States. The
Fund normally invests in at least three countries, one of which is typically the
United States. The Fund normally invests at least 65% of its total assets in
equity securities of foreign and U.S. companies. The Fund may invest up to 35%
of its total assets in investment grade bonds issued by corporate or
governmental entities. The bonds in which the Fund invests have maturities no
longer than seven years. The Fund may assume a temporary defensive position by
investing all or a significant portion of its assets in securities of U.S. and
Canadian issuers or by holding cash or short-term money market investments.
Under normal circumstances, at least 80% of the Fund's total assets are invested
in equity securities or bonds of issuers in countries represented in the Morgan
Stanley Capital International World Index. This is a well-known index that
reflects developed and developing markets throughout the world.
GE Investment Management Incorporated serves as sub-adviser to Global Equity
Fund.
GLOBAL INCOME FUND
Global Income Fund's primary investment objective is high current income
consistent with prudent investment risk; capital appreciation is a secondary
objective. The Fund seeks to achieve these objectives by investing principally
in high-quality debt securities issued or guaranteed by foreign governments, by
the U.S. government, by their respective agencies or instrumentalities or by
supranational organizations, or issued by U.S. or foreign companies. The Fund's
portfolio consists primarily of debt securities rated within one of the two
highest grades assigned by a nationally recognized statistical rating
organization ("NRSRO") or, if unrated, determined by Mitchell Hutchins to be of
comparable quality. Normally, at least 65% of the Fund's total assets are
invested in high-quality debt securities, denominated in foreign currencies or
U.S. dollars, of issuers located in at least three of the following countries:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong
Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Prospectus Page 13
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Singapore, Spain, Sweden, Switzerland, Thailand, the United Kingdom and the
United States. No more than 40% of the Fund's assets normally are invested in
securities of issuers located in any one country other than the United States.
Global Income Fund may invest up to 35% of its total assets in debt securities
rated below the two highest grades assigned by an NRSRO. Except as noted below,
these securities must be at least investment grade. Within this 35% limitation,
the Fund may invest up to 20% of its total assets in sovereign debt securities
rated below investment grade.
Global Income Fund is a non-diversified fund as defined in the 1940 Act and is
subject to greater risk than funds that have a broader range of investments.
CAPITAL APPRECIATION FUND
Capital Appreciation Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective by investing at least 65%
of its total assets in common stocks of medium-sized (or mid cap) companies. The
Fund's sub-adviser defines mid cap companies as public companies:
o that have market capitalizations (referring to a company's size or the
value of the equity securities it has issued) of at least $100 million and,
generally, no more than $10 billion at the time of purchase; and
o that are not included in either of the largest 100 companies ranked by
revenues or by market capitalization in FORTUNE magazine's "Fortune 500."
Capital Appreciation Fund may invest up to 35% of its total assets in U.S.
dollar-denominated equity securities of foreign companies that trade on
recognized U.S. stock exchanges or on the U.S. over-the-counter market. When its
sub-adviser believes it is consistent with the Fund's investment objective, the
Fund may invest up to 35% of its total assets in common stocks of companies that
are larger or smaller than those of mid cap companies as defined above, as well
as in bonds and money market instruments.
Denver Investment Advisors, LLC, serves as sub-adviser to Capital
Appreciation Fund.
FINANCIAL SERVICES GROWTH FUND
Financial Services Growth Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve this objective by primarily investing in
equity securities of companies in the financial services industries. These
companies include banks, thrifts, insurance companies, commercial finance
companies, consumer finance companies, brokerage companies, investment
management companies and their holding companies.
Financial Services Growth Fund normally invests at least 65% of its total assets
in equity securities of financial services companies. To be considered a
financial services company, a company must:
o derive at least 50% of either its revenues or earnings from financial
services activities or devote at least 50% of its assets to these
activities; or
o be engaged in "securities-related businesses," meaning it derives more
than 15% of its gross revenues from securities brokerage or investment
management activities.
Financial Services Growth Fund may invest up to 35% of its total assets in
equity securities of companies outside the financial services industries and in
bonds of all issuers. The Fund may also invest up to 20% of its total assets in
equity securities and bonds of foreign issuers. The Fund may invest in
securities other than equity securities when, in the opinion of Mitchell
Hutchins, their potential for capital appreciation is equal to or greater than
that of equity securities or when such holdings might reduce volatility in the
Fund.
Financial Services Growth Fund may not invest more than 5% of its total assets
in the equity securities of any one company engaged in securities-related
businesses. The Fund may invest in banks and thrifts (and their holding
companies) only if their deposits are insured by the FDIC. However, neither the
securities of these companies nor the Fund's shares are insured by the FDIC or
any other federal or governmental agency.
Prospectus Page 14
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PaineWebber Aggressive Growth Moderate Conservative
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Financial Services Growth Fund's concentration in the financial services
industries makes it subject to greater risk and volatility than equity funds
that are more diversified.
GROWTH FUND
The investment objective of Growth Fund is long-term capital appreciation. The
Fund seeks to achieve this objective by investing primarily in equity securities
issued by companies believed by Mitchell Hutchins to have substantial potential
for capital growth. Under normal circumstances, at least 65% of the Fund's total
assets are invested in equity securities. The Fund may invest up to 35% of its
total assets in U.S. government bonds and in corporate bonds (including up to
10% in bonds and convertible securities rated below investment grade). Up to 25%
of the Fund's total assets may be invested in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S. OTC market.
GROWTH AND INCOME FUND
The investment objective of Growth and Income Fund is current income and capital
growth. The Fund seeks to achieve this objective by investing primarily in
dividend-paying equity securities believed by Mitchell Hutchins to have the
potential for rapid earnings growth. Normally, the Fund invests at least 65% of
its total assets in these equity securities. The Fund may invest up to 35% of
its total assets in equity securities not meeting these selection criteria, as
well as in U.S. government bonds, corporate bonds and money market instruments,
including up to 10% in convertible bonds rated below investment grade. Up to 25%
of the Fund's total assets may be invested in U.S. dollar-denominated equity
securities and bonds of foreign issuers that are traded on recognized U.S.
exchanges or in the U.S.
over-the-counter market.
SMALL CAP FUND
The investment objective of Small Cap Fund is long-term capital appreciation.
Under normal circumstances, at least 65% of the Fund's total assets are invested
in equity securities of small cap companies, which are defined as companies
having market capitalizations of up to $1 billion. The Fund may invest up to 35%
of its total assets in equity securities of companies that are larger than small
cap companies, as well as in U.S. government bonds, corporate bonds and money
market instruments, including up to 10% of total assets in convertible bonds
rated below investment grade. Up to 25% of the Fund's total assets may be
invested in U.S. dollar-denominated equity securities of foreign issuers traded
on recognized U.S. exchanges or in the U.S. OTC market.
UTILITY INCOME FUND
Utility Income Fund's investment objective is current income and capital
appreciation. The Fund attempts to achieve its objective by investing at least
65% of its total assets in income-producing equity securities and bonds issued
by domestic and foreign companies that are primarily engaged in the ownership or
operation of facilities used in the generation, transmission or distribution of
electricity, telecommunications, gas or water.
"Primarily engaged" means that:
o more than 50% of the company's assets are devoted to the ownership or
operation of one or more such facilities; or
o more than 50% of the company's operating revenues are derived from such
businesses.
Utility Income Fund may invest in the equity securities and bonds of foreign
companies. The Fund may invest up to 35% of its total assets in equity
securities and bonds of companies that are outside the utility industries and in
high quality money market instruments. The Fund may invest up to 5% of its net
assets in bonds (including convertible securities) that are rated lower than
investment grade.
Utility Income Fund seeks to invest in companies that should benefit from a
dramatically changing operating environment, spurred by a long-term, secular
trend toward deregulation. Some of these changes include:
o local telecommunications providers' shift from rate of return to price
cap regulation;
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o more liberal legislation, which is gradually eliminating entry barriers
that historically prohibited telephone companies from entering new
businesses; and
o a more open market in the electric utility industry, which should lead to
consolidation within the industry.
Utility Income Fund's concentration in these industries subjects it to more
volatility than a fund whose portfolio is more diversified.
BALANCED FUND
Balanced Fund's investment objective is high total return with low volatility.
The Fund pursues this objective by investing primarily in a combination of three
asset classes: stocks (equity securities), bonds (investment grade bonds) and
cash (money market securities). The portion invested in each of these asset
classes is based on Mitchell Hutchins' judgment of the best allocation of the
Fund's assets. However, the Fund maintains a fixed income allocation (including
bonds and cash) of at least 25%. The Fund attempts to maintain a dollar-weighted
average maturity for its fixed income investments-the average remaining time to
maturity of a portfolio's bonds-of three to ten years.
The Fund may invest in a broad range of:
o Equity securities issued by companies believed by Mitchell Hutchins to
have the potential for rapid earnings growth;
o Investment grade bonds;
o U.S. government securities;
o Convertible securities; provided that the Fund will not invest more than
10% of its total assets in convertible securities rated below investment
grade; and
o High quality money market securities.
TACTICAL ALLOCATION FUND
Tactical Allocation Fund's investment objective is total return, consisting of
long-term capital appreciation and current income. The Fund seeks to achieve its
objective by using a disciplined investment strategy that allocates its assets
between common stocks and U.S. Treasury notes or U.S.
Treasury bills.
In seeking total return, the Fund shifts its asset mix among an equity portion
designed to track the performance of the S&P 500 Index (the Fund holds
approximately 450 of the 500 stocks in the Standard & Poors's 500 Composite
Stock Price Index ("S&P 500 Index"), a bond portion, consisting of five-year
U.S. Treasury notes, and a cash portion, consisting of 30-day U.S. Treasury
bills. The allocation among these three segments is based on the asset mix
recommendation of the Mitchell Hutchins Tactical Allocation Model.
The Fund seeks to achieve total return during all economic and financial market
cycles, with lower volatility than that of the S&P 500 Index, by investing in
common stocks held in the S&P 500 Index, but can take a more defensive posture
when the Tactical Allocation Model signals a potential bear market, prolonged
downturn in stock prices or significant loss in value.
HIGH INCOME FUND
High Income Fund's investment objective is to provide high income. The Fund
normally invests at least 65% of its total assets in high yield, high risk,
income producing, corporate bonds that, at the time of purchase, are rated B or
better by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") or Moody's Investors Service, Inc. ("Moody's"), are comparably rated by
another NRSRO or, if unrated, are considered to be of comparable quality by
Mitchell Hutchins. The Fund also may invest up to 35% of its total assets in (1)
bonds that are rated below B or comparable unrated bonds; (2) U.S. government
bonds; (3) preferred stocks; (4) equity securities (including common stocks,
warrants and rights); and (5) money market instruments, including repurchase
agreements. Up to 25% of the Fund's total assets may be invested in bonds and
equity securities that are not paying current income. Up to 35% of the Fund's
net assets may be invested in securities of foreign issuers. However, no more
Prospectus Page 16
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than 10% of the Fund's net assets may be invested in securities of foreign
issuers that are denominated and traded in currencies other than the U.S.
dollar.
INVESTMENT GRADE INCOME FUND
Investment Grade Income Fund's objective is to provide high current income
consistent with the preservation of capital and liquidity. The Fund normally
invests at least 65% of its total assets in U.S. government and investment grade
corporate bonds (including mortgage-backed securities). The Fund also may invest
up to 35% of its total assets in the following: (1) corporate bonds that are
rated below investment grade; (2) preferred stocks; (3) convertible securities;
(4) asset-backed securities; (5) commercial paper or variable amount master
notes whose issuers, at the time the security is purchased by the Fund, have
outstanding either long-term bonds that are rated investment grade by S&P or
Moody's or commercial paper rated in the highest rating category by S&P or
Moody's; and (6) other money market instruments, including repurchase
agreements.
Investment Grade Income Fund may invest in mortgage-backed securities only if
they are U.S. government issued or guaranteed or if, at the time of purchase,
they are investment grade. The Fund may invest in other asset-backed securities
only if, at the time of purchase, they are rated in one of the two highest
rating categories by S&P or Moody's. Also, the Fund may not invest more than 10%
of its total assets in interest-only and principal-only classes of
mortgaged-backed securities.
Up to 20% of the Fund's net assets may be invested in certain foreign
securities. These are: (1) U.S. dollar-denominated securities of foreign
issuers or of foreign branches of U.S. banks that are traded in the U.S.
securities markets; and (2) securities that are U.S. dollar-denominated but
whose value is linked to the value of foreign currencies.
U.S. GOVERNMENT INCOME FUND AND
LOW DURATION U.S. GOVERNMENT INCOME FUND ("LOW DURATION INCOME FUND")
U.S. Government Income Fund's investment objective is to provide high income
consistent with the preservation of capital and liquidity. Low Duration Income
Fund's investment objective is to achieve the highest level of income consistent
with the preservation of capital and low volatility of net asset value.
Low Duration Income Fund seeks to limit (but not eliminate) the volatility of
net asset value by normally maintaining an overall portfolio duration of from 1
to 3 years. U.S. Government Income Fund has no fixed portfolio duration policy.
"Duration" is a measure of the expected life of a fixed income security on a
present value basis.
Each Fund normally invests at least 65% of its total assets in U.S. government
bonds (including mortgage-backed securities) and repurchase agreements with
respect to them. Each Fund also may invest up to 35% of its total assets in
privately issued mortgage-backed and asset-backed securities that, at the time
of purchase, are rated in the highest rating category by a nationally recognized
rating agency, such as S&P or Moody's, or if unrated, are considered to be of
comparable quality by Mitchell Hutchins or, for Low Duration Income Fund, its
sub-adviser.
Each Fund has a fundamental policy of normally concentrating at least 25% of its
total assets in U.S. government and privately issued mortgage- and asset-backed
securities. This policy has the effect of increasing each Fund's exposure to the
risks of these securities and might cause the Fund's net asset value to
fluctuate more than otherwise would be the case. Some types of mortgage-backed
securities, including "interest only," "principal-only" and inverse floating
rate classes of these securities can be extremely volatile and may become
illiquid. Low Duration Income Fund does not invest in these classes of
mortgage-backed securities.
Pacific Investment Management Company ("PIMCO") serves as sub-adviser for Low
Duration Income Fund.
STRATEGIC INCOME FUND
Strategic Income Fund's primary investment objective is to achieve a high level
of current income. As a secondary objective, it seeks capital appreciation. The
Fund strategically allocates its investments among three distinct bond market
Prospectus Page 17
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
sectors: (1) U.S. government and investment grade corporate bonds, including
mortgage- and asset-backed securities; (2) U.S. high yield, high risk corporate
bonds, and preferred stock; and (3) foreign and emerging market bonds. A portion
of the Fund's assets normally is invested in each of these investment sectors.
However, the Fund has the flexibility at any time to invest all or substantially
all of its assets in any one sector.
Investment grade bonds are bonds that, at the time of purchase, are rated in one
of the four highest rating categories by a nationally recognized rating agency,
such as S&P or Moody's, or if unrated, are considered to be of comparable
quality by Mitchell Hutchins.
The foreign and emerging market bonds in which the Fund may invest include: (1)
government bonds, including Brady bonds and other sovereign debt, and bonds
issued by multi-national institutions such as the International Bank for
Reconstruction and Development and the International Monetary Fund; (2)
corporate bonds and preferred stock issued by entities located in foreign
countries, or denominated in or indexed to foreign currencies; and (3) interests
in securitized or restructured foreign loans, bonds or preferred stock. The Fund
may invest without limit in securities of issuers located in any country in the
world, including both industrialized and emerging market countries. The Fund
generally is not restricted in the portion of its assets that may be invested in
a single country or region, but the Fund's assets normally are invested in
issuers located in at least three countries. No more than 25% of the Fund's
total assets are invested in securities issued or guaranteed by any single
government. The Fund may invest up to 100% of its total assets in preferred
stock of U.S. and foreign issuers. The Fund normally invests at least 65% of its
total assets in income producing securities, but it can invest up to 35% of its
total assets in zero coupon bonds and payment-in-kind ("PIK") securities. The
Fund may invest without limit in other securities that are issued with original
issue discount ("OID").
Strategic Income Fund is a non-diversified fund as defined in the 1940 Act and
is subject to greater risk than funds that have a broader range of investments.
CASHFUND
Cashfund's investment objective is to provide current income, stability of
principal and high liquidity. The Fund invests exclusively in high quality money
market instruments having or deemed to have remaining maturities of 13 months or
less. These instruments include U.S. government securities, obligations of U.S.
banks, commercial paper and other short-term corporate obligations, variable and
floating rate securities and participation interests or repurchase agreements
involving any of the foregoing. The Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.
Shares of Cashfund are not insured or guaranteed by the U.S. government.
Prospectus Page 18
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INVESTMENT PHILOSOPHY & PROCESS
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[TEXT TO BE SUPPLIED]
Prospectus Page 19
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PERFORMANCE
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PERFORMANCE OF UNDERLYING FUNDS
The following table shows the average annual total returns of each Underlying
Fund (other than PaineWebber Cashfund) for the most recent one-, five- and
ten-year periods (or since inception if shorter). The performance information
reflects the maximum applicable sales charges and other distribution-related
expenses and service fees. Returns would be higher if these charges and fees
were not reflected. The Select Portfolios invest in Class Y shares of the
Underlying Funds, which are not subject to these sales charges and
distribution-related expenses and service fees.
<TABLE>
<CAPTION>
PERFORMANCE OF UNDERLYING FUNDS
Assets of Average Annual Total 30-Day
Underlying Fund all Classes Inception Returns Yield for
as of Date Class(1) through 12/31/96 period
12/31/96 One Year Five Years Ten Years period ended
($000's) 12/31/96
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<S> <C> <C> <C> <C> <C> <C> <C>
PAINEWEBBER GLOBAL FUNDS
PaineWebber Asia Pacific Growth Fund 03/27/97 A
PaineWebber Emerging Markets Equity Fund 01/19/94 A
PaineWebber Global Equity Fund 11/14/91 A
PaineWebber Global Income Fund 03/20/87 B
PAINEWEBBER STOCK FUNDS
PaineWebber Capital Appreciation Fund 04/07/92 B
PaineWebber Financial Services Growth 05/22/86 A
Fund
PaineWebber Growth Fund 03/18/85 A
PaineWebber Growth and Income Fund 12/20/83 A
PaineWebber Small Cap Fund 02/01/93 B
PaineWebber Utility Income Fund 07/02/93 B
PAINEWEBBER ASSET ALLOCATION FUNDS
PaineWebber Balanced Fund 12/12/86 B
PaineWebber Tactical Allocation Fund 07/22/92 C
PAINEWEBBER BOND FUNDS
PaineWebber High Income Fund 08/31/84 A
PaineWebber Investment Grade Income Fund 08/31/84 A
PaineWebber Low Duration U.S. Government 05/03/93 C
Income Fund
PaineWebber Strategic Income Fund 02/07/94 B
PaineWebber U.S. Government Income Fund 08/31/84 A
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(1) The class outstanding for the longest period. If more than one class is
outstanding for the longest period, the table shows performance for the class
that represents the largest portion of the Underlying Fund's net assets.
(2) For the seven-day period ended December 31, 1996, PaineWebber Cashfund's
yield was ___% and its effective yield was ____%.
The past performance of the Underlying Funds is not a guarantee of future
results for either the Underlying Funds or the Select Portfolios. Further
information about each Underlying Fund's performance is contained in its Annual
Report, which may be obtained without charge by contacting the Underlying Fund,
your PaineWebber investment executive or PaineWebber's correspondent firms or by
calling toll-free 1-800-647-1568.
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PERFORMANCE INFORMATION
The Select Portfolios perform a standardized computation of annualized total
return and may show this return in advertisements or promotional materials.
Standardized return shows the change in value of an investment in a Select
Portfolio as a steady compound annual rate of return. Actual year-by-year
returns fluctuate and may be higher or lower than standardized return.
Standardized returns for Class A shares of the Select Portfolios reflect
deduction of the Select Portfolios' maximum initial sales charge of 4.5% (4.0%
for Select Conservative Portfolio) at the time of purchase, and standardized
returns for the Class B and Class C shares of the Select Portfolios reflect
deduction of the applicable contingent deferred sales charge imposed on the sale
of shares held for the period. One-, five- and ten-year periods will be shown,
unless the Select Portfolio or class has been in existence for a shorter period.
If so, returns will be shown for the period since inception.
The Select Portfolios may use other total return presentations in conjunction
with standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof. Non-standardized
return does not reflect initial or contingent deferred sales charges and would
be lower if such charges were deducted.
The Select Conservative Portfolio also may advertise its yield. Yield reflects
investment income net of expenses over a 30-day (or one month) period on the
Select Portfolio share, expressive as an annualized percentage of the maximum
offering price per share for Class A shares and net asset value per share for
Class B, Class C and Class Y shares at the end of the period. Yield computations
differ from other accounting methods and thus may differ from dividends actually
paid or reported net income.
The Underlying Funds perform the same standardized computation of annualized
total return as the Select Portfolios.
Total return information reflects past performance and does not indicate future
results. The investment return and principal value of shares of the Select
Portfolios and the Underlying Funds will fluctuate. The amount investors receive
when selling shares may be more or less than what they paid.
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THE UNDERLYING FUNDS' INVESTMENTS
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The risks of each Underlying Fund are determined by the nature of the securities
it holds and the investment techniques and strategies used by Mitchell Hutchins
or a sub-adviser. Certain of these securities, investment techniques and related
risks are described here. More information is available in the Statement of
Additional Information and in the prospectuses of the Underlying Funds. The
shareholders of a Select Portfolio will be affected by the securities held by
and the investment techniques used for an Underlying Fund in direct proportion
to the amount of assets allocated by the Select Portfolio to that Underlying
Fund.
TYPES OF SECURITIES
EQUITY SECURITIES include common stocks, preferred stocks and securities that
are convertible into them, including convertible debentures and notes and common
stock purchase warrants and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed-income features, like a bond, but is actually
equity in a company, like common stock. Convertible securities may include
debentures, notes and preferred equity securities, which are convertible into
common stock.
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BONDS are fixed or variable rate obligations, including notes, debentures and
similar debt instruments and securities. Mortgage- and asset-backed securities
are types of bonds. Corporations, governments and other issuers use bonds to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and must repay the amount borrowed at or before maturity. Bonds
have varying degrees of investment risk and varying levels of sensitivity to
changes in interest rates.
U.S. GOVERNMENT BONDS include direct obligations of the U.S. government
(such as U.S. Treasury bills, notes and bonds) and obligations issued or
guaranteed by the U.S. government, its agencies or its instrumentalities.
U.S. government bonds include mortgage-backed securities issued or
guaranteed by government agencies or government-sponsored enterprises.
Other U.S. government bonds may be backed by the full faith and credit of
the U.S. government or supported primarily or solely by the creditworthiness
of the government-related issuer, such as the Resolution Funding
Corporation, the Student Loan Marketing Association ("Sallie Mae"), the
Federal Home Loan Banks and the Tennessee Valley Authority.
CORPORATE BONDS are bonds issued by corporations, banks, partnerships, trusts or
other non-governmental entities.
MORTGAGE- AND ASSET- BACKED SECURITIES are bonds backed by specific types of
assets. Mortgage-backed securities represent direct or indirect interests in
pools of underlying mortgage loans that are secured by real property. U.S.
government mortgage-backed securities are issued or guaranteed as to principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae (also known as the Federal National
Mortgage Association), the Federal Home Loan Mortgage Corporation ("Freddie
Mac") or other government-sponsored enterprises. Other mortgage-backed
securities are sponsored or issued by private entities, including investment
banking firms and mortgage originators. The growth of mortgage-backed securities
and the secondary mortgage market in which they are traded has helped to keep
mortgage money available for home financing. Mortgage-backed securities may be
composed of one or more classes and may be structured as either pass-through
securities or collateralized debt obligations.
Other asset-backed securities are similar to mortgage-backed securities, except
that the underlying assets are different. These underlying assets may be nearly
any type of financial asset or receivable, such as motor vehicle installment
sales contracts, home equity loans, leases of various types of real and personal
property and receivables from credit cards.
RISKS
Following is a discussion of the risks that are common to a number of the
Underlying Funds:
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities, and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that an Underlying Fund may
experience a substantial or complete loss on an individual equity investment.
BONDS - INTEREST RATE AND CREDIT RISK. Interest rate risk is the risk that
interest rates will rise and that, as a result, bond prices will fall, lowering
the value of the Underlying Fund's investments. In general, bonds having longer
durations are more sensitive to interest rate changes than are bonds with
shorter durations. "Duration" is a measure of the expected life of a fixed
income security on a present value basis
Credit risk is the risk the issuer or guarantor may be unable to pay interest or
repay principal on the bond. This can be affected by many factors, including
adverse changes in the issuer's own financial condition or in economic
conditions.
CREDIT RATINGS; BONDS RATED BELOW INVESTMENT GRADE. Credit ratings attempt to
evaluate the safety of principal and interest payments, but they do not evaluate
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the volatility of the security's value or its liquidity and do not guarantee the
performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's current
financial condition may be better or worse than the rating indicates. There is a
risk that rating agencies may downgrade bonds.
Investment grade bonds are rated in one of the four highest rating categories by
a nationally recognized rating agency, such as S&P or Moody's or, if unrated,
are considered to be of comparable quality by Mitchell Hutchins or the
applicable sub-adviser. Moody's considers bonds rated Baa (its lowest investment
grade rating) to have speculative characteristics. This means that changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for
higher-rated bonds.
High yield, high risk bonds are rated below investment grade and are commonly
referred to as "junk bonds." High Income Fund and Strategic Income Fund may
invest without limit in these bonds and other Underlying Funds may invest
significant portions of their assets in them. High yield, high risk bonds are
considered predominantly speculative with respect to the issuer's ability to pay
interest and repay principal. An Underlying Fund's investments in these lower
rated bonds entail greater risk than its investments in investment grade bonds.
Lower rated bonds may be more sensitive to adverse market conditions. During an
economic downturn or period of rising interest rates, their issuers may
experience financial stress that adversely affects their ability to pay interest
and repay principal and may increase the possibility of default. Lower rated
bonds are frequently unsecured by collateral and will not receive payment until
more senior claims are paid in full. The market for these bonds is thinner and
less active, which may limit the Underlying Funds' ability to sell them at fair
value in response to changes in the economy or financial markets.
FOREIGN SECURITIES. Investing in foreign securities involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
INVESTING IN EMERGING MARKETS. Investing in securities issued by companies
located in emerging markets involves additional risks. These countries typically
have economic and political systems that are relatively less mature, and can be
expected to be less stable, than those of developed countries. Emerging market
countries may have policies that restrict investment by foreigners in those
countries, and there is a risk of government expropriation or nationalization of
private property. The possibility of low or nonexistent trading volume in the
securities of companies in emerging markets may also result in a lack of
liquidity and in price volatility. Issuers in emerging markets typically are
subject to a greater degree of change in earnings and business prospects than
are companies in developed markets.
CURRENCY. Currency risk is the risk that changes in foreign exchange rates may
reduce the U.S. dollar value of an Underlying Fund's foreign investments. An
Underlying Fund's share value may change significantly when investments are
denominated in foreign currencies. Generally, currency exchange rates are
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determined by supply and demand in the foreign exchange markets and the relative
merits of investments in different countries. Currency exchange rates can also
be affected by the intervention of the U.S. and foreign governments or central
banks, the imposition of currency controls, speculation or other political or
economic developments inside and outside the United States.
DERIVATIVES. Some of the instruments in which the Underlying Funds may invest
may be referred to as "derivatives," because their value depends on (or
"derives" from) the value of an underlying asset, reference rate or index. These
instruments include options, futures contracts, forward currency contracts,
interest rate protection contracts and similar instruments that may be used in
hedging and related strategies. There is limited consensus as to what
constitutes a "derivative" security. The market value of derivative instruments
and securities sometimes is more volatile than that of other investments, and
each type of derivative instrument may pose its own special risks. Mitchell
Hutchins and the applicable sub-advisers take these risks into account in their
management of the Underlying Funds.
COUNTERPARTIES. The Underlying Funds may be exposed to the risk of financial
failure or insolvency of another party. To help lessen those risks, Mitchell
Hutchins and the applicable sub-advisers, subject to the supervision of the
respective boards, monitor and evaluate the creditworthiness of the parties with
which each Underlying Fund does business.
RISKS OF ZERO COUPON, OID AND PIK BONDS. Zero coupon bonds are Treasury bills,
notes and bonds that have been stripped of their unmatured interest coupons, and
receipts or certificates representing interest in such stripped debt obligations
and coupons. A zero coupon security pays no cash interest to its holder prior to
maturity. The buyer of a zero coupon bond receives a rate of return from the
gradual appreciation of the securities that occurs because it will be redeemed
at face value on a specified maturity date. Federal tax law requires that the
holder of a zero coupon security and other securities issued with original issue
discount ("OID") include in gross income each year the OID that accrues on the
security for the year
Because zero coupon bonds bear no interest, they usually trade at a discount
from their face or par value and they are generally more sensitive to changes in
interest rates than other bonds. This means that when interest rates fall, the
value of zero coupon bonds rises more rapidly than bonds paying interest on a
current basis. However, when interest rates rise, their value falls more
dramatically.
Interest or dividends on payment in kind ("PIK") securities are paid in
additional securities. PIK securities also often trade at a discount from their
face or par value and also are subject to greater fluctuations in market value
in response to changing interest rates than comparable securities that pay
interest or dividends in cash.
SOVEREIGN DEBT AND BRADY BONDS. Sovereign debt includes bonds that are issued or
guaranteed by foreign governments or their agencies, instrumentalities or
political subdivisions or by foreign central banks. Sovereign debt also may be
issued by quasi-governmental entities that are owned by foreign governments but
are not backed by their full faith and credit or general taxing powers. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to pay interest or repay principal when due
in accordance with the terms of such debt, and the Underlying Fund may have
limited legal recourse in the event of default. Political conditions, especially
a sovereign entity's willingness to meet the terms of its debt obligations, are
of considerable significance.
Brady bonds are sovereign debt securities issued under a 1989 plan (named for
former Secretary of the Treasury Nicolas F. Brady) that allows emerging market
countries to restructure their outstanding debt to U.S. and other banks.
Although Brady Bonds are collateralized by U.S. government securities, payment
of interest and repayment of principal is not guaranteed by the U.S. government.
MORTGAGE-BACKED SECURITIES. A major difference between mortgage-backed
securities and traditional bonds is that interest and principal payments are
made more frequently (usually monthly) and that principal may be repaid at any
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time. When interest rates go down and homeowners refinance their mortgages,
mortgage-backed securities may be paid off more quickly than investors expect.
When interest rates rise, mortgage-backed securities may be paid off more slowly
than originally expected. Changes in the rate or "speed" of these prepayments
can cause the value of mortgage-backed securities to fluctuate rapidly. Because
of prepayments, mortgage-backed securities may not benefit as much as other
bonds from declining interest rates, and an Underlying Fund may have to reinvest
prepayments in bonds with lower interest rates than the original investment,
thus adversely affecting its yield. Actual prepayment experience may cause the
yield of a mortgage-backed security to differ from what was assumed when the
Underlying Fund purchased the security.
The market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Both U.S. government and privately issued mortgage-backed securities may be
composed of one or more classes and may be structured either as pass-through
securities or collateralized debt obligations. Multiple-class mortgage-backed
securities are referred to in this prospectus as "CMOs." CMO classes may be
specially structured in a manner that provides any of a wide variety of
investment characteristics, such as yield, effective maturity and interest rate
sensitivity. As market conditions change, however, and especially during periods
of rapid or unanticipated changes in market interest rates, the attractiveness
of some CMO classes and the ability of the structure to provide the anticipated
investment characteristics may be significantly reduced. These changes can
result in volatility in the market value and, in some instances, reduced
liquidity of the CMO class.
Certain classes of CMOs are structured in a manner that makes them extremely
sensitive to changes in prepayment rates. Interest only ("IO") and principal
only ("PO") classes are examples of this. IOs are entitled to receive all or a
portion of the interest, but none (or only a nominal amount) of the principal
payments, from the underlying mortgage assets. If the mortgage assets underlying
an IO experience greater than anticipated principal prepayments then the total
amount of interest payments allocable to the IO class, and therefore the yield
to investors, generally will be reduced. In some instances, an investor may fail
to recoup all of his original investment in the IO, even if the security is
government guaranteed or is considered to be of the highest credit quality.
Conversely, PO classes are entitled to receive all or a portion of the principal
payments, but none of the interest, from the underlying mortgage assets. PO
classes are purchased at substantial discounts from par, and the yield to
investors will be reduced if principal payments are slower than expected. Some
IOs and POs, as well as other CMO classes, are structured to have special
protections against the effects of prepayments. These structural protections,
however, normally are effective only within certain ranges of prepayment rates
and thus will not protect investors in all circumstances.
Floating rate CMO classes also may be extremely volatile. These classes pay
interest at a rate that decreases when a specified index of market rates
increases.
INVESTING IN NON-CAPITALIST COUNTRIES. Emerging Markets Equity Fund may invest
in emerging markets that are formerly communist countries of Eastern Europe, the
Commonwealth of Independent States (formerly the Soviet Union) and the People's
Republic of China (collectively, "Non-Capitalist Countries"). Upon the accession
to power of communist regimes approximately 50 to 80 years ago, the governments
of a number of Non-Capitalist Countries expropriated a large amount of property.
The claims of many property owners against those governments were never finally
settled. There can be no assurance that the Fund's investments in Non-Capitalist
Countries, if any, would not also be expropriated, nationalized or otherwise
confiscated, in which case the Fund could lose its entire investment in the
Non-Capitalist Country involved. In addition, any change in the leadership or
policies of Non-Capitalist Countries may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring.
CONCENTRATION IN MORTGAGE-BACKED SECURITIES. U.S. Government Income Fund and Low
Duration Income Fund each concentrates at least 25% of its total assets in U.S.
government and privately issued mortgage- and asset-backed securities. This
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policy has the effect of increasing each of these Underlying Fund's exposure to
the risks of these securities and might cause its net asset value to fluctuate
more than would otherwise be the case. Some types of mortgage-backed securities,
including "interest-only," "principal only" and inverse floating rate classes of
these securities can be extremely volatile and may become illiquid. Low Duration
Income Fund does not invest in these classes of mortgage-backed securities.
CONCENTRATION IN FINANCIAL SERVICES INDUSTRIES. Financial Services Growth Fund
concentrates its investments in the financial services industry. As a result,
its shares are subject to greater risk than the shares of a fund whose portfolio
is not so concentrated. In particular, Financial Services Growth Fund will be
affected by economic, competitive and regulatory developments affecting those
industries.
Financial services companies are subject to extensive governmental regulation.
This regulation may limit both the amounts and types of loans and other
financial commitments these companies can make, as well as the interest rates
and fees they can charge. Profitability of these companies is largely dependent
on the availability and cost of capital funds and can fluctuate significantly
when interest rates change. Credit losses resulting from financial difficulties
of borrowers can negatively impact the industry. Companies in the financial
services industries may be subject to severe price competition. Also, the
industry and Financial Services Growth Fund may be significantly impacted if the
legislation that is currently being considered, to reduce the separation between
commercial and investment banking businesses, is enacted.
CONCENTRATION IN THE UTILITY INDUSTRIES. Because investments made by Utility
Income Fund are concentrated in the utility industries, its shares will be
particularly affected by economic and regulatory developments in or related to
those industries and are subject to greater risk than shares of an Underlying
Fund whose portfolio is not so concentrated. Interest rate changes may affect
the value of Utility Income Fund's assets. When interest rates decline, prices
of utility equity securities and bonds tend to increase. When interest rates
rise, these prices tend to decrease.
The regulation of utility industries is evolving in the United States and in
foreign countries. As a result, certain companies may be forced to defend their
core businesses against outside companies and may become less profitable.
Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs
on borrowing, costs associated with compliance in regard to environmental,
nuclear facility and other safety regulations and changes in the regulatory
climate. Increasing competition due to past regulatory changes in the telephone
communications industry continues and, although certain companies have
benefited, many companies may be adversely affected in the future.
Gas transmission companies and gas distribution companies continue to undergo
significant changes as well. Water supply utilities are in an industry that is
highly fragmented due to local ownership and generally the companies are more
mature and are experiencing little or no per capita volume growth. There is no
assurance that utility industries, as a whole, will experience favorable
developments or that business opportunities will continue to undergo significant
changes or growth.
NON-DIVERSIFIED STATUS. Global Income Fund and Strategic Income Fund are
"non-diversified," as that term is defined in the 1940 Act. This means that
these Underlying Funds are permitted to invest a greater proportion of their
assets in the securities of a smaller number of issuers. As a result, these
Underlying Funds may be subject to greater risk because their return and the
price of their shares may be significantly affected by the market condition or
market assessment of a single issuer.
The Select Portfolios also are non-diversified investment companies because they
invest in a limited number of Underlying Funds. The Select Portfolios hold
indirectly their pro rata share of all the portfolio securities in the
Underlying Funds, and thus are not exposed to the same risks as an Underlying
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Fund that is non-diversified. However, the Select Portfolios' total return and
the price of their shares can be significantly affected by the performance of a
single Underlying Fund.
INVESTMENT TECHNIQUES AND STRATEGIES
HEDGING AND OTHER STRATEGIES USING DERIVATIVE CONTRACTS. Each Underlying Fund
except Cashfund may use derivative contracts, which may include options (both
exchange traded and over-the-counter), futures contracts and forward currency
contracts, in strategies intended to reduce the overall risk of its investments
("hedge") or, in the case of some Underlying Funds, to enhance income or return
(including reallocating exposure to different asset classes) or realize gains.
Use of these derivative contracts solely to enhance income or realize gains may
be considered a form of speculation. The Underlying Funds that invest
substantially in bonds also may use interest rate swaps and similar contracts to
preserve a return or spread on a particular investment or portion of their
portfolios or to protect against an increase in the price of securities that the
Underlying Fund anticipates purchasing at a later date. New financial products
and risk management techniques continue to be developed, and may be used by an
Underlying Fund if consistent with its investment objective and policies. The
Statement of Additional Information contains further information on these
derivative contracts and related strategies.
The Underlying Funds might not use any derivative contracts or strategies, and
there can be no assurance that using them will succeed. If Mitchell Hutchins or
the applicable sub-adviser is incorrect in its judgment on market values,
interest rates or other economic factors in using a hedging strategy, an
Underlying Fund may have lower net income and a net loss on the investment. Each
of these strategies involves certain risks, which include:
o the fact that the skills needed to implement a strategy using derivative
contracts are different from those needed to select securities for the
Underlying Funds;
o the possibility of imperfect correlation, or even no correlation, between
price movements of derivative contracts used in hedging strategies and
price movements of the securities or currencies being hedged;
o possible constraints placed on an Underlying Fund's ability to purchase or
sell portfolio investments at advantageous times due to the need for the
Underlying Fund to maintain "cover" or to segregate securities; and
o the possibility that an Underlying Fund is unable to close out or
liquidate its hedged position.
REPURCHASE AGREEMENTS. All the Underlying Funds may use repurchase agreements
and the Select Portfolios also may use them in investing cash reserves.
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or recognized securities dealer and simultaneously commits to resell the
securities to the bank or dealer, usually no more than seven days after
purchase, at an agreed upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities. Repurchase agreements carry certain risks not associated
with direct investments in securities, including a possible decline in the
market value of the underlying securities and delays and costs to the Fund if
the other party to the repurchase agreement becomes insolvent. Each Fund intends
to enter into repurchase agreements only with banks and dealers in transactions
believed by Mitchell Hutchins or the applicable sub-adviser to present minimum
credit risks in accordance with guidelines established by each Fund's board.
BORROWINGS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. U.S. Government
Income Fund, Low Duration Income Fund and Strategic Income Fund each may invest
in "arbitraged" dollar roll and reverse repurchase transactions. In a dollar
roll, the Underlying Fund sells mortgage-backed or other securities for delivery
on the next regular settlement date and, simultaneously, contracts to purchase
substantially identical securities for delivery on a later settlement date. In a
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reverse repurchase agreement, the Underlying Fund sells securities to a bank or
dealer and agrees to repurchase them on demand or on a specified future date and
at a specified price. In "arbitraged" transactions, the Underlying Fund
maintains an offsetting position in cash or in U.S. government or investment
grade bonds that mature on or before the settlement date of the related dollar
roll or reverse repurchase agreement. Mitchell Hutchins believes that these
"arbitraged" transactions do not present the risks that are normally associated
with leverage. These Underlying Funds may invest up to 5% of their total assets
in dollar rolls that are not arbitraged. These dollar rolls and reverse
repurchase transactions are subject to each Underlying Fund's limitation on
borrowings and may not exceed 33-1/3% of its total assets. These Underlying
Funds also may borrow for temporary or emergency purposes, but not in excess of
an additional 5% of the Underlying Fund's total assets.
The other Underlying Funds may borrow money and use reverse repurchase
agreements subject to each Underlying Fund's limitation on borrowings, which
varies from 10% to 33-1/3% of total assets.
The Select Portfolios also each may borrow money for temporary or emergency
purposes in an amount not exceeding ____% of its total assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Underlying Fund may purchase
securities on a "when-issued" or delayed-delivery basis. In when-issued or
delayed-delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but the Underlying Fund would not pay for such securities or
start earning interest on them until they are delivered. However, when the
Underlying Fund purchases securities on a when-issued or delayed-delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation
LENDING PORTFOLIO SECURITIES. Each Underlying Fund may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of that Underlying Fund's total assets. Lending securities enables an Underlying
Fund to earn additional income, but could result in a loss or delay in
recovering these securities.
PORTFOLIO TURNOVER. Each Underlying Fund's portfolio turnover rate may vary
greatly from year to year and will not be a limiting factor when Mitchell
Hutchins or a sub-adviser deems portfolio changes appropriate. A higher turnover
rate (100% or more) for an Underlying Fund will involve correspondingly greater
transaction costs, which will be borne directly by the Underlying Fund, and may
increase the potential for short-term capital gains.
DEFENSIVE POSITIONS; CASH RESERVES. When Mitchell Hutchins or the applicable
sub-adviser believes that unusual market or economic circumstances warrant a
defensive posture, each Underlying Fund may temporarily commit all or any
portion of its assets to cash or investment grade money market instruments of
U.S. (and foreign issuers for some Underlying Funds), including repurchase
agreements. Each Underlying Fund may invest up to 35% of its total assets in
cash or investment grade money market instruments of U.S. (and foreign issuers
for some Underlying Funds) for liquidity purposes or pending investment in other
securities
ILLIQUID SECURITIES. Each Underlying Fund may invest up to 10% or 15% of its net
assets, in illiquid securities, including certain cover for over-the-counter
options and securities whose disposition is restricted under the federal
securities laws. The Underlying Funds do not consider securities that are
eligible for resale pursuant to SEC Rule 144A to be illiquid securities if
Mitchell Hutchins or the sub-adviser, as applicable, has determined such
securities to be liquid, based upon the trading markets for the securities under
procedures approved by the Underlying Funds' boards.
The Select Portfolios each may invest up to __% of its net assets in illiquid
securities, including Rule 144A securities, but intend to use this authorization
only in connection with their investment of cash reserves in short-term
securities.
OTHER INFORMATION. Each Underlying Fund may sell securities short "against the
box" to defer realization of gains or losses for tax or other purposes. When a
security is sold against the box, the seller owns the security. In addition,
each Underlying Fund may invest up to 10% of its total assets in the securities
of other investment companies. To the extent an Underlying Fund invests in other
investment companies, its shareholders, including the Select Portfolios, incur
duplicative fees and expenses, including investment advisory fees.
Prospectus Page 28
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
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FLEXIBLE PRICING(SERVICEMARK)
- --------------------------------------------------------------------------------
Each Select Portfolio offers through this Prospectus four classes of shares that
differ in terms of sales charges and expenses. An investor can select the class
that is best suited to his or her investment needs, based upon the holding
period and the amount of investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial sales
charge (the maximum is 4.5% of the public offering price) next calculated after
PaineWebber's New York City headquarters or PFPC Inc., the Select Portfolios'
transfer agent ("Transfer Agent"), receives the purchase order. Although
investors pay an initial sales charge when they buy Class A shares, the ongoing
expenses for this class are lower than the ongoing expenses of Class B and Class
C shares. Class A shares sales charges are calculated as follows:
<TABLE>
<CAPTION>
SELECT AGGRESSIVE GROWTH PORTFOLIO, SELECT GROWTH PORTFOLIO AND SELECT MODERATE PORTFOLIO
SALES CHARGE AS
A PERCENTAGE OF DISCOUNT TO
--------------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
PRICE INVESTED OFFERING PRICE
----- -------- --------------
<S> <C> <C> <C> <C>
AMOUNT OF INVESTMENT
- --------------------
Less than $50,000.................................. 4.50% 4.71% 4.25%
$50,000 to $99,999................................. 4.00 4.17 3.75
$100,000 to $249,999............................... 3.50 3.63 3.25
$250,000 to $499,999............................... 2.50 2.56 2.25
$500,000 to $999,999............................... 1.75 1.78 1.50
$1,000,000 and over (1)............................ None None 1.00(2)
</TABLE>
<TABLE>
<CAPTION>
SELECT CONSERVATIVE PORTFOLIO
SALES CHARGE AS
A PERCENTAGE OF DISCOUNT TO
--------------------------------- SELECTED DEALERS
OFFERING NET AMOUNT AS PERCENTAGE OF
PRICE INVESTED OFFERING PRICE
----- -------- --------------
<S> <C> <C> <C> <C>
AMOUNT OF INVESTMENT
Less than $100,000................................. 4.00% 4.17% 3.75%
$100,000 to $249,999............................... 3.00 3.09 2.75
$250,000 to $499,999............................... 2.25 2.30 2.00
$500,000 to $999,999............................... 1.75 1.78 1.50
$1,000,000 and over (1)............................ None None 1.00(2)
</TABLE>
(1) A contingent deferred sales charge of 1% of the shares' offering price
or the net asset value at the time of sale by the shareholder,
whichever is less, is charged on sales of shares made within one year
of the purchase date. Class A shares representing reinvestment of any
dividends or other distributions are not subject to the 1% charge.
Withdrawals under the Systematic Withdrawal Plan are not subject to
this charge. However, investors may not withdraw annually more than
12% of the value of the Fund account under the Plan in the first year
after purchase.
(2) Mitchell Hutchins pays 1% to PaineWebber.
Prospectus Page 29
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PaineWebber Aggressive Growth Moderate Conservative
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SALES CHARGE REDUCTIONS & WAIVERS
Investors who are purchasing Class A shares in more than one PaineWebber mutual
fund may combine those purchases to get a reduced sales charge. Investors who
already own Class A shares in one or more PaineWebber mutual funds may combine
the amount they are currently purchasing with the value of such previously owned
shares to qualify for a reduced sales charge. To determine the sales charge
reduction in either case, please refer to the charts above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
o their spouses, parents or children under age 21;
o their Individual Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k) plans;
o any company controlled by the investor;
o trusts created by the investor;
o Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts
created by the investor or group of investors for the benefit of the
investors' children; or
o accounts with the same adviser.
Employers who own Class A shares for one or more of their qualified retirement
plans may also qualify for the reduced sales charge.
The sales charge will not apply when the investor:
o is an employee, director, trustee or officer of PaineWebber, its
affiliates or any PaineWebber mutual fund;
o is the spouse, parent or child of any of the above, or advisory
clients of Mitchell Hutchins;
o buys these shares through a PaineWebber investment executive who was
formerly employed as a broker with a competing brokerage firm that was
registered as a broker-dealer with the SEC and
o the investor was the investment executive's client at the
competing brokerage firm;
o within 90 days of buying Class A shares in a Select Portfolio,
the investor sells shares of one or more mutual funds that (a)
were principally underwritten by the competing brokerage firm or
its affiliates and (b) the investor either paid a sales charge to
buy those shares, paid a contingent deferred sales charge when
selling them or held those shares until the contingent deferred
sales charge was waived; and
o the amount that the investor purchases does not exceed the total
amount of money the investor received from the sale of the other
mutual fund;
o is a certificate holder of unit investment trusts sponsored by PaineWebber
and has elected to have dividends and other distributions from that
investment automatically invested in Class A shares;
o is an employer establishing an employee benefit plan qualified under
section 401, including a salary reduction plan qualified under section
401(k) or section 403(b) of the Internal Revenue Code. (This waiver is
subject to minimum requirements, with respect to the number of employees
and the amount of plan assets, established by Mitchell Hutchins. Currently,
a plan must have 50 or more eligible employees or at least $1 million in
assets;
o acquires Class A shares through an investment program that is not
sponsored by PaineWebber or its affiliates and that charges participants a
fee for program services, provided that the program sponsor has entered
into a written agreement with PaineWebber permitting the sale of Class A
Prospectus Page 30
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
shares at net asset value to that program. For investments made pursuant to
this waiver, Mitchell Hutchins may make a payment to PaineWebber out of its
own resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to implement a rebalancing feature
of such an investment program, the minimum subsequent investment
requirement is also waived; or
[o acquires Class A shares in connection with a reorganization pursuant to
which a Select Portfolio acquires substantially all of the assets and
liabilities of another investment company in exchange for shares of the
Select Portfolio.]
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information to
PaineWebber or the Fund if they seek any of these waivers.
CLASS B SHARES
HOW PRICE IS CALCULATED: The price is the net asset value next calculated after
PaineWebber's New York City headquarters or the Transfer Agent receives the
purchase order. The ongoing expenses investors pay for Class B shares are higher
than those of Class A shares. Because investors do not pay an initial sales
charge when they buy Class B shares, 100% of their purchase is immediately
invested.
Depending on how long they own their Select Portfolio investment, investors may
have to pay a sales charge when they sell their Select Portfolio shares. This
sales charge is called a "contingent deferred sales charge." The amount of the
charge depends on how long the investor owned the shares. The sales charge is
calculated by multiplying the offering price (net asset value at the time of
purchase) or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, by the percentage shown on the following table.
Investors who own shares for more than six years do not have to pay a sales
charge when selling those shares.
PERCENTAGE BY WHICH
IF THE INVESTOR SELLS THE SHARES' NET ASSET
SHARES WITHIN: 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
CONVERSION OF CLASS B SHARES
Class B shares automatically convert to the appropriate number of Class A shares
of equal dollar value after the investor has owned them for six years. Dividends
and other distributions paid to the investor by the Select Portfolio in the form
of additional Class B shares will also convert to Class A shares on a pro-rata
basis. This benefits shareholders because Class A shares have lower ongoing
expenses than Class B shares. If the investor has exchanged Class B shares
between PaineWebber funds, the Select Portfolio uses the purchase date at which
the initial investment was made to determine the conversion date.
MINIMIZING THE CONTINGENT DEFERRED SALES CHARGE
When investors sell Class B shares they have owned for less than six years, the
Select Portfolio automatically will minimize the sales charge by assuming the
investors are selling:
o First, Class B shares owned through reinvested dividends and capital
gain distributions; and
o Second, Class B shares held in the Select Portfolio the longest.
WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will not apply to:
Prospectus Page 31
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
o sales of shares under the Select Portfolio's "Systematic Withdrawal Plan"
(investors may not withdraw annually more than 12% of the value of the
Select Portfolio account under the Plan);
o a distribution from an IRA, a self-employed individual retirement plan
("Keogh Plan") or a custodial account under Section 403(b) of the Internal
Revenue Code (after the investor reaches age 59 1/2);
o a tax-free return of an excess IRA contribution;
o a tax-qualified retirement plan distribution following retirement; or
o Class B shares sold within one year of an investor's death if the investor
owned the shares at the time of death either as the sole shareholder or
with his or her spouse as a joint tenant with the right of survivorship.
An investor must provide satisfactory information to PaineWebber or the Select
Portfolio if the investor seeks any of these waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value next
calculated after PaineWebber's New York City headquarters or the Transfer Agent
receives the purchase order. Investors do not pay an initial sales charge when
they buy Class C shares, but the ongoing expenses of Class C shares are higher
than those of Class A shares. Class C shares never convert to any other class of
shares.
A contingent deferred sales charge of 1% (0.75% for Select Conservative
Portfolio) of the offering price (net asset value at the time of purchase) or
the net asset value of the shares at the time of sale by the shareholder,
whichever is less, is charged on sales of shares made within one year of the
purchase date. Other PaineWebber mutual funds may impose a different contingent
deferred sales charge on Class C shares sold within one year of the purchase
date. A sale of Class C shares acquired through an exchange and held less than
one year will be subject to the same contingent deferred sales charge that would
have been imposed on the Class C shares of the PaineWebber mutual fund
originally purchased. Class C shares representing reinvestment of any dividends
or capital gain distributions will not be subject to the 1% (0.75% for Select
Conservative Portfolio) charge. Withdrawals under the Systematic Withdrawal Plan
also will not be subject to this charge. However, investors may not withdraw
more than 12% of the value of the Select Portfolio account under the Plan in the
first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED. Class Y shares are sold to eligible investors at the
net asset value next determined after PaineWebber's New York City headquarters
or the Transfer Agent receives the purchase order. Because investors do not pay
an initial sales charge when they buy Class Y shares, 100% of their purchase is
immediately invested. The ongoing expenses for Class Y shares are lower than for
the other classes because Class Y shares are not subject to rule 12b-1
distribution or service fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to
buy Class Y shares:
o a participant in INSIGHT when Class Y shares are purchased through
that program;
o an investor who buys $10 million or more at any one time in any combination
of PaineWebber mutual funds in the Flexible Pricing(SERVICEMARK) System;
o an employee benefit plan qualified under section 401 (including a salary
reduction plan qualified under section 401(k)) or 403(b) of the Internal
Revenue Code that has either 5,000 or more eligible employees or $50
million or more in assets; and
o [an investment company advised by PaineWebber or an affiliate of
PaineWebber.]
INSIGHT. An investor who purchases $50,000 or more of shares of the mutual funds
that are available to INSIGHT participants (which include the PaineWebber mutual
funds in the Flexible Pricing(SERVICEMARK) system and certain other specified
mutual funds) may take part in INSIGHT, a total portfolio asset allocation
Prospectus Page 32
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
program sponsored by PaineWebber, and thus become eligible to purchase Class Y
shares. INSIGHT offers comprehensive investment services, including a
personalized asset allocation investment strategy using an appropriate
combination of funds, monitoring of investment performance and comprehensive
quarterly reports that cover market trends, portfolio summaries and personalized
account information.
Participation in INSIGHT is subject to payment of an advisory fee to PaineWebber
at the maximum annual rate of 1.50% of assets held through the program
(generally charged quarterly in advance), which covers all INSIGHT investment
advisory services and program administration fees. Employees of PaineWebber and
its affiliates are entitled to a 50% reduction in the fee otherwise payable for
participation in INSIGHT. INSIGHT clients may elect to have their INSIGHT fees
charged to their PaineWebber accounts (by the automatic redemption of money
market fund shares) or, if a qualified plan, invoiced.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to INSIGHT participants or for other INSIGHT information.
ACQUISITION OF CLASS Y SHARES BY OTHERS. Each Select Portfolio is authorized to
offer Class Y shares to employee benefit and retirement plans of Paine Webber
Group, Inc. and its affiliates and certain other investment programs that are
sponsored by PaineWebber and that may invest in PaineWebber mutual funds. At
present, however, INSIGHT participants are the only purchasers in these
categories.
- ------------------------------------------------------------------------------
HOW TO BUY SHARES
- ------------------------------------------------------------------------------
Prices are calculated for each class of the Select Portfolio's shares once each
Business Day, at the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time). A "Business Day" is any day, Monday through
Friday, on which the New York Stock Exchange is open for business. Shares are
purchased at the next share price calculated after the purchase order is
received.
The Select Portfolio and Mitchell Hutchins reserve the right to reject any
purchase order and to suspend the offering of Fund shares for a period of time.
When placing an order to buy shares, investors should specify which class of
shares they want to buy. If investors fail to specify the class, they will
automatically receive Class A shares, which include an initial sales charge.
Investors in Class Y shares must provide satisfactory information to PaineWebber
or the Select Portfolio that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's New
York City headquarters.
Investors may pay for their purchases with checks drawn on U.S. banks or with
funds they have in their brokerage accounts at PaineWebber or its correspondent
firms. Payment is due on the third Business Day after PaineWebber's New York
City headquarters office receives the purchase order.
Prospectus Page 33
<PAGE>
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Select Portfolio shares
and set up an account through the Transfer Agent by completing an account
application which may be obtained by calling 1-800-647-1568. The application and
check must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
Investors who already have money invested in a PaineWebber mutual fund, and want
to invest in another PaineWebber mutual fund, can:
o mail an application with a check; or
o open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional investments
in the Select Portfolio.
MINIMUM INVESTMENTS FOR CLASS A, CLASS B AND CLASS C SHARES
To open an account .....................$ 1,000
To add to an account ...................$ 100
A Select Portfolio may waive or reduce these minimums for:
o employees of PaineWebber or its affiliates; or
o participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the Select Portfolio's automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A, Class B and
Class C shares of the Select Portfolios for the same class of other PaineWebber
mutual fund shares. For classes of shares where no initial sales charge is
imposed, a contingent deferred sales charge may apply if the investor sells the
shares acquired through the exchange. Class Y shares are not exchangeable.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
o Investors who purchased their shares through an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
contacting their investment executive in person or by telephone, mail or
wire.
o Investors who do not have an account with an investment executive at
PaineWebber or one of its correspondent firms may exchange their shares by
writing a "letter of instruction" to the Transfer Agent. The letter of
instruction must include:
o the investor's name and address;
o the Select Portfolio's name;
o the Select Portfolio account number;
o the dollar amount or number of shares to be sold; and
o a guarantee of each registered owner's signature by an eligible
institution, such as a commercial bank, trust company or stock
exchange member.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O. Box
8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when shares are exchanged for the
corresponding class of shares of other PaineWebber mutual funds. A Select
Portfolio will use the purchase date of the initial investment to determine any
contingent deferred sales charge due when the acquired shares are sold. Select
Portfolio shares may be exchanged only after the settlement date has passed and
payment for the shares has been made. The exchange privilege is available only
in those jurisdictions where the sale of the fund shares to be acquired is
authorized. This exchange privilege may be modified or terminated at any time
and, when required by SEC rules, upon 60 days' notice. See the back cover of
this prospectus for a listing of other PaineWebber mutual funds.
Prospectus Page 34
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------
HOW TO SELL SHARES
- ------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the share
price for that class as next calculated after the order is received and accepted
(less any applicable contingent deferred sales charge). Share prices are
normally calculated at the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time).
Investors who own more than one class of shares should specify which class they
are selling. If they do not, the Select Portfolio will assume they are first
selling their Class A shares, then Class C, and last, Class B.
If a shareholder wants to sell shares which were purchased recently, the Select
Portfolio may delay payment until it verifies that good payment was received. In
the case of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executive. Investors who do not have an account and have bought their shares
through PFPC Inc., the Select Portfolios' Transfer Agent, may sell shares by
writing a "letter of instruction," as detailed in "How to Exchange Shares."
Because the Select Portfolios incur certain fixed costs in maintaining
shareholder accounts, each Select Portfolio reserves the right to purchase back
all of its shares in any shareholder account with a net asset value of less than
$500. If the Select Portfolio elects to do so, it will notify the shareholder of
the opportunity to increase the amount invested to $500 or more within 60 days
of the notice. A Select Portfolio will not purchase back accounts that fall
below $500 solely due to a reduction in net asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Select Portfolio
account without a sales charge up to the dollar amount sold by purchasing the
Select Portfolio's Class A shares within 365 days after the sale. To take
advantage of this reinstatement privilege, shareholders must notify their
investment executive at PaineWebber or one of its correspondent firms at the
time of purchase.
- ------------------------------------------------------------------------------
OTHER SERVICES
- ------------------------------------------------------------------------------
Investors should consult their investment executives at PaineWebber or one of
its correspondent firms to learn more about the following services available
with respect to the Select Portfolios' Class A, Class B and Class C shares:
AUTOMATIC INVESTMENT PLAN
Investing on a regular basis helps investors meet their financial goals.
PaineWebber offers an Automatic Investment Plan with a minimum initial
investment of $1,000 through which a Select Portfolio will deduct $50 or more
each month from the investor's bank account to invest directly in the Select
Portfolio. In addition to providing a convenient and disciplined manner of
investing, participation in the Automatic Investment Plan enables the investor
to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December) or semiannual (June and December)
withdrawals from their Select Portfolio accounts. Minimum balances and
withdrawals vary according to the class of shares:
Prospectus Page 35
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
o Class A and Class C shares. Minimum value of Select Portfolio shares is
$5,000; minimum withdrawals of $100.
o Class B shares. Minimum value of Select Portfolio shares is $20,000;
minimum monthly, quarterly and semi annual withdrawals of $200, $400 and
$600, respectively.
Withdrawals under the Systematic Withdrawal Plan will not be subject to a
contingent deferred sales charge. An investor may not withdraw more than 12% of
the value of the Select Portfolio account when the investor signed up for the
Plan (for Class B shares, annually; for Class A and Class C shares, during the
first year under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in the Plan.
INDIVIDUAL RETIREMENT ACCOUNTS
Self-Directed IRAs are available through PaineWebber in which purchases of
PaineWebber mutual funds and other investments may be made. Investors
considering establishing an IRA should review applicable tax laws and should
consult their tax advisers.
TRANSFER OF ACCOUNTS
If investors holding shares of a Select Portfolio in a PaineWebber brokerage
account transfer their brokerage accounts to another firm, the Select Portfolio
shares will be moved to an account with the Transfer Agent. However, if the
other firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the Select Portfolio, the shareholder may be able to hold Select
Portfolio shares in an account with the other firm.
- ------------------------------------------------------------------------------
MANAGEMENT
- ------------------------------------------------------------------------------
The Select Portfolios are governed by a board of trustees, which oversees their
operations. Each Select Portfolio has appointed Mitchell Hutchins as investment
adviser and administrator responsible for that Select Portfolio's operations
(subject to the authority of the board). As investment adviser and
administrator, Mitchell Hutchins supervises all aspects of each Select
Portfolio's operations and makes and implements all investment decisions for
that Select Portfolio.
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is the asset management subsidiary of PaineWebber Incorporated, which is
wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On February 28, 1997, Mitchell Hutchins was adviser or
sub-adviser of 30 investment companies with 65 separate portfolios and aggregate
assets of approximately $33.3 billion.
Personnel of Mitchell Hutchins may engage in securities transactions for their
own accounts pursuant to Mitchell Hutchins' code of ethics that establishes
procedures for personal investing and restricts certain transactions.
T. Kirkham Barneby is responsible for the day-to-day management of each
Select Portfolio's portfolio. Mr. Barneby is a managing director and chief
investment officer of quantitative investments of Mitchell Hutchins. Mr.
Barneby rejoined Mitchell Hutchins in 1994 after being with Vantage Global
Management for one year. During the eight years that Mr. Barneby was
previously with Mitchell Hutchins, he was a senior vice president
responsible for quantitative management and asset allocation models.
MANAGEMENT FEES & OTHER EXPENSES
Each Select Portfolio incurs various expenses in its operations, such as the
management fee paid to Mitchell Hutchins, 12b-1 distribution and services fees
paid with respect to the various classes, custody and transfer agency fees,
Prospectus Page 36
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
professional fees, expenses of board and shareholder meetings, fees and expenses
relating to registration of its shares, taxes and governmental fees, fees and
expenses of trustees, costs of obtaining insurance, expenses of printing and
distributing shareholder materials, organizational expenses and extraordinary
expenses, including costs or losses in any litigation.
Mitchell Hutchins has agreed to bear all expenses of the Select Portfolios other
than the management fee, the 12b-1 fees and extraordinary expenses. For its
services and its bearing these expenses, each Select Portfolio pays Mitchell
Hutchins a monthly fee at the annual rate of ______% of its average daily net
assets.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of each Select Portfolio's shares and has
appointed PaineWebber as the exclusive dealer for the sale of those shares.
There is no distribution plan with respect to the Select Portfolios' Class Y
shares. Under distribution plans for Class A, Class B and Class C shares ("Class
A Plan," "Class B Plan" and "Class C Plan," collectively, "Plans"), each Select
Portfolio pays Mitchell Hutchins:
o Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
o Monthly distribution fees at the annual rate of 0.75% (0.50% for the
Select Conservative Portfolio) of the average daily net assets of Class B
and Class C shares.
Mitchell Hutchins primarily uses the service fees under the Plans for the Class
A, Class B and Class C shares to pay PaineWebber for shareholder servicing,
currently at the annual rate of 0.25% of the aggregate investment amounts
maintained in each Select Portfolio by PaineWebber clients. PaineWebber then
compensates its investment executives for shareholder servicing that they
perform and offsets its own expenses in servicing and maintaining shareholder
accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C Plans
to:
o Offset the commissions it pays to PaineWebber for selling each Select
Portfolio's Class B and Class C shares, respectively.
o Offset each Select Portfolio's marketing costs attributable to such
classes, such as preparation, printing and distribution of sales
literature, advertising and prospectuses to prospective investors and
related overhead expenses, such as employee salaries and bonuses.
PaineWebber compensates investment executives when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the Select Portfolios or investors
at the time Class B or Class C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge paid when
Class A shares are bought and of the contingent deferred sales charge paid upon
sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related distribution contracts for each class of shares
("Distribution Contracts") specify that each Select Portfolio must pay service
and distribution fees to Mitchell Hutchins for its activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
Select Portfolios will not be obligated to pay more than those fees. On the
other hand, if Mitchell Hutchins' expenses are less than such fees, it will
retain its full fees and realize a profit. Expenses in excess of service and
distribution fees received or accrued through the termination date of any Plan
will be Mitchell Hutchins' sole responsibility and not that of the Select
Portfolios. Annually, the board of each Select Portfolio reviews the Plans and
Mitchell Hutchins' corresponding expenses for each class separately from the
Plans and expenses of the other classes.
Prospectus Page 37
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PaineWebber Aggressive Growth Moderate Conservative
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- ------------------------------------------------------------------------------
DETERMINING THE SHARES'
NET ASSET VALUE
- ------------------------------------------------------------------------------
The net asset value of a Select Portfolio's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. Each
Select Portfolio's net asset value per share is determined by dividing the value
of the securities held by the Select Portfolio, plus any cash or other assets,
minus all liabilities, by the total number of Select Portfolio shares
outstanding.
The value of each Underlying Fund will be its net asset value at the time of
computation. Short-term investments that have a maturity of more than 60 days
are valued at prices based on market quotations for securities of similar type,
yield and maturity. The amortized cost method of valuation generally is used to
value debt obligations with 60 days or less remaining to maturity, unless the
board determines that this does not represent fair value.
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DIVIDENDS & TAXES
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DIVIDENDS
Select Conservative Portfolio and Select Moderate Portfolio declare quarterly
dividends from their net investment income. Select Aggressive Growth Portfolio
and Select Growth Portfolio declare annual dividends from their net investment
income Each Select Portfolio also distributes annually substantially all of its
net capital gain (the excess of net long-term capital gain over net short-term
capital loss), if any. The Select Portfolios may make additional distributions,
if necessary, to avoid a 4% excise tax on certain undistributed income and
capital gains.
Dividends and other distributions paid on each class of shares of each Select
Portfolio are calculated at the same time and in the same manner. Dividends on
Class A, Class B and Class C shares of a Select Portfolio are expected to be
lower than those on its Class Y shares because the other shares have higher
expenses resulting from their distribution and service fees. Dividends on Class
B and Class C shares of a Select Portfolio are expected to be lower than those
on its Class A shares because Class B and Class C shares have higher expenses
resulting from their distribution fees.
The Select Portfolios' dividends and other distributions are paid in additional
Select Portfolio shares of the same class at net asset value, unless the
shareholder has requested cash payments. Shareholders who wish to receive
dividends and other distributions in cash, either mailed to them by check or
credited to their PaineWebber accounts, should contact their investment
executives at PaineWebber or one of its correspondent firms or complete the
appropriate section of the account application.
TAXES
Each Select Portfolio intends to qualify for treatment as a regulated investment
company under the Internal Revenue Code so that it will not have to pay federal
income tax on the part of its investment company taxable income (generally
consisting of net investment income and net short-term capital gains) and net
capital gain that it distributes to its shareholders.
Prospectus Page 38
<PAGE>
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
Dividends from each Select Portfolio's investment company taxable income
(whether paid in cash or additional shares) are generally taxable to its
shareholders as ordinary income. Distributions of each Select Portfolio's net
capital gain (whether paid in cash or additional shares) are taxable to its
shareholders as long-term capital gain, regardless of how long they have held
their Select Portfolio shares. Shareholders who are not subject to tax on their
income generally will not be required to pay tax on distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, each Select Portfolio notifies its
shareholders of the amounts of dividends and capital gain distributions paid (or
deemed paid) for that year and any portion of those dividends that qualifies for
special treatment.
WITHHOLDING REQUIREMENTS
Each Select Portfolio is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Select Portfolio with a
correct taxpayer identification number. Withholding at that rate also is
required from dividends and capital gain distributions payable to such
shareholders who otherwise are subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF SELECT PORTFOLIO SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholders receive more or less than their
adjusted basis for the shares (which normally takes into account any initial
sales charge paid on Class A shares). An exchange of any Select Portfolio's
shares for shares of another PaineWebber mutual fund generally will have similar
tax consequences. In addition, if a Select Portfolio's shares are bought within
30 days before or after selling other shares of that Select Portfolio
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL TAX RULES FOR CLASS A SHAREHOLDERS
Special tax rules apply when a shareholder sells or exchanges Class A shares
within 90 days of purchase and subsequently acquires Class A shares of a
PaineWebber mutual fund without paying a sales charge due to the 365-day
reinstatement privilege or the exchange privilege. In these cases, any gain on
the sale or exchange of the original Class A shares would be increased, or any
loss would be decreased, by the amount of the sales charge paid when those
shares were bought, and that amount will increase the basis of the PaineWebber
mutual fund shares subsequently acquired.
CLASS B SHAREHOLDERS
No gain or loss will be recognized by a shareholder as a result of a conversion
from Class B shares into Class A shares.
****
Because the foregoing only summarizes some of the important tax considerations
affecting the Select Portfolios and their shareholders, prospective shareholders
are urged to consult their tax advisers.
Prospectus Page 39
<PAGE>
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PaineWebber Aggressive Growth Moderate Conservative
Select Growth Portfolio Portfolio Portfolio Portfolio
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GENERAL INFORMATION
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ORGANIZATION
The Select Portfolios are non-diversified series of PaineWebber Select Fund
("Trust"), an open-end management investment company formed on August 9, 1996 as
a business trust under the laws of Delaware. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, with a par value of $0.001 per share.
SHARES
The shares of each Select Portfolio are divided into four classes, designated
Class A, Class B, Class C and Class Y shares. Each class represents an identical
interest in the respective Select Portfolio's investment portfolio and has the
same rights, privileges and preferences. However, each class may differ with
respect to sales charges distribution and/or service fees, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege. The different charges
applicable to the different classes of shares of the Select Portfolios will
affect the performance of those classes.
Each share of each Select Portfolio is entitled to participate equally in
dividends, other distributions and the proceeds of any liquidation of that
Select Portfolio. However, due to the differing expenses of the classes,
dividends on Class A, Class B and Class C shares are likely to be lower than for
Class Y shares, which bear the lowest expenses, and dividends on Class B and
Class C shares are likely to be lower than for Class A shares.
VOTING RIGHTS
Shareholders of each Select Portfolio are entitled to one vote for each full
share held and fractional votes for fractional shares held. Voting rights are
not cumulative and the holders of more than 50% of all the shares of the Select
Portfolios as a group may elect all the board members of the Trust. The shares
of a Select Portfolio will be voted together, except that only the shareholders
of a particular class may vote on matters affecting only that class, such as the
terms of a Plan as it relates to the class. The shares of each series of the
Trust will be voted separately, except when an aggregate vote of all the
securities is required by law.
SHAREHOLDER MEETINGS
The Trust does not intend to hold annual meetings.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a board member through a declaration in writing or by vote
cast in person or by proxy at a meeting called for that purpose. A meeting will
be called to vote on the removal of a board member at the written request of
holders of 10% of the outstanding shares of the Trust.
REPORTS TO SHAREHOLDERS
Each Select Portfolio sends its shareholders audited annual and unaudited
semiannual reports, each of which includes a list of the investment securities
held by the Select Portfolio as of the end of the period covered by the report.
The Statement of Additional Information, which is incorporated by this
reference, is available to shareholders upon request.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for the
Select Portfolios. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the
Select Portfolios' transfer and dividend disbursing agent. It is located at 400
Bellevue Parkway, Wilmington, DE 19809.
Prospectus Page 40
<PAGE>
PAINEWEBBER SELECT PORTFOLIOS
PROSPECTUS -- __________, 1997
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The PAINEWEBBER FAMILY OF MUTUAL FUNDS consists of the six broad categories
presented here. Class A, Class B and Class C shareholders in the PaineWebber
Select Portfolios may exchange their shares for the corresponding shares of
funds in the PaineWebber Family of Mutual Funds.
<TABLE>
<CAPTION>
<S> <C>
PAINEWEBBER BOND FUNDS for income by PAINEWEBBER STOCK FUNDS for long term
investing mainly in bonds. growth by investing mainly in stocks.
High Income Fund Capital Appreciation Fund
Investment Grade Income Fund Financial Services Growth Fund
Low Duration U.S. Government Growth Fund
Income Fund Growth and Income Fund
Strategic Income Fund Small Cap Fund
U.S. Government Income Fund Utility Income Fund
PAINEWEBBER TAX-FREE BOND FUNDS for income PAINEWEBBER GLOBAL FUNDS for long-term growth
exempt from federal income tax and, in some by investing mainly in foreign stocks or high
cases, state and local income taxes, by current income by investing mainly in global
investing in municipal bonds. debt instruments.
California Tax-Free Income Fund Asia Pacific Growth Fund
Municipal High Income Fund Emerging Markets Equity Fund
National Tax-Free Income Fund Global Equity Fund
New York Tax-Free Income Fund Global Income Fund
PAINEWEBBER ASSET ALLOCATION FUNDS for high PAINEWEBBER MONEY MARKET FUND for income and
total return by investing in stocks and bonds. stability by investing in high-quality,
short-term instruments.
Balanced Fund
Tactical Allocation Fund
</TABLE>
A prospectus containing more complete information for any of these funds,
including charges and expenses, can be obtained from a PaineWebber Investment
executive or correspondent firm. Please read it carefully before investing. It
is important you have all the information you need to make a sound investment
decision.
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(C) 1997 PaineWebber Incorporated
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY SAI DATED April 29, 1997
PAINEWEBBER SELECT PORTFOLIOS
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The following PaineWebber Select Portfolios (each a "Select Portfolio" and,
collectively, "Select Portfolios") are non-diversified series of PaineWebber
Select Fund ("Trust"), an open-end management investment company organized as
Delaware business trust. The Select Portfolios seek to achieve their investment
objectives by investing in a number of other PaineWebber mutual funds
("Underlying Funds").
SELECT AGGRESSIVE GROWTH PORTFOLIO seeks long-term capital appreciation
by investing the majority of its assets in aggressive equity mutual
funds.
SELECT GROWTH PORTFOLIO seeks long-term capital appreciation by
investing the majority of its assets in equity mutual funds that invest
in larger, more established companies.
SELECT MODERATE PORTFOLIO seeks high total return with low volatility
by investing its assets in a combination of equity and fixed income
mutual funds.
SELECT CONSERVATIVE PORTFOLIO seeks a combination of income and growth,
with preservation of capital as a primary goal, by investing the
majority of its assets in fixed income mutual funds.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), an asset
management subsidiary of PaineWebber Incorporated ("PaineWebber"), is the
investment adviser, administrator and distributor for each Select Portfolio. As
distributor, Mitchell Hutchins has appointed PaineWebber to serve as the
exclusive dealer for the sale of the Select Portfolio shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Select Portfolios' current Prospectus dated
__________, 1997. A copy of the Prospectus may be obtained by calling any
PaineWebber investment executive or correspondent firm, or by calling toll-free
1- 800-647-1568. Participants in the PaineWebber Savings Investment Plan may
obtain a copy of the Prospectus by contacting the PaineWebber Benefits
Department, 1000 Harbor Boulevard, 10th Floor, Weehawken, New Jersey 07087 or by
calling 1-201-902-4444. This Statement of Additional Information is dated
__________, 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS SAI SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY.
<PAGE>
SELECT PORTFOLIOS - INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Select Portfolios.
DIRECT INVESTMENTS IN SECURITIES. As stated in the Prospectus, in addition
to investing in the Underlying Funds, each Select Portfolio may invest directly
in short-term U.S. government securities, high grade short-term commercial paper
and other money market instruments and repurchase agreements. Under normal
conditions, each Select Portfolio's investments in these securities, together
with its investments in PaineWebber Cashfund, a money market fund, is not
expected to exceed 20% of its total assets. However, when Mitchell Hutchins
believes that unusual market or economic conditions warrant a defensive posture,
each Select Portfolio may invest without limit in these securities.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Select Portfolio purchases securities from a bank or recognized securities
dealer and simultaneously commits to resell the securities to the bank or dealer
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Select Portfolio maintains custody of the underlying securities prior to
their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by a Select Portfolio upon acquisition is
accrued as interest and included in its net investment income. Repurchase
agreements carry certain risks not associated with direct investments in
securities, including possible declines in the market value of the underlying
securities and delays and costs to a Select Portfolio if the other party to a
repurchase agreement becomes insolvent.
The Select Portfolios intend to enter into repurchase agreements only with
banks and dealers in transactions believed by Mitchell Hutchins to present
minimal credit risks in accordance with guidelines established by the Trust's
board. Mitchell Hutchins reviews and monitors the creditworthiness of those
institutions under the board's general supervision.
MONEY MARKET INSTRUMENTS. Money market instruments may include securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
commercial paper rated in the highest category by a nationally recognized
statistical rating organization, bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by any of the foregoing.
U.S. GOVERNMENT SECURITIES. The Select Portfolios may invest in various
direct obligations of the U.S. Treasury and obligations issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities (collectively,
"U.S. government securities"). Among the U.S. government securities that may be
held by the Select Portfolios are securities that are supported by the full
faith and credit of the United States; securities that are supported by the
right of the issuer to borrow from the U.S. Treasury; and securities that are
supported solely by the credit of the instrumentality. U.S. government
securities are described in greater detail in "Underlying Funds - Investment
Policies."
ILLIQUID SECURITIES. Each Select Portfolio may invest up to 15% of its net
assets in illiquid securities, although the Select Portfolios intend to use this
authorization only in connection with their investment of cash reserves in
short-term securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Select Portfolio has value
the securities and includes, among other things, repurchase agreements maturing
in more than seven days and restricted securities other than those Mitchell
Hutchins has determined to be liquid pursuant to guidelines established by the
2
<PAGE>
Trust's board. More information about illiquid securities and the circumstances
under which restricted securities can be determined to be liquid is provided in
"Underlying Funds - Investment Policies, Illiquid Securities" below.
INVESTMENT LIMITATIONS OF THE SELECT PORTFOLIOS
FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed for a Select Portfolio without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the Select Portfolio or
(b) 67% or more of the Select Portfolio's shares present at a shareholders'
meeting if more than 50% of the outstanding Select Portfolio shares are
represented at the meeting in person or by proxy. If a percentage restriction is
adhered to at the time of an investment or transaction, a later increase or
decrease in percentage resulting from a change in values of portfolio securities
or amount of total assets will not be considered a violation of any of the
foregoing limitations.
Each Select Portfolio will not:
(1) purchase any security if, as a result of that purchase, 25% or more of
the Select Portfolio's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except that
this limitation does not apply to investments in other investment companies or
to securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or to municipal securities.
(2) issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 ("1940 Act") and then not in excess of 33 1/3% of
the Select Portfolio's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Select
Portfolio may borrow up to an additional 5% of its total assets (not including
the amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the Select Portfolio might be considered an
underwriter under the federal securities laws in connection with its disposition
of portfolio securities.
(5) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Select
Portfolio may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Select Portfolio may purchase,
sell or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions, which
apply to each Select Portfolio, are non-fundamental and may be changed by the
vote of the Trust's board without shareholder approval.
3
<PAGE>
Each Select Portfolio will not:
(1) invest more than 15% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Select
Portfolio has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Select Portfolio may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Select Portfolio may (a) sell short "against the box" and (b)
maintain short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or under the terms of an exemptive order granted by
the Securities and Exchange Commission ("SEC") and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger.
Notwithstanding the forgoing investment limitations, the Select Portfolios
may invest in Underlying Funds that have adopted investment limitations that may
be more or less restrictive than those listed above. As a result, the Select
Portfolios and may engage indirectly in investment strategies that are
prohibited under the investment limitations listed above. The investment
limitations and other investment policies and restrictions of each Underlying
Fund are described in its prospectus and statement of additional information.
UNDERLYING FUNDS - INVESTMENT POLICIES
The following supplements the information contained in the Prospectus
concerning the investment policies and limitations of the Underlying Funds. With
respect to certain Underlying Funds, Mitchell Hutchins has retained one or more
sub-advisers ("Sub-Adviser" or "Sub-Advisers"), who are identified by name in
the Prospectus. More information about the investment policies and restrictions
and the investment limitations of each Underlying Fund is set forth in its
prospectus and statement of additional information.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt obligations.
A description of the ratings assigned to corporate debt obligations by Moody's
and S&P is included in the Appendix to this Statement of Additional Information.
The process by which S&P and Moody's determine ratings for mortgage- and
asset-backed securities includes consideration of the likelihood of the receipt
by security holders of all distributions, the nature of the underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects associated with such securities. Not even the highest such
ratings represents an assessment of the likelihood that principal prepayments
will be made by mortgagors or the degree to which such prepayments may differ
from that originally anticipated, nor do such ratings address the possibility
that investors may suffer a lower than anticipated yield or that investors in
such securities may fail to recoup fully their initial investment due to
prepayments.
4
<PAGE>
The Underlying Funds may use these ratings in determining whether to purchase,
sell or hold a security. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, securities with
the same maturity, interest rate and rating may have different market prices.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events so that an issuer's current financial condition
may be better or worse than the rating indicates. The rating assigned to a
security by a NRSRO does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Subsequent to its purchase by an Underlying Fund, an issue of debt obligations
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by that Underlying Fund.
The yields on bonds and other debt securities in which the Underlying
Funds invest are dependent on a variety of factors, including general money
market conditions, general conditions in the bond market, the financial
condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the payment
of interest and principal on their bonds.
Below investment grade debt securities are debt securities that are not
rated at the time of purchase within one of the four highest grades assigned by
S&P or Moody's, comparably rated by another NRSRO or determined by Mitchell
Hutchins or the applicable Sub-Adviser to be of comparable quality. Lower rated
debt securities generally offer a higher current yield than that available for
investment grade issues; however, they involve higher risks in that they are
especially subject to adverse changes in general economic conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely
affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for lower-rated debt securities has expanded rapidly in recent
years, and its growth generally paralleled a long economic expansion. In the
past, many lower rated debt securities experienced substantial price declines
reflecting an expectation that many issuers of such securities might experience
financial difficulties. As a result, the yields on lower rated debt securities
rose dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructurings or defaults. There can be no
assurance that such declines will not recur. The market for lower-rated debt
issues generally is thinner and less active than that for higher quality
securities, which may limit an Underlying Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower-rated securities,
especially in a thinly traded market.
U.S. GOVERNMENT SECURITIES. The Underlying Funds may invest in various
direct obligations of the U.S. Treasury and obligations issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities. Among the U.S.
government securities that may be held by the Underlying Funds are securities
that are supported by the full faith and credit of the United States; securities
that are supported by the right of the issuer to borrow from the U.S. Treasury;
and securities that are supported solely by the credit of the instrumentality.
Certain Underlying Funds may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities. These
securities are described below under "Underlying Funds -- Investment Policies,
Mortgage-Backed Securities."
5
<PAGE>
Certain Underlying Funds may invest in exchange rate-related U.S.
government securities. Such securities are indexed to specific foreign currency
exchange rates and generally provide that the interest rate and/or principal
amount will be adjusted upwards or downwards (but not below zero) to reflect
changes in the exchange rate between two currencies while the obligations are
outstanding. While such securities offer the potential for an attractive rate of
return, they also entail the risk of loss of principal.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities, as discussed in more
detail below. However, the underlying assets are not first lien mortgage loans
or interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain time
period by a letter of credit or pool insurance policy issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-through
securities and collateralized mortgage obligations are collectively referred to
herein as CMOs. U.S. government mortgage-backed securities include
mortgage-backed securities issued or guaranteed as to the payment of principal
and interest (but not as to market value) by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae (formerly, the Federal National Mortgage
Association) or the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Other mortgage-backed securities are issued by private issuers, generally
originators of an investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers and special purpose
entities (collectively, "Private Mortgage Lenders"). Payments of principal and
interest (but not the market value) of such private mortgage-backed securities
may be supported by pools of mortgage loans or other mortgage-backed securities
that are guaranteed, directly or indirectly, by the U.S. government or one of
its agencies or instrumentalities, or they may be issued without any government
guarantee of the underlying mortgage assets but with some form of non-government
credit enhancement. New types of mortgage-backed securities are developed and
marketed from time to time and, consistent with their investment policies and
limitations, the Underlying Funds expect to invest in these new types of
mortgage-backed securities that Mitchell Hutchins or the applicable Sub-Adviser
believes may assist in achieving the Underlying Fund's investment objective.
Similarly, an Underlying Fund may invest in mortgage-backed securities issued by
new or existing governmental or private issuers other than those identified
herein.
GINNIE MAE CERTIFICATES. Ginnie Mae guarantees certain mortgage
pass-through certificates ("Ginnie Mae certificates") that are issued by Private
Mortgage Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. Timely payment of interest
and principal is backed by the full faith and credit of the U.S. government.
Each mortgagor's monthly payments to his lending institution on his residential
mortgage are "passed through" to certificate holders such as Global Income Fund.
Mortgage pools consist of whole mortgage loans or participations in loans. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. Lending institutions that originate
mortgages for the pools are subject to certain standards, including credit and
other underwriting criteria for individual mortgages included in the pools.
FANNIE MAE CERTIFICATES. Fannie Mae facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government agencies
and in privately insured or uninsured residential mortgage loans (sometimes
referred to as "conventional mortgage loans" or "conventional loans") through
its mortgage purchase and mortgage-backed securities sales activities. Fannie
Mae issues guaranteed mortgage pass-through certificates ("Fannie Mae
certificates"), which represent pro rata shares of all interest and principal
payments made and owed on the underlying pools. Fannie Mae guarantees timely
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payment of interest and principal on Fannie Mae certificates. The Fannie Mae
guarantee is not backed by the full faith and credit of the U.S. government.
FREDDIE MAC CERTIFICATES. Freddie Mac also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage loans
through its mortgage purchase and mortgage-backed securities sales activities.
Freddie Mac issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). Each PC represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. Freddie Mac generally guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal,
but it also has a PC program under which it guarantees timely payment of both
principal and interest. GMCs also represent a pro rata interest in a pool of
mortgages. These instruments, however, pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The Freddie Mac guarantee
is not backed by the full faith and credit of the U.S. government.
PRIVATE, RTC AND SIMILAR MORTGAGE-BACKED SECURITIES. Mortgage-backed
securities issued by Private Mortgage Lenders are structured similarly to CMOs
issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac. Such
mortgage-backed securities may be supported by pools of U.S. government or
agency insured or guaranteed mortgage loans or by other mortgage-backed
securities issued by a government agency or instrumentality, but they generally
are supported by pools of conventional (I.E., non-government guaranteed or
insured) mortgage loans. Since such mortgage-backed securities normally are not
guaranteed by an entity having the credit standing of Ginnie Mae, Fannie Mae and
Freddie Mac, they normally are structured with one or more types of credit
enhancement. See "--Types of Credit Enhancement." These credit enhancements do
not protect investors from changes in market value.
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
government in connection with the savings and loan crisis, held assets of failed
savings associations as either a conservator or receiver for such associations,
or it acquired such assets in its corporate capacity. These assets included,
among other things, single family and multi-family mortgage loans, as well as
commercial mortgage loans. In order to dispose of such assets in an orderly
manner, RTC established a vehicle registered with the SEC through which it sold
mortgage-backed securities. RTC mortgage-backed securities represent pro rata
interests in pools of mortgage loans that RTC held or had acquired, as described
above, and are supported by one or more of the types of private credit
enhancements used by Private Mortgage Lenders.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE PASS-THROUGHS.
CMOs are debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities (such collateral collectively being called "Mortgage
Assets"). Payments of principal of, and interest on, the Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide the funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any
principal-only or "PO" class) on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. In one structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or final
distribution dates so that no payment of principal will be made on any class of
the CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. In some CMO structures, all or a
portion of the interest attributable to one or more of the CMO classes may be
added to the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of the CMO
are paid in full.
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Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest
rates--I.E., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an "inverse IO," on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Such credit enhancement falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Underlying Funds
will not pay any additional fees for such credit enhancement, although the
existence of credit enhancement may increase the price of a security. Credit
enhancements do not provide protection against changes in the market value of
the security. Examples of credit enhancement arising out of the structure of the
transaction include "senior- subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "spread accounts" or "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. The yield
characteristics of mortgage- and asset-backed securities differ from those of
traditiona1 debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other
obligations generally may be prepaid at any time. Prepayments on a pool of
mortgage loans are influenced by a variety of economic, geographic, social and
other factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. Generally, however, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Similar factors apply to prepayments on asset-backed
securities, but the receivables underlying asset-backed securities generally are
of a shorter maturity and thus less likely to experience substantial
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prepayments. Such securities, however, often provide that for a specified time
period the issuers will replace receivables in the pool that are repaid with
comparable obligations. If the issuer is unable to do so, repayment of principal
on the asset-backed securities may commence at an earlier date. Mortgage- and
asset-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice was to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising interest
rates, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting the yield of an Underlying Fund.
ADDITIONAL INFORMATION ON ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES.
Adjustable rate mortgage ("ARM") securities are mortgage-backed securities that
represent a right to receive interest payments at a rate that is adjusted to
reflect the interest earned on a pool of mortgage loans bearing variable or
adjustable rates of interest (such mortgage loans are referred to as "ARMs").
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans.
Because the interest rates on ARM and floating rate mortgage-backed
securities are reset in response to changes in a specified market index, the
values of such securities tend to be less sensitive to interest rate
fluctuations than the values of fixed-rate securities. As a result, during
periods of rising interest rates, ARMs generally do not decrease in value as
much as fixed rate securities. Conversely, during periods of declining rates,
ARMs generally do not increase in value as much as fixed rate securities. ARM
mortgage-backed securities represent a right to receive interest payments at a
rate that is adjusted to reflect the interest earned on a pool of ARMs. ARMs
generally specify that the borrower's mortgage interest rate may not be adjusted
above a specified lifetime maximum rate or, in some cases, below a minimum
lifetime rate. In addition, certain ARMs specify limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment
period. ARMs also may limit changes in the maximum amount by which the
borrower's monthly payment may adjust for any single adjustment period. In the
event that a monthly payment is not sufficient to pay the interest accruing on
the ARM, any such excess interest is added to the mortgage loan ("negative
amortization"), which is repaid through future payments. If the monthly payment
exceeds the sum of the interest accrued at the applicable mortgage interest rate
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and the principal payment that would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
reduces the principal balance of the ARM. Borrowers under ARMs experiencing
negative amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds Index ("COFI"), that tend to lag behind changes in market interest rates.
The values of ARM mortgage-backed securities supported by ARMs that adjust based
on lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting current interest rate levels, although the
values of such ARM mortgage-backed securities still tend to be less sensitive to
interest rate fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
DURATION. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept "term
to maturity." Traditionally, a debt security's "term to maturity" has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides for a final payment, taking no account of the pattern of the security's
payments prior to maturity.
For any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. For example,
depending upon its coupon and the level of market yields, a Treasury note with a
remaining maturity of five years might have a duration of 4.5 years. For
mortgage-backed and other securities that are subject to prepayments, put or
call features or adjustable coupons, the difference between the remaining stated
maturity and the duration is likely to be much greater.
Futures, options and options on futures have durations that, in general,
are closely related to the duration of the securities that underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a security's duration by approximately
the same amount as would holding an equivalent amount of the underlying
securities. Short futures or put options have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount as would
selling an equivalent amount of the underlying securities.
There are some situations in which the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
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coupon reset. Another example where the interest rate exposure is not properly
captured by the standard duration calculation is the case of mortgage-backed
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are critical in determining the securities'
interest rate exposure. In these and other similar situations, Mitchell Hutchins
and the applicable Sub-Advisers will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its duration and, therefore, its interest rate exposure.
ZERO COUPON, OID AND PIK SECURITIES. Federal tax law requires that a holder
of a security with original issue discount ("OID") accrue a portion of the OID
on the security as income each year, even though the holder may receive no
interest payment on the security during the year. Accordingly, although the
investing Underlying Fund will receive no payments on its zero coupon securities
prior to their maturity or disposition, it will have income attributable to such
securities. Similarly, while payment-in-kind ("PIK") securities may pay interest
in the form of additional securities rather than cash, that interest must be
included in an Underlying Fund's annual income.
To qualify for pass-through federal income tax treatment as regulated
investment companies, the Underlying Funds must distribute substantially all of
their net investment income each year, including non cash income. Accordingly,
each Underlying Fund will be required to include in its dividends an amount
equal to the income attributable to its zero coupon, other OID and PIK
securities. See "Taxes" in the Statement of Additional Information. Those
dividends will be paid from the cash assets of an Underlying Fund or by
liquidation of portfolio securities, if necessary, at a time when the Underlying
Fund otherwise might not have done so.
Certain zero coupon securities are U.S. Treasury notes and bonds that have
been stripped of their unmatured interest coupon receipts or interests in such
U.S. Treasury securities or coupons. The staff of the SEC currently takes the
position that "stripped" U.S. government securities that are not issued through
the U.S. Treasury are not U.S. government securities. This technique is
frequently used with U.S. Treasury bonds to create CATS (Certificates of Accrual
Treasury Securities), TIGRs (Treasury Income Growth Receipts) and similar
securities. As long as the SEC takes this position, "CATS" and "TIGRs", which
are not issued through the U.S. Treasury, will not be counted as U.S. government
securities for purposes of the 65% investment requirement applicable to U.S.
Government Income Fund and Low Duration Income Fund.
FOREIGN AND EMERGING MARKET SECURITIES. Investments in foreign securities
involve risks relating to political, social and economic developments abroad, as
well as risks resulting from the differences between the regulations to which
U.S. and foreign issuers and markets are subject. These risks are greater for
emerging market securities and may include expropriation, confiscatory taxation,
withholding taxes on interest and/or dividends, limitations on the use of or
transfer of Underlying Fund assets and political or social instability or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Securities of many foreign
companies may be less liquid and their prices more volatile than securities of
comparable U.S. companies. Many foreign securities may be difficult to liquidate
rapidly without significantly depressing the price of such securities. There may
be less publicly available information concerning foreign issuers of securities
held by the Underlying Funds than is available concerning U.S. companies.
Transactions in foreign securities may be subject to less efficient settlement
practices. Foreign securities trading practices, including those involving
securities settlement where Underlying Fund assets may be released prior to
receipt of payment, may expose the Underlying Funds to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer. Legal
remedies for defaults and disputes may have to be pursued in foreign courts,
whose procedures differ substantially from those of U.S. courts. Foreign
securities trading practices, including those involving securities settlement
where an Underlying Fund's assets may be released prior to receipt of payment,
may expose that Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.
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These risks are greater for emerging market securities than for securities of
foreign issuers in more developed markets. Disclosure and regulatory standards
for securities traded in emerging markets are less stringent than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. In certain
emerging markets, there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
the assets of an Underlying Fund are uninvested and no return is earned thereon.
The inability of an Underlying Fund to make intended securities purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Underlying Fund due to subsequent
declines in the value of such portfolio security or, if the Underlying Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
To the extent that the Underlying Funds hold securities of foreign issuers,
these securities may not be registered with the SEC, nor may the issuers thereof
be subject to its reporting requirements. Accordingly, there may be less
publicly available information concerning foreign issuers of securities held by
the Underlying Funds than is available concerning U.S. companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies.
The Underlying Funds may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other
securities convertible into securities of issuers based in foreign countries.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets. EDRs are similar to ADRs, but may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. GDRs are similar to EDRs and are designed for use
in several international markets. For purposes of each Underlying Fund's
investment policies, ADRs, EDRs and GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR or
GDR representing ownership of common stock will be treated as common stock.
The Underlying Funds anticipate that their brokerage transactions involving
foreign securities of companies headquartered in countries other than the United
States will be conducted primarily on the principal exchanges of such countries.
Transactions on foreign exchanges are usually subject to fixed commissions that
are generally higher than negotiated commissions on U.S. transactions, although
each Underlying Fund will endeavor to achieve the best net results in effecting
its portfolio transactions. There is generally less government supervision and
regulation of exchanges and brokers in foreign countries than in the United
States.
From time to time, investments in other investment companies may be the
most effective available means by which the Underlying Funds may invest in
securities of issuers in certain countries. Investment in such investment
companies may involve the payment of management expenses and, in connection with
some purchases, sales loads, and payment of substantial premiums above the value
of such companies' portfolio securities. At the same time, an Underlying Fund
would continue to pay its own management fees and other expenses. The Underlying
Funds may invest in these investment funds and in registered investment
companies subject to the provisions of the 1940 Act. Such investment funds or
investment companies may be "passive foreign investment companies" (as described
in "Taxes" below) and may result in special federal income tax consequences.
Investment income on certain foreign securities in which the Underlying
Funds may invest may be subject to foreign withholding or other taxes that could
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reduce the return on these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the Underlying Funds would be subject.
FOREIGN SOVEREIGN DEBT. Investment by the Underlying Funds in debt
securities issued by foreign governments and their political subdivisions or
agencies ("Sovereign Debt") involves special risks. The issuer of the debt or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal and/or interest when due in accordance
with the terms of such debt, and the Underlying Funds may have limited legal
recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Underlying
Funds' investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Mitchell Hutchins and the Sub-Advisers manage the
Underlying Funds' portfolios in a manner that is intended to minimize the
exposure to such risks, there can be no assurance that adverse political changes
will not cause an Underlying Fund to suffer a loss of interest or principal on
any of its holdings.
BRADY BONDS. Brady Bonds are Sovereign Debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the IMF. The Brady Plan framework, as it has developed, contemplates the
exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may
also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount.
Brady Plan debt restructurings totaling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. There can be no assurance that the circumstances regarding
the issuance of Brady Bonds by these countries will not change. Investors should
recognize that Brady Bonds have been issued only recently, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
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face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, the
Underlying Fund will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions at
the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF, the
World Bank and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. Brady Bonds
are often viewed as having several valuation components: (1) the collateralized
repayment of principal, if any, at final maturity, (2) the collateralized
interest payments, if any, (3) the uncollateralized interest payments and (4)
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative. The
Underlying Funds may purchase Brady Bonds with no or limited collateralizations
and will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) repayment of principal primarily on the willingness
and ability of the foreign government to make payment in accordance with the
terms of the Brady Bonds. Brady Bonds issued to date are purchased and sold in
secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories.
STRUCTURED FOREIGN INVESTMENTS. Strategic Income Fund may invest a portion
of its assets in interests in U.S. and foreign entities organized and operated
solely for the purpose of securitizing or restructuring the investment
characteristics of foreign securities. This type of securitization or
restructuring involves the deposit with or purchase by a U.S. or foreign entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Foreign Investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Structured
Foreign Investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to Structured
Foreign Investments is dependent on the extent of the cash flow on the
underlying instruments.
The Structured Foreign Investments of the type in which Strategic Income
Fund typically invests will involve no credit enhancement. Accordingly, their
credit risk generally will be equivalent to that of the underlying instruments.
The Strategic Income Fund is permitted, however, to invest in classes of
Structured Foreign Investments that are subordinated to the right of payment of
another class. Subordinated Structured Foreign Investments typically have higher
yields and present greater risks than unsubordinated Structured Foreign
Investments. Structured Foreign Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Foreign Investments.
FOREIGN CURRENCY TRANSACTIONS. Although the Underlying Funds value their
assets daily in U.S. dollars, they do not intend to convert their holdings of
foreign currencies to U.S. dollars on a daily basis. The Underlying Funds'
foreign currencies generally will be held as "foreign currency call accounts" at
foreign branches of foreign or domestic banks. These accounts bear interest at
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negotiated rates and are payable upon relatively short demand periods. If a bank
became insolvent, the Underlying Funds could suffer a loss of some or all of the
amounts deposited. The Underlying Funds may convert foreign currency to U.S.
dollars from time to time. Although foreign exchange dealers generally do not
charge a stated commission or fee for conversion, the prices posted generally
include a "spread," which is the difference between the prices at which the
dealers are buying and selling foreign currencies.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to non-convertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than the issuer's common stock, although the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by an Underlying Fund is called for
redemption, that Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
WARRANTS. Warrants are securities permitting, but not obligating, their
holder to subscribe for other securities or commodities. Warrants do not carry
with them the right to dividends or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying securities,
and a warrant ceases to have value if it is not exercised prior to its
expiration date.
ILLIQUID SECURITIES. The Underlying Funds may invest up to 10% or 15% of
their net assets in illiquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which an Underlying
Fund has valued the securities and includes, among other things, purchased OTC
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options, repurchase agreements maturing in more than seven days and restricted
securities other than those Mitchell Hutchins or a Sub- Adviser, as applicable,
have determined are liquid pursuant to guidelines established by each Underlying
Fund's board of trustees (each sometimes referred to as a "board"). The assets
used as cover for OTC options written by the Underlying Funds will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that a
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). However,
to the extent that securities are freely tradeable in the country in which they
are principally traded, they are not considered illiquid securities for purposes
of the Underlying Funds' respective percentage limitations, even if they are not
freely tradeable in the United States. Where registration is required, an
Underlying Fund may be obligated to pay all or part of the registration expenses
and a considerable period may elapse between the time of the decision to sell
and the time a Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, an Underlying Fund might obtain a less favorable price than
prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
an Underlying Fund, however, could affect adversely the marketability of such
portfolio securities and the Fund might be unable to dispose of such securities
promptly or at favorable prices.
Each board of directors or board of trustees for the Underlying Funds (each
a "board") has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins or the applicable Sub- Adviser pursuant to
guidelines approved by the board. Mitchell Hutchins or the Sub-Adviser takes
into account a number of factors in reaching liquidity decisions, including (1)
the frequency of trades for the security, (2) the number of dealers that make
quotes for the security, (3) the number of dealers that have undertaken to make
a market in the security, (4) the number of other potential purchasers and (5)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how offers are solicited and the mechanics of transfer).
Mitchell Hutchins or the Sub-Adviser monitors the liquidity of restricted
securities in each Underlying Fund's portfolio and reports periodically on such
decisions to the applicable board.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which an
Underlying Fund purchases securities from a bank or recognized securities dealer
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and simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Underlying Fund maintains custody of the underlying securities prior to
their repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to is, in effect, secured by such
securities. If the value of these securities is less than the repurchase price,
plus any agreed-upon additional amount, the other party to the agreement must
provide additional collateral so that at all times the collateral is at least
equal to the repurchase price, plus any agreed-upon additional amount. The
difference between the total amount to be received upon repurchase of the
securities and the price that was paid by an Underlying Fund upon acquisition is
accrued as interest and included in its net investment income.
The Underlying Funds intend to enter into repurchase agreements only with
banks and dealers in transactions believed by Mitchell Hutchins or a Sub-Adviser
to present minimal credit risks in accordance with guidelines established by the
applicable board. Mitchell Hutchins reviews and monitors the creditworthiness of
those institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. Most of the Underlying Funds may enter into
reverse repurchase agreements with banks and securities dealers. Such agreements
involve the sale of securities held by the Underlying Fund subject to the Fund's
agreement to repurchase the securities at an agreed-upon date or upon demand and
at a price reflecting a market rate of interest. Such agreements are considered
to be borrowings and may be entered into only for temporary or emergency
purposes. While a reverse repurchase agreement is outstanding, the Underlying
Fund's custodian segregates assets to cover the Fund's obligations under the
reverse repurchase agreement. See "Underlying Funds -- Investment Policies,
Segregated Accounts."
LENDING OF PORTFOLIO SECURITIES. Each Underlying Fund is authorized to lend
up to 33 1/3% of its total assets to broker-dealers or institutional investors
that Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with that Fund's custodian in an amount, marked to market
daily, at least equal to the market value of the securities loaned, plus accrued
interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. In determining whether to lend
securities to a particular broker-dealer or institutional investor, Mitchell
Hutchins will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. Each Underlying Fund will retain authority to terminate any loans at
any time. Each Underlying Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash held as collateral to the borrower or placing broker. Each
Underlying Fund will receive reasonable interest on the loan or a flat fee from
the borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. Each Underlying Fund will regain record
ownership of loaned securities to exercise beneficial rights, such as voting and
subscription rights, when regaining such rights is considered to be in the
Fund's interest.
SHORT SALES "AGAINST THE BOX." Each Underlying Fund other than PaineWebber
Cashfund may engage in short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (short sales "against the box") to defer realization of gains or losses for
tax or other purposes. To make delivery to the purchaser in a short sale, the
executing broker borrows the securities being sold short on behalf of an
Underlying Fund, and that Fund is obligated to replace the securities borrowed
at a date in the future. When an Underlying Fund sells short, it will establish
a margin account with the broker effecting the short sale, and will deposit
collateral with the broker. In addition, the Underlying Fund will maintain with
its custodian, in a segregated account, the securities that could be used to
cover the short sale. Each Underlying Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales "against the box."
The Underlying Funds might make a short sale "against the box" in order to
hedge against market risks when Mitchell Hutchins or a Sub-Adviser believes that
the price of a security may decline, thereby causing a decline in the value of a
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security owned by a Fund or a security convertible into or exchangeable for a
security owned by the Fund, or when Mitchell Hutchins wants to sell a security
that a Fund owns at a current price, but also wishes to defer recognition of
gain or loss for federal income tax purposes. In such case, any loss in the
Fund's long position after the short sale should be reduced by a gain in the
short position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which gains or losses in the long
position are reduced will depend upon the amount of the securities sold short
relative to the amount of the securities an Underlying Fund owns, either
directly or indirectly, and in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Investment Grade Income Fund and High
Income Fund each may invest up to 5% of its net assets in secured or unsecured
fixed or floating rate loans ("Loans") arranged through private negotiations
between a borrowing corporation and one or more financial institutions
("Lenders"), and Strategic Income Fund may invest in these instruments subject
only to its limitation on investments in illiquid securities. These Underlying
Funds' investments in Loans are expected in most instances to be in the form of
participations ("Participations") in Loans and assignments ("Assignments") of
all or a portion of Loans from third parties. Participations typically result in
an Underlying Fund's having a contractual relationship only with the Lender, not
with the borrower. An Underlying Fund has the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, an Underlying
Fund generally has no direct right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result, an
Underlying Fund assumes the credit risk of both the borrower and the Lender that
is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, an Underlying Fund may be treated as a general creditor
of the Lender and may not benefit from any set-off between the Lender and the
borrower. The Underlying Funds will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by Mitchell
Hutchins to be creditworthy.
When an Underlying Fund purchases Assignments from Lenders, it acquires
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and assignors,
the rights and obligations acquired by an Underlying Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
Assignments and Participations are generally not registered under the 1933
Act and thus are subject to each Underlying Fund's limitation on investment in
illiquid securities. Because there is no liquid market for such securities, the
Underlying Funds anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on an Underlying
Fund's ability to dispose of particular Assignments or Participations when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
SEGREGATED ACCOUNTS. When an Underlying Fund enters into certain
transactions to make future payments to third parties, it will maintain with an
approved custodian in a segregated account cash or liquid securities, marked to
market daily, in an amount at least equal to the Fund's obligation or commitment
under such transactions. As described below under "Hedging and Other Strategies
Using Derivative Contracts," segregated accounts may also be required in
connection with certain transactions involving options, futures contracts and
forward currency contracts and certain interest rate protection transactions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. As stated in the Prospectus,
each Underlying Fund may purchase securities on a "when-issued" or delayed
delivery basis. A security purchased on a when- issued or delayed delivery basis
is recorded as an asset on the commitment date and is subject to changes in
market value, generally based upon changes in the level of interest rates. Thus,
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fluctuation in the value of the security from the time of the commitment date
will affect a Fund's net asset value. When an Underlying Fund agrees to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "Underlying Funds - Investment
Policies Segregated Accounts." An Underlying Fund purchases when-issued
securities only with the intention of taking delivery, but may sell the right to
acquire the security prior to delivery if Mitchell Hutchins or a Sub-Adviser, as
applicable, deems it advantageous to do so, which may result in a gain or loss
to the Fund.
SPECIAL CONSIDERATIONS CONCERNING UTILITY INCOME FUND--UTILITY INDUSTRIES.
Utility companies in the United States and in foreign countries are generally
subject to regulation. In the United States, most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the public
while ensuring that the rate of return earned by utility companies is sufficient
to allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.
The nature of regulation of utility industries is evolving both in the
United States and in foreign countries. Changes in regulation in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. Although certain companies may
develop more profitable opportunities, others may be forced to defend their core
businesses and may be less profitable.
The regulation of foreign utility companies may or may not be comparable to
that in the United States. Foreign regulatory systems vary from country to
country, and may evolve in ways different from regulation in the United States.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. Mitchell Hutchins takes into account anticipated economic growth rates
and other economic developments when selecting securities of utility companies.
Further descriptions of specific segments within the global utility industries
are set forth below.
ELECTRIC. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies in general recently have been favorably affected by lower fuel
and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental,
nuclear facility and other safety regulations and changes in the regulatory
climate. For example, in the United States, the construction and operation of
nuclear power facilities is subject to increased scrutiny by, and evolving
regulations of, the Nuclear Regulatory Commission. Increased scrutiny might
result in higher operating costs and higher capital expenditures, with the risk
that regulators may disallow inclusion of these costs in rate authorizations.
TELECOMMUNICATIONS. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to the telephone networks
comprise the largest portion of this segment. The telephone industry is large
and highly concentrated. Telephone companies in the United States are still
experiencing the effects of the break-up of American Telephone & Telegraph
Company, which occurred in 1984. Since that date the number of local and
long-distance companies and the competition among such companies has increased.
In addition, since 1984, companies engaged in telephone communication services
have expanded their nonregulated activities into other businesses, including
cellular telephone services, data processing, equipment retailing and software
services. This expansion has provided significant opportunities for certain
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telephone companies to increase their earnings and dividends at faster rates
than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruption in the oil industry and have also been affected by increased
concentration and competition.
WATER. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented, because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. Mitchell Hutchins believes
that favorable investment opportunities may result from consolidation within
this industry.
There can be no assurance that the positive developments noted above,
including those relating to business growth and changing regulation, will occur
or that risk factors other than those noted above will not develop in the
future.
SPECIAL CONSIDERATIONS AND RISK FACTORS RELATING TO ASIA PACIFIC REGION
INVESTMENTS
FOREIGN CURRENCY AND EXCHANGE RATES. Certain of the risks associated with
international investments are heightened for investments in Asia Pacific Region
countries (as defined in the Prospectus). For example, some of the currencies of
Asia Pacific Region countries have experienced devaluations relative to the U.S.
dollar, and major adjustments have been made periodically in certain of such
currencies. Certain countries such as India face serious exchange constraints.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several of the Asia Pacific Region countries is restricted
or controlled to varying degrees. These restrictions may limit investment in
these countries and may increase expenses of Asia Pacific Fund. Even where there
is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operation of the Asia Pacific
Fund. In addition, if there is a deterioration in a country's balance of
payments or for other reasons, a country may impose restrictions on foreign
capital remittances abroad. The Asia Pacific Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation. as well as by the application to it of other restrictions or
investments.
If, because of restrictions on repatriation or conversion, Asia Pacific
Fund were unable to distribute substantially all of its net investment income
(including short-term capital gains) and long-term capital gains within
applicable time periods, the Fund could be subject to federal income and excise
taxes, which would not otherwise be incurred, and may cease to qualify for the
favorable tax treatment afforded to regulated investment companies under the
Internal Revenue Code ("Code"), in which case it would become subject to federal
income tax on all of its income and gains.
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DIFFERENCES BETWEEN THE U.S. AND ASIA PACIFIC REGION SECURITIES MARKETS.
Most of the securities markets of the Asia Pacific Region countries have
substantially less volume than the New York Stock Exchange, and equity
securities of most companies in the Asia Pacific Region countries are less
liquid and more volatile than equity securities of U.S. companies of comparable
size. Some of the stock exchanges in the Asia Pacific Region countries, such as
those in China, are in the earliest stages of their development. As a result,
security settlements may in some instances be subject to delays and related
administrative uncertainties. Many companies traded on securities markets in
Asia Pacific Region countries are smaller, newer and less seasoned than
companies whose securities are traded on securities markets in the United
States. Investments in smaller companies involve greater risk than is
customarily associated with investing in larger companies. Smaller companies may
have limited product lines, markets or financial or managerial resources and may
be more susceptible to losses and risks of bankruptcy. Additionally,
market-making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of
such markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that any of the Asia Pacific Region countries experiences
rapid increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in any such country may trade
at price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.
GOVERNMENT SUPERVISION OF ASIA PACIFIC REGION SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in the Asia Pacific Region countries
than exists in the United States. Less information may, therefore, be available
to the Asia Pacific Fund than with respect to investments in the United States.
Further, in certain Asia Pacific Region countries, less information may be
available to the Fund than to local market participants. Brokers in Asia Pacific
Region countries may not be as well capitalized as those in the United States,
so that they are more susceptible to financial failure in times of market,
political or economic stress. In addition. existing laws and regulations are
often inconsistently applied. As legal systems in some of the Asia Pacific
Region countries develop, foreign investors may be adversely affected by new
laws and regulations, changes to existing laws and regulations and preemption of
local laws and regulations by national laws. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
FINANCIAL INFORMATION AND STANDARDS. Issuers in Asia Pacific Region
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an Asia Pacific Region issuer may not reflect its
financial position or results of operations in the way they would be reflected
had the financial statements been prepared in accordance with U.S. generally
accepted accounting principles.
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SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many of the Asia Pacific Region
countries may be subject to a greater degree of social, political and economic
instability than is the case in the United States. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, and changes in
government through extra- constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social conditions: (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection. Such social, political and
economic instability could significantly disrupt the principal financial markets
in which the Asia Pacific Fund invests and adversely affect the value of the
Fund's assets. In addition. there may be the possibility of asset expropriations
or future confiscatory levels of taxation affecting the Fund.
Few of the Asia Pacific Region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military collapse, while others have periodically demonstrated
repressive police state characteristics. In several Asia Pacific Region
countries, the leadership ability of the government has suffered as a result of
recent corruption scandals. Disparities of wealth, among other factors, have
also led to social unrest in some of the Asia Pacific Region countries,
accompanied, in certain cases. by violence and labor unrest. Ethnic, religious
and racial disaffection, as evidenced in India, Pakistan and Sri Lanka, for
example, have created social, economic and political problems.
Several Asia Pacific Region countries have or in the past have had hostile
relationships with neighboring nations or have experienced internal insurgency.
Thailand has experienced border conflicts with Laos and Cambodia, and India is
engaged in border disputes with several of its neighbors, including China and
Pakistan. Tension between the Tamil and Sinhalese communities in Sri Lanka has
resulted in periodic outbreaks of violence. An uneasy truce exists between North
Korea and South Korea, and the recurrence of hostilities remains possible.
Reunification of North Korea and South Korea could have a detrimental effect on
the economy of South Korea. Also, China continues to claim sovereignty over
Taiwan and recently has conducted military maneuvers near Taiwan. China is
acknowledged to possess nuclear weapons capability; North Korea is alleged to
possess or be in the process of developing such a capability.
China is scheduled to assume sovereignty over Hong Kong in July 1997.
Although China has committed by treaty to preserve the economic and social
freedoms enjoyed in Hong Kong for 50 years after regaining control, there can be
no assurance that China will not renege, and in fact China has recently
announced its intent to repeal the law providing for civil rights for citizens
of Hong Kong. Business confidence and market and business performance in Hong
Kong, therefore, can be significantly affected by political developments.
In addition, the reversion of Hong Kong also presents a risk that the Hong
Kong dollar will be devalued and a risk of possible loss of investor confidence
in the Hong Kong markets and dollar. However, factors exist that may mitigate
this risk. First, China has stated its intention to implement a "one country,
two systems" policy, which would preserve monetary sovereignty and leave control
in the hands of the Hong Kong Monetary Authority ("HKMA"). Second, fixed rate
parity with the U.S. dollar is seen as critical to maintaining investors'
confidence in the transition to Chinese rule and, therefore, it is anticipated
that, in the event international investors lose confidence in Hong Kong dollar
assets, the HKMA would intervene to support the currency, though such
intervention cannot be assured. Third Hong Kong's and China's sizable combined
foreign exchange reserve may be used to support the value of the Hong Kong
dollar, provided that China does not appropriate such reserves for other uses,
which is not anticipated, but cannot be assured. Finally, China would be likely
to experience significant adverse political and economic consequences if
confidence in the Hong Kong dollar and the territory's assets were to be
endangered.
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The economies of most of the Asia Pacific Region countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally the United States, Japan, China and the European Community. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the securities markets of the Asia
Pacific Region countries. In addition, the economies of some Asia Pacific Region
countries, Australia, Indonesia and Malaysia, for example, are vulnerable to
weakness in world prices for their commodity exports, including crude oil.
UNDERLYING FUNDS -- HEDGING AND OTHER STRATEGIES USING DERIVATIVE
CONTRACTS
DERIVATIVE INSTRUMENTS. Mitchell Hutchins and the Sub-Advisers may use a
variety of derivative contracts ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures") and options on
futures contracts to attempt to hedge the portfolio of each Underlying Fund
(other than PaineWebber Cashfund). Certain Underlying Funds also may use these
derivative contracts to attempt to enhance income or return, including shifting
an Underlying Fund's exposure from one asset class to another. Certain
Underlying Funds also may hedge their portfolios by entering into certain swaps
or other interest rate protection transactions and by using forward currency
contracts. An Underlying Fund may enter into transactions involving one or more
types of Derivative Instruments under which the full value of its portfolio is
at risk. Under normal circumstances, however, an Underlying Fund's use of these
derivative contracts will place at risk a much smaller portion of its assets.
The particular Derivative Instruments used by the Underlying Funds are described
below.
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security or currency underlying the option at a
specified price at any time during the term of the option. The writer of the
call option, who receives the premium, has the obligation, upon exercise of the
option during the option term, to deliver the underlying security or currency
against payment of the exercise price. A put option is a similar contract that
gives its purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The writer of
the put option, who receives the premium, has the obligation, upon exercise of
the option during the option term, to buy the underlying security or currency at
the exercise price.
OPTIONS ON SECURITIES INDEXES--A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS--A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
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delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
GENERAL DESCRIPTION OF STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase or
sale of a Derivative Instrument intended to partially or fully offset potential
declines in the value of one or more investments held in an Underlying Fund's
portfolio. Thus, in a short hedge an Underlying Fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, an Underlying Fund
might purchase a put option on a security to hedge against a potential decline
in the value of that security. If the price of the security declined below the
exercise price of the put, an Underlying Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transactions
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, an Underlying Fund
might be able to close out the put option and realize a gain to offset the
decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that an Underlying Fund intends to acquire.
Thus, in a long hedge, an Underlying Fund takes a position in a Derivative
Instrument whose price is expected to move in the same direction as the price of
the prospective investment being hedged. For example, an Underlying Fund might
purchase a call option on a security it intends to purchase in order to hedge
against an increase in the cost of the security. If the price of the security
increased above the exercise price of the call, an Underlying Fund could
exercise the call and thus limit its acquisition cost to the exercise price plus
the premium paid and transactions costs. Alternatively, an Underlying Fund might
be able to offset the price increase by closing out an appreciated call option
and realizing a gain.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that an
Underlying Fund owns or intends to acquire. Derivative Instruments on stock
indices, in contrast, generally are used to hedge against price movements in
broad equity market sectors in which an Underlying Fund has invested or expects
to invest. Derivative Instruments on debt securities may be used to hedge either
individual securities or broad fixed income market sectors.
Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce an Underlying Fund's exposure to an asset
class without buying or selling the underlying instruments.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, an
Underlying Fund's ability to use Derivative Instruments will be limited by tax
considerations. See "Taxes."
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In addition to the products, strategies and risks described below and in
the Prospectus, Mitchell Hutchins and the Sub-Advisers expect to discover
additional opportunities in connection with options, futures contracts and other
derivative contracts and hedging techniques. These new opportunities may become
available as Mitchell Hutchins or the Sub-Advisers develop new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
options, futures contracts, foreign currency contracts or other derivative
contracts and techniques are developed. Mitchell Hutchins or a Sub- Adviser, as
applicable, may utilize these opportunities for an Underlying Fund to the extent
that they are consistent with the Fund's investment objective and permitted by
its investment limitations and applicable regulatory authorities. An Underlying
Fund's prospectus or statement of additional information will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in its prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Derivative Instruments in
hedging strategies involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of Mitchell Hutchins or a Sub-Adviser, as applicable, to predict movements of
the overall securities and interest rate markets, which requires different
skills than predicting changes in the prices of individual securities. While
Mitchell Hutchins and the Sub-Advisers are experienced in the use of Derivative
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which
Derivative Instruments are traded.
The effectiveness of hedges using Derivative Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if an Underlying Fund entered
into a short hedge because Mitchell Hutchins or a Sub-Adviser projected a
decline in the price of a security in that Fund's portfolio, and the price of
that security increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the Derivative Instrument.
Moreover, if the price of the Derivative Instrument declined by more than the
increase in the price of the security, that Underlying Fund could suffer a loss.
In either such case, the Underlying Fund would have been in a better position
had it not hedged at all.
(4) As described below, an Underlying Fund might be required to maintain
assets as "cover," maintain segregated accounts or make margin payments when it
takes positions in Derivative Instruments involving obligations to third parties
(I.E., Derivative Instruments other than purchased options). If the Underlying
Fund was unable to close out its positions in such Derivative Instruments, it
might be required to continue to maintain such assets or accounts or make such
payments until the positions expired or matured. These requirements might impair
an Underlying Fund's ability to sell a portfolio security or make an investment
at a time when it would otherwise be favorable to do so, or require that the
Fund sell a portfolio security at a disadvantageous time. An Underlying Fund's
ability to close out a position in a Derivative Instrument prior to expiration
or maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of a contra party to enter
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into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to an
Underlying Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Underlying
Funds to an obligation to another party. An Underlying Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, other options or futures contracts or (2) cash and
liquid securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. Each Underlying
Fund will comply with SEC guidelines regarding cover for these transactions and
will, if the guidelines so require, set aside cash or liquid securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
an Underlying Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS. The Underlying Funds may purchase put and call options, and write
(sell) covered put or call options on securities on which they are permitted to
invest and indices of those securities. Those Underlying Funds that are
permitted to invest in foreign securities denominated in foreign currencies also
may purchase put and call options on foreign currencies. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the affected Underlying Fund
will be obligated to sell the security at less than its market value. Writing
covered put options serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Underlying Fund will be obligated to purchase
the security at more than its market value. The securities or other assets used
as cover for OTC options written by an Underlying Fund would be considered
illiquid to the extent described under "Underlying Funds -- Investment Policies,
Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
An Underlying Fund may effectively terminate its right or obligation under
an option by entering into a closing transaction. For example, an Underlying
Fund may terminate its obligation under a call or put option that it had written
by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, an Underlying Fund may terminate a position in
a put or call option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing transactions permit
an Underlying Fund to realize profits or limit losses on an option position
prior to its exercise or expiration.
The Underlying Funds may purchase and write both exchange-traded and OTC
options. Exchange markets for options on debt securities and foreign currencies
exist but are relatively new, and these instruments are primarily traded on the
OTC market. Exchange-traded options in the United States are issued by a
clearing organization affiliated with the exchange on which the option is listed
which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
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between an Underlying Fund and its contra party (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when an Underlying Fund
purchases or writes an OTC option, it relies on the contra party to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the contra party to do so would result in the loss of any premium paid by the
Underlying Fund as well as the loss of any expected benefit of the transaction.
The Underlying Funds will enter into OTC option transactions only with contra
parties that have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Underlying Funds are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.
The Underlying Funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The
Underlying Funds intend to purchase or write only those exchange-traded options
for which there appears to be a liquid secondary market. However, there can be
no assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
contra party, or by a transaction in the secondary market if any such market
exists. Although the Underlying Funds will enter into OTC options only with
contra parties that are expected to be capable of entering into closing
transactions with the Underlying Funds, there is no assurance that an Underlying
Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency of the contra party, an
Underlying Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If an Underlying Fund were unable to effect a closing transaction for an
option it had purchased, it would have to exercise the option to realize any
profit. The inability to enter into a closing purchase transaction for a covered
put or call option written by the Underlying Fund could cause material losses
because the Fund would be unable to sell the investment used as cover for the
written option until the option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by the applicable board for each
Underlying Fund without shareholder vote:
(1) Each Underlying Fund may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated with the
premiums on all other options held by the Fund, does not exceed 5% of its total
assets.
(2) The aggregate value of securities underlying put options written by an
Underlying Fund determined as of the date the put options are written will not
exceed 50% of that Fund's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock and bond indices and options on futures
contracts) purchased by an Underlying Fund that are held at any time will not
exceed 20% of that Fund's net assets.
FUTURES. The Underlying Funds may purchase and sell futures contracts that
are related to securities in which they are permitted to invest, such as
securities index futures contracts for Underlying Funds that invest in equity
securities, interest rate futures contracts for Underlying Funds that invest in
bonds and foreign currency futures contracts for Underlying Funds that invest in
securities that are denominated in foreign currencies. An Underlying Fund may
also purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options on securities
or indices.
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No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract an Underlying Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash,
obligations of the United States or obligations that are fully guaranteed as to
principal and interest by the United States, in an amount generally equal to 10%
or less of the contract value. Margin must also be deposited when writing a call
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to an Underlying Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, an
Underlying Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each Underlying Fund's obligations to or from a
futures broker. When an Underlying Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast, when an
Underlying Fund purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If an Underlying Fund has insufficient
cash to meet daily variation margin requirements, it might need to sell
securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Underlying Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If an Underlying Fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. An Underlying Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, an Underlying Fund would continue to be
required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets
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involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by changed by the applicable board for each Underlying Fund without
shareholder vote:
(1) To the extent an Underlying Fund enters into futures contracts and
options on futures positions that are not for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums on those
positions (excluding the amount by which options are "in-the-money") may not
exceed 5% of that Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by an Underlying Fund that are held at any time will not
exceed 20% of that Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by an Underlying Fund will not exceed 5% of its total
assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. Those
Underlying Funds that invest in securities that are denominated in foreign
currencies may use options and futures on foreign currencies, as described
above, and forward currency contracts, as described below, to hedge against
movements in the values of the foreign currencies in which their portfolio
securities are denominated. Such currency hedges can protect against price
movements in a security an Underlying Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The Underlying Funds might seek to hedge against changes in the value of a
particular currency when no Derivative Instruments on that currency are
available or such Derivative Instruments are more expensive than certain other
Hedging Instruments. In such cases, the Underlying Funds may hedge against price
movements in that currency by entering into transactions using Derivative
Instruments on another currency or a basket of currencies, the value of which
Mitchell Hutchins or the applicable Sub-Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Derivative Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, an Underlying Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.
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Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Underlying Funds might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. An Underlying Fund that invests in securities
denominated in foreign currencies may enter into forward currency contracts to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency. Such transactions may serve as long hedges--for
example, an Underlying Fund may purchase a forward currency contract to lock in
the U.S. dollar price of a security denominated in a foreign currency that the
Fund intends to acquire. Forward currency contract transactions may also serve
as short hedges--for example, an Underlying Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
As noted above, an Underlying Fund also may seek to hedge against changes
in the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which Mitchell Hutchins
or a Sub-Adviser believes will have a positive correlation to the values of the
currency being hedged. In addition, an Underlying Fund may use forward currency
contracts to shift its exposure to foreign currency fluctuations from one
country to another. For example, if an Underlying Fund owned securities
denominated in a foreign currency and Mitchell Hutchins or the Sub-Adviser
believed that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency. Transactions
that use two foreign currencies are sometimes referred to as "cross hedging."
Use of a different foreign currency magnifies the risk that movements in the
price of the Derivative Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The cost to an Underlying Fund of engaging in forward currency contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved. When an Underlying Fund enters into a forward currency contract,
it relies on the contra party to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that an Underlying Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, an Underlying Fund might be unable to close out
a forward currency contract at any time prior to maturity. In either event, the
Underlying Fund would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, an Underlying Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
30
<PAGE>
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS. An Underlying Fund may
enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Underlying Fund to deliver an amount of foreign currency in excess of the value
of the position being hedged by such contracts or (2) the Underlying Fund
segregates with its custodian cash or liquid securities in an amount not less
than the value of its total assets committed to the consummation of the contract
and not covered as provided in (1) above, as marked to market daily.
INTEREST RATE PROTECTION TRANSACTIONS. Certain Underlying Funds may enter
into interest rate protection transactions, including interest rate swaps and
interest rate caps, floors and collars. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on the
basis of a specified amount of principal (the "notional principal amount") for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which payments are made
when a designated market interest rate either goes above a designated ceiling
level or goes below a designated floor level on predetermined dates or during a
specified time period.
The Underlying Funds expect to enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Underlying Funds
intend to use these transactions as a hedge and not as a speculative investment.
Interest rate protection transactions are subject to risks comparable to those
described above with respect to other hedging strategies.
Certain Underlying Funds may enter into interest rate swaps, caps, floors
and collars on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Underlying Fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate protection
transactions are entered into for good faith hedging purposes, and inasmuch as
segregated accounts will be established with respect to such transactions,
Mitchell Hutchins, the applicable Sub-Advisers and the Underlying Funds believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the Underlying Funds' borrowing restrictions. The
net amount of the excess, if any, of an Underlying Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis, and appropriate Fund assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account as
described above in "Underlying Funds -- Investment Policies--Segregated
Accounts." The Underlying Fund also will establish and maintain such segregated
accounts with respect to its total obligations under any interest rate swaps
that are not entered into on a net basis and with respect to any interest rate
caps, collars and floors that are written by the Fund.
The Underlying Funds will enter into interest rate protection transactions
only with banks and recognized securities dealers believed by Mitchell Hutchins
or the applicable Sub-Adviser to present minimal credit risk in accordance with
guidelines established by each Fund's board. If there is a default by the other
party to such a transaction, the Underlying Fund will have to rely on its
contractual remedies (which may be limited by bankruptcy, insolvency or similar
laws) pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, floors and collars are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
31
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TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with Business Experience;
Name And Address* The Trust Other Directorships
- ----------------- --------- -------------------
<S> <C> <C>
Victoria E. Schonfeld; 46 Trustee, President Ms. Schonfeld is a managing director and
and Chairman of the general counsel of Mitchell Hutchins. Prior
Board of Trustees to May 1994, she was a partner in the law
firm of Arnold & Porter. Ms. Schonfeld is a
vice president of 29 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Dianne E. O'Donnell; 44 Trustee, Vice Ms. O'Donnell is a senior vice president
President and and deputy general counsel of Mitchell
Secretary Hutchins. Ms. O'Donnell is a vice president
and secretary of 29 investment companies for
which Mitchell Hutchins or PaineWebber serves
as investment adviser.
Julian F. Sluyters, 36 Vice President and Mr. Sluyters is a senior vice president and
Treasurer the director of the mutual fund finance
division of Mitchell Hutchins. Mr. Sluyters
is a vice president and treasurer of 30
investment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019. Ms. Schonfeld and Ms.
O'Donnell are "interested persons" of the Trust as defined in the 1940 Act by
virtue of their positions with Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust
$1,000 for each series and $150 for each board meeting and each separate meeting
of a board committee. Accordingly, the Trust pays each such trustee $4,000
annually for its four series, plus any additional amounts due for board or
committee meetings. Trustees and officers own in the aggregate less than 1% of
the outstanding shares of each Select Portfolio. Because PaineWebber and
Mitchell Hutchins perform substantially all the services necessary for the
operation of the Trust and each Select Portfolio, the Trust requires no
employees. No officer, director or employee of Mitchell Hutchins or PaineWebber
presently receives any compensation from the Trust for acting as a trustee or
officer.
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The table below shows the estimated compensation to be paid to each trustee
during the current fiscal year and the compensation of those trustees from other
PaineWebber funds during the calendar year ended December 31, 1996.
COMPENSATION TABLE(1)
Total
Estimated Compensation
Aggregate from the
Compensation Trust and
from the Fund
Name Of Person, Position The Trust Complex
- ------------------------ --------- -------
(1) Only independent members of the board are compensated by the Trust and
identified above; trustees who are "interested persons," as defined by the
1940 Act, do not receive compensation.
(2) Estimated for the initial fiscal year of the Trust..
(3) Represents total compensation paid to each trustee during the calendar year
ended December 31, 1996; no fund within the fund complex has a pension or
retirement plan.
PRINCIPAL HOLDERS OF SECURITIES. Prior to , 1997, Mitchell Hutchins held
all outstanding securities of each Select Portfolio and thus may be deemed a
controlling person of each Select Portfolio until additional shareholders
purchase shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to each Select Portfolio pursuant to a contract (the
"Advisory Contract") with the Trust. Under the Advisory Contract, each Select
Portfolio pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of __% of average daily net assets.
[Mitchell Hutchins is responsible for the payment of all expenses of each
Select Portfolio with the following exceptions: fees and expenses of all
trustees who are not "interested persons" of the Trust or Mitchell Hutchins,
interest on borrowings, taxes, brokerage commissions (if any); shareholder
charges (if any) associated with investing in the Underlying Funds; and such
nonrecurring expenses as may arise, including costs of any litigation to which a
Select Portfolio may be a party, and any obligation Mitchell Hutchins may have
to indemnify the officers and trustees of the Trust with respect to litigation.
Specific expenses borne by Mitchell Hutchins include expenses for typesetting,
printing and mailing proxy materials to shareholders; legal expenses, and the
fees of the custodian, independent auditor and interested trustees; costs of
typesetting, printing and mailing prospectuses and statements of additional
information, notices and reports to shareholders; each Select Portfolio's
proportionate share of insurance premiums and dues of membership in voluntary
investment company associations.
[Under the terms of the Advisory Contract, each Select Portfolio bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Select Portfolio include the following: (1) the
cost (including brokerage commissions) of securities purchased or sold by the
Select Portfolio and any losses incurred in connection therewith; (2) fees
payable to and expenses incurred on behalf of the Select Portfolio by Mitchell
Hutchins; (3) organizational expenses; (4) filing fees and expenses relating to
the registration and qualification of the Select Portfolio's shares under
federal and state securities laws and maintenance of such registrations and
33
<PAGE>
qualifications; (5) fees and salaries payable to trustees and officers who are
not interested persons (as defined in the 1940 Act) of the applicable Trust or
Mitchell Hutchins; (6) all expenses incurred in connection with the trustees'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and other insurance or fidelity bonds; (9) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the applicable Trust or Select Portfolio for
violation of any law; (10) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees; (11) charges of
custodians, transfer agents and other agents; (12) costs of preparing share
certificates; (13) expenses of setting in type and printing prospectuses,
statements of additional information and supplements thereto, reports and proxy
materials for existing shareholders, and costs of mailing such materials to
shareholders; (14) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Select Portfolio; (15) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof; (17) the cost of
investment company literature and other publications provided to trustees and
officers; and (18) costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Select
Portfolio in connection with the performance of the Advisory Contract, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. The Advisory Contract
terminates automatically upon assignment and is terminable at any time without
penalty by the Trust's board or by vote of the holders of a majority of the
Select Portfolio's outstanding voting securities on 60 days' written notice to
Mitchell Hutchins, or by Mitchell Hutchins on 60 days' written notice to the
Select Portfolio.
NET ASSETS. The following table shows the approximate net assets as of
February 28, 1997, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY $ MIL
- ------------------- ----------
Domestic (excluding Money Market)........................ $ 5,710.4
Global................................................... 2,938.0
Equity/Balanced.......................................... 3,579.3
Fixed Income (excluding Money Market).................... 5,069.2
Taxable Fixed Income........................... 3,478.8
Tax-Free Fixed Income.......................... 1,590.4
Money Market Funds....................................... 24,668.5
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to codes of ethics that describe the
fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must be
maintained at PaineWebber, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
PaineWebber Funds and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of each Select Portfolio under separate distribution contracts with
the Trust (collectively, "Distribution Contracts") that require Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
shares of each Select Portfolio. Shares of each Select Portfolio are offered
continuously. Under separate exclusive dealer agreements between Mitchell
Hutchins and PaineWebber relating each class share of each Select Portfolio
34
<PAGE>
(collectively, "Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell the Select Portfolios' shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by the Trust in the manner prescribed under Rule 12b-1
under the 1940 Act (each, respectively, a "Class A Plan," "Class B Plan" and
"Class C Plan," and collectively, "Plans"), each Select Portfolio pays Mitchell
Hutchins a service fee, accrued daily and payable monthly, at the annual rate of
0.25% of the average daily net assets of each Class of shares for each
respective Select Portfolio. Under the Class B Plan and Class C Plan, each
Select Portfolio pays Mitchell Hutchins a distribution fee, accrued daily and
payable monthly, at the annual rate of 0.75% of the average daily net assets of
that Class. There is no distribution plan with respect to Class Y shares and the
Select Portfolios pay no service or distribution fees with respect to their
Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the Trust's board at least quarterly, and the trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendment thereto is
approved, by the board, including those trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan, acting in person
at a meeting called for that purpose, (3) payments by a Select Portfolio under
the Plan shall not be materially increased without the affirmative vote of the
holders of a majority of the outstanding shares of the relevant class of that
Select Portfolio and (4) while the Plan remains in effect, the selection and
nomination of trustees who are not "interested persons" of the Trust shall be
committed to the discretion of the trustees who are not "interested persons" of
the Trust.
In reporting amounts expended under the Plans to the Trust's board,
Mitchell Hutchins allocates expenses attributable to the sale of each Class of
each Select Portfolio's shares to such Class based on the ratio of sales of
shares of such Class to the sales of all Classes of shares. The fees paid by one
Class of a Select Portfolio's shares will not be used to subsidize the sale of
any other Class of that Select Portfolio's shares.
In approving the Select Portfolios' overall Flexible PricingSM system of
distribution, the Trust's board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in each respective Select
Portfolio and attracting new investors and assets to the Select Portfolio to the
benefit of the Select Portfolio and its shareholders, (2) facilitate
distribution of the Select Portfolios' shares and (3) maintain the competitive
position of the Select Portfolios in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan for each Select Portfolio, the Trust's board
considered all the features of the distribution system, including (1) the
conditions under which initial sales charges would be imposed and the amount of
such charges, (2) Mitchell Hutchins' belief that the initial sales charge
combined with a service fee would be attractive to PaineWebber investment
executives and correspondent firms, resulting in greater growth of the Select
Portfolio than might otherwise be the case, (3) the advantages to the
shareholders of economies of scale resulting from growth in the Select
Portfolio's assets and potential continued growth, (4) the services provided to
the Select Portfolio and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan for each Select Portfolio, the Trust's board
considered all the features of the distribution system, including (1) the
conditions under which contingent deferred sales charges would be imposed and
the amount of such charges, (2) the advantage to investors in having no initial
sales charges deducted from Select Portfolio purchase payments and instead
35
<PAGE>
having the entire amount of their purchase payments immediately invested in
Select Portfolio shares, (3) Mitchell Hutchins' belief that the ability of
PaineWebber investment executives and correspondent firms to receive sales
commissions when Class B shares are sold and continuing service fees thereafter
while their customers invest their entire purchase payments immediately in Class
B shares would prove attractive to the investment executives and correspondent
firms, resulting in greater growth of the Select Portfolio than might otherwise
be the case, (4) the advantages to the shareholders of economies of scale
resulting from growth in the Select Portfolio's assets and potential continued
growth, (5) the services provided to the Select Portfolio and its shareholders
by Mitchell Hutchins, (6) the services provided by PaineWebber pursuant to its
Exclusive Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins'
shareholder service and distribution-related expenses and costs. The board also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives, without the concomitant receipt by Mitchell Hutchins of
initial sales charges, was conditioned upon its expectation of being compensated
under the Class B Plan.
In approving the Class C Plan for each Select Portfolio, the Trust's board
considered all the features of the distribution system, including (1) the
advantage to investors in having no initial sales charges deducted from the
Select Portfolio purchase payments and instead having the entire amount of their
purchase payments immediately invested in Select Portfolio shares, (2) the
advantage to investors in being free from contingent deferred sales charges upon
redemption for shares held more than one year and paying for distribution on an
ongoing basis, (3) Mitchell Hutchins' belief that the ability of PaineWebber
investment executives and correspondent firms to receive sales compensation for
their sales of Class C shares on an ongoing basis, along with continuing service
fees, while their customers invest their entire purchase payments immediately in
Class C shares and generally do not face contingent deferred sales charges,
would prove attractive to the investment executives and correspondent firms,
resulting in greater growth to the Select Portfolio than might otherwise be the
case, (4) the advantages to the shareholders of economies of scale resulting
from growth in the Select Portfolio's assets and potential continued growth, (5)
the services provided to the Select Portfolio and its shareholders by Mitchell
Hutchins, (6) the services provided by PaineWebber pursuant to its Exclusive
Dealer Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder
andvice- and distribution-related expenses and costs. The trustees also
recognized that Mitchell Hutchins' willingness to compensate PaineWebber and its
investment executives without the concomitant receipt by Mitchell Hutchins of
initial sales charges or contingent deferred sales charges upon redemption, was
conditioned upon its expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The board also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees which are
calculated based upon a percentage of the average net assets of each Select
Portfolio, which would increase if the Plan were successful and the Select
Portfolio attained and maintained significant asset levels.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities for the Select
Portfolios (normally shares of the Underlying Funds) are placed on behalf of a
particular Select Portfolio by Mitchell Hutchins. A Select Portfolio will not
incur any commissions or sales charges when it invests in shares of the
Underlying Funds, but it may incur such costs if it invests directly in other
types of securities. When a Select Portfolio purchases short-term U.S.
government securities or commercial paper directly, it may purchase such
securities in dealer transactions, which generally include a "spread," as
explained below.
Subject to policies established by each Underlying Fund's board, Mitchell
Hutchins or the applicable Sub-Adviser is responsible for the execution of the
Underlying Fund's portfolio transactions and the allocation of brokerage
transactions. In executing portfolio transactions, Mitchell Hutchins or the Sub-
Adviser seeks to obtain the best net results for an Underlying Fund, taking into
36
<PAGE>
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins or the Sub-Adviser
generally seeks reasonably competitive commission rates, payment of the lowest
commission is not necessarily consistent with obtaining the best net results.
Prices paid to dealers in principal transactions, through which most debt
securities and some equity securities are traded, generally include a "spread,"
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at the time. The Underlying Funds may
invest in securities traded in the OTC market and will engage primarily in
transactions directly with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker.
The Select Portfolios and the Underlying Funds have no obligation to deal
with any broker or group of brokers in the execution of portfolio transactions.
The Select Portfolios and the Underlying Funds contemplate that, consistent with
the policy of obtaining the best net results, brokerage transactions may be
conducted through PaineWebber. Each Select Portfolio and Underlying Fund's board
has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to
ensure that all brokerage commissions paid to PaineWebber are reasonable and
fair. Specific provisions in the Advisory Contract authorize PaineWebber to
effect portfolio transactions for the Select Portfolios on such exchange and to
retain compensation in connection with such transactions. Any such transactions
will be effected and related compensation paid only in accordance with
applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Underlying Funds' procedures in selecting FCMs to execute their transactions in
futures contracts, including procedures permitting the use of PaineWebber, are
similar to those in effect with respect to brokerage transactions in securities.
Consistent with the interests of the Select Portfolios and the Underlying
Funds and subject to the review of each Fund's board, Mitchell Hutchins or a
Sub-Adviser may cause a Fund to purchase and sell portfolio securities from and
to dealers or through brokers who provide that Fund with research, analysis,
advice and similar services. In return for such services, a Select Portfolio or
Underlying Fund may pay to those brokers a higher commission than may be charged
by other brokers, provided that Mitchell Hutchins or the Sub-Adviser determines
in good faith that such commission is reasonable in terms either of that
particular transaction or of the overall responsibility of Mitchell Hutchins to
that Fund and its other clients and that the total commissions paid by the Fund
will be reasonable in relation to the benefits to the Fund over the long term.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins or the Sub- Adviser seeks best execution. Although Mitchell
Hutchins or a Sub-Adviser may receive certain research or execution services in
connection with these transactions, they will not purchase securities at a
higher price or sell securities at a lower price than would otherwise be paid if
no weight was attributed to the services provided by the executing dealer.
Moreover, Mitchell Hutchins and the Sub-Adviser will not enter into any explicit
soft dollar arrangements relating to principal transactions and will not receive
in principal transactions the types of services which could be purchased for
hard dollars. Mitchell Hutchins or a Sub- Adviser may engage in agency
transactions in OTC equity and debt securities in return for research and
execution services. These transactions are entered into only in compliance with
procedures ensuring that the transaction (including commissions) is at least as
favorable as it would have been if effected directly with a market-maker that
did not provide research or execution services. These procedures include
Mitchell Hutchins or the Sub-Adviser receiving multiple quotes from dealers
before executing the transactions on an agency basis.
Information and research services furnished by brokers or dealers through
which or with which the Select Portfolios or Underlying Funds effect securities
transactions may be used by Mitchell Hutchins or a Sub-Adviser in advising other
funds or accounts and, conversely, research services furnished to Mitchell
Hutchins or a Sub-Adviser by brokers or dealers in connection with other funds
or accounts that either of them advises may be used in advising the Funds.
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<PAGE>
Information and research received from brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by Mitchell
Hutchins under the Advisory Contract or a Sub-Adviser under its contract with
Mitchell Hutchins.
Investment decisions for a Select Portfolio or Underlying Fund and for
other investment accounts managed by Mitchell Hutchins are made independently of
each other in light of differing considerations for the various accounts.
However, the same investment decision may occasionally be made for a Select
Portfolio or Underlying Fund and one or more of such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated between that Select Portfolio or Underlying Fund and
such other account(s) as to amount according to a formula deemed equitable to
the Fund and such account(s). While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the
Purchases or sales are then averaged as to price and allocated between that
Select Portfolio or Underlying Fund are concerned, or upon their ability to
complete their entire order, in other cases it is believed that coordination and
the ability to participate in volume transactions will be beneficial to the
Funds.
The Select Portfolios and Underlying Funds will not purchase securities
that are offered in underwritings in which PaineWebber is a member of the
underwriting or selling group, except pursuant to procedures adopted by each
Fund's board of trustees pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the spread or commission paid in
connection with such a purchase be reasonable and fair, the purchase be at not
more than the public offering price prior to the end of the first business day
after the date of the public offering and that PaineWebber or any affiliate
thereof not participate in or benefit from the sale to the Funds.
PORTFOLIO TURNOVER. The Select Portfolios' annual portfolio turnover rates
may vary greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each Select Portfolio's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of securities in the portfolio during the year. Mitchell
Hutchins estimates that no Select Portfolio's annual portfolio turnover rate
will exceed [50%] during its first fiscal year.
The portfolio turnover rates of the Underlying Funds have ranged from __%
to __% during their most recent fiscal years. There can be no assurance that the
portfolio turnover rates of the Underlying Funds will remain within this range
during subsequent fiscal years. Higher portfolio turnover rates may result in
higher expenses being incurred by the Underlying Funds.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE-CLASS A SHARES. Investors and eligible groups
of related Select Portfolio investors may combine purchases of Class A shares of
the Select Portfolios with concurrent purchases of Class A shares of any other
PaineWebber mutual fund and thus take advantage of the reduced sales charges
indicated in the table of sales charges for Class A shares in the Prospectus.
The sales charge payable on the purchase of Class A shares of the Select
Portfolios and Class A shares of such other funds will be at the rates
applicable to the total amount of the combined concurrent purchases.
An "eligible group of related Select Portfolio investors" can consist of
any combination of the following:
(a) an individual, that individual's spouse, parents and children;
an individual and his or her Individual Retirement Account ("IRA");
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<PAGE>
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust created by
the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter or
investment update establishing a relationship with all of the accounts.
RIGHTS OF ACCUMULATIONS-CLASS A SHARES. Reduced sales charges are available
through a right of accumulation, under which investors and eligible groups of
related Select Portfolio investors (as defined above) are permitted to purchase
Class A shares of the Select Portfolios among related accounts at the offering
price applicable to the total of (1) the dollar amount then being purchased plus
(2) an amount equal to the then-current net asset value of the purchaser's
combined holdings of Class A Select Portfolio shares and Class A shares of any
other PaineWebber mutual fund. The purchaser must provide sufficient information
to permit confirmation of his or her holdings, and the acceptance of the
purchase order is subject to such confirmation. The right of accumulation may be
amended or terminated at any time.
WAIVERS OF SALES CHARGES-CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Select Portfolios may be exchanged for shares
of the corresponding Class of most other PaineWebber mutual funds. This exchange
privilege is available only in those jurisdictions where the sale of PaineWebber
fund shares to be acquired through such exchange may be legally made.
Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce any exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or a Select Portfolio
temporarily delays or ceases the sales of its shares because it is unable to
invest amounts effectively in accordance with the Select Portfolio's investment
objective, policies and restrictions.
If conditions exist that make cash payments undesirable, each Select
Portfolio reserves the right to honor any request for redemption by making
payment in whole or in part in securities chosen by the Select Portfolio and
valued in the same way as they would be valued for purposes of computing the
Select Portfolio's net asset value. If payment is made in securities, a
shareholder may incur brokerage expenses in converting these securities into
cash. Each Select Portfolio has elected, however, to be governed by Rule 18f-1
under the 1940 Act, under which it is obligated to redeem shares solely in cash
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up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for one shareholder. This election is irrevocable unless the SEC permits
its withdrawal.
The Select Portfolios may suspend redemption privileges or postpone the
date of payment during any period (1) when the New York Stock Exchange ("NYSE")
is closed or trading on the NYSE is restricted as determined by the SEC, (2)
when an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for a Select Portfolio to dispose of securities owned by it or
fairly to determine the value of its assets or (3) as the SEC may otherwise
permit. The redemption price may be more or less than the shareholder's cost,
depending on the market value of a Select Portfolio's portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Select Portfolio's net asset value per share is
low and fewer shares when the net asset value per share is high. Using this
technique, an investor's average purchase price per share over any given period
will be lower than if the investor purchased a fixed number of shares on a
monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of low price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance" (a
term that means the value of the Select Portfolio account at the time the
investor elects to participate in the systematic withdrawal plan) less aggregate
redemptions made other than pursuant to the systematic withdrawal plan is less
than $5,000 for Class A and Class C shareholders or $20,000 for Class B
shareholders. Purchases of additional shares of a Select Portfolio concurrent
with withdrawals are ordinarily disadvantageous to shareholders because of tax
liabilities and, for Class A shares, initial sales charges. On or about the 15th
of each month for monthly plans and on or about the 15th of the months selected
for quarterly or semi-annual plans, PaineWebber will arrange for redemption by
the Select Portfolios of sufficient Select Portfolio shares to provide the
withdrawal payments specified by participants in the Select Portfolios'
systematic withdrawal plan. The payments generally are mailed approximately
three Business Days (defined under "Valuation of Shares") after the redemption
date. Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends & Taxes" in the
Prospectus. If periodic withdrawals continually exceed reinvested dividends and
other distributions, a shareholder's investment may be correspondingly reduced.
A shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. ("Transfer Agent"). Instructions to participate in the plan, change
the withdrawal amount or terminate participation in the plan will not be
effective until five days after written instructions with signatures guaranteed
are received by the Transfer Agent. Shareholders may request the forms needed to
establish a systematic withdrawal plan from their PaineWebber investment
executives, correspondent firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE-CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their account
in a Select Portfolio without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the date
of redemption. The reinstatement will be made at the net asset value per share
next computed after the notice of reinstatement and check are received. The
amount of a purchase under this reinstatement privilege cannot exceed the amount
of the redemption proceeds. Gain on a redemption is taxable regardless of
whether the reinstatement privilege is exercised; however, a loss arising out of
a redemption will not be deductible to the extent the reinstatement privilege is
exercised within 30 days after redemption, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege. Gain or loss on a redemption also will be adjusted for federal income
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tax purposes by the amount of any sales charge paid on Class A shares, under the
circumstances and to the extent described in "Dividends & Taxes" in the
Prospectus.
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA) (R)
Shares of PaineWebber mutual funds, including the Select Portfolios, (each
a "PW Fund" and, collectively, the "PW Funds") are available for purchase
through the RMA Resource Accumulation Plan ("Plan") by customers of PaineWebber
and its correspondent firms who maintain Resource Management Accounts ("RMA
accountholders"). The Plan allows an RMA accountholder to continually invest in
one or more of the PW Funds at regular intervals, with payment for shares
purchased automatically deducted from the client's RMA account. The client may
elect to invest at monthly or quarterly intervals and may elect either to invest
a fixed dollar amount (minimum $100 per period) or to purchase a fixed number of
shares. A client can elect to have Plan purchases executed on the first or
fifteenth day of the month. Settlement occurs three Business Days (defined under
"Valuation of Shares") after the trade date, and the purchase price of the
shares is withdrawn from the investor's RMA account on the settlement date from
the following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable to
the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de- emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an investor
to take advantage of "dollar cost averaging." By investing a fixed amount in
mutual fund shares at established intervals, an investor purchases more shares
when the price is lower and fewer shares when the price is higher, thereby
increasing his or her earning potential. Of course, dollar cost averaging does
not guarantee a profit or protect against a loss in a declining market, and an
investor should consider his or her financial ability to continue investing
through periods of low share prices. However, over time, dollar cost averaging
generally results in a lower average original investment cost than if an
investor invested a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
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o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold MasterCard (R)
transactions during the period, and provide unrealized and realized gain and
loss estimates for most securities held in the account;
o comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax return
preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the six RMA money market funds-RMA Money Market Portfolio, RMA U.S.
Government Portfolio, RMA Tax- Free Fund, RMA California Municipal Money Fund,
RMA New Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
money market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so. Investments in
the money market funds are not insured or guaranteed by the U.S. government;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA accountholders
can code their checks to classify expenditures.
All canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to remain
invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service Center;
o expanded account protection to $50 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of the RMA
money market funds or the PW Funds because those shares are held at the transfer
agent and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Select Portfolios will automatically convert to Class
A shares, based on the relative net asset values per share of the two Classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If a
shareholder acquired Class B shares of any Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion will be determined based
on the date the CDSC Fund shares were initially issued. For purposes of
conversion to Class A shares, Class B shares purchased through the reinvestment
of dividends and other distributions paid in respect of Class B shares will be
held in a separate sub-account. Each time any Class B 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
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the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and that the conversion
of shares does not constitute a taxable event. If the conversion feature ceased
to be available, the Class B shares would not be converted and would continue to
be subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not be met.
VALUATION OF SHARES
The Select Portfolios determine their net asset values per share separately
for each Class of shares as of the close of regular trading (currently 4:00
p.m., Eastern time) on the NYSE on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The value of the shares of each Underlying Fund will be their net asset
value at the time of the net asset value of the Select Portfolio shares is
determined. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining until maturity, unless the
Trust's board determines that this does not represent fair value.
PERFORMANCE INFORMATION
Each Select Portfolio's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represents past performance
and are not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each Select Portfolio's Performance
Advertisements are calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares
of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 4.5% sales charge is deducted from the initial $1,000 payment and, for
Class B and Class C shares, the applicable contingent deferred sales charge
imposed on a redemption of Class B or Class C shares held for the period is
deducted. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The Select Portfolios also may refer in Performance Advertisements to total
return performance data that are not calculated according to the formula set
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forth above ("Non-Standardized Return"). The Select Portfolios calculate
Non-Standardized Return for specified periods of time by assuming an investment
of $1,000 in Select Portfolio shares and assuming the reinvestment of all
dividends and other distributions. The rate of return is determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the initial value. Neither initial nor contingent
deferred sales charges are taken into account in calculating Non-Standardized
Return; the inclusion of those charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years will reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
YIELD. Yields used in Select Moderate Portfolio's and Select Conservative
Portfolio's Performance Advertisements are calculated by dividing the Select
Portfolio's interest income attributable to a Class of shares for a 30-day
period ("Period"), net of expenses attributable to such Class, by the average
number of shares of such Class entitled to receive dividends during the Period
and expressing the result as an annualized percentage (assuming semi-annual
compounding) of the maximum offering price per share (in the case of Class A
shares) or the net asset value per share (in the case of Class B and Class C
shares) at the end of the Period. Yield quotations are calculated according to
the following formula:
YIELD = 2 [( a-b/cd +1 ) 6 -1 ]
where: a = interest earned during the Period attributable to a Class of
shares
b = expenses accrued for the Period attributable to a Class of
shares (net of reimbursements)
c = the average daily number of shares of a Class outstanding
during the Period that were entitled to receive dividends
d = the maximum offering price per share (in the case
of Class A shares) or the net asset value per share
(in the case of Class B and Class C shares) on the
last day of the Period.
Except as noted below, in determining interest income earned during the
Period (variable "a" in the above formula), a Select Portfolio calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the Select Portfolio, interest earned during the Period is then determined by
totalling the interest earned on all debt obligations. For purposes of these
calculations, the maturity of an obligation with one or more call provisions is
assumed to be the next date on which the obligation reasonably can be expected
to be called or, if none, the maturity date. With respect to Class A shares, in
calculating the maximum offering price per share at the end of the Period
(variable "d" in the above formula) the Select Portfolio's current maximum 4%
initial sales charge on Class A shares is included.
OTHER INFORMATION. In Performance Advertisements, the Select Portfolios may
compare their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, the
International Finance Corporation Global Total Return Index, the Nasdaq
Composite Index, the Russell 2000 Index, the Wilshire 5000 Index, the Lehman
Bond Index, the Lehman Brothers 20+ Year Treasury Bond Index, the Lehman
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Brothers Government/Corporate Bond Index, other similar Lehman Brothers indices
or components thereof, 30-year and 10-year U.S. Treasury bonds, the Morgan
Stanley Capital International Perspective Indices, the Morgan Stanley Capital
International Energy Sources Index, the Standard & Poor's Oil Composite Index,
the Morgan Stanley Capital International World Index, the Salomon Brothers
Non-U.S. Dollar Index, the Salomon Brothers Non-U.S. World Government Bond
Index, the Salomon Brothers World Government Index, other similar Salomon
Brothers indices or components thereof and changes in the Consumer Price Index
as published by the U.S. Department of Commerce. The Select Portfolios also may
refer in such materials to mutual fund performance rankings and other data, such
as comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Select Portfolios and comparative mutual fund data and
ratings reported in independent periodicals, including (but not limited to) THE
WALL STREET JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
AND THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in
graphic form.
The Select Portfolios may include discussions or illustrations of the
effects of compounding in Performance Advertisements. "Compounding" refers to
the fact that, if dividends or other distributions on a Select Portfolio
investment are reinvested in additional Select Portfolio shares, any future
income or capital appreciation of a Select Portfolio would increase the value,
not only of the original Select Portfolio investment, but also of the additional
Select Portfolio shares received through reinvestment. As a result, the value of
a Select Portfolio investment would increase more quickly than if dividends or
other distributions had been paid in cash.
The Select Portfolios may also compare their performance with the
performance of bank certificates of deposit (CDs) as measured by the CDA
Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDs of major banks published by Banxquote(Registered)
Money Markets. In comparing the Select Portfolios' performance to CD
performance, investors should keep in mind that bank CDs are insured in whole or
in part by an agency of the U.S. government and offer fixed principal and fixed
or variable rates of interest, and that bank CD yields may vary depending on the
financial institution offering the CD and prevailing interest rates. Shares of
the Select Portfolios are not insured or guaranteed by the U.S. government and
returns and net asset values will fluctuate. The debt securities held by the
Select Portfolios may have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
Select Portfolio involves greater risks than an investment in either a money
market fund or a CD.
Each Select Portfolio may also compare its performance to general trends in
the stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Select Portfolio must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gains) ("Distribution Requirement") and must meet
several additional requirements. For each Select Portfolio these requirements
include the following: (1) the Select Portfolio must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of securities,
or other income derived with respect to its business of investing in securities
("Income Requirement"); (2) the Select Portfolio must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities that were held for less than three months ("Short-Short Limitation");
(3) at the close of each quarter of the Select Portfolio's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
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to an amount that does not exceed 5% of the value of the Select Portfolio's
total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) at the close of each quarter of the
Select Portfolio's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Select Portfolio in
October, November or December of any year and payable to shareholders of record
on a date in any of those months will be deemed to have been paid by the Select
Portfolio and received by the shareholders on December 31 of that year if the
distributions are paid by the Select Portfolio during the following January.
Accordingly, those distributions will be taxed to shareholders for the year in
which that December 31 falls.
[A portion of the dividends from each Select Portfolio's investment company
taxable income (whether paid in cash or additional shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by a Select Portfolio from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.]
If shares of a Select Portfolio are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of short-term,
capital loss to the extent of any capital gain distributions received on those
shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back as
a taxable distribution.
[Dividends and interest received by a Select Portfolio may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions (collectively "foreign taxes") that would reduce the yield on its
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and many foreign countries do
not impose taxes on capital gains in respect of investments by foreign
investors. If more than 50% of the value of a Select Portfolio's total assets at
the close of its taxable year consists of securities of foreign corporations, it
will be eligible to, and may, file an election with the Internal Revenue Service
that will enable its shareholders, in effect, to receive the benefit of the
foreign tax credit with respect to any foreign taxes paid by it. Pursuant to the
election, the Select Portfolio would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him or her, his or her proportionate share of those
taxes, (2) treat his or her share of those taxes and of any dividend paid by the
Select Portfolio that represents income from foreign or U.S. possessions sources
as his or her own income from those sources, and (3) either deduct the taxes
deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his or her federal income tax. A Select Portfolio will report to
its shareholders shortly after each taxable year their respective shares of the
Select Portfolio's foreign taxes and income from sources within foreign
countries and U.S. possessions if it makes this election.]
Each Select Portfolio will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any calendar
year substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
OTHER INFORMATION
The Trust is a Delaware business trust. The Trust has authority to issue an
unlimited number of shares of beneficial interest. The Trust's board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate series and may divide the shares of any series into classes,
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and the costs of doing so will be borne by the Trust. The Trust currently
consist of four series, each with four classes of shares.
Although Delaware law statutorily limits the potential liabilities of a
Delaware business trust's shareholders to the same extent as it limits the
potential liabilities of a Delaware corporation, shareholders of a Select
Portfolio could, under certain conflicts of laws jurisprudence in various
states, be held personally liable for the obligations of the Trust or a Select
Portfolio. However, the Trust's trust instrument disclaims shareholder liability
for acts or obligations of the Trust or its series (the Select Portfolios) and
requires that notice of such disclaimer be given in each written obligation made
or issued by the trustees or by any officers or officer by or on behalf of the
Trust, a series, the trustees or any of them in connection with the Trust. The
trust instrument provides for indemnification from a Select Portfolio's property
for all losses and expenses of any series shareholder held personally liable for
the obligations of the Select Portfolio. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Select Portfolio itself would be unable to meet its
obligations, a possibility which Mitchell Hutchins believes is remote and not
material. Upon payment of any liability incurred by a shareholder solely by
reason of being or having been a shareholder of a Select Portfolio , the
shareholder paying such liability will be entitled to reimbursement from the
general assets of the Select Portfolio. The trustees intend to conduct the
operations of the Select Portfolios in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Select
Portfolios.
Each Select Portfolio is entitled to participate equally in the dividends
and other distribution and the proceeds of any liquidation except that, due to
the differing expenses borne by the classes, dividends and liquidation proceeds
for each class will likely differ. Shares are fully paid and non-assessable and
have no preemptive or other right to subscribe to any additional shares or other
securities issued by the Trust. Shareholders have non-cumulative voting rights.
A shareholder is entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held.
[Annual shareholder meetings are not required. Special meetings of the
shareholders of any class or any series may be called by the trustees and shall
be called by the trustees upon the written request of shareholders owning at
least ten percent of the outstanding shares of such series or class, or at least
ten percent of the outstanding shares entitled to vote. On matters requiring
shareholder approval, all share shall be voted by individual series or class,
except (a) when required by the 1940 Act, shares shall be voted in the aggregate
and not by individual series or class, and (b) when the trustees have determined
that the matter affects the interests of more than one series or class, then the
shareholders of all such series or classes shall be entitled to one vote
thereon.]
CLASS-SPECIFIC EXPENSES. Each Select Portfolio may determine to allocate
certain of its expenses (in addition to distribution fees) to the specific
Classes of the Select Portfolio's shares to which those expenses are
attributable. For example, Class B shares bear higher transfer agency fees per
shareholder account than those borne by Class A or Class C shares. The higher
fee is imposed due to the higher costs incurred by the Transfer Agent in
tracking shares subject to a contingent deferred sales charge because, upon
redemption, the duration of the shareholder's investment must be determined in
order to determine the applicable charge. Moreover, the tracking and
calculations required by the automatic conversion feature of the Class B shares
will cause the Transfer Agent to incur additional costs. Although the transfer
agency fee will differ on a per account basis as stated above, the specific
extent to which the transfer agency fees will differ between the Classes as a
percentage of net assets is not certain, because the fee as a percentage of net
assets will be affected by the number of shareholder accounts in each Class and
the relative amounts of net assets in each Class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Select
Portfolios. Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and
Mitchell Hutchins in connection with other matters.
47
<PAGE>
AUDITORS. [Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Trust and each Select Portfolio.]
48
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as a
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; AA. Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities; A. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future; BAA. Bonds which are rated Baa are considered
as medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well; BA. Bonds
which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class; B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small; Caa. Bonds which are rated CAA are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; CA. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings; C. Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
lowest degree of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation rated
BB is less vulnerable to nonpayment than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation; B. An obligation rated B
A-1
<PAGE>
is more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment on the
obligation; CCC. An obligation rated CCC is currently vulnerable to nonpayment
and is dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation; CC. An
obligation rated CC is currently highly vulnerable to nonpayment; C. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on this obligation are
being continued; D. An obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
R. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE SELECT PORTFOLIOS OR THEIR DISTRIBUTOR.
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE SELECT PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
Select Portfolios - Investment Policies And Restrictions.....................2
Underlying Funds - Investment Policies.......................................4
Underlying Funds - Hedging And Other Strategies Using Derivative Contracts..23
Trustees And Officers; Principal Holders Of Securities......................32
Compensation Table..........................................................33
Investment Advisory And Distribution Arrangements...........................33
Portfolio Transactions......................................................36
Reduced Sales Charges, Additional Exchange And Redemption Information
And Other Services.......................................................38
Conversion Of Class B Shares................................................42
Valuation Of Shares.........................................................43
Performance Information.....................................................43
Taxes.......................................................................45
Other Information...........................................................46
Appendix...................................................................A-1
(COPYRIGHT) 1997 PAINEWEBBER INCORPORATED
A-3
<PAGE>
PAINEWEBBER
SELECT PORTFOLIOS
- ---------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
_________, 1997
- ---------------------------------------------------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements: (to be filed)
(b) Exhibits:
(1) Trust Instrument (filed herewith)
(2) By-Laws (filed herewith)
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 1/
(5) Investment Advisory and Administration Contract (to be filed)
(6) (a) Distribution Contract with respect to Class A Shares (to be filed)
(b) Distribution Contract with respect to Class B Shares (to be filed)
(c) Distribution Contract with respect to Class C Shares (to be filed)
(d) Distribution Contract with respect to Class Y Shares (to be filed)
(e) Exclusive Dealer Agreement with respect to Class A Shares (to be
filed)
(f) Exclusive Dealer Agreement with respect to Class B Shares (to be
filed)
(g) Exclusive Dealer Agreement with respect to Class C Shares (to be
filed)
(h) Exclusive Dealer Agreement with respect to Class Y Shares (to be
filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (to be filed)
(9) Transfer Agency Agreement (to be filed)
(10) Opinion of Counsel (to be filed)
(11) Other opinions, appraisals, rulings and consents:
Accountants' consent (to be filed)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent (to be filed)
(14) Prototype Retirement Plan - none
(15) Rule 12b-1 Plans
(a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares (to be filed)
(16) Schedule for Computation of Performance Quotations - none
and (27) Financial Data Schedule (to be filed)
(18) Plan Pursuant to Rule 18f-3 (to be filed)
- ----------------------
1/ Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles VI and IX of Registrant's By-Laws.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
- -------- -------------------------------------------------------------
None
C-1
<PAGE>
Item 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
Number of Record
Holders as of
TITLE OF CLASS April 15, 1997
- -------------- --------------
Shares of beneficial interest, par value
$0.001 per share, in
PaineWebber Select Aggressive Growth Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
PaineWebber Select Growth Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
PaineWebber Select Moderate Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
PaineWebber Select Conservative Portfolio
Class A Shares 0
Class B Shares 0
Class C Shares 0
Class Y Shares 0
Item 27. INDEMNIFICATION
---------------
Section 2 of Article IX of the Trust Instrument, "Indemnification,"
provides that the appropriate series of the Registrant will indemnify the
trustees and officers of the Registrant to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue of
being or having been a trustee or officer; provided that no such person shall be
indemnified where there has been an adjudication or other determination, as
described in Article IX, that such person is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
did not act in good faith in the reasonable belief that his action was in the
best interest of the Registrant. Section 2 of Article IX also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
C-2
<PAGE>
Additionally, "Limitation of Liability" in Section 1 of Article IX of
the Trust Instrument provides that the trustees or officers of the Registrant
shall not be personally liable to any person extending credit to, contracting
with or having a claim against the Registrant or a particular series; and that,
provided they have exercised reasonable care and have acted under the reasonable
belief that their actions are in the best interest of the Registrant, the
trustees and officers shall not be liable for neglect or wrongdoing by them or
any officer, agent, employee, investment adviser or independent contractor of
the Registrant.
Section 9 of the Investment Advisory and Administration Contract with
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") provides that
Mitchell Hutchins shall not be liable for any error of judgment or mistake of
law or for any loss suffered by any series of the Registrant in connection with
the matters to which the Contract relates, except for a loss resulting from the
willful misfeasance, bad faith, or gross negligence of Mitchell Hutchins in the
performance of its duties or from its reckless disregard of its obligations and
duties under the Contract. Section 10 of the Contract provides that the Trustees
shall not be liable for any obligations of the Trust or any series under the
Contract and that Mitchell Hutchins shall look only to the assets and property
of the Registrant in settlement of such right or claim and not to the assets and
property of the Trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors and controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and Trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with the Contract. Section 10 of each Distribution
Contract contains provisions similar to Section 10 of the Investment Advisory
and Administration Contract, with respect to Mitchell Hutchins and PaineWebber,
as appropriate.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
C-3
<PAGE>
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding or payment pursuant to any insurance policy) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219), and is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SELECT TRUST
PAINEWEBBER SERIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219). The directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
C-4
<PAGE>
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the principal business
address of each person named is 1285 Avenue of the Americas, New York, NY 10019.
Positions and Offices
Positions and Offices With Underwriter or
Name With Registrant Exclusive Dealer
- ---- --------------- ----------------
Dianne E. O'Donnell Trustee, Vice President Senior Vice President and
and Secretary Deputy General Counsel of
Mitchell Hutchins
Victoria E. Schonfeld Trustee, President and Managing Director and General
Chairman of the Board Counsel of Mitchell Hutchins
of Trustees
Julian F. Sluyters Vice President and Senior Vice President and
Treasurer Director of the Mutual Fund
Finance Division of Mitchell
Hutchins
c) None
Item 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's investment adviser, Mitchell Hutchins, 1285
Avenue of the Americas, New York, New York 10019. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's transfer agent and custodian.
Item 31. MANAGEMENT SERVICES
-------------------
Not applicable.
Item 32. UNDERTAKINGS
- -------- ------------
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement, containing financial statements that need not be
certified, within four to six months from the effective date of this
Registration Statement.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on the 29th day of
April, 1997.
PAINEWEBBER SELECT FUND
By: /S/ VICTORIA E. SCHONFELD
Victoria E. Schonfeld
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE Title Date
- --------- ----- ----
/S/ VICTORIA E. SCHONFELD Trustee, President and April 29, 1997
- -----------------------------
Victoria E. Schonfeld Chairman of the Board
of Trustees (Chief
Executive Officer)
/S/ DIANNE E. O'DONNELL Trustee April 29, 1997
- -----------------------------
Dianne E. O'Donnell
/S/ JULIAN F. SLUYTERS Vice President and April 29, 1997
- -----------------------------
Julian F. Sluyters Treasurer (Chief
Financial and
Accounting Officer)
<PAGE>
PAINEWEBBER SELECT FUND
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) Trust Instrument (filed herewith)
(2) By-Laws (filed herewith)
(3) Voting trust agreement - none
(4) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 1/
(5) Investment Advisory and Administration Contract (to be filed)
(6) (a) Distribution Contract with respect to Class A Shares (to be filed)
(b) Distribution Contract with respect to Class B Shares (to be filed)
(c) Distribution Contract with respect to Class C Shares (to be filed)
(d) Distribution Contract with respect to Class Y Shares (to be filed)
(e) Exclusive Dealer Agreement with respect to Class A Shares (to be
filed)
(f) Exclusive Dealer Agreement with respect to Class B Shares (to be
filed)
(g) Exclusive Dealer Agreement with respect to Class C Shares (to be
filed)
(h) Exclusive Dealer Agreement with respect to Class Y Shares (to be
filed)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement (to be filed)
(9) Transfer Agency Agreement (to be filed)
Opinion of Counsel (to be filed)
(11) Other opinions, appraisals, rulings and consents:
Accountants' consent (to be filed)
(12) Financial Statements omitted from Part B - none
(13) Letter of investment intent (to be filed)
(14) Prototype Retirement Plan - none
(15) Rule 12b-1 Plans
(a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares (to be filed)
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares (to be filed)
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares (to be filed)
(16) Schedule for Computation of Performance Quotations - none
(17) and (27) Financial Data Schedule (to be filed)
(18) Plan Pursuant to Rule 18f-3 (to be filed)
- ----------------------
1/ Incorporated by reference from Articles IV, VI, IX and X of Registrant's
Trust Instrument and from Articles VI and IX of Registrant's By-Laws.
<PAGE>
PAINEWEBBER SELECT FUND
TRUST INSTRUMENT
August 9, 1996
<PAGE>
TABLE OF CONTENTS
PAGE NO.
ARTICLE I.....................................................................1
ARTICLE II....................................................................2
Section 1. Management of the Trust..................................2
Section 2. Initial Trustees; Number and Election
of Trustees..............................................2
Section 3. Term of Office...........................................2
Section 4. Vacancies; Appointment of Trustees.......................3
Section 5. Temporary Vacancy or Absence.............................3
Section 6. Chairman.................................................3
Section 7. Action by the Trustees...................................3
Section 8. Ownership of Trust Property..............................4
Section 9. Effect of Trustees Not Serving...........................4
Section 10. Trustees, etc. as Shareholders...........................4
ARTICLE III...................................................................5
Section 1. Powers...................................................5
Section 2. Certain Transactions.....................................7
ARTICLE IV....................................................................8
Section 1. Establishment of Series or Class.........................8
Section 2. Shares...................................................8
Section 3. Investment in the Trust..................................9
Section 4. Assets and Liabilities of Series.........................9
Section 5. Ownership and Transfer of Shares........................10
Section 6. Status of Shares; Limitation of Shareholder Liability...10
ARTICLE V....................................................................11
Section 1. Distributions...........................................11
Section 2. Redemptions.............................................11
Section 3. Determination of Net Asset Value........................12
Section 4. Suspension of Right of Redemption.......................12
Section 5. Redemptions Necessary for Qualification
as Regulated Investment Company.........................12
ARTICLE VI...................................................................13
Section 1. Voting Powers...........................................13
Section 2. Meetings of Shareholders................................14
Section 3. Quorum; Required Vote...................................14
ARTICLE VII..................................................................14
Section 1. Investment Adviser......................................14
Section 2. Principal Underwriter...................................15
Section 3. Transfer Agency, Shareholder Services,
and Administration Agreements...........................15
Section 4. Custodian...............................................15
Section 5. Parties to Contracts with Service
Providers...............................................15
Section 6. Requirements of the 1940 Act............................16
ARTICLE VIII.................................................................16
ARTICLE IX...................................................................17
Section 1. Limitation of Liability.................................17
Section 2. Indemnification.........................................17
Section 3. Indemnification of Shareholders.........................19
ARTICLE X....................................................................20
Section 1. Trust Not a Partnership.................................20
Section 2. Trustee Action; Expert Advice; No Bond or Surety........20
Section 3. Record Dates............................................20
Section 4. Termination of the Trust................................20
Section 5. Reorganization..........................................21
Section 6. Trust Instrument........................................22
Section 7. Applicable Law..........................................22
Section 8. Amendments..............................................23
Section 9. Fiscal Year.............................................23
Section 10. Severability............................................23
Exhibit 1
PAINEWEBBER SELECT FUND
TRUST INSTRUMENT
This TRUST INSTRUMENT is made on August 9, 1996, by the Trustees, to
establish a business trust for the investment and reinvestment of funds
contributed to the Trust by investors. The Trustees declare that all money and
property contributed to the Trust shall be held and managed in trust pursuant to
this Trust Instrument. The name of the Trust created by this Trust Instrument is
PaineWebber Select Fund.
ARTICLE I
DEFINITIONS
Unless otherwise provided or required by the context:
(a) "By-laws" means the By-laws of the Trust adopted by the Trustees,
as amended from time to time;
(b) "Class" means the class of Shares of a Series established pursuant
to Article IV;
(c) "Commission," "Interested Person," and "Principal Underwriter" have
the meanings provided in the 1940 Act;
(d) "Covered Person" means a person so defined in Article IX, Section
2;
(e) "Delaware Act" means Chapter 38 of Title 12 of the Delaware Code
entitled "Treatment of Delaware Business Trusts," as amended from time to time;
(f) "Majority Shareholder Vote" means "the vote of a majority of the
outstanding voting securities" as defined in the 1940 Act;
(g) "Net Asset Value" means the net asset value of each Series of the
Trust, determined as provided in Article V, Section 3;
(h) "Outstanding Shares" means Shares shown on the books of the Trust
or its transfer agent as then issued and outstanding, but does not include
Shares which have been repurchased or redeemed by the Trust;
(i) "Series" means a series of Shares established pursuant to Article
IV;
<PAGE>
(j) "Shareholder" means a record owner of Outstanding Shares;
(k) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest of each Series or Class is divided
from time to time (including whole Shares and fractions of Shares);
(l) "Trust" means PaineWebber Select Fund established hereby, and
reference to the Trust, when applicable to one or more Series, refers to that
Series;
(m) "Trustees" means the persons who have signed this Trust Instrument,
so long as they shall continue in office in accordance with the terms hereof,
and all other persons who may from time to time be duly qualified and serving as
Trustees in accordance with Article II, in all cases in their capacities as
Trustees hereunder;
(n) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the Trust or any Series
or the Trustees on behalf of the Trust or any Series; and
(o) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
ARTICLE II
TRUSTEES
Section 1. MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by or under the direction of the Trustees, and they shall
have all powers necessary or desirable to carry out that responsibility. The
Trustees may execute all instruments and take all action they deem necessary or
desirable to promote the interests of the Trust. Any determination made by the
Trustees in good faith as to what is in the interests of the Trust shall be
conclusive.
Section 2. INITIAL TRUSTEES; NUMBER AND ELECTION OF TRUSTEES. The
initial Trustees shall be the persons initially signing this Trust Instrument.
The number of Trustees (other than the initial Trustees) shall be fixed from
time to time by a majority of the Trustees; provided, that there shall be at
least two (2) Trustees. The Shareholders shall elect the Trustees (other than
the initial Trustees) on such dates as the Trustees may fix from time to time.
Section 3. TERM OF OFFICE. Each Trustee shall hold office for life or
until his or her successor is elected or the Trust terminates; except that (a)
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any Trustee may resign by delivering to the other Trustees or to any Trust
officer a written resignation effective upon such delivery or a later date
specified therein; (b) any Trustee may be removed with or without cause at any
time by a written instrument signed by at least two-thirds of the other
Trustees, specifying the effective date of removal; (c) any Trustee who requests
to be retired, or who has become physically or mentally incapacitated or is
otherwise unable to serve, may be retired by a written instrument signed by a
majority of the other Trustees, specifying the effective date of retirement; and
(d) any Trustee may be removed at any meeting of the Shareholders by a vote of
at least two-thirds of the Outstanding Shares.
Section 4. VACANCIES; APPOINTMENT OF TRUSTEES. Whenever a vacancy shall
exist in the Board of Trustees, regardless of the reason for such vacancy, the
remaining Trustees shall appoint any person as they determine in their sole
discretion to fill that vacancy, consistent with the limitations under the 1940
Act. Such appointment shall be made by a written instrument signed by a majority
of the Trustees or by a resolution of the Trustees, duly adopted and recorded in
the records of the Trust, specifying the effective date of the appointment. The
Trustees may appoint a new Trustee as provided above in anticipation of a
vacancy expected to occur because of the retirement, resignation, or removal of
a Trustee, or an increase in number of Trustees, provided that such appointment
shall become effective only at or after the expected vacancy occurs. As soon as
any such Trustee has accepted his or her appointment in writing, the trust
estate shall vest in the new Trustee, together with the continuing Trustees,
without any further act or conveyance, and he or she shall be deemed a Trustee
hereunder.
Section 5. TEMPORARY VACANCY OR ABSENCE. Whenever a vacancy in the
Board of Trustees shall occur, until such vacancy is filled, or while any
Trustee is absent from his or her domicile (unless that Trustee has made
arrangements to be informed about, and to participate in, the affairs of the
Trust during such absence), or is physically or mentally incapacitated, the
remaining Trustees shall have all the powers hereunder and their certificate as
to such vacancy, absence, or incapacity shall be conclusive. Any Trustee may, by
power of attorney, delegate his or her powers as Trustee for a period not
exceeding six (6) months at any one time to any other Trustee or Trustees to the
extent permitted by the 1940 Act.
Section 6. CHAIRMAN. The Trustees shall appoint one of their number to
be Chairman of the Board of Trustees. The Chairman shall preside at all meetings
of the Trustees, shall be responsible for the execution of policies established
by the Trustees and the administration of the Trust, and may be the chief
executive, financial and/or accounting officer of the Trust.
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Section 7. ACTION BY THE TRUSTEES. The Trustees shall act by majority
vote at a meeting duly called (including at a telephonic meeting, unless the
1940 Act requires that a particular action be taken only at a meeting of
Trustees in person) at which a quorum is present or by written consent of a
majority of Trustees (or such greater number as may be required by applicable
law) without a meeting. A majority of the Trustees shall constitute a quorum at
any meeting. Meetings of the Trustees may be called orally or in writing by the
Chairman of the Board of Trustees or by any two other Trustees. Notice of the
time, date and place of all Trustees meetings shall be given to each Trustee by
telephone, facsimile or other electronic mechanism sent to his or her home or
business address at least twenty-four hours in advance of the meeting or by
written notice mailed to his or her home or business address at least
seventy-two hours in advance of the meeting. Notice need not be given to any
Trustee who attends the meeting without objecting to the lack of notice or who
signs a waiver of notice either before or after the meeting. Subject to the
requirements of the 1940 Act, the Trustees by majority vote may delegate to any
Trustee or Trustees authority to approve particular matters or take particular
actions on behalf of the Trust. Any written consent or waiver may be provided
and delivered to the Trust by facsimile or other similar electronic mechanism.
Section 8. OWNERSHIP OF TRUST PROPERTY. The Trust Property of the Trust
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. All of the Trust Property and legal title thereto
shall at all times be considered as vested in the Trustees on behalf of the
Trust, except that the Trustees may cause legal title to any Trust Property to
be held by or in the name of the Trust, or in the name of any person as nominee.
No Shareholder shall be deemed to have a severable ownership in any individual
asset of the Trust or of any Series or any right of partition or possession
thereof, but each Shareholder shall have, as provided in Article IV, a
proportionate undivided beneficial interest in the Trust or Series represented
by Shares.
Section 9. EFFECT OF TRUSTEES NOT SERVING. The death, resignation,
retirement, removal, incapacity, or inability or refusal to serve of the
Trustees, or any one of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Trust Instrument.
Section 10. TRUSTEES, ETC. AS SHAREHOLDERS. Subject to any restrictions
in the By-laws, any Trustee, officer, agent or independent contractor of the
Trust may acquire, own and dispose of Shares to the same extent as any other
Shareholder; the Trustees may issue and sell Shares to and buy Shares from any
such person or any firm or company in which such person is interested, subject
only to any general limitations herein.
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ARTICLE III
POWERS OF THE TRUSTEES
Section 1. POWERS. The Trustees in all instances shall act as
principals, free of the control of the Shareholders. The Trustees shall have
full power and authority to take or refrain from taking any action and to
execute any contracts and instruments that they may consider necessary or
desirable in the management of the Trust. The Trustees shall not in any way be
bound or limited by current or future laws or customs applicable to trust
investments, but shall have full power and authority to make any investments
which they, in their sole discretion, deem proper to accomplish the purposes of
the Trust. The Trustees may exercise all of their powers without recourse to any
court or other authority. Subject to any applicable limitation herein or in the
By-laws, operating documents or resolutions of the Trust, the Trustees shall
have power and authority, without limitation:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
current or future law or custom concerning investments by trustees, and to sell,
exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or
all of the Trust Property; to invest in obligations and securities of any kind,
and without regard to whether they may mature before the possible termination of
the Trust; and without limitation to invest all or any part of its cash and
other property in securities issued by a registered investment company or series
thereof, subject to the provisions of the 1940 Act;
(b) To operate as and carry on the business of a registered investment
company, and exercise all the powers necessary and proper to conduct such a
business;
(c) To adopt By-laws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent such right is not reserved to the Shareholders;
(d) To elect and remove such officers and appoint and terminate such
agents as they deem appropriate;
(e) To employ as custodian of any assets of the Trust, subject to any
provisions herein or in the By-laws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such;
(f) To retain one or more transfer agents and Shareholder servicing
agents, or both;
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(g) To provide for the distribution of Shares either through a
Principal Underwriter as provided herein or by the Trust itself, or both, or
pursuant to a distribution plan of any kind;
(h) To set record dates in the manner provided for herein or in the
By-laws;
(i) To delegate such authority as they consider desirable to any
officers of the Trust and to any agent, independent contractor, manager,
investment adviser, custodian or underwriter;
(j) To sell or exchange any or all of the assets of the Trust, subject
to Article X, Section 4;
(k) To vote or give assent, or exercise any rights of ownership, with
respect to other securities or property; and to execute and deliver powers of
attorney delegating such power to other persons;
(l) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(m) To hold any security or other property (i) in a form not indicating
any trust, whether in bearer, book entry, unregistered or other negotiable form,
or (ii) either in the Trust's or Trustees' own name or in the name of a
custodian or a nominee or nominees, subject to safeguards according to the usual
practice of business trusts or investment companies;
(n) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes, and with
separate Shares representing beneficial interests in such Series, and to
establish separate Classes, all in accordance with the provisions of Article IV;
(o) To the full extent permitted by Section 3804 of the Delaware Act,
to allocate assets, liabilities and expenses of the Trust to a particular Series
and liabilities and expenses to a particular Class or to apportion the same
between or among two or more Series or Classes, provided that any liabilities or
expenses incurred by a particular Series or Class shall be payable solely out of
the assets belonging to that Series or Class as provided for in Article IV,
Section 4;
(p) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern whose securities are held
by the Trust; to consent to any contract, lease, mortgage, purchase, or sale of
property by such corporation or concern; and to pay calls or subscriptions with
respect to any security held in the Trust;
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(q) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(r) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided for;
(s) To borrow money;
(t) To establish, from time to time, a minimum total investment for
Shareholders, and to require the redemption of the Shares of any Shareholders
whose investment is less than such minimum upon giving notice to such
Shareholder;
(u) To establish committees for such purposes, with such membership,
and with such responsibilities as the Trustees may consider proper, including a
committee consisting of fewer than all of the Trustees then in office, which may
act for and bind the Trustees and the Trust with respect to the institution,
prosecution, dismissal, settlement, review or investigation of any legal action,
suit or proceeding, pending or threatened;
(v) To issue, sell, repurchase, redeem, cancel, retire, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares; to establish terms and
conditions regarding the issuance, sale, repurchase, redemption, cancellation,
retirement, acquisition, holding, resale, reissuance, disposition of or dealing
in Shares; and, subject to Articles IV and V, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any funds or
property of the Trust or of the particular Series with respect to which such
Shares are issued; and
(w) To carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary or desirable to
accomplish any purpose or to further any of the foregoing powers, and to take
every other action incidental to the foregoing business or purposes, objects or
powers.
The clauses above shall be construed as objects and powers, and the
enumeration of specific powers shall not limit in any way the general powers of
the Trustees. Any action by one or more of the Trustees in their capacity as
such hereunder shall be deemed an action on behalf of the Trust or the
applicable Series, and not an action in an individual capacity. No one dealing
with the Trustees shall be under any obligation to make any inquiry concerning
the authority of the Trustees, or to see to the application of any payments made
or property transferred to the Trustees or upon their order. In construing this
Trust Instrument, the presumption shall be in favor of a grant of power to the
Trustees.
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Section 2. CERTAIN TRANSACTIONS. Except as prohibited by applicable
law, the Trustees may, on behalf of the Trust, buy any securities from or sell
any securities to, or lend any assets of the Trust to, any Trustee or officer of
the Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with any investment adviser, administrator,
distributor or transfer agent for the Trust or with any Interested Person of
such person. The Trust may employ any such person or entity in which such person
is an Interested Person, as broker, legal counsel, registrar, investment
adviser, administrator, distributor, transfer agent, dividend disbursing agent,
custodian or in any other capacity upon customary terms.
ARTICLE IV
SERIES; CLASSES; SHARES
Section 1. ESTABLISHMENT OF SERIES OR CLASS. The Trust shall consist of
one or more Series. The Trustees hereby establish the Series listed in Schedule
A attached hereto and made a part hereof. Each additional Series shall be
established by the adoption of a resolution by the Trustees. The Trustees may
designate the relative rights and preferences of the Shares of each Series. The
Trustees may divide the Shares of any Series into Classes. In such case each
Class of a Series shall represent interests in the assets of that Series and
have identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that expenses allocated to a Class may be borne solely by
such Class as determined by the Trustees and a Series or Class may have
exclusive voting rights with respect to matters affecting only that Series or
Class. The Trust shall maintain separate and distinct records for each Series
and hold and account for the assets thereof separately from the other assets of
the Trust or of any other Series. A Series may issue any number of Shares and
need not issue Shares. Each Share of a Series shall represent an equal
beneficial interest in the net assets of such Series. Each holder of Shares of a
Series shall be entitled to receive his or her pro rata share of all
distributions made with respect to such Series, provided that, if Classes of a
Series are outstanding, each holder of Shares of a Class shall be entitled to
receive his or her pro rata share of all distributions made with respect to such
Class of the Series. Upon redemption of his or her Shares, such Shareholder
shall be paid solely out of the assets and property of such Series. The Trustees
may change the name of the Trust, or any Series or Class without shareholder
approval.
Section 2. SHARES. The beneficial interest in the Trust shall be
divided into Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of the Trust and of each
Series and Class is unlimited and each Share shall have a par value of $0.001
per Share. All Shares issued hereunder shall be fully paid and nonassessable.
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Shareholders shall have no preemptive or other right to subscribe to any
additional Shares or other securities issued by the Trust. The Trustees shall
have full power and authority, in their sole discretion and without obtaining
Shareholder approval: to issue original or additional Shares and fractional
Shares at such times and on such terms and conditions as they deem appropriate;
to establish and to change in any manner Shares of any Series or Classes with
such preferences, terms of conversion, voting powers, rights and privileges as
the Trustees may determine (but the Trustees may not change Outstanding Shares
in a manner materially adverse to the Shareholders of such Shares); to divide or
combine the Shares of any Series or Classes into a greater or lesser number; to
classify or reclassify any unissued Shares of any Series or Classes into one or
more Series or Classes of Shares; to abolish any one or more Series or Classes
of Shares; to issue Shares to acquire other assets (including assets subject to,
and in connection with, the assumption of liabilities) and businesses; and to
take such other action with respect to the Shares as the Trustees may deem
desirable.
Section 3. INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which that Series
is authorized to invest, valued as provided in Article V, Section 3. Investments
in a Series shall be credited to each Shareholder's account in the form of full
and fractional Shares at the Net Asset Value per Share next determined after the
investment is received or accepted in good form as may be determined by the
Trustees; provided, however, that the Trustees may, in their sole discretion,
(a) impose a sales charge upon investments in any Series or Class, or (b)
determine the Net Asset Value per Share of the initial capital contribution. The
Trustees shall have the right to refuse to accept investments in any Series at
any time without any cause or reason therefor whatsoever.
Section 4. ASSETS AND LIABILITIES OF SERIES. All consideration received
by the Trust for the issue or sale of Shares of a particular Series, together
with all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof (including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be), shall be held and accounted for separately from the other assets of the
Trust and every other Series and are referred to as "assets belonging to" that
Series. The assets belonging to a Series shall belong only to that Series for
all purposes, and to no other Series, subject only to the rights of creditors of
that Series. Any assets, income, earnings, profits, and proceeds thereof, funds,
or payments which are not readily identifiable as belonging to any particular
Series shall be allocated by the Trustees between and among one or more Series
as the Trustees deem fair and equitable. Each such allocation shall be
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conclusive and binding upon the Shareholders of all Series for all purposes, and
such assets, earnings, income, profits or funds, or payments and proceeds
thereof shall be referred to as assets belonging to that Series. The assets
belonging to a Series shall be so recorded upon the books of the Trust, and
shall be held by the Trustees in trust for the benefit of the Shareholders of
that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of the
Trustees to allocate general liabilities, expenses, costs, charges or reserves
as herein provided, the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a particular Series shall
be enforceable against the assets of such Series only, and not against the
assets of the Trust generally or of any other Series. Notice of this contractual
limitation on liabilities among Series may, in the Trustees' discretion, be set
forth in the certificate of trust of the Trust (whether originally or by
amendment) as filed or to be filed in the Office of the Secretary of State of
the State of Delaware pursuant to the Delaware Act, an upon giving of such
notice in the certificate of trust, the statutory provisions of Section 3804 of
the Delaware Act relating to limitations on liabilities among Series (and the
statutory effect under Section 3804 of setting forth such notice in the
certificate of trust) shall become applicable to the Trust and each Series. Any
person extending credit to, contracting with or having any claim against any
Series may look only to the assets of that Series to satisfy or enforce any
debt, with respect to that Series. No Shareholder or former Shareholder of any
Series shall have a claim on or any right to any assets allocated or belonging
to any other Series.
Section 5. OWNERSHIP AND TRANSFER OF SHARES. The Trust shall maintain a
register containing the names and addresses of the Shareholders of each Series
and Class thereof, the number of Shares of each Series and Class held by such
Shareholders, and a record of all Share transfers. The register shall be
conclusive as to the identity of Shareholders of record and the number of Shares
held by them from time to time. The Trustees shall not be required to, but may
authorize the issuance of certificates representing Shares and adopt rules
governing their use. The Trustees may make rules governing the transfer of
Shares, whether or not represented by certificates.
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Section 6. STATUS OF SHARES; LIMITATION OF SHAREHOLDER LIABILITY.
Shares shall be deemed to be personal property giving Shareholders only the
rights provided in this Trust Instrument. Every Shareholder, by virtue of having
acquired a Share, shall be held expressly to have assented to and agreed to be
bound by the terms of this Trust Instrument and to have become a party hereto.
No Shareholder shall be personally liable for the debts, liabilities,
obligations and expenses incurred by, contracted for, or otherwise existing with
respect to, the Trust or any Series. Neither the Trust nor the Trustees shall
have any power to bind any Shareholder personally or to demand payment from any
Shareholder for anything, other than as agreed by the Shareholder. Shareholders
shall have the same limitation of personal liability as is extended to
shareholders of a private corporation for profit incorporated in the State of
Delaware. Every written obligation of the Trust or any Series shall contain a
statement to the effect that such obligation may only be enforced against the
assets of the Trust or such Series; however, the omission of such statement
shall not operate to bind or create personal liability for any Shareholder or
Trustee.
ARTICLE V
DISTRIBUTIONS AND REDEMPTIONS
Section 1. DISTRIBUTIONS. The Trustees may declare and pay dividends
and other distributions, including dividends on Shares of a particular Series
and other distributions from the assets belonging to that Series. The amount and
payment of dividends or distributions and their form, whether they are in cash,
Shares or other Trust Property, shall be determined by the Trustees. Dividends
and other distributions may be paid pursuant to a standing resolution adopted
once or more often as the Trustees determine. All dividends and other
distributions on Shares of a particular Series shall be distributed pro rata to
the Shareholders of that Series in proportion to the number of Shares of that
Series they held on the record date established for such payment, except that
such dividends and distributions shall appropriately reflect expenses allocated
to a particular Class of such Series. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
similar plans as the Trustees deem appropriate.
Section 2. REDEMPTIONS. Each Shareholder of a Series shall have the
right at such times as may be permitted by the Trustees to require the Series to
redeem all or any part of his or her Shares at a redemption price per Share
equal to the Net Asset Value per Share at such time as the Trustees shall have
prescribed by resolution less such charges as are determined by the Trustees and
described in the Trust's Registration Statement for that Series under the
Securities Act of 1933 or any prospectus or statement of additional information
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contained therein, as supplemented. In the absence of such resolution, the
redemption price per Share shall be the Net Asset Value next determined after
receipt by the Series of a request for redemption in proper form less such
charges as are determined by the Trustees and described in the Trust's
Registration Statement for that Series under the Securities Act of 1933 or any
prospectus or statement of additional information contained therein, as
supplemented.
The Trustees may specify conditions, prices, and places of redemption,
and may specify binding requirements for the proper form or forms of requests
for redemption. Payment of the redemption price may be wholly or partly in
securities or other assets at the value of such securities or assets used in
such determination of Net Asset Value, or may be in cash. Upon redemption,
Shares may be reissued from time to time. The Trustees may require Shareholders
to redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if required
to do so, or to have the minimum investment required, or to pay when due for the
purchase of Shares issued to him or her. To the extent permitted by law, the
Trustees may retain the proceeds of any redemption of Shares required by them
for payment of amounts due and owing by a Shareholder to the Trust or any Series
or Class. Notwithstanding the foregoing, the Trustees may postpone payment of
the redemption price and may suspend the right of the Shareholders to require
any Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
Section 3. DETERMINATION OF NET ASSET VALUE. The Trustees shall cause
the Net Asset Value of Shares of each Series or Class to be determined from time
to time in a manner consistent with applicable laws and regulations. The
Trustees may delegate the power and duty to determine Net Asset Value per Share
to one or more Trustees or officers of the Trust or to an investment manager,
administrator or investment adviser, custodian, depository or other agent
appointed for such purpose. The Net Asset Value of Shares shall be determined
separately for each Series or Class at such times as may be prescribed by the
Trustees or, in the absence of action by the Trustees, as of the close of
trading on the New York Stock Exchange on each day for all or part of which such
Exchange is open for unrestricted trading.
Section 4. SUSPENSION OF RIGHT OF REDEMPTION. If, as referred to in
Section 2 of this Article, the Trustees postpone payment of the redemption price
and suspend the right of Shareholders to redeem their Shares, such suspension
shall take effect at the time the Trustees shall specify, but not later than the
close of business on the business day next following the declaration of
suspension. Thereafter Shareholders shall have no right of redemption or payment
until the Trustees declare the end of the suspension. If the right of redemption
is suspended, a Shareholder may either withdraw his request for redemption or
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receive payment based on the Net Asset Value per Share next determined after the
suspension terminates.
Section 5. REDEMPTIONS NECESSARY FOR QUALIFICATION AS REGULATED
INVESTMENT COMPANY. If the Trustees shall determine that direct or indirect
ownership of Shares of any Series has or may become concentrated in any person
to an extent which would disqualify any Series as a regulated investment company
under the Internal Revenue Code, then the Trustees shall have the power (but not
the obligation) by lot or other means they deem equitable to (a) call for
redemption by any such person of a number, or principal amount, of Shares
sufficient to maintain or bring the direct or indirect ownership of Shares into
conformity with the requirements for such qualification and (b) refuse to
transfer or issue Shares to any person whose acquisition of Shares in question
would, in the Trustees' judgment, result in such disqualification.
Any such redemption shall be effected at the redemption price and in the manner
provided in this Article. Shareholders shall upon demand disclose to the
Trustees in writing such information concerning direct and indirect ownership of
Shares as the Trustees deem necessary to comply with the requirements of any
taxing authority.
ARTICLE VI
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. VOTING POWERS. The Shareholders shall have power to vote
only with respect to (a) the election of Trustees as provided in Section 2 of
this Article; (b) the removal of Trustees as provided in Article II, Section
3(d); (c) any investment advisory or management contract as provided in Article
VII, Section 1; (d) any termination of the Trust as provided in Article X,
Section 4; (e) the amendment of this Trust Instrument to the extent and as
provided in Article X, Section 8; and (f) such additional matters relating to
the Trust as may be required or authorized by law, this Trust Instrument, or the
By-laws or any registration of the Trust with the Commission or any State, or as
the Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall
be voted by individual Series or Class, except (a) when required by the 1940
Act, Shares shall be voted in the aggregate and not by individual Series or
Class, and (b) when the Trustees have determined that the matter affects the
interests of more than one Series or Class, then the Shareholders of all such
Series or Classes shall be entitled to vote thereon. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Shares may be voted
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in person or by proxy or in any manner provided for in the By-laws. The By- laws
may provide that proxies may be given by any electronic or telecommunications
device or in any other manner, but if a proposal by anyone other than the
officers or Trustees is submitted to a vote of the Shareholders of any Series or
Class, or if there is a proxy contest or proxy solicitation or proposal in
opposition to any proposal by the officers or Trustees, Shares may be voted only
in person or by written proxy. Until Shares of a Series are issued, as to that
Series the Trustees may exercise all rights of Shareholders and may take any
action required or permitted to be taken by Shareholders by law, this Trust
Instrument or the By-laws.
Section 2. MEETINGS OF SHAREHOLDERS. The first Shareholders' meeting
shall be held to elect Trustees at such time and place as the Trustees
designate. Annual meetings shall not be required. Special meetings of the
Shareholders of any Series or Class may be called by the Trustees and shall be
called by the Trustees upon the written request of Shareholders owning at least
ten percent of the Outstanding Shares of such Series or Class, or at least ten
percent of the Outstanding Shares of the Trust entitled to vote. Special
meetings of Shareholders shall be held, notice of such meetings shall be
delivered and waiver of notice shall occur according to the provisions of the
Trust's By-laws. Any action that may be taken at a meeting of Shareholders may
be taken without a meeting according to the procedures set forth in the By-laws.
Section 3. QUORUM; REQUIRED VOTE. One-third of the Outstanding Shares
of each Series or Class, or one-third of the Outstanding Shares of the Trust,
entitled to vote in person or by proxy shall be a quorum for the transaction of
business at a Shareholders' meeting with respect to such Series or Class, or
with respect to the entire Trust, respectively. Any lesser number shall be
sufficient for adjournments. Any adjourned session of a Shareholders' meeting
may be held within a reasonable time without further notice. Except when a
larger vote is required by law, this Trust Instrument or the By-laws, a majority
of the Outstanding Shares voted, in person or by proxy, shall decide any matters
to be voted upon with respect to the entire Trust and a plurality of such
Outstanding Shares voted shall elect a Trustee; provided, that if this Trust
Instrument or applicable law permits or requires that Shares be voted on any
matter by individual Series or Classes, then a majority of the Outstanding
Shares of that Series or Class (or, if required or permitted by law, regulation,
Commission order, or no-action letter, a Majority Shareholder Vote of that
Series or Class) voted, in person or by proxy, on the matter shall decide that
matter insofar as that Series or Class is concerned. Shareholders may act as to
the Trust or any Series or Class by the written consent of a majority (or such
greater amount as may be required by applicable law) of the Outstanding Shares
of the Trust or of such Series or Class, as the case may be.
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ARTICLE VII
CONTRACTS WITH SERVICE PROVIDERS
Section 1. INVESTMENT ADVISER. Subject to a Majority Shareholder Vote,
the Trustees may enter into one or more investment advisory contracts on behalf
of the Trust or any Series, providing for investment advisory services,
statistical and research facilities and services, and other facilities and
services to be furnished to the Trust or Series on terms and conditions
acceptable to the Trustees. Any such contract may provide for the investment
adviser to effect purchases, sales or exchanges of portfolio securities or other
Trust Property on behalf of the Trustees or may authorize any officer or agent
of the Trust to effect such purchases, sales or exchanges pursuant to
recommendations of the investment adviser. The Trustees may authorize the
investment adviser to employ one or more sub-advisers or servicing agents.
Section 2. PRINCIPAL UNDERWRITER. The Trustees may enter into contracts
on behalf of the Trust or any Series or Class, providing for the distribution
and sale of Shares by the other party, either directly or as sales agent, on
terms and conditions acceptable to the Trustees. The Trustees may adopt a plan
or plans of distribution with respect to Shares of any Series or Class and enter
into any related agreements, whereby the Series or Class finances directly or
indirectly any activity that is primarily intended to result in sales of its
Shares, subject to the requirements of Section 12 of the 1940 Act, Rule 12b-1
thereunder, and other applicable rules and regulations.
Section 3. TRANSFER AGENCY, SHAREHOLDER SERVICES, AND ADMINISTRATION
AGREEMENTS. The Trustees, on behalf of the Trust or any Series or Class, may
enter into transfer agency agreements, Shareholder service agreements, and
administration and management agreements with any party or parties on terms and
conditions acceptable to the Trustees.
Section 4. CUSTODIAN. The Trustees shall at all times place and
maintain the securities and similar investments of the Trust and of each Series
with a custodian meeting the requirements of Section 17(f) of the 1940 Act and
the rules thereunder. The Trustees, on behalf of the Trust or any Series, may
enter into an agreement with a custodian on terms and conditions acceptable to
the Trustees, providing for the custodian, among other things, to (a) hold the
securities owned by the Trust or any Series and deliver the same upon written
order or oral order confirmed in writing, (b) to receive and receipt for any
moneys due to the Trust or any Series and deposit the same in its own banking
department or elsewhere, (c) to disburse such funds upon orders or vouchers, and
(d) to employ one or more sub-custodians.
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<PAGE>
Section 5. PARTIES TO CONTRACTS WITH SERVICE PROVIDERS. The Trustees
may enter into any contract referred to in this Article with any entity,
although one or more of the Trustees or officers of the Trust may be an officer,
director, trustee, partner, shareholder, or member of such entity, and no such
contract shall be invalidated or rendered void or voidable because of such
relationship. No person having such a relationship shall be disqualified from
voting on or executing a contract in his or her capacity as Trustee and/or
Shareholder, or be liable merely by reason of such relationship for any loss or
expense to the Trust with respect to such a contract or accountable for any
profit realized directly or indirectly therefrom; provided, that the contract
was reasonable and fair and not inconsistent with this Trust Instrument or the
By-laws.
Section 6. REQUIREMENTS OF THE 1940 ACT. Any contract referred to in
Sections 1 and 2 of this Article shall be consistent with and subject to the
applicable requirements of Section 15 of the 1940 Act and the rules and orders
thereunder with respect to its continuance in effect, its termination, and the
method of authorization and approval of such contract or renewal. No amendment
to a contract referred to in Section 1 of this Article shall be effective unless
assented to in a manner consistent with the requirements of Section 15 of the
1940 Act, and the rules and orders thereunder.
ARTICLE VIII
EXPENSES OF THE TRUST AND SERIES
Subject to Article IV, Section 4, the Trust or a particular Series
shall pay, or shall reimburse the Trustees from the Trust estate or the assets
belonging to the particular Series, for their expenses and disbursements,
including, but not limited to, interest charges, taxes, brokerage fees and
commissions; expenses of issue, repurchase and redemption of Shares; insurance
premiums; applicable fees, interest charges and expenses of third parties,
including the Trust's investment advisers, managers, administrators,
distributors, custodians, transfer agents and fund accountants; fees of pricing,
interest, dividend, credit and other reporting services; costs of membership in
trade associations; telecommunications expenses; funds transmission expenses;
auditing, legal and compliance expenses; costs of forming the Trust and its
Series and maintaining its existence; costs of preparing and printing the
prospectuses of the Trust and each Series, statements of additional information
and reports for Shareholders and delivering them to Shareholders; expenses of
meetings of Shareholders and proxy solicitations therefor (unless otherwise
agreed to by another party); costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; fees and expenses of the Trustees;
compensation of the Trust's officers and employees and costs of other personnel
performing services for the Trust or any Series; costs of Trustee meetings;
Commission registration fees and related expenses; state or foreign
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securities laws registration fees and related expenses; and for such
non-recurring items as may arise, including litigation to which the Trust or a
Series (or a Trustee or officer of the Trust acting as such) is a party, and for
all losses and liabilities by them incurred in administering the Trust. The
Trustees shall have a lien on the assets belonging to the appropriate Series, or
in the case of an expense allocable to more than one Series, on the assets of
each such Series, prior to any rights or interests of the Shareholders thereto,
for the reimbursement to them of such expenses, disbursements, losses and
liabilities.
ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. LIMITATION OF LIABILITY. All persons contracting with or
having any claim against the Trust or a particular Series shall look only to the
assets of the Trust or such Series for payment under such contract or claim; and
neither the Trustees nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable therefor. Every
written instrument or obligation on behalf of the Trust or any Series shall
contain a statement to the foregoing effect, but the absence of such statement
shall not operate to make any Trustee or officer of the Trust liable thereunder.
Provided they have exercised reasonable care and have acted under the reasonable
belief that their actions are in the best interest of the Trust, the Trustees
and officers of the Trust shall not be responsible or liable for any act or
omission or for neglect or wrongdoing of them or any officer, agent, employee,
investment adviser or independent contractor of the Trust, but nothing contained
in this Trust Instrument or in the Delaware Act shall protect any Trustee or
officer of the Trust against liability to the Trust or to Shareholders to which
he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Section 2. INDEMNIFICATION. (a) Subject to the exceptions and
limitations contained in subsections (b) and (c) below:
(i) every person who is, or has been, a
Trustee or an officer, employee, investment manager and
administrator, director, officer or employee of an investment
manager and administrator, investment adviser or agent of the
Trust ("Covered Person") shall be indemnified by the Trust or
the appropriate Series to the fullest extent permitted by law
against liability and against all expenses reasonably incurred
or paid by him or her in connection with any claim, action,
suit or proceeding in which he or she becomes involved as a
party or otherwise by virtue of his or
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<PAGE>
her being or having been a Covered Person and against amounts
paid or incurred by him or her in the settlement thereof; and
(ii) as used herein, the words "claim,"
"action," "suit," or "proceeding" shall apply to all claims,
actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened, and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person
who is, or has been: an investment manager and administrator; director, officer
or employee of an investment manager and administrator; an investment adviser or
an agent of the Trust and:
(i) who shall have been adjudicated by a
court or body before which the proceeding was brought (A) to
be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, negligence or reckless
disregard of the duties involved in the conduct of his or her
office, or (B) not to have acted in good faith in the
reasonable belief that his or her action was in the best
interest of the Trust; or
(ii) in the event of a settlement, unless
there has been a determination that such Covered Person did
not engage in willful misfeasance, bad faith, negligence or
reckless disregard of the duties involved in the conduct of
his or her office; (A) by the court or other body approving
the settlement; (B) by the vote of at least a majority of
those Trustees who are neither Interested Persons of the Trust
nor are parties to the proceeding based upon a review of
readily available facts (as opposed to a full trial-type
inquiry); or (C) by written opinion of independent legal
counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry).
(c) No indemnification shall be provided hereunder to a Covered Person
who is, or has been, a Trustee or an officer or employee of the Trust, and
(i) who shall have been adjudicated by a
court or body before which the proceeding was brought (A) to
be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her
office, or (B) not to have acted in good faith in the
reasonable belief that his or her action was in the best
interest of the Trust; or
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<PAGE>
(ii) in the event of a settlement, unless
there has been a determination that such Covered Person did
not engage in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
his or her office; (A) by the court or other body approving
the settlement; (B) by the vote of at least a majority of
those Trustees who are neither Interested Persons of the Trust
nor are parties to the proceeding based upon a review of
readily available facts (as opposed to a full trial-type
inquiry); or (C) by written opinion of independent legal
counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry).
(d) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, and shall inure to the benefit of the heirs, executors
and administrators of a Covered Person.
(e) To the maximum extent permitted by applicable law, expenses in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in subsection (a) of this
Section may be paid by the Trust or applicable Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or on behalf of such
Covered Person that such amount will be paid over by him or her to the Trust or
applicable Series if it is ultimately determined that he or she is not entitled
to indemnification under this Section; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such undertaking,
(ii) the Trust is insured against losses arising out of any such advance
payments or (iii) either a majority of the Trustees who are neither Interested
Persons of the Trust nor parties to the proceeding, or independent legal counsel
in a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a full trial-type inquiry) that there is reason
to believe that such Covered Person will not be disqualified from
indemnification under this Section.
(f) Any repeal or modification of this Article IX by the Shareholders
of the Trust, or adoption or modification of any other provision of the Trust
Instrument or By-laws inconsistent with this Article, shall be prospective only,
to the extent that such repeal or modification would, if applied
retrospectively, adversely affect any limitation on the liability of any Covered
Person or indemnification available to any Covered Person with respect to any
act or omission which occurred prior to such repeal, modification or adoption.
Section 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or
former Shareholder of any Series shall be held personally liable solely by
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<PAGE>
reason of his or her being or having been a Shareholder and not because of his
or her acts or omissions or for some other reason, the Shareholder or former
Shareholder (or his or her heirs, executors, administrators or other legal
representatives or in the case of any entity, its general successor) shall be
entitled out of the assets belonging to the applicable Series to be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust, on behalf of the affected Series, shall, upon request by
such Shareholder, assume the defense of any claim made against such Shareholder
for any act or obligation of the Series and satisfy any judgment thereon from
the assets of the Series.
ARTICLE X
MISCELLANEOUS
Section 1. TRUST NOT A PARTNERSHIP. This Trust Instrument creates a
trust and not a partnership. No Trustee shall have any power to bind personally
either the Trust's officers or any Shareholder.
Section 2. TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY. The
exercise by the Trustees of their powers and discretion hereunder in good faith
and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Article IX, the
Trustees shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Trust Instrument, and subject to the provisions of
Article IX, shall not be liable for any act or omission in accordance with such
advice or for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is obtained.
Section 3. RECORD DATES. The Trustees may fix in advance a date up to
ninety (90) days before the date of any Shareholders' meeting, or the date for
the payment of any dividends or other distributions, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect as a record date for the determination of the
Shareholders entitled to notice of, and to vote at, any such meeting, or
entitled to receive payment of such dividend or other distribution, or to
receive any such allotment of rights, or to exercise such rights in respect of
any such change, conversion or exchange of Shares. Record dates for adjourned
meetings of Shareholders shall be set according to the Trust's By-laws.
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<PAGE>
Section 4. TERMINATION OF THE TRUST. (a) This Trust shall have
perpetual existence. Subject to a Majority Shareholder Vote of the Trust or of
each Series to be affected, the Trustees may
(i) sell and convey all or substantially all
of the assets of the Trust or any affected Series to another
Series or to another entity which is an investment company as
defined in the 1940 Act, or is a series thereof, for adequate
consideration, which may include the assumption of all
outstanding obligations, taxes and other liabilities, accrued
or contingent, of the Trust or any affected Series, and which
may include shares of or interests in such Series, entity, or
series thereof; or
(ii) at any time sell and convert into money
all or substantially all of the assets of the Trust or any
affected Series.
Upon making reasonable provision for the payment of all known liabilities of the
Trust or any affected Series in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) ratably among the Shareholders of the Trust or any affected
Series then outstanding; however, the payment to any particular Class of such
Series may be reduced by any fees, expenses or charges allocated to that Class.
Nothing in this Declaration of Trust shall preclude the Trustees from
distributing such remaining proceeds or assets so that holders of the Shares of
a particular Class of the Trust or any affected Series receive as their ratable
distribution shares solely of an analogous class, as determined by the Trustees,
of such trust, partnership, association or corporation.
(b) The Trustees may take any of the actions specified in subsection
(a) (i) and (ii) above without obtaining a Majority Shareholder Vote of the
Trust or any Series if a majority of the Trustees determines that the
continuation of the Trust or Series is not in the best interests of the Trust,
such Series, or their respective Shareholders as a result of factors or events
adversely affecting the ability of the Trust or such Series to conduct its
business and operations in an economically viable manner. Such factors and
events may include the inability of the Trust or a Series to maintain its assets
at an appropriate size, changes in laws or regulations governing the Trust or
the Series or affecting assets of the type in which the Trust or Series invests,
or economic developments or trends having a significant adverse impact on the
business or operations of the Trust or such Series.
(c) Upon completion of the distribution of the remaining proceeds or
assets pursuant to subsection (a), the Trust or affected Series shall terminate
and the Trustees and the Trust shall be discharged of any and all further
liabilities and duties hereunder with respect thereto and the right, title and
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<PAGE>
of all parties therein shall be canceled and discharged. Upon termination of the
Trust, following completion of winding up of its business, the Trustees shall
cause a certificate of cancellation of the Trust's certificate of trust to be
filed in accordance with the Delaware Act, which certificate of cancellation may
be signed by any one Trustee.
Section 5. REORGANIZATION. Notwithstanding anything else herein, to
change the Trust's form of organization the Trustees may, without Shareholder
approval, (a) cause the Trust to merge or consolidate with or into one or more
entities, if the surviving or resulting entity is the Trust or another open-end
management investment company under the 1940 Act, or a series thereof, that will
succeed to or assume the Trust's registration under the 1940 Act, or (b) cause
the Trust to incorporate to the extent permitted by law. Any agreement of merger
or consolidation or certificate of merger may be signed by a majority of
Trustees and facsimile signatures conveyed by electronic or telecommunication
means shall be valid.
Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 5 may effect any amendment to the Trust
Instrument or effect the adoption of a new trust instrument of the Trust if it
is the surviving or resulting trust in the merger or consolidation.
Section 6. TRUST INSTRUMENT. The original or a copy of this Trust
Instrument and of each amendment hereto or Trust Instrument supplemental shall
be kept at the office of the Trust where it may be inspected by any Shareholder.
Anyone dealing with the Trust may rely on a certificate by a Trustee or an
officer of the Trust as to the authenticity of the Trust Instrument or any such
amendments or supplements and as to any matters in connection with the Trust.
The masculine gender herein shall include the feminine and neuter genders.
Headings herein are for convenience only and shall not affect the construction
of this Trust Instrument. This Trust Instrument may be executed in any number of
counterparts, each of which shall be deemed an original.
Section 7. APPLICABLE LAW. This Trust Instrument and the Trust created
hereunder are governed by and construed and administered according to the
Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware
Code, or (b) any provisions of the laws (statutory or common) of the State of
Delaware (other than the Delaware Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (ii) affirmative requirements
to post bonds for trustees, officers, agents or employees of a trust, (iii) the
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<PAGE>
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards of responsibilities or limitations on the acts or powers of
trustees, which are inconsistent with the limitations or liabilities or
authorities and powers of the Trustees set forth or referenced in this Trust
Instrument. The Trust shall be of the type commonly called a Delaware business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust under Delaware law. The
Trust specifically reserves the right to exercise any of the powers or
privileges afforded to trusts or actions that may be engaged in by trusts under
the Delaware Act, and the absence of a specific reference herein to any such
power, privilege or action shall not imply that the Trust may not exercise such
power or privilege or take such actions.
Section 8. AMENDMENTS. The Trustees may, without any Shareholder vote,
amend or otherwise supplement this Trust Instrument by making an amendment, a
Trust Instrument supplemental hereto or an amended and restated trust
instrument; provided, that Shareholders shall have the right to vote on any
amendment (a) which would affect the voting rights of Shareholders granted in
Article VI, Section 1, (b) to this Section 8, (c) required to be approved by
Shareholders by law or by the Trust's registration statement(s) filed with the
Commission, or (d) submitted to them by the Trustees in their discretion. Any
amendment submitted to Shareholders which the Trustees determine would affect
the Shareholders of any Series shall be authorized by vote of the Shareholders
of such Series and no vote shall be required of Shareholders of a Series not
affected. Notwithstanding anything else herein, any amendment to Article IX
which would have the effect of reducing the indemnification and other rights
provided thereby to Trustees, officers, employees, and agents of the Trust or to
Shareholders or former Shareholders, and any repeal or amendment of this
sentence shall each require the affirmative vote of the holders of two-thirds of
the Outstanding Shares of the Trust entitled to vote thereon.
Section 9. FISCAL YEAR. The fiscal year of the Trust shall end on a
specified date as set forth in the By-laws. The Trustees may change the fiscal
year of the Trust without Shareholder approval.
Section 10. SEVERABILITY. The provisions of this Trust Instrument are
severable. If the Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Trust Instrument; provided, however, that such determination
shall not affect any of the remaining provisions of this Trust Instrument or
render invalid or improper any action taken or omitted prior to such
determination. If any provision hereof shall be held invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall attach only to such
provision only in such jurisdiction and shall not affect any other provision of
this Trust Instrument.
23
<PAGE>
Schedule A
SERIES OF THE TRUST
- -------------------
Series One
Series Two
Series Three
Series Four
Series Five
24
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the initial
Trustees, have executed this Trust Instrument as of the date first above
written.
/s/ Victoria E. Schonfeld
------------------------------
Victoria E. Schonfeld, as
Trustee and not individually
Address: 1285 Avenue of the Americas
New York, New York 10019
STATE OF NEW YORK ss
CITY OF NEW YORK
Before me this 9th day of August, 1996, personally appeared
the above-named Victoria E. Schonfeld, known to me to be the person who executed
the foregoing instrument and who acknowledged that he executed the same.
/s/ Rita T. Barnett
--------------------------
Notary Public
My commission expires: July 10, 1997
-------------
/s/ Dianne E. O'Donnell
------------------------------
Dianne E. O'Donnell, as
Trustee and not individually
Address: 1285 Avenue of the Americas
New York, New York 10019
25
<PAGE>
STATE OF NEW YORK ss
CITY OF NEW YORK
Before me this 9th day of August, 1996, personally appeared
the above-named Dianne E. O'Donnell, known to me to be the person who executed
the foregoing instrument and who acknowledged that he executed the same.
/s/ Rita T. Barnett
--------------------------
Notary Public
My commission expires: July 10, 1997
-------------
Exhibit 2
BY-LAWS
OF
PAINEWEBBER SELECT FUND
August 9, 1996
<PAGE>
BY-LAWS
OF
PAINEWEBBER SELECT FUND
These By-laws of PaineWebber Select Fund (the "Trust"), a Delaware
business trust, are subject to the Trust Instrument of the Trust dated as of
August 9, 1996, as from time to time amended, supplemented or restated (the
"Trust Instrument"). Capitalized terms used herein have the same meanings as in
the Trust Instrument.
ARTICLE I
PRINCIPAL OFFICE AND SEAL
SECTION 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located in New York, New York, or such other location as the Trustees determine.
The Trust may establish and maintain other offices and places of business as the
Trustees determine
SECTION 2. SEAL. The Trustees may adopt a seal for the Trust in such
form and with such inscription as the Trustees determine. Any Trustee or officer
of the Trust shall have authority to affix the seal to any document.
ARTICLE II
MEETINGS OF TRUSTEES
SECTION 1. ACTION BY TRUSTEES. Trustees may take actions at meetings
held at such places and times as the Trustees may determine, or without
meetings, all as provided in Article II, Section 7, of the Trust Instrument
SECTION 2. COMPENSATION OF TRUSTEES. Each Trustee who is neither an
employee of an investment adviser of the Trust or any Series nor an employee of
an entity affiliated with the investment adviser may receive such compensation
from the Trust for services as the Trustees may determine. Each Trustee may
receive such reimbursement for expenses as the Trustees may determine.
SECTION 3. RETIREMENT OF TRUSTEES. Each Trustee who has attained the
age of seventy-two (72) years as of December 31 of any year shall retire from
service as a Trustee on such date unless that retirement would cause the Trust
to be required to call a meeting of Shareholders to fill the resulting vacancy
<PAGE>
on the Board of Trustees. Notwithstanding anything in this Section, a Trustee
may retire at any time as provided for in the Trust Instrument.
ARTICLE III
COMMITTEES
SECTION 1. ESTABLISHMENT. The Trustees may designate one or more
committees of the Trustees, which may include an Executive Committee, a
Nominating Committee, and an Audit Committee. The Trustees shall determine the
number of members of each committee and its powers and shall appoint its members
and its chair. Each committee member shall serve at the pleasure of the
Trustees. The Trustees may abolish any committee at any time. Each committee
shall maintain records of its meetings and report its actions to the Trustees.
The Trustees may rescind any action of any committee, but such rescission shall
not have retroactive effect. The Trustees may delegate to any committee any of
its powers, subject to the limitations of applicable law.
SECTION 2. PROCEEDINGS; QUORUM; ACTION. Each committee may adopt such
rules governing its proceedings, quorum and manner of acting as it shall deem
proper and desirable. In the absence of such rules, a majority of any committee
shall constitute a quorum, and a committee shall act by the vote of a majority
of a quorum.
SECTION 3. COMPENSATION OF COMMITTEE MEMBERS. Each committee member who
is not an "interested person" of the Trust, as defined in the 1940 Act
("Disinterested Trustees") may receive such compensation from the Trust for
services as the Trustees may determine. Each Trustee may receive such
reimbursement for expenses as the Trustees may determine.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The officers of the Trust shall be a Chairman, a
President, one or more Vice Presidents, a Treasurer, and a Secretary, and may
include one or more Assistant Treasurers or Assistant Secretaries and such other
officers ("Other Officers") as the Trustees may determine.
SECTION 2. ELECTION. Tenure and Qualifications of Officers. The
Trustees shall elect the officers of the Trust. Each officer elected by the
Trustees shall hold office until his or her successor shall have been elected
and qualified or until his or her earlier death, inability to serve, or
resignation. Any person may hold one or more offices, except that the Chairman
and the Secretary may not be the same individual. A person who holds more than
one office in the Trust may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer. No officer other than the
Chairman need be a Trustee or Shareholder.
2
<PAGE>
SECTION 3. VACANCIES AND NEWLY CREATED OFFICES. Whenever a vacancy
shall occur in any office or if any new office is created, the Trustees may fill
such vacancy or new office.
SECTION 4. REMOVAL AND RESIGNATION. Officers serve at the pleasure of
the Trustees and may be removed at any time with or without cause. The Trustees
may delegate this power to the Chairman or President with respect to any Other
Officer. Such removal shall be without prejudice to the contract rights, if any,
of the person so removed. Any officer may resign from office at any time by
delivering a written resignation to the Trustees, Chairman, or the President.
Unless otherwise specified therein, such resignation shall take effect upon
delivery.
SECTION 5. CHAIRMAN. The Chairman shall preside at all meetings of the
Trustees and shall in general exercise the powers and perform the duties of the
Chairman of the Trustees. The Chairman shall exercise such other powers and
perform such other duties as the Trustees may assign to the Chairman.
SECTION 6. PRESIDENT. The President shall be the chief executive
officer of the Trust. The President shall preside at any Shareholders' meetings.
Subject to the direction of the Trustees, the President shall have general
charge, supervision and control over the Trust's business affairs and shall be
responsible for the management thereof and the execution of policies established
by the Trustees. Except as the Trustees may otherwise order, the President shall
have the power to grant, issue, execute or sign such powers of attorney,
proxies, agreements or other documents. The President also shall have the power
to employ attorneys, accountants and other advisers and agents for the Trust,
except as otherwise required by the 1940 Act. At the request or in the absence
or disability of the Chairman, the President shall perform all the duties of the
Chairman and, when so acting, shall have all the powers of the Chairman.
SECTION 7. VICE PRESIDENT(S). The Vice President(s) shall have such
powers and perform such duties as the Trustees or the Chairman may determine. At
the request or in the absence or disability of the President, the Vice President
(or, if there are two or more Vice Presidents, then the senior of the Vice
Presidents present and able to act) shall perform all the duties of the
President and, when so acting, shall have all the powers of the President. The
Trustees may designate a Vice President as the principal financial officer of
the Trust or to serve one or more other functions. If a Vice President is
designated as principal financial officer of the Trust, he or she shall have
general charge of the finances and books of the Trust and shall report to the
Trustees annually regarding the financial condition of each Series as soon as
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possible after the close of such Series's fiscal year. The Trustees also may
designate one of the Vice Presidents as Executive Vice President.
SECTION 8. TREASURER AND ASSISTANT TREASURER(S). The Treasurer may be
designated as the principal financial officer or as the principal accounting
officer of the Trust. If designated as principal financial officer, the
Treasurer shall have general charge of the finances and books of the Trust, and
shall report to the Trustees annually regarding the financial condition of each
Series as soon as possible after the close of such Series' fiscal year. The
Treasurer shall be responsible for the delivery of all funds and securities of
the Trust to such company as the Trustees shall retain as Custodian. The
Treasurer shall furnish such reports concerning the financial condition of the
Trust as the Trustees may request. The Treasurer shall perform all acts
incidental to the office of Treasurer, subject to the Trustees' supervision, and
shall perform such additional duties as the Trustees may designate.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Trustees or the Treasurer may assign, and, in the absence of the Treasurer, may
perform all the duties of the Treasurer.
SECTION 9. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all votes and proceedings of the meetings of Trustees and Shareholders in
books to be kept for that purpose. The Secretary shall be responsible for giving
and serving notices of the Trust. The Secretary shall have custody of any seal
of the Trust and shall be responsible for the records of the Trust, including
the Share register and such other books and documents as may be required by the
Trustees or by law. The Secretary shall perform all acts incidental to the
office of Secretary, subject to the supervision of the Trustees, and shall
perform such additional duties as the Trustees may designate.
Any Assistant Secretary may perform such duties of the Secretary as the
Trustees or the Secretary may assign, and, in the absence of the Secretary, may
perform all the duties of the Secretary.
SECTION 10. COMPENSATION OF OFFICERS. Each officer may receive such
compensation from the Trust for services and reimbursement for expenses as the
Trustees may determine.
SECTION 11. SURETY BOND. The Trustees may require any officer or agent
of the Trust to execute a bond (including, without limitation, any bond required
by the 1940 Act and the rules and regulations of the Securities and Exchange
Commission ("Commission")) to the Trust in such sum and with such surety or
sureties as the Trustees may determine, conditioned upon the faithful
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performance of his or her duties to the Trust, including responsibility for
negligence and for the accounting of any of the Trust's property, funds or
securities that may come into his or her hands.
ARTICLE V
MEETINGS OF SHAREHOLDERS
SECTION 1. NO ANNUAL MEETINGS. There shall be no annual Shareholders'
meetings, unless required by law.
SECTION 2. SPECIAL MEETINGS. The Secretary shall call a special meeting
of Shareholders of any Series or Class whenever ordered by the Trustees.
The Secretary also shall call a special meeting of Shareholders of any
Series or Class upon the written request of Shareholders owning at least ten
percent of the Outstanding Shares of such Series or Class entitled to vote at
such meeting; provided, that (1) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (2) the Shareholders
requesting such meeting shall have paid to the Trust the reasonably estimated
cost of preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such Shareholders. If the Secretary fails for more than
thirty days to call a special meeting when required to do so, the Trustees or
the Shareholders requesting such a meeting may, in the name of the Secretary,
call the meeting by giving the required notice. The Secretary shall not call a
special meeting upon the request of Shareholders of any Series or Class to
consider any matter that is substantially the same as a matter voted upon at any
special meeting of Shareholders of such Series or Class held during the
preceding twelve months, unless requested by the holders of a majority of the
Outstanding Shares of such Series or Class entitled to be voted at such meeting.
A special meeting of Shareholders of any Series or Class shall be held
at such time and place as is determined by the Trustees and stated in the notice
of that meeting.
SECTION 3. NOTICE OF MEETINGS; WAIVER. The Secretary shall call a
special meeting of Shareholders by giving written notice of the place, date,
time, and purposes of that meeting at least fifteen days before the date of such
meeting. The Secretary may deliver or mail, postage prepaid, the written notice
of any meeting to each Shareholder entitled to vote at such meeting. If mailed,
notice shall be deemed to be given when deposited in the United States mail
directed to the Shareholder at his or her address as it appears on the records
of the Trust.
SECTION 4. ADJOURNED MEETINGS. A Shareholders' meeting may be adjourned
one or more times for any reason, including the failure of a quorum to attend
the meeting. No notice of adjournment of a meeting to another time or place need
be given to Shareholders if such time and place are announced at the meeting at
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which the adjournment is taken or reasonable notice is given to Persons present
at the meeting, and if the adjourned meeting is held within a reasonable time
after the date set for the original meeting. Any business that might have been
transacted at the original meeting may be transacted at any adjourned meeting.
If after the adjournment a new record date is fixed for the adjourned meeting,
the Secretary shall give notice of the adjourned meeting to Shareholders of
record entitled to vote at such meeting. Any irregularities in the notice of any
meeting or the nonreceipt of any such notice by any of the Shareholders shall
not invalidate any action otherwise properly taken at any such meeting.
SECTION 5. VALIDITY OF PROXIES. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by proxy;
provided, that either (1) the Shareholder or his or her duly authorized attorney
has signed and dated a written instrument authorizing such proxy to act, or (2)
the Trustees adopt by resolution an electronic, telephonic, computerized or
other alternative to execution of a written instrument authorizing the proxy to
act, but if a proposal by anyone other than the officers or Trustees is
submitted to a vote of the Shareholders of any Series or Class, or if there is a
proxy contest or proxy solicitation or proposal in opposition to any proposal by
the officers or Trustees, Shares may be voted only in person or by written
proxy. Unless the proxy provides otherwise, it shall not be valid for more than
eleven months before the date of the meeting. All proxies shall be delivered to
the Secretary or other person responsible for recording the proceedings before
being voted. A proxy with respect to Shares held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to exercise
of such proxy the Trust receives a specific written notice to the contrary from
any one of them. Unless otherwise specifically limited by their terms, proxies
shall entitle the Shareholder to vote at any adjournment of a Shareholders'
meeting. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise, and the
burden of proving invalidity shall rest on the challenger. At every meeting of
Shareholders, unless the voting is conducted by inspectors, the chairman of the
meeting shall decide all questions concerning the qualifications of voters, the
validity of proxies, and the acceptance or rejection of votes. Subject to the
provisions of the Delaware Business Trust Act, the Trust Instrument, or these
By-laws, the General Corporation Law of the State of Delaware relating to
proxies, and judicial interpretations thereunder shall govern all matters
concerning the giving, voting or validity of proxies, as if the Trust were a
Delaware corporation and the Shareholders were shareholders of a Delaware
corporation.
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SECTION 6. RECORD DATE. The Trustees may fix in advance a date up to
ninety days before the date of any Shareholders' meeting as a record date for
the determination of the Shareholders entitled to notice of, and to vote at, any
such meeting. The Shareholders of record entitled to vote at a Shareholders'
meeting shall be deemed the Shareholders of record at any meeting reconvened
after one or more adjournments, unless the Trustees have fixed a new record
date. If the Shareholders' meeting is adjourned for more than sixty days after
the original date, the Trustees shall establish a new record date.
SECTION 7. ACTION WITHOUT A MEETING. Shareholders may take any action
without a meeting if a majority (or such greater amount as may be required by
law) of the Outstanding Shares entitled to vote on the matter consent to the
action in writing and such written consents are filed with the records of
Shareholders' meetings. Such written consent shall be treated for all purposes
as a vote at a meeting of the Shareholders.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 1. NO SHARE CERTIFICATES. Neither the Trust nor any Series or
Class shall issue certificates certifying the ownership of Shares, unless the
Trustees may otherwise specifically authorize such certificates.
SECTION 2. TRANSFER OF SHARES. Shares shall be transferable only by a
transfer recorded on the books of the Trust by the Shareholder of record in
person or by his or her duly authorized attorney or legal representative. Shares
may be freely transferred and the Trustees may, from time to time, adopt rules
and regulations regarding the method of transfer of such Shares.
ARTICLE VII
CUSTODY OF SECURITIES
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall at all times
place and maintain all cash, securities and other assets of the Trust and of
each Series in the custody of a custodian meeting the requirements set forth in
Article VII, Section 4 of the Trust Instrument ("Custodian"). The Custodian
shall be appointed from time to time by the Board of Trustees, who shall
determine its remuneration
SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of any
Custodian Agreement or the inability of the Custodian to continue to serve as
custodian, in either case with respect to the Trust or any Series, the Board of
Trustees shall (a) use its best efforts to obtain a successor Custodian; and (b)
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require that the cash, securities and other assets owned by the Trust or any
Series be delivered directly to the successor Custodian.
SECTION 3. OTHER ARRANGEMENTS. The Trust may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT
SECTION 1. FISCAL YEAR. The fiscal year of the Trust shall end on
September 30.
SECTION 2. ACCOUNTANT. The Trust shall employ independent certified
public accountants as its Accountant to examine the accounts of the Trust and to
sign and certify financial statements filed by the Trust. The Accountant's
certificates and reports shall be addressed both to the Trustees and to the
Shareholders. A majority of the Disinterested Trustees shall select the
Accountant at any meeting held within ninety days before or after the beginning
of the fiscal year of the Trust, acting upon the recommendation of the Audit
Committee. The Trust shall submit the selection for ratification or rejection at
the next succeeding Shareholders' meeting, if such a meeting is to be held
within the Trust's fiscal year. If the selection is rejected at that meeting,
the Accountant shall be selected by majority vote of the Trust's outstanding
voting securities, either at the meeting at which the rejection occurred or at a
subsequent meeting of Shareholders called for the purpose of selecting an
Accountant. The employment of the Accountant shall be conditioned upon the right
of the Trust to terminate such employment without any penalty by vote of a
Majority Shareholder Vote at any Shareholders' meeting called for that purpose.
ARTICLE IX
AMENDMENTS
SECTION 1. GENERAL. Except as provided in Section 2 of this Article,
these By-laws may be amended by the Trustees, or by the affirmative vote of a
majority of the Outstanding Shares entitled to vote at any meeting.
SECTION 2. BY SHAREHOLDERS ONLY. After the issue of any Shares, this
Article may only be amended by the affirmative vote of the holders of the lesser
of (a) at least two-thirds of the Outstanding Shares present and entitled to
vote at any meeting, or (b) at least fifty percent of the Outstanding Shares.
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ARTICLE X
NET ASSET VALUE
The term "Net Asset Value" of any Series shall mean that amount by
which the assets belonging to that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. Net Asset Value per Share
shall be determined separately for each Series and each Class and shall be
determined on such days and at such times as the Trustees may determine. The
Trustees shall make such determination with respect to securities for which
market quotations are readily available, at the market value of such securities,
and with respect to other securities and assets, at the fair value as determined
in good faith by the Trustees; provided, however, that the Trustees, without
Shareholder approval, may alter the method of appraising portfolio securities
insofar as permitted under the 1940 Act and the rules, regulations and
interpretations thereof promulgated or issued by the SEC or insofar as permitted
by any order of the SEC applicable to the Series or to the Class. The Trustees
may delegate any of their powers and duties under this Article X with respect to
appraisal of assets and liabilities. At any time the Trustees may cause the Net
Asset Value per Share last determined to be determined again in a similar manner
and may fix the time when such redetermined values shall become effective.
ARTICLE XI
MISCELLANEOUS
SECTION 1. INSPECTION OF BOOKS. The Board of Trustees shall from time
to time determine whether and to what extent, and at what times and places, and
under what conditions the accounts and books of the Trust or any Series or Class
shall be open to the inspection of Shareholders. No Shareholder shall have any
right to inspect any account or book or document of the Trust except as
conferred by law or otherwise by the Board of Trustees or by resolution of
Shareholders.
SECTION 2. SEVERABILITY. The provisions of these By-laws are severable.
If the Board of Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of these By-laws; provided, however, that such determination shall not
affect any of the remaining provisions of these By-laws or render invalid or
improper any action taken or omitted prior to such determination. If any
provision hereof shall be held invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall attach only to such provision only in
such jurisdiction and shall not affect any other provision of these Bylaws
SECTION 3. HEADINGS. Headings are placed in these By-laws for
convenience of reference only and in case of any conflict, the text of these
By-laws rather than the headings shall control.
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TABLE OF CONTENTS
PAGE
ARTICLE I
PRINCIPAL OFFICE AND SEAL................................................... 1
Section 1. Principal Office....................................... 1
Section 2. Seal................................................... 1
ARTICLE II
MEETINGS OF TRUSTEES........................................................ 1
Section 1. Action by Trustees..................................... 1
Section 2. Compensation of Trustees............................... 1
Section 3. Retirement of Trustees................................. 1
ARTICLE III
COMMITTEES.................................................................. 2
Section 1. Establishment.......................................... 2
Section 2. Proceedings; Quorum; Action............................ 2
Section 3. Compensation of Committee Members...................... 2
ARTICLE IV
OFFICERS.................................................................... 2
Section 1. General................................................ 2
Section 2. Election............................................... 2
Section 3. Vacancies and Newly Created Offices.................... 3
Section 4. Removal and Resignation................................ 3
Section 5. Chairman............................................... 3
Section 6. President.............................................. 3
Section 7. Vice President(s)...................................... 3
Section 8. Treasurer and Assistant Treasurer(s)................... 4
Section 9. Secretary and Assistant Secretaries.................... 4
Section 10. Compensation of Officers............................... 4
Section 11. Surety Bond............................................ 4
ARTICLE V
MEETINGS OF SHAREHOLDERS.................................................... 5
Section 1. No Annual Meetings..................................... 5
Section 2. Special Meetings....................................... 5
Section 3. Notice of Meetings; Waiver............................. 5
Section 4. Adjourned Meetings..................................... 5
Section 5. Validity of Proxies.................................... 6
Section 6. Record Date............................................ 7
Section 7. Action Without a Meeting............................... 7
ARTICLE VI
SHARES OF BENEFICIAL INTEREST............................................... 7
Section 1. No Share Certificates.................................. 7
Section 2. Transfer of Shares..................................... 7
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ARTICLE VII
CUSTODY OF SECURITIES....................................................... 7
Section 1. Employment of a Custodian.............................. 7
Section 2. Termination of Custodian Agreement..................... 7
Section 3. Other Arrangements..................................... 8
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT.................................................. 8
Section 1. Fiscal Year............................................ 8
Section 2. Accountant............................................. 8
ARTICLE IX
AMENDMENTS.................................................................. 8
Section 1. General................................................ 8
Section 2. By Shareholders Only................................... 8
ARTICLE X
NET ASSET VALUE............................................................. 9
ARTICLE XI
MISCELLANEOUS................................................................ 9
Section 1. Inspection of Books..................................... 9
Section 2. Severability............................................ 9
Section 3. Headings............................................... 10
