<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1998
1933 Act Registration No. 333-27917
1940 Act Registration No. 811-08229
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. ____________ [ 1 ]
-------
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2
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PAINEWEBBER INDEX TRUST
(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.
BENJAMIN J. HASKIN, 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: Effective Date of this Post-
Effective Amendment.
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
- ------
[ ] On ____ pursuant to Rule 485(b)
- ------
[ ] 60 days after filing pursuant to Rule 485(a)(1)
- ------
[ X ] On October 1, 1998 pursuant to Rule 485(a)(1)
- ------ ---------------
[ ] 75 days after filing pursuant to Rule 485(a)(2)
- ------
[ ] On _____ pursuant to Rule 485(a)(2)
- ------
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
PAINEWEBBER INDEX TRUST
Form N-1A Cross Reference Sheet
<TABLE>
<CAPTION>
Part A Item No. and Caption Prospectus Caption
---------------------------- -------------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis The Fund at a Glance; Expense Table
3. Condensed Financial Information Financial Highlights; Performance
4. General Description of Registrant The Fund at a Glance; Investment Objective &
Policies; Investment Philosophy & Process; The
Fund's Investments; General Information
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Financial Highlights
Performance
6. Capital Stock and Other Securities Cover Page; Flexible Pricing(SM); Dividends & Taxes;
General Information
7. Purchase of Securities Being Offered Flexible Pricing(SM); How to Buy Shares; Other
Services; Determining the Shares' Net Asset Value
8. Redemption or Repurchase How to Sell Shares; Other Services
9. Pending Legal Proceedings Not Applicable
Part B Item No. and Caption Statement of Additional Information Caption
---------------------------- -------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information
13. Investment Objective and Policies Investment Policies and Restrictions; Strategies
Using Derivative Instruments; Portfolio Transactions
14. Management of the Fund Trustees and Officers; Principal Holders of Securities
15. Control Persons and Principal Holders Trustees and Officers; Principal Holders of
of Securities Securities
16. Investment Advisory and Other Services Investment Advisory and Distribution Arrangements
17. Brokerage Allocation and Other Services Portfolio Transactions
18. Capital Stock and Other Securities Other Information
19. Purchase, Redemption and Pricing of Redemption Information and Other Services;
Securities Being Offered Valuation of Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Distribution Arrangements
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
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>
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PaineWebber S&P 500 Index Fund
1285 Avenue of the Americas, New York, New York 10019
Prospectus -- October 1, 1998
- --------------------------------------------------------------------------------
PaineWebber S&P 500 Index Fund is designed for long-term investors who seek
investment results, before fees and expenses, that track the performance
results of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500
Index"). The Fund, a series of PaineWebber Index Trust, seeks to replicate the
total return of the S&P 500 Index, which is composed of 500 selected large
capitalization common stocks.
This Prospectus concisely sets forth information that a prospective investor
should know about the Fund before investing. Please read this Prospectus
carefully and retain a copy for future reference.
A Statement of Additional Information dated October 1, 1998, has been filed
with the Securities and Exchange Commission ("SEC" or "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 the
Fund, your investment executive at PaineWebber or one of its correspondent
firms or by calling toll-free 1-800-647-1568. In addition, the Commission
maintains a website (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other
information regarding registrants that file electronically with the Commission.
- --------------------------------------------------------------------------------
THE PAINEWEBBER FAMILY OF MUTUAL FUNDS
The PaineWebber Family of Mutual Funds consists of seven broad categories,
which are presented here. Generally, investors seeking to maximize return must
assume greater risk. The Fund offered by this Prospectus is in the STOCK FUNDS
category.
. Asset Allocation Funds . Global Funds for long-
for high total return by term growth by investing
investing in stocks and mainly in foreign stocks
bonds. or high current income
by investing mainly in
global debt instruments.
. Stock funds for long-
term growth by investing
mainly in stocks. . Money Market Fund for
income and stability by
investing in high-
. Bond Funds for income by quality, short-term
investing mainly in investments.
bonds.
. Fund of Funds for either
. Tax-Free Bond Funds for long-term growth of
income exempt from capital; total return;
federal income tax and, or income and,
in some cases, state secondarily, growth of
and local income taxes, capital by investing in
by investing in other PaineWebber mutual
municipal bonds. funds.
A complete listing of the PaineWebber Family of Mutual Funds is found on the
back cover of this Prospectus.
- --------------------------------------------------------------------------------
INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE FUND AND ITS DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE
INVESTORS WITH INFORMATION THAT IS DIFFERENT. THE PROSPECTUS IS NOT AN OFFER TO
SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND OR ITS DISTRIBUTOR
MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------
Prospectus Page 1
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Fund At A Glance....................................................... 3
Expense Table.............................................................. 4
Financial Highlights....................................................... 6
Investment Objective & Policies............................................ 7
Investment Philosophy & Process............................................ 8
Performance................................................................ 8
The Fund's Investments..................................................... 9
Flexible PricingSM......................................................... 11
How To Buy Shares.......................................................... 14
How To Sell Shares......................................................... 15
Other Services............................................................. 16
Management................................................................. 17
Determining The Shares' Net Asset Value.................................... 18
Dividends & Taxes.......................................................... 19
General Information........................................................ 20
</TABLE>
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Prospectus Page 2
<PAGE>
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PaineWebber S&P 500 Index Fund
The Fund at a Glance
- -------------------------------------------------------------------------------
The Fund is not intended to provide a complete investment program but may be
appropriate as a component of an investor's overall portfolio. Some common
reasons to invest in the Fund are to finance college educations, plan for
retirement or diversify a portfolio. When selling shares, investors should be
aware that they may get more or less for their shares than they originally
paid for them. As with any mutual fund, there is no assurance that the Fund
will achieve its goal.
GOAL: To increase the value of your investment by investing in the common
stocks of companies in the S&P 500 Index.
INVESTMENT OBJECTIVE: To replicate the total return of the S&P 500 Index,
before fees and expenses.
RISKS: Stock prices rise and fall. The U.S. stock market tends to be cyclical,
with periods when stock prices generally rise and periods when prices
generally decline. Deviations from the performance of the S&P 500 Index may
result from shareholder purchases and sales of shares that can occur daily, as
well as from fees and expenses borne by the Fund. The Fund may use derivative
instruments, such as options and futures contracts, to simulate full
investment in the S&P 500 Index while handling cash flows into and out of the
Fund and to reduce transaction expenses. These derivatives involve special
risks. Investors may lose money by investing in the Fund; investments in the
Fund are not guaranteed.
MANAGEMENT
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"), is
the Fund's investment adviser and administrator.
WHO SHOULD INVEST
The Fund is for investors who seek investment results, before fees and
expenses, that track the performance results of the S&P 500 Index. Unlike
other mutual funds, which generally seek to "beat" stock market averages and
often have unpredictable results, the Fund seeks to "match" the performance of
the S&P 500 Index and thus is expected to provide a predictable return
relative to its benchmark.
MINIMUM INVESTMENT
To open an account, investors must invest at least $5,000; to add to an
account, investors need only $100.
HOW TO PURCHASE SHARES OF THE FUND
Investors may select among these classes of shares.
CLASS A SHARES
The price is the net asset value plus the initial sales charge; the maximum
sales charge is 2.5% 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 C shares.
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 1.00% is charged on
shares sold within one year of purchase.
CLASS Y SHARES
Class Y shares are offered only to limited groups of investors. The price is
the net asset value. Investors do not pay an initial sales charge when they
buy Class Y shares. As a result, 100% of their purchase is immediately
invested. Investors also do not pay a contingent deferred sales charge when
they sell Class Y shares. Class Y shares have lower ongoing expenses than the
other classes of shares.
----------
Prospectus Page 3
<PAGE>
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--------------------------------
PaineWebber S&P 500 Index Fund
Expense Table
- -------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses associated with investing in each class of shares of the Fund.
Because the Fund had less than six months of operation at the end of its
initial fiscal period, "Other Expenses" shown below are estimated.
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS Y
SHAREHOLDER TRANSACTION EXPENSES ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases of Shares (as a % of
offering price)...................................... 2.5% None None
Sales Charge on Reinvested Dividends (as a % of offer-
ing price)........................................... None None None
Maximum Contingent Deferred Sales Charge (as a % of
offering price or net asset value at the time of
sale, whichever is less)............................. None 1% None
Exchange Fees......................................... None None None
ANNUAL FUND OPERATING EXPENSES*
(as a % of average net assets)
Management Fees (after waivers)....................... 0.20% 0.20% 0.20%
12b-1 Fees............................................ 0.25 1.00 None
Other Expenses (after expense reimbursements)......... 0.55 0.55 0.55
---- ---- ----
Total Operating Expenses (after fee waivers and ex-
pense reimbursements)*............................... 1.00% 1.75% 0.55%
==== ==== ====
</TABLE>
- -------
* For the Fund's initial year of operations (until December 31, 1998),
Mitchell Hutchins intends to waive its management fees and reimburse Fund
expenses, if necessary, so that the total operating expenses for Class Y
shares for that period do not exceed 0.35% of its average net assets. During
this period, Management Fees with respect to Class A and Class C shares of
the Fund also will be waived to the same extent and Other Expenses of those
classes will be reimbursed proportionately. After December 31, 1998,
Mitchell Hutchins expects to stop waiving its fees and reimbursing expenses
for the Fund.
CLASS A SHARES: Sales charge waivers and a reduced sales purchase plan are
available. Purchases of $1 million or more are not subject to an initial
sales charge; however, if a shareholder sells those shares within one year
after purchase, a contingent deferred sales charge of 0.50% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.
CLASS C SHARES: If a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge of 1% of the offering price or
the net asset value of the shares at the time of sale by the shareholder,
whichever is less, is imposed.
CLASS Y SHARES: No initial or contingent sales charge is imposed, nor are
Class Y shares subject to 12b-1 distribution or service fees. Class Y
shares may be purchased by participants in certain investment programs that
are sponsored by PaineWebber and that may invest in PaineWebber mutual
funds ("PW Programs"), when Class Y shares are purchased through that
program. Participation in a PW Program is subject to an advisory fee at the
effective maximum annual rate of 1.5% of assets held through that PW
Program. This account charge is not included in the table because investors
who are not PW Program participants also are permitted to purchase Class Y
shares of the Fund.
----------
Prospectus Page 4
<PAGE>
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--------------------------------
PaineWebber S&P 500 Index Fund
Expense Table
(Continued)
- -------------------------------------------------------------------------------
EXAMPLES OF EFFECT OF FUND EXPENSES
The following examples should assist investors in understanding various costs
and expenses incurred as shareholders of the Fund. The assumed 5% annual
return shown in the examples is required by regulations of the Securities and
SEC applicable to all mutual funds. THESE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES OF THE FUND MAY BE
MORE OR LESS THAN THOSE SHOWN.
An investor would pay the following expenses, directly or indirectly, on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Class A.......................................................... $ $
Class C (Assuming sale of all shares at end of period)........... $ $
Class C (Assuming no sale of shares)............................. $ $
Class Y.......................................................... $ $
</TABLE>
ASSUMPTION MADE IN THE EXAMPLE
. ALL CLASSES: Reinvestment of all dividends and other distributions;
percentage amounts listed under "Annual Fund Operating Expenses" remain
the same for the years shown.
. CLASS A SHARES: Deduction of the maximum 2.5% initial sales charge at
the time of purchase.
. CLASS C SHARES: Deduction of a 1% contingent deferred sales charge for
sales of shares within one year of purchase.
----------
Prospectus Page 5
<PAGE>
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--------------------------------
PaineWebber S&P 500 Index Fund
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following table provides investors with data and ratios for one Class Y
share for the period shown. The Fund had no Class A or Class C shares
outstanding during that period. This information is supplemented by the
financial statements, accompanying notes and the report of Ernst & Young LLP,
independent auditors, which appear in the Fund's Annual Report to Shareholders
for the period ended May 31, 1998, and are incorporated by reference into the
Statement of Additional Information. The financial statements and notes, as
well as the information in the period below relating to the period ended May
31, 1998, have been audited by Ernst & Young LLP. Further information about
the Fund's performance is also included in the Annual Report to Shareholders,
which may be obtained without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
CLASS Y
------------------
FOR THE PERIOD
DECEMBER 31, 1997+
TO
MAY 31, 1998
------------------
<S> <C>
Net asset value, beginning
of period................................................ $
----
Net investment income
(loss)...................................................
Net realized and
unrealized gains (losses)
from investments.........................................
----
Total income (loss) from
investment operations....................................
----
Dividends from net invest-
ment income..............................................
Distributions from net re-
alized gains from invest-
ments....................................................
----
Total dividends and dis-
tributions...............................................
----
Net asset value, end of
period................................................... $
====
Total investment return
(1)...................................................... %
====
Ratios/Supplemental Data:
Net assets, end of pe-
riod (000's)........................................... $
Expenses to average net
assets................................................. %*
Net investment income to
average net assets..................................... %*
Portfolio Turnover Rate................................. %
Average commission rate
paid (2)............................................... $
</TABLE>
- -------
+ Commencement of operations.
* Annualized.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends and
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. Total investment
returns for periods of less than one year have not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose the average commission rate paid per share of
common stock investment purchased or sold.
----------
Prospectus Page 6
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
INVESTMENT OBJECTIVE & POLICIES
- -------------------------------------------------------------------------------
The Fund's investment objective is to replicate the total return of the S&P
500 Index, before fees and expenses. The investment objective of the Fund may
not be changed without shareholder approval. The Fund's other investment
policies, except where noted, are not fundamental and may be changed by its
board of trustees ("board").
The Fund seeks to achieve its objective by investing substantially all of its
assets in common stocks issued by companies in the S&P 500 Index and in
related derivatives, such as options and futures contracts, that simulate
investment in that Index. The Fund invests at least 65% of its total assets in
a substantial majority of the common stocks issued by companies represented in
the S&P 500 Index.
The S&P 500 Index is composed of 500 common stocks that are selected by
Standard & Poor's a division of The McGraw-Hill Companies, Inc. ("S&P"), to
capture the price performance of a large cross-section of the U.S. publicly
traded stock market. These 500 stocks, most of which trade on the New York
Stock Exchange, represent approximately 75% of the market value of all U.S.
common stocks. Each stock in the S&P 500 Index is weighted by its total market
value relative to the total market value of all securities in the Index. S&P
selects the component stocks included in the S&P 500 Index with the aim of
achieving a distribution at the Index level representative of the various
industry components of the U.S. market for common stocks. Therefore, the 500
stocks do not represent the 500 largest companies. Aggregate market value and
trading activity also are considered in the selection process.
The inclusion of a security in the S&P 500 Index in no way implies an opinion
by S&P as to the attractiveness of the security as an investment. The Fund is
not sponsored, endorsed, sold or promoted by S&P.
ADDITIONAL INFORMATION CONCERNING S&P 500 INDEX. "Standard & Poor's(R),"
"S&P(R)," "S&P 500(R)," and "500" are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use by the Fund. S&P makes no representation
or warranty, express or implied, to the purchasers of the Fund or any member
of the public regarding the advisability of investing in securities generally
or the Fund particularly or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to the Fund is the licensing
of certain trademarks and trade names of S&P and the S&P 500 Index, which is
determined, composed, and calculated by S&P without regard to the Fund. S&P
has no obligation to take the needs of the Fund into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination or calculation
of the equation by which shares of the Fund are priced or converted into cash.
S&P has no obligation or liability in connection with the administration of
the Fund or the marketing or sale of the Fund's shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR
ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
----------
Prospectus Page 7
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
INVESTMENT PHILOSOPHY & PROCESS
- -------------------------------------------------------------------------------
The Fund is not managed according to traditional methods of "active"
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgment. Instead, it
uses a "passive" investment approach in attempting to replicate the investment
performance of the S&P 500 Index.
The Fund invests in substantially all 500 stocks in the S&P 500 Index in
proportion to their weighting in the S&P 500 Index and, ordinarily, invests in
at least 450 stocks that are represented in the S&P 500 Index. If the Fund
experiences exceptional levels of purchases or redemptions, the Fund may be
delayed in rebalancing its portfolio to reflect the weightings of the common
stocks reflected in the S&P 500 Index or may hold less than 450 stocks of the
Index. The Fund will be rebalanced as soon as practicable to reflect the
common stock weightings represented in the S&P 500
Index and may use derivative instruments to replicate the weightings of the
Index in the interim. From time to time, adjustments may be made in the Fund's
investments because of changes in the composition of the Index, but these
changes are expected to be infrequent.
Because the Fund seeks to replicate the performance of the S&P 500 Index, a
close correlation between the Fund's performance and the performance of the
S&P 500 Index is anticipated in both rising and falling markets.
The Fund attempts to achieve a correlation, over time, between the performance
of its investments and that of the S&P 500 Index of at least 0.95, before
deduction of fees and expenses. A correlation of 1.00 would represent perfect
correlation between the Fund's performance and that of the S&P 500 Index. The
performance of the Fund versus that of the S&P 500 Index is compared at least
weekly. If an unexpected tracking error develops, the Fund's portfolio will be
rebalanced to bring it into line with the S&P 500 Index. There can be no
assurance that the Fund will achieve its expected results.
- -------------------------------------------------------------------------------
PERFORMANCE
- -------------------------------------------------------------------------------
The Fund performs 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 the Fund as a steady
compound annual rate of return. Actual year-by-year returns fluctuate and may
be higher or lower than standardized return. Standardized return for Class A
shares of the Fund reflects deduction of the maximum initial sales charge of
2.5% at the time of purchase, and standardized return for the Class C shares
reflects the deduction of the applicable contingent deferred sales charge
imposed on a sale of shares held for the period. One-, five- and ten-year
periods will be shown, unless the Fund has been in existence for a shorter
period. If so, returns will be shown for the period since inception, known as
"Life." Total return calculations assume reinvestment of dividends and other
distributions.
The Fund may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those
used for standardized return and may include cumulative returns, average
annual rates, actual year-by-year rates or any combination thereof. Non-
standardized return does not reflect initial or contingent deferred sales
charges and would be lower if such charges were deducted.
Total return information reflects past performance and does not indicate
future results. The investment return and principal value of shares of the
Fund will fluctuate. The amount investors receive when selling shares may be
more or less than what they paid.
----------
Prospectus Page 8
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
THE FUND'S INVESTMENTS
- -------------------------------------------------------------------------------
EQUITY 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.
RISKS
EQUITY SECURITIES. While past performance does not guarantee future results,
equity securities historically have provided the greatest long-term growth
potential in a company. However, their prices generally fluctuate more than
other securities and reflect changes in a company's financial condition and in
overall market and economic conditions. Common stocks generally represent the
riskiest investment in a company. It is possible that the Fund may experience
a substantial or complete loss on an individual common stock investment.
INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund attempts to
replicate, before deduction of operating expenses, the investment results of
the S&P 500 Index, the Fund's investment results generally will not be
identical to those of the S&P 500 Index. Deviations from the performance of
the S&P 500 Index may result from shareholder purchases and sales of shares
that can occur daily, as well as from fees and expenses borne by the Fund.
FOREIGN SECURITIES. The S&P 500 Index includes some U.S. dollar-denominated
foreign securities that are traded on recognized U.S. exchanges or on the U.S.
over-the-counter ("OTC") market. Investing in the securities of foreign
companies may involve 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. 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.
DERIVATIVES. Some of the instruments in which the Fund 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. Derivatives
include options and futures contracts that may be used to simulate full
investment in the S&P 500 Index and in other strategies. There is limited
consensus as to what constitutes a "derivative" security or instrument. The
market value of derivatives sometimes is more volatile than that of other
investments, and each type of derivative may pose its own special risks.
Mitchell Hutchins takes these risks into account in its management of the
Fund.
COUNTERPARTIES. The Fund may be exposed to the risk of financial failure or
insolvency of another party. To help lessen those risks, Mitchell Hutchins,
subject to the supervision of the board, monitors and evaluates the
creditworthiness of the parties with which the Fund does business.
INDUSTRY CONCENTRATION POLICY. The Fund will invest 25% or more of its total
assets in securities of issuers in the same industry if necessary to replicate
the weighting of that particular industry in the S&P 500 Index.
YEAR 2000 RISK. Like other mutual funds and other financial and business
organizations around the world, the Fund could be adversely affected if the
computer systems used by Mitchell Hutchins, other service providers and
entities with computer systems that are linked to Fund records do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Issue." Mitchell Hutchins is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Fund's other major service providers. However, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Fund.
----------
Prospectus Page 9
<PAGE>
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-------------------
Paine Webber S&P 500 Index Fund
INVESTMENT TECHNIQUES AND STRATEGIES
STRATEGIES USING DERIVATIVES. The Fund may use derivatives, which may include
options (both exchange traded and OTC) and futures contracts in strategies
intended to simulate full investment in the S&P 500 Index while retaining a
cash balance for Fund management purposes, such as to provide liquidity to
meet anticipated sales of its shares by shareholders and for Fund operating
expenses. The Fund may also use these derivatives to reduce the risk of
adverse price movements in the securities in the S&P 500 Index while investing
cash received from investor purchases of Fund shares, to facilitate trading
and to reduce transaction costs. New financial products and management
techniques continue to be developed and may be used by the Fund if consistent
with its investment objective and policies. The Statement of Additional
Information contains further information on these derivatives and related
strategies.
The Fund might not use any derivative instruments or strategies, and there can
be no assurance that using them will succeed. If Mitchell Hutchins is
incorrect in its judgment on market values or other economic factors in using
a strategy, the Fund may have lower net income and a net loss on the
investment. Each of these strategies involves certain risks, which include:
. the possibility of imperfect correlation between price movements of
derivatives used in the Fund's strategies and price movements of the
securities in the S&P 500 Index;
. possible constraints placed on the Fund's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Fund to
maintain "cover" or to segregate securities; and
. the possibility that the Fund is unable to close out or liquidate its
position in derivatives.
LENDING PORTFOLIO SECURITIES. The Fund may lend its securities to qualified
broker-dealers or institutional investors in an amount up to 33 1/3% of the
Fund's total assets. Lending securities enables the Fund to earn additional
income, but could result in a loss or delay in recovering these securities.
CASH MANAGEMENT. The Fund expects to use derivatives to provide liquidity for
anticipated sales of its shares by shareholders and for Fund operating
expenses and to manage cash flows into the Fund pending investment in
securities in the S&P 500 Index. The Fund may also invest in cash or
investment grade U.S. money market instruments, including repurchase
agreements, for liquidity purposes or pending investment in other securities.
The Fund is authorized to invest up to 35% of its total assets in cash or
money market instruments, although it expects these investments will represent
a much smaller portion of its total assets under normal circumstances.
Repurchase agreements are transactions in which the Fund purchases securities
from banks or recognized securities dealers and simultaneously commits to
resell the securities to the bank or dealer, usually no more than seven days
after purchase. 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.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities, including certain cover for OTC options and securities
whose disposition is restricted under the federal securities laws. The Fund
does not consider securities that are eligible for resale pursuant to SEC Rule
144A to be illiquid securities if Mitchell Hutchins has determined such
securities to be liquid, based upon the trading markets for the securities
under procedures approved by the board.
OTHER INFORMATION. The Fund may purchase securities on a when-issued basis or
may purchase or sell securities for delayed delivery. The Fund would not pay
for such securities or start earning interest on them until they are
delivered, but it would immediately assume the risks of ownership, including
the risk of price fluctuation. The Fund may borrow money for temporary or
emergency purposes in an amount up to 33 1/3% of its total assets, including
up to 5% of its net assets in reverse repurchase agreements.
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Prospectus Page 10
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
FLEXIBLE PRICING
- -------------------------------------------------------------------------------
The Fund offers through this Prospectus three classes of shares that differ in
terms of sales charges and expenses. An eligible investor can select the class
that is best suited to his or her investment needs, based upon the holding
period and the amount of the investment.
CLASS A SHARES
HOW PRICE IS CALCULATED: The price is the net asset value plus the initial
sales charge (the maximum is % of the public offering price next calculated
after PaineWebber's New York City headquarters or PFPC Inc., the Fund's
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 C
shares. Class A shares sales charges are calculated as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNTS TO SELECTED
---------------------------------- DEALERS AS PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- -------------------- -------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than $100,000...... 2.50% 2.56% 2.25%
$100,000 to $249,999.... 2.00 2.04 1.75
$250,000 to $499,999.... 1.50 1.52 1.25
$500,000 to $999,999.... 1.00 1.01 0.75
$1,000,000 and over(1).. None None 0.50(2)
</TABLE>
- -------
(1) A contingent deferred sales charge of 0.50% 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 0.50% charge.
Withdrawals under the Systematic Withdrawal Plan are not subject to this
charge. However, investors may withdraw no more than 12% of the value of
the Fund account under the Plan in the first year after purchase.
(2) Mitchell Hutchins pays 0.50% to PaineWebber.
SALES CHARGE REDUCTIONS & WAIVERS
Investors 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 chart above.
Investors may also qualify for a lower sales charge when they combine their
purchases with those of:
. their spouses, parents or children under age 21;
. their Individual Retirement Accounts (IRAs);
. certain employee benefit plans, including 401(k) plans;
. any company controlled by the investors;
. trusts created by the investor;
. 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
. 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:
. is an employer, director, trustee or officer of PaineWebber, its affiliates
or any PaineWebber mutual fund;
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Prospectus Page 11
<PAGE>
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-------------------
Paine Webber S&P 500 Index Fund
. is the spouse, parent or child of any of the above;
. 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
. was the investment executive's client at the competing brokerage firm;
. within 90 days of buying Class A shares in this Fund, the investor sells
shares of one or more mutual funds that (a) were principally underwritten by
the competing brokerage firm or its affiliates and (b) the investor either
paid a sales charge to buy those shares, paid a contingent deferred sales
charge when selling them or held those shares until the contingent deferred
sales charge was waived; and
. 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;
. 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;
. is an employer establishing an employee benefit plan qualified under section
401, including a salary reduction plan qualified under section 401(k) or
section 403(b), of the Internal Revenue Code ("Code") (each a "qualified
plan"). (This waiver is subject to minimum requirements, with respect to the
number of employees and amount of plan assets, established by Mitchell
Hutchins. Currently, a plan must have 50 or more eligible employees and at
least $1 million in plan assets.) For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested;
. is a participant in the PaineWebber Members Only Program(TM). For
investments made pursuant to this waiver, Mitchell Hutchins may make
payments out of its own resources to PaineWebber and to participating
membership organizations in a total amount not to exceed 1% of the amount
invested;
. is a variable annuity offered only to qualified plans. For investments made
pursuant to this waiver, Mitchell Hutchins may make payments out of its own
resources to PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed 1% of the amount invested;
. acquires Class A shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of Class A shares at
net asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its own
resources in an amount not to exceed 1% of the amount invested. For
subsequent investments or exchanges made to supplement a rebalancing feature
of such an investment program, the minimum subsequent investment requirement
is also waived; or
. acquires Class A shares in connection with a reorganization pursuant to
which the Fund acquires substantially all of the assets and liabilities of
another investment company in exchange solely for shares of the Fund.
For more information on how to get any reduced sales charge, investors should
contact their investment executive at PaineWebber or one of its correspondent
firms or call 1-800-647-1568. Investors must provide satisfactory information
to PaineWebber or the Fund if they seek any of these sales charge reductions
or waivers.
CLASS C SHARES
HOW PRICE IS CALCULATED: The price of Class C shares is the net asset value
next calculated after PaineWebber's New York City headquarters or the Transfer
Agent receives the purchase order. Investors do not pay an initial sales
charge when they buy Class C shares, but the ongoing expenses of Class C
shares are higher than those of Class A shares. Because investors do not pay
an initial sales charge when they buy Class C shares, 100% of their purchase
is immediately invested. Class C shares never convert to any other class of
shares.
A contingent deferred sales charge of 1% of the offering price (net asset
value at the time of purchase) or 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
----------
Prospectus Page 12
<PAGE>
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-------------------
Paine Webber S&P 500 Index Fund
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 gains are not subject to the 1% charge. Withdrawals
under the Systematic Withdrawal Plan also are not subject to this charge.
However, investors may withdraw no more than 12% of the value of the Fund
account under the Plan in the first year after purchase.
CLASS Y SHARES
HOW PRICE IS CALCULATED. Class Y shares are sold to eligible investors at the
net asset value next calculated 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 the other classes because Class Y shares are not subject to rule
12b-1 service or distribution fees.
LIMITED GROUPS OF INVESTORS. Only the following investors are eligible to buy
Class Y shares:
. a participant in a PaineWebber Program, when Class Y shares are purchased
through that program;
. an investor who buys $10 million or more at any one time in any combination
of the Fund and any PaineWebber mutual fund in the Flexible Pricing
System SM;
. 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
. an investment company advised by PaineWebber or an affiliate of PaineWebber.
PACE MULTI-ADVISOR PROGRAM. An investor who participates in the PACE Multi-
Advisor Program is eligible to purchase Class Y shares. The PACE Multi-Advisor
Program is an advisory program sponsored by PaineWebber that provides
comprehensive investment services, including investor profiling, a
personalized asset allocation strategy using an appropriate combination of
funds, and a quarterly investment performance review. Participation in the
Pace Multi-Advisor Program is subject to payment of an advisory fee to
PaineWebber at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee.
Please contact your PaineWebber investment executive or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available to the PACE Multi-Advisor Program.
----------
Prospectus Page 13
<PAGE>
-------------------
PaineWebber S&P 500 Index Fund
HOW TO BUY SHARES
- -------------------------------------------------------------------------------
Shares are purchased at the next share price calculated after the purchase
order is received by PaineWebber's New York City headquarters or the Transfer
Agent. Prices are calculated for each class of the Fund's shares once each
Business Day, at the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time). A "Business Day" is any day, Monday
through Friday, on which the New York Stock Exchange is open for business.
The Funds and Mitchell Hutchins reserve the right to reject any purchase order
and to suspend the offering of Fund shares for a period of time.
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 Fund that they are eligible to purchase Class Y shares.
PAINEWEBBER CLIENTS
Investors who are PaineWebber clients may buy shares through PaineWebber
investment executives or its correspondent firms. Investors may buy shares in
person, by mail, by telephone or by wire (the minimum wire purchase is $1
million). PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' purchase orders to PaineWebber's
New York City headquarters. Investors may pay for their purchases with checks
drawn on U.S. banks or with funds they have in their brokerage accounts at
PaineWebber or its correspondent firms.
OTHER INVESTORS
Investors who are not PaineWebber clients may purchase Fund shares and set up
an account through the Transfer Agent (PFPC Inc.) by completing an account
application which 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 are new to PaineWebber may complete and sign an account
application and mail it along with a check. Investors also may open an account
in person.
Investors who already have money invested in a PaineWebber mutual fund, and
want to invest in another PaineWebber mutual fund, can:
. mail an application with a check; or
. open an account by exchanging from another PaineWebber mutual fund.
Investors do not have to send an application when making additional
investments in the Fund.
MINIMUM INVESTMENTS
<TABLE>
<S> <C>
To open an account............. $5,000
To add to an account........... $ 100
</TABLE>
The Fund may waive or reduce these minimums for:
. employees of PaineWebber or its affiliates; or
. participants in certain pension plans, retirement accounts, investment
programs or the Fund's automatic investment plan.
HOW TO EXCHANGE SHARES
As shareholders, investors have the privilege of exchanging Class A and C
shares for the same class of most other PaineWebber mutual funds. Class Y
shares are not exchangeable. For classes where no initial sales charge is
imposed, a contingent deferred sales charge may apply if the investor sells
the shares acquired through the exchange.
Exchanges may be subject to minimum investment requirements of the fund into
which exchanges are made.
. 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.
. Investors who do not have an account with an investment executive at
PaineWebber or one of its
----------
Prospectus Page 14
<PAGE>
-------------------
PaineWebber S&P 500 Index Fund
correspondent firms may exchange their shares by writing a "letter of
instruction" to the Transfer Agent. The letter of instruction must include:
. the investor's name and address;
. the Fund's name;
. the Fund account number;
. the dollar amount or number of shares to be sold; and
. a guarantee of each registered owner's signature. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer, clearing
agency or savings association which is a participant in a medallion program
recognized by the Securities Transfer Association. The three recognized
medallion programs are Securities Transfer Agents Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) and the New York Stock Exchange
Medallion Signature Program (MSP). Signature guarantees which are not part
of these programs will not be accepted.
The letter must be mailed to PFPC Inc., Attn: PaineWebber Mutual Funds, P.O.
Box 8950, Wilmington, DE 19899.
No contingent deferred sales charge is imposed when Class A or C shares are
exchanged for the corresponding class of shares of other PaineWebber mutual
funds. A Fund will use the purchase date of the initial investment to
determine any contingent deferred sales charge due when the acquired shares
are sold. Fund shares may be exchanged only after the settlement date has
passed and payment for the shares has been made. The exchange privilege is
available only in those jurisdictions where the sale of the fund shares to be
acquired is authorized. This exchange privilege may be modified or terminated
at any time and, when required by SEC rules, upon 60 days' notice. See the
back cover of this Prospectus for a list of other PaineWebber mutual funds.
- -------------------------------------------------------------------------------
HOW TO SELL SHARES
- -------------------------------------------------------------------------------
Investors can sell (redeem) shares at any time. Shares will be sold at the
share price for that class as next calculated (less any contingent deferred
sales charge) after the order is received by PaineWebber's New York City
headquarters or the Transfer Agent. Share prices are normally calculated at
the close of regular trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time).
Investors who own more than one class of shares should specify which class
they are selling. If they do not, the Fund will assume they are first selling
their Class A shares, then Class C shares and last, Class Y shares.
If a shareholder wants to sell shares that were purchased recently, the Fund
may delay payment until it verifies that good payment was received. In the
case of purchases by check, this can take up to 15 days.
Investors who have an account with PaineWebber or one of PaineWebber's
correspondent firms can sell their shares by contacting their investment
executives. PaineWebber investment executives and correspondent firms are
responsible for promptly sending investors' sell orders to PaineWebber's New
York City headquarters. Investors who do not have an account and have bought
their shares through the Fund's Transfer Agent (PFPC Inc.), may sell shares by
writing a "letter of instruction" to the Transfer Agent, as detailed in "How
to Exchange Shares."
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, it reserves the right to purchase back all of its shares in any
shareholder account with a net asset value of less than $5,000. If the Fund
elects to do so, it will notify the shareholder of the opportunity to increase
the amount invested to $5,000 or more within 60 days of the notice. The Fund
will not purchase back accounts that fall below $5,000 solely due to a
reduction in net asset value per share.
REINSTATEMENT PRIVILEGE
Shareholders who sell their Class A shares may reinstate their Fund account
without a sales charge up to the dollar amount sold by purchasing the Fund's
Class A shares within 365 days after the sale. To take advantage of this
reinstatement privilege, shareholders must notify their investment executive
at PaineWebber or one of its correspondent firms at the time of purchase.
----------
Prospectus Page 15
<PAGE>
-------------------
PaineWebber S&P 500 Index Fund
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 Fund's Class A 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 $5,000 through which the Fund will deduct $50 or more monthly,
quarterly, semiannually or annually from the investor's bank account to invest
directly in the Fund. In addition to providing a convenient and disciplined
manner of investing, participation in the Automatic Investment Plan enables
the investor to use the technique of "dollar cost averaging."
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows investors to set up monthly, quarterly
(March, June, September and December), semiannual (June and December) or
annual (December) withdrawals from their Fund accounts. To participate in this
Plan, an investor's Class A or Class C shares must have a minimum value of
$5,000; the minimum value of withdrawals is $100.
An investor may not withdraw more than 12% of the value of the Fund account
when the investor signed up for the Plan 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 Individual Retirement Accounts ("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 the Fund in a PaineWebber brokerage account
transfer their brokerage accounts to another firm, the Fund shares will be
moved to an account with the Transfer Agent. However, if the other firm has
entered into a selected dealer agreement with Mitchell Hutchins relating to
the Fund, the shareholder may be able to hold Fund shares in an account with
the other firm.
----------
Prospectus Page 16
<PAGE>
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-------------------
PaineWebber S&P 500 Index Fund
MANAGEMENT
- -------------------------------------------------------------------------------
The Fund is governed by a board of trustees, which oversees its operations.
The Fund has appointed Mitchell Hutchins as investment adviser and
administrator responsible for the Fund's operations (subject to the authority
of the board). As investment adviser and administrator, Mitchell Hutchins
supervises all aspects of the Fund's operations and makes and implements all
investment decisions for the Fund.
In accordance with procedures adopted by the board, brokerage transactions for
the Fund may be conducted through PaineWebber or its affiliates and the Fund
may pay fees, including fees calculated as a percentage of earnings, to
PaineWebber for its services as lending agent in its portfolio securities
lending program. Personnel of Mitchell Hutchins may engage in securities
transactions for their own accounts pursuant to Mitchell Hutchins' code of
ethics, which establishes procedures for personal investing and restricts
certain transactions.
ABOUT THE INVESTMENT ADVISER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New York
10019, is wholly owned asset management subsidiary of PaineWebber
Incorporated, which is wholly owned by Paine Webber Group Inc., a publicly
owned financial services holding company. On August 31, 1998, Mitchell
Hutchins was adviser or sub-adviser of investment companies with
separate portfolios and aggregate assets of approximately $ billion.
T. Kirkham Barneby is responsible for the day-to-day management of the Fund'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
The Fund incurs various expenses in its operations, such as the management fee
paid to Mitchell Hutchins, 12b-1 service and distribution fees, custody and
transfer agency fees, 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.
For the Fund's initial year of operations (which ends December 31, 1998),
Mitchell Hutchins intends to waive its management fees and reimburse Fund
expenses, if necessary, so that the total operating expenses for Class Y
shares for that period do not exceed 0.35% of its average net assets. During
this period, Mitchell Hutchins will waive its management fees with respect to
the Fund's Class A and Class C shares to the same extent and reimburse other
expenses of those classes proportionately. As a result, the effective
management fee for the Fund was 0. % for its initial fiscal period ended May
31, 1998. After December 31, 1998, Mitchell Hutchins expects to stop waiving
its fees and reimbursing expenses for the Fund.
DISTRIBUTION ARRANGEMENTS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. There is no
distribution plan with respect to the Fund's Class Y shares. Under the
distribution plan for Class A and Class C shares ("Class A Plan" and "Class C
Plan," collectively, "Plans"), the Fund pays Mitchell Hutchins:
. Monthly service fees at the annual rate of 0.25% of the average daily net
assets of each class of shares.
. Monthly distribution fees at the annual rate of 0.75% of the average daily
net assets of Class C shares.
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Prospectus Page 17
<PAGE>
-------------------
PaineWebber S&P 500 Index Fund
Mitchell Hutchins uses the service fees under the Plans primarily to pay
PaineWebber for shareholder servicing, currently at the annual rate of 0.25%
of the aggregate investment amounts maintained in the Fund by PaineWebber
clients. PaineWebber then compensates its investment executives for
shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class C Plan to:
. Offset the commissions it pays to PaineWebber for selling the Fund's Class C
shares.
. Offset the Fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature, advertising and
prospectuses to prospective investors and related overhead expenses, such as
employee salaries and bonuses.
PaineWebber compensates investment executives when Class C shares are bought
by investors, as well as on an ongoing basis. Mitchell Hutchins receives no
special compensation from the Fund or investors at the time 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 Class A and Class C
shares ("Distribution Contracts") specify that the service and distribution
fees paid to Mitchell Hutchins are not reimbursement for specific expenses
incurred. Therefore, even if Mitchell Hutchins' expenses exceed the service
and distribution fees it receives, the Fund 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 the Plan will be Mitchell Hutchins' sole responsibility
and not that of the Fund. Annually, the board reviews each Plan and Mitchell
Hutchins' corresponding expenses for that class of shares separately from the
Plan and expenses of the other class.
- -------------------------------------------------------------------------------
DETERMINING THE SHARES' NET ASSET VALUE
- -------------------------------------------------------------------------------
The net asset value of the Fund's shares fluctuates and is determined
separately for each class as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) each Business Day. The
Fund's net asset value per share is determined by dividing the value of the
securities held by the Fund, plus any cash or other assets, minus all
liabilities, by the total number of Fund shares outstanding.
The Fund values its assets based on its current market value when market
quotations are readily available. If market quotations are not readily
available, assets are valued at fair value as determined in good faith by or
under the direction of the board.
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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Prospectus Page 18
<PAGE>
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PaineWebber S&P 500 Index Fund
DIVIDENDS & TAXES
- -------------------------------------------------------------------------------
DIVIDENDS
The Fund pays an annual dividend from net investment income and net short-term
capital gain, if any. The Fund also distributes annually substantially all of
its net capital gain (the excess of net long-term capital gain over net short-
term capital loss), if any. The Fund 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 the Fund are
calculated at the same time and in the same manner. Dividends on Class A and
Class C shares of the Fund are expected to be lower than those on its Class Y
shares because shares of the first two classes have higher expenses resulting
from their service fees and, in the case of Class C shares, their distribution
fees. Dividends on Class C shares are expected to be lower than those on the
Class A shares because Class A shares bear no distribution fees. Dividends on
each class might also be affected differently by the allocation of other
class-specific expenses. See "General Information."
The Fund's dividends and other distributions are paid in additional Fund
shares of the same class at net asset value, unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and other
distributions in cash, either mailed to them by check or credited to their
PaineWebber accounts, should contact their investment executives at
PaineWebber or one of its correspondent firms or complete the appropriate
section of the account application.
TAXES
The Fund intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code so that it will not have to
pay federal income tax on the part of its investment company taxable income
and net capital gain that it distributes to its shareholders. Investment
company taxable income generally consists of net investment income and net
short-term capital gain (the excess of gains from the sale or exchange of
capital assets held for not more than one year over loss from those assets).
Dividends from the Fund's investment company taxable income (whether paid in
cash or additional shares) are generally taxable to its shareholders as
ordinary income. Distributions of the Fund's net capital gain (whether paid in
cash or additional shares) are taxable to its shareholders as long-term
capital gain, regardless of how long they have held their Fund shares. Under
the Taxpayer Relief Act of 1997, as modified by recent legislation, the
maximum tax rate applicable to a non-corporate taxpayer's net capital gain
recognized on capital assets held for more than one year is 20% (10% for
taxpayers in the 15% marginal tax bracket). In the case of a regulated
investment company such as the Fund, the relevant holding period is determined
by how long the Fund has held the portfolio securities on which the gain was
realized, not by how long the shareholders have held their Fund shares.
Shareholders who are not subject to tax on their income generally will not be
required to pay tax on distributions.
YEAR-END TAX REPORTING
Following the end of each calendar year, the Fund notifies its shareholders of
the amounts of dividends and capital gain distributions paid (or deemed paid)
for that year including any portion of those dividends that qualifies for
special treatment. The information regarding capital gain destributions
designates the portions thereof subject to the different maximum rates of tax
applicable to non-corporate taxpayers' net capital gain.
BACKUP WITHHOLDING
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate also is required from
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Prospectus Page 19
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PaineWebber S&P 500 Index Fund
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
A shareholder's sale (redemption) of shares may result in a taxable gain or
loss. This depends upon whether the shareholder receives more or less than the
shareholder's adjusted basis for the shares (which normally includes any
initial sales charge paid on Class A shares). An exchange of a Fund's shares
for shares of another PaineWebber mutual fund generally will have the same tax
consequences. Capital gain on shares held for more than one year will be long-
term capital gain, in which event it will be subject to federal income tax at
the rates indicated above. In addition, if Fund shares are bought within 30
days before or after selling other Fund shares (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 would increase the basis of the
PaineWebber mutual fund shares subsequently acquired.
* * * *
Because the foregoing only summarizes some of the important tax considerations
affecting the Fund and its shareholders, prospective shareholders are urged to
consult their tax advisers.
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GENERAL INFORMATION
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ORGANIZATION
The Fund is a diversified series of PaineWebber Index Trust ("Trust"), an
open-end management investment company formed on May 27, 1997 as a business
trust under the laws of Delaware. The board has 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 the Fund are divided into three classes, Class A, Class C and
Class Y. Each class represents an identical interest in the Fund's investment
portfolio and has the same rights, privileges and preferences. However, each
class differs with respect to sales charges, if any, distribution and/or
service fees, if any, other expenses allocable exclusively to that class and
voting rights on matters exclusively affecting that class and its exchange
privilege, if any. The different charges applicable to the different classes
of shares of the Fund will affect the performance of those classes.
Each share of the Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of the Fund. However, due to
the differing expenses of the classes, dividends and liquidation proceeds on
Class A, C and Y shares will differ on Class A shares are likely to be lower
than for Class Y shares, which bear lower expenses.
VOTING RIGHTS
Shareholders of the Fund 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 Fund may elect all
the board members of the Trust. The shares of the Fund 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 distribution plan as it
relates to the class. As of the date of this Prospectus, Mitchell Hutchins and
PaineWebber own more than % of the outstanding shares of the Fund and may be
deemed controlling persons of the Fund until additional investors purchase
Fund shares.
SHAREHOLDER MEETINGS
The Fund does not intend to hold annual meetings.
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Prospectus Page 20
<PAGE>
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PaineWebber S&P 500 Index Fund
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
The Fund sends its shareholders audited annual and unaudited semiannual
reports, each of which includes a list of the investment securities held by
the Fund as of the end of the period covered by the report. The Statement of
Additional Information, which is incorporated by this reference into this
Prospectus, is available to shareholders upon request.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, located at One Heritage Drive, North
Quincy, Massachusetts 02171, serves as custodian and recordkeeping agent for
the Fund. PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the Fund's
transfer and dividend disbursing agent. It is located at 400 Bellevue Parkway,
Wilmington, DE 19809.
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PaineWebber S&P 500 Index Fund
Prospectus -- October 1, 1998
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.PAINEWEBBER BOND FUNDS .PAINEWEBBER STOCK FUNDS
High Income Fund Financial Services Growth Fund
Investment Grade Income Growth Fund
Fund Growth and Income Fund
Low Duration U.S.
Government Income Fund Mid Cap Fund
Small Cap Fund
Strategic Income Fund
U.S. Government Income S&P 500 Index Fund
Fund Utility Income Fund
.PAINEWEBBER TAX-FREE BOND .PAINEWEBBER GLOBAL FUNDS
FUNDS
Asia Pacific Growth Fund
California Tax-Free Emerging Markets Equity Fund
Income Fund Global Equity Fund
Municipal High Income Global Income Fund
Fund
National Tax-Free
Income Fund
New York Tax-Free
Income Fund
.PAINEWEBBER .PAINEWEBBER MONEY MARKET
ASSETALLOCATION FUNDS FUND
Balanced Fund .PAINEWEBBER FUNDS OF FUNDS
Tactical Allocation
Fund
Mitchell Hutchins Conservative Portfolio
Mitchell Hutchins Moderate Portfolio
Mitchell Hutchins Aggressive Portfolio
A prospectus containing more complete information for any of the above
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.
(C) 1998 PaineWebber Incorporated
<PAGE>
PAINEWEBBER S&P 500 INDEX FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber S&P 500 Index Fund ("Fund") is a diversified series of
PaineWebber Index Trust ("Trust"), an open-end management investment company
organized as Delaware business trust. The Fund seeks to replicate the total
return of the Standard & Poor's 500 Composite Price Index ("S&P 500 Index"),
before fees and expenses.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
is the investment adviser, administrator and distributor for the Fund. As
distributor, Mitchell Hutchins has appointed PaineWebber to serve as the
exclusive dealer for the sale of the Fund shares.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus dated October 1,
1998. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm. This Statement of Additional
Information is dated October 1, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations. Except as indicated
in the Prospectus or this Statement of Additional Information, there are no
policy limitations on the Fund's ability to use the investments or techniques
discussed in these documents.
MONEY MARKET INSTRUMENTS. Money market instruments in which the Fund may
invest include: U.S. Treasury bills and other obligations issued or guaranteed
as to interest and principal by the U.S. government, its agencies and
instrumentalities; obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) with total assets in excess of $1.5 billion
at the time of purchase; interest-bearing savings deposits in U.S. commercial
and savings banks with principal amounts not greater than are fully insured by
the Federal Deposit Insurance Corporation (the aggregate amount of these
deposits may not exceed 5% of the value of the Fund's assets); commercial
paper and other short-term corporate obligations; and variable and floating-
rate securities and repurchase agreements. In addition, the Fund may hold cash
and may invest in participation interests in the money market securities
mentioned above without limitation.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES. To the extent the
Fund holds U.S. dollar-denominated securities of foreign issuers, such
securities may not be registered with the Securities and Exchange Commission
("SEC"), nor are the issuers thereof subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Fund 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 Fund invests in securities of foreign issuers only if such securities
are traded in the U.S. securities markets directly or through American
Depository Receipts ("ADRs"). Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. For purposes of the
<PAGE>
Fund's investment policies, ADRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR evidencing ownership of
common stock will be treated as common stock.
Investment income and realized gains on certain foreign securities in which
the Fund may invest may be subject to foreign withholding or other taxes that
could reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount of
foreign taxes to which the Fund would be subject.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund purchases securities from banks or recognized securities dealers and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Fund maintains custody of the 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 the Fund upon acquisition is accrued as interest and included in its
net investment income. Repurchase agreements carry certain risks not
associated with direct investments in securities, including possible declines
in the market value of the underlying securities and delays and costs to a
Fund if the other party to a repurchase agreement becomes insolvent.
The Fund intends 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 of
trustees (sometimes referred to as the "board"). Mitchell Hutchins reviews and
monitors the creditworthiness of those institutions under the board's general
supervision.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, purchased over-the-counter
("OTC") options, repurchase agreements maturing in more than seven days and
restricted securities other than those Mitchell Hutchins has determined are
liquid pursuant to guidelines established by the board. The assets used as
cover for OTC options written by the Fund will be considered illiquid unless
the OTC options are sold to qualified dealers who agree that the 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. To the extent the Fund invests in illiquid securities, it may not
be able readily to liquidate these investments and may have to sell other
investments if necessary to raise cash to meet its obligations.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, the 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 the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
However, 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.
2
<PAGE>
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, 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 the 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.
The board has delegated the function of making day-to-day determinations of
liquidity to Mitchell Hutchins pursuant to guidelines approved by the board.
Mitchell Hutchins 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 monitors the liquidity of
restricted securities in the Fund's portfolio and reports periodically on such
decisions to the board.
LENDING OF PORTFOLIO SECURITIES. The 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 the Fund's custodian in an amount, marked to market
daily, at least equal to the market value of the securities loaned, plus
accrued interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. 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. The Fund will retain authority to terminate any loans at any time.
The Fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
cash held as collateral. The Fund will receive amounts equivalent to any
dividends, interest or other distributions on the securities loaned. The Fund
will regain record ownership of loaned securities to exercise beneficial
rights, such as voting and subscription rights, when regaining such rights is
considered to be in the Fund's interest.
Pursuant to procedures adopted by the board governing the Fund's securities
lending program, PaineWebber has been retained to serve as lending agent for
the Fund. The board also has authorized the Fund to pay fees (including fees
calculated as a percentage of invested cash collateral) to PaineWebber for
these services. The board periodically reviews all portfolio securities loan
transactions for which PaineWebber has acted as lending agent.
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.
SEGREGATED ACCOUNTS. When the 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 "Strategies Using Derivative
Instruments," segregated accounts may also be required in connection with
certain transactions involving options and futures contracts.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. 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
3
<PAGE>
based upon changes in the level of interest rates. Thus, fluctuation in the
value of the security from the time of the commitment date will affect the
Fund's net asset value. When the Fund agrees to purchase securities on a when-
issued or delayed delivery basis, its custodian segregates assets to cover the
amount of the commitment. See "Investment Policies and Restrictions--
Segregated Accounts." The 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 deems it advantageous to do so, which
may result in a gain or loss to the Fund.
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for the Fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the Fund or (b) 67%
or more of the Fund's shares present at a shareholders' meeting if more than
50% of the outstanding Fund shares are represented at the meeting in person or
by proxy. If a percentage restriction is adhered to at the time of an
investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or amount of total
assets will not be considered a violation of any of the following limitations.
The Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the Fund's total assets would be invested in securities of that issuer
or the Fund would own or hold more than 10% of the outstanding voting
securities of that issuer, except that up to 25% of the Fund's total assets
may be invested without regard to this limitation, and except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities or to securities issued by
other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental restriction: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the
securities having the same sponsor, and mortgage- and asset-backed
securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a
separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to investments in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities or to
municipal securities and provided that the Fund will invest 25% or more of
its total assets in securities of issuers in the same industry if necessary
to replicate the weighting of that particular industry in the S&P 500
Index.
(3) 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 Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund
may borrow up to an additional 5% of its total assets (not including the
amount borrowed) for temporary or emergency purposes.
(4) 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.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except
that the Fund may exercise rights under agreements relating to such
securities, including the right to enforce security interests and to hold
real estate acquired by reason of such enforcement until that real estate
can be liquidated in an orderly manner.
4
<PAGE>
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are non-
fundamental and may be changed by the vote of the board without shareholder
approval.
The Fund 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 Fund
has valued the securities and includes, among other things, repurchase
agreements maturing in more than seven days.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make
margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(5) purchase securities of other investment companies, except to the
extent permitted by the 1940 Act or under the terms of an exemptive order
granted by the 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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of derivative instruments ("Derivative Instruments"), including
certain options, futures contracts (sometimes referred to as "futures") and
options on futures contracts, to simulate full investment by the Fund in the
S&P 500 Index while retaining a cash balance for Fund management purposes,
such as to provide liquidity to meet anticipated shareholder sales of Fund
shares and for Fund operating expenses. As part of its use of Derivative
Instruments for the Fund's cash management purposes, Mitchell Hutchins may
attempt to reduce the risk of adverse price movements ("hedge") in the
securities in the S&P 500 Index while investing cash received from investor
purchases of Fund shares, to facilitate trading and selling securities to meet
shareholder redemptions. Mitchell Hutchins may also use Derivative Instruments
to reduce transaction costs for the Fund. The 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, the
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 Fund
are described below.
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
5
<PAGE>
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.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities, 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, 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.
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 partially or fully to offset
potential declines in the value of one or more investments held in the Fund's
portfolio. Thus, in a short hedge the 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, the 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, the Fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value
of the Fund security declines, the 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 the Fund intends to acquire. Thus, in a
long hedge, the 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, the 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, the Fund could exercise the call and thus limit
its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the 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 the 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.
Derivative Instruments also can be used to increase or reduce the Fund's
exposure to the stocks in the S&P 500 Index without buying or selling those
securities.
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, the Fund's
ability to use Derivative Instruments will be limited by tax considerations.
See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects 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 develops new techniques, as regulatory authorities broaden the range
of permitted transactions and as new options, futures contracts, or other
derivative contracts and techniques are developed. Mitchell Hutchins may
utilize these opportunities for the Fund to the extent that they are
consistent with the Fund's investment objective and permitted by its
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or this 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.
6
<PAGE>
SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) There might be imperfect 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.
(2) 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 the Fund entered
into a short hedge because Mitchell Hutchins 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, the Fund could suffer a loss. In
either such case, the Fund would have been in a better position had it not
hedged at all.
(3) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund
was unable to close out its positions in such Derivative Instruments, it
might be required to continue to maintain such assets or accounts or make
such payments until the positions expired or matured. These requirements
might impair the 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.
The Fund's ability to close out a position in a Derivative Instrument prior
to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of
a contra party to enter into a transaction closing out the position.
Therefore, there is no assurance that any position can be closed out at a
time and price that is favorable to the Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Fund to an
obligation to another party. The 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. The 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 the 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 Fund may purchase put and call options, and write (sell)
covered put or call options on securities on which it is permitted to invest
and indices of those securities. 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 Fund will be obligated to sell
7
<PAGE>
the security at less than its market value. Writing covered put options serves
as a limited long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security depreciates to a price lower than the
exercise price of the put option, it can be expected that the put option will
be exercised and the Fund will be obligated to purchase the security at more
than its market value. The securities or other assets used as cover for OTC
options written by the Fund would be considered illiquid to the extent
described under "Investment Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the Fund investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
Fund investment, the historical price volatility of the Fund investment and
general market conditions. Options normally have expiration dates of up to
nine months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the 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, the 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 the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Fund may purchase and write both exchange-traded and OTC options.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on
the counterparty to make or take delivery of the Fund investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss
of any premium paid by the Fund as well as the loss of any expected benefit of
the transaction.
Generally, the OTC debt options used by the Fund 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 Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends 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
Fund will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the 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 counterparty, the Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or
call option written by the Fund could cause material losses because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The use of options is governed by the
following guidelines, which can be changed by the board without shareholder
vote:
(1) The Fund may purchase a put or call option, including any straddle or
spread, only if the value of its premium, when aggregated with the premiums
on all other options held by the Fund, does not exceed 5% of its total
assets.
8
<PAGE>
(2) The aggregate value of securities underlying put options written by
the Fund determined as of the date the put options are written will not
exceed 50% of its net assets.
(3) The aggregate premiums paid on all options (including options on
securities, stock indices and options on futures contracts) purchased by
the Fund that are held at any time will not exceed 20% of its net assets.
FUTURES. The Fund may purchase and sell futures contracts that are related
to securities in which it is permitted to invest, such as securities index
futures contracts. The 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.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the 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 the
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility, the 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 the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the 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 the 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 Fund intends 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 the 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. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, the 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.
9
<PAGE>
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The use of futures
and related options is governed by the following guidelines, which can be
changed by the board without shareholder vote:
(1) To the extent the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed
5% of its net assets.
(2) The aggregate premiums paid on all options (including options on
securities, stock indices and options on futures contracts) purchased by
the Fund that are held at any time will not exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the Fund will not exceed 5% of its total
assets.
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 THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
Margo N. Alexander*; 51 Trustee and Mrs. Alexander is president,
President chief executive officer and a
director of Mitchell Hutchins
(since January 1995) and an ex-
ecutive vice president and a di-
rector of PaineWebber. Mrs. Al-
exander is president and a di-
rector or trustee of 31 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and principal
occupation since March 1995).
Mr. Armstrong was chairman of
the board, chief executive of-
ficer and co-owner of Adiron-
dack Beverages (producer and
distributor of soft drinks and
sparkling/still waters) (Octo-
ber 1993-March 1995). He was a
partner of the New England Con-
sulting Group (management con-
sulting firm) (December 1992-
September 1993). He was manag-
ing director of LVMH U.S. Cor-
poration (U.S. subsidiary of
the French luxury goods con-
glomerate, Louis Vuitton Moet
Hennessey Corporation) (1987-
1991) and chairman of its wine
and spirits subsidiary,
Schieffelin & Somerset Company
(1987-1991). Mr. Armstrong is a
director or trustee of 30 in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
E. Garrett Bewkes, Jr.*; Trustee and Mr. Bewkes is a director of
71 Chairman of the Paine Webber Group Inc. ("PW
Board of Trustees Group") (holding company of
PaineWebber and Mitchell
Hutchins). Prior to December
1995, he was a consultant to PW
Group. Prior to 1988, he was
chairman of the board, presi-
dent and chief executive offi-
cer of American Bakeries Compa-
ny. Mr. Bewkes is a director of
Interstate Bakeries Corporation
and NaPro BioTherapeutics, Inc.
Mr. Bewkes is a director of
trustee of 31 investment compa-
nies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Richard R. Burt; 50 Trustee Mr. Burt is chairman of IEP Ad-
1101 visors, Inc. (international in-
Connecticut Ave., N.W. vestments and consulting firm)
Washington, D.C. 20036 (since March 1994) and a part-
ner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co. (ag-
ricultural commodities), Hol-
linger International Co. (pub-
lishing), Homestake Mining
Corp., Powerhouse Technologies
Inc. and Wierton Steel Corp. He
was the chief negotiator in the
Strategic Arms Reduction Talks
with the former Soviet Union
(1989-1991) and the U.S. Ambas-
sador to the Federal Republic
of Germany (1985-1989). Mr.
Burt is a director or trustee
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
Mary C. Farrell*; 48 Trustee Ms. Farrell is a managing di-
rector, senior investment
strategist and member of the
Investment Policy Committee of
PaineWebber. Ms. Farrell joined
PaineWebber in 1982. She is a
member of the Financial Women's
Association and Women's Eco-
nomic Roundtable, and appears
as a regular panelist on Wall
$treet Week with Louis
Rukeyser. She also serves on
the Board of Overseers of New
York University's Stern School
of Business. Ms. Farrell is a
director or trustee of 30 in-
vestment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Pro-
Columbia University fessor of Management of the
101 Uris Hall Graduate School of Business,
New York, New York 10027 Columbia University. Prior to
1989, he was president of the
Illinois Institute of Technolo-
gy. Dean Feldberg is also a di-
rector of Primedia Inc., Feder-
ated Department Stores, Inc.
and Revlon, Inc. Dean Feldberg
is a director or trustee of 30
investment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
George W. Gowen; 68 Trustee Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner in
the law firm of Fryer, Ross &
Gowen. Mr. Gowen is a director
of Columbia Real Estate Invest-
ments, Inc. Mr. Gowen is a di-
rector or trustee of 30 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer
1445 Pennsylvania Capital Partners (merchant
Avenue, N.W. bank). From January 1992 to No-
Suite 350 vember 1992, he was campaign
Washington, D.C. 20004 manager of Bush-Quayle '92.
From 1990 to 1992, he was vice
chairman and, from 1989 to
1990, he was president of
Northwest Airlines Inc., NWA
Inc. (holding company of North-
west Airlines Inc.) and Wings
Holdings Inc. (holding company
of NWA Inc.). Prior to 1989, he
was employed by the Marriott
Corporation (hotels, restau-
rants, airline catering and
contract feeding), where he
most recently was an executive
vice president and president of
Marriott Hotels and Resorts.
Mr. Malek is also a director of
American Management Systems,
Inc. (management consulting and
computer-related services), Au-
tomatic Data Processing Inc.,
CB Commercial Group, Inc. (real
estate services), Choice Hotels
International (hotel and hotel
franchising), FPL Group, Inc.
(electric services), Manor
Care, Inc. (health care), and
Northwest Airlines Inc. Mr.
Malek is a director or trustee
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Carl W. Schafer; 61 Trustee Mr. Schafer is president of the
66 Witherspoon Street Atlantic Foundation (charitable
#1000 foundation supporting mainly
Princeton, NJ 08542 oceanographic exploration and
research). He is a director of
Base Ten Systems, Inc. (Soft-
ware), Roadway Express, Inc.
(trucking), The Guardian Group
of Mutual Funds, the Harding,
Loevnex Funds, Evans Systems,
Inc. (motor fuels, convenience
store and diversified company),
Electronic Clearing House, Inc.
(financial transactions
processing), Frontier Oil Cor-
poration and Nutraceutix, Inc.
(biotechnology). Prior to Janu-
ary 1993, Mr. Schafer was
chairman of the Investment Ad-
visory Committee of the Howard
Hughes Medical Institute. Mr.
Schafer is a director or
trustee of 30 investment compa-
nies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
T. Kirkham Barneby; 52 Vice President Mr. Barneby is a managing di-
rector and chief investment of-
ficer--quantitative investments
of Mitchell Hutchins. Prior to
September 1994, he was a senior
vice president at Vantage
Global Management. Prior to
June 1993, he was a senior vice
president at Mitchell Hutchins.
Mr. Barneby is a vice president
of six investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
John J. Lee; 29 Vice President and Mr. Lee is a vice president and
Assistant Treasurer a manager of the mutual fund
finance department of Mitchell
Hutchins. Prior to September
1997, he was an audit manager
in the financial services prac-
tice of Ernst & Young LLP. Mr.
Lee is a vice president and as-
sistant treasurer of 30 invest-
ment companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president
Assistant Treasurer and manager of the mutual fund
finance department of Mitchell
Hutchins. Ms. Moran is a vice
president and assistant trea-
surer of 31 investment compa-
nies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice
Secretary president and deputy general
counsel of Mitchell Hutchins.
Ms. O'Donnell is a vice presi-
dent and secretary of 30 in-
vestment companies and vice
president and assistant secre-
tary of one investment company
for which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Emil Polito; 37 Vice President Mr. Polito is a senior vice
president and director of oper-
ations and control for Mitchell
Hutchins. From March 1991 to
September 1993 he was director
of the Mutual Funds Sales Sup-
port and Service Center for
Mitchell Hutchins and
PaineWebber. Mr. Polito is a
vice president of 31 investment
companies for which Mitchell
Hutchins or PaineWebber serves
as investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing di-
47 rector and general counsel of
Mitchell Hutchins. Prior to May
1994, she was a partner in the
law firm of Arnold & Porter.
Ms. Schonfeld is a vice presi-
dent of 30 investment companies
and vice president and secre-
tary of one investment company
for which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice
Treasurer president and the director of
the mutual fund finance depart-
ment of Mitchell Hutchins. From
August 1992 to August 1994, he
was a vice president of Black-
Rock Financial Management L.P.
Prior to August 1992, he was an
audit manager with Ernst &
Young LLP. Mr. Schubert is a
vice president and treasurer of
31 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH THE BUSINESS EXPERIENCE; OTHER
NAME AND ADDRESS*; AGE TRUST DIRECTORSHIPS
---------------------- ----------------- --------------------------
<C> <C> <S>
Barney A. Taglialatela; Vice President and Mr. Taglialatela is a vice
37 Assistant Treasurer president and manager of the
mutual fund finance division of
Mitchell Hutchins. Prior to
February 1995, he was a manager
of the mutual fund finance di-
vision of Kidder Peabody Asset
Management Inc. Mr.
Taglialatela is a vice presi-
dent and assistant treasurer of
31 investment companies for
which Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice
Assistant Secretary president and associate general
counsel of Mitchell Hutchins.
Prior to May 1995, he was an
attorney in private practice.
Mr. Weller is a vice president
and assistant secretary of 30
investment companies for which
Mitchell Hutchins or
PaineWebber serves as invest-
ment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019. Mrs. Alexander, Mr.
Bewkes and Ms. Farrell are "interested persons" of the Trust as defined in
the 1940 Act by virtue of their positions with PW Group, PaineWebber and/or
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 meeting of a board
committee (other than committee meetings held on the same day as a board
meeting). The Trust has only one operating series and thus pays each such
trustee $1,000 annually, plus any additional amounts due for board or
committee meetings. Each chairman of the audit and contract review committees
of individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually from the relevant funds. All
trustees are reimbursed for any expenses incurred in attending meetings.
Trustees and officers own no outstanding shares of the Fund. Because
PaineWebber and Mitchell Hutchins perform substantially all the services
necessary for the operation of the Trust and the Fund, 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.
The table below shows the estimated compensation paid to each trustee during
the period ended May 31, 1998 and the compensation of those trustees from
other PaineWebber funds during the calendar year ended December 31, 1997.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM THE FUND
NAME OF PERSON, POSITION(1) FROM THE TRUST(2) COMPLEX(3)
- --------------------------- ----------------- -------------
<S> <C> <C>
Richard A. Armstrong, Trustee................... $94,885
Richard R. Burt, Trustee........................ 87,085
Meyer Feldberg, Trustee......................... 117,853
George W. Gowen, Trustee........................ 101,567
Frederic V. Malek, Trustee...................... 95,845
Carl W. Schafer, Trustee........................ 94,885
</TABLE>
- --------
(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) Represents total compensation paid to each board member during the initial
fiscal period ended May 31, 1998.
(3) Represents total compensation paid to each trustee during the calendar
year ended December 31, 1997; no fund within the fund complex has a
pension or retirement plan.
15
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES. As of , 1998, the records of the Trust
indicate that Paine Webber owned % of the Fund's shares and that Mitchell
Hutchins owned % of the Fund's shares. The Trust is not aware of any other
shareholder who is the beneficial owner of 5% or more of the Fund's shares
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator to the Fund pursuant to a contract (the "Advisory
Contract") with the Trust dated October 14, 1997. Under the Advisory Contract,
the Fund pays Mitchell Hutchins a fee, computed daily and paid monthly, at the
annual rate of 0.20% of average daily net assets.
During the period December 31, 1997 (commencement of operations) to May 31,
1998, Mitchell Hutchins earned advisory fees in the amount of $ ($ of
which was waived) from the Fund.
Under the terms of the Advisory Contract, the Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by the Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to trustees and officers who are not interested
persons (as defined in the 1940 Act) of the 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 Trust or Fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for the independent
trustees; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Fund; (15) fees,
voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of 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; (18) costs of mailing, stationery and
communications equipment; (19) expenses incident to any dividend, withdrawal
or redemption options; (20) charges and expenses of any outside pricing
service used to value portfolio securities; (21) interest on borrowings of the
Fund; and (22) fees or expenses related to license agreements with respect to
securities indices.
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 the Fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Mitchell Hutchins in the performance of its duties or from reckless
disregard of its duties and obligations thereunder. 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
Fund's outstanding voting securities on 60 days' written notice to Mitchell
Hutchins, or by Mitchell Hutchins on 60 days' written notice to the Fund.
16
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
August 31, 1998, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY $ MIL
------------------- ----------
<S> <C>
Domestic (excluding Money Market)................................. $
Global............................................................
Equity/Balanced...................................................
Fixed Income (excluding Money Market).............................
Taxable Fixed Income............................................
Tax-Free Fixed Income...........................................
Money Market Funds................................................
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must
be maintained at PaineWebber, personal trades in most securities require pre-
clearance and short-term trading and participation in initial public offerings
generally are prohibited. In addition, the code of ethics puts restrictions on
the timing of personal investing in relation to trades by PaineWebber Funds
and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of each
class of shares of the Fund under separate distribution contracts with the
Trust ("Distribution Contracts") that require Mitchell Hutchins to use its
best efforts, consistent with its other businesses, to sell shares of the
Fund. Shares of the Fund are offered continuously. Under exclusive dealer
agreements between Mitchell Hutchins and PaineWebber relating to each class of
shares ("Exclusive Dealer Agreements"), PaineWebber and its correspondent
firms sell the Fund's shares.
Under a plan of distribution pertaining to the Class A shares and Class C
shares adopted by the Trust in the manner prescribed under Rule 12b-1 under
the 1940 Act ("Class A Plan" and "Class C Plan," collectively, "Plans"), the
Fund pays Mitchell Hutchins a service fee, accrued daily and payable monthly,
at the annual rate of 0.25% of the average daily net assets of Class A and
Class C shares of the Fund. Under the Class C Plan, the Fund pays Mitchell
Hutchins a distribution fee, accrued daily and payable monthly at the annual
rate of 0.75% of the average daily net assets of the Class C shares. The Fund
pays Mitchell Hutchins no distribution fees with respect to its Class A
shares. There is no distribution plan with respect to Class Y shares and the
Fund pays no service or distribution fees with respect to its Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the 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 the Fund under
the Plan shall not be materially increased without the affirmative vote of the
holders of a majority of the outstanding shares of the relevant class and (4)
while the Plan remains in effect, the selection and nomination of 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 Plan to the board, Mitchell Hutchins
allocates expenses attributable to the sale of each class of the Fund's shares
to such class based on the ratio of sales of shares of such class to the sales
of all classes of shares. The fees paid by one class of the Fund's shares will
not be used to subsidize the sale of the other class of the Fund's shares.
17
<PAGE>
In approving the Fund's overall Flexible PricingSM system of distribution,
the board considered several factors, including that implementation of
Flexible Pricing would (1) enable investors to choose the purchasing option
best suited to their individual situation, thereby encouraging current
shareholders to make additional investments in the Fund and attracting new
investors and assets to the Fund to the benefit of the Fund and its
shareholders, (2) facilitate distribution of the Fund's shares and (3)
maintain the competitive position of the Fund in relation to other funds that
have implemented or are seeking to implement similar distribution
arrangements.
In approving the Class A Plan, the board considered all the features of the
distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell
Hutchins' belief that the initial sales charge combined with a service fee
would be attractive to PaineWebber investment executives and correspondent
firms, resulting in greater growth of the Fund than might otherwise be the
case, (3) the advantages to the shareholders of economies of scale resulting
from growth in the Fund's assets and potential continued growth, (4) the
services provided to the Fund and its shareholders by Mitchell Hutchins, (5)
the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class C Plan, the board considered all the features of the
distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from the Fund purchase payments and instead
having the entire amount of their purchase payments immediately invested in
Fund shares, (2) the advantage to investors in being free from contingent
deferred sales charges upon redemption for shares held more than one year and
paying for distribution on an ongoing basis, (3) Mitchell Hutchins' belief
that the ability of PaineWebber investment executives and correspondent firms
to receive sales compensation for their sales of Class C shares on an ongoing
basis, along with continuing service fees, while their customers invest their
entire purchase payments immediately in Class C shares and generally do not
face contingent deferred sales charges, would prove attractive to the
investment executives and correspondent firms, resulting in greater growth to
the Fund than might otherwise be the case, (4) the advantage to the
shareholders of economies of scale resulting from growth in the Fund's assets
and potential continued growth, (5) the services provided to the Fund and its
shareholders by Mitchell Hutchins, (6) the services provided by PaineWebber
pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins and (7)
Mitchell Hutchins' shareholder service- and distribution-related expenses and
costs. The board members also recognized that Mitchell Hutchins' willingness
to compensate PaineWebber and its investment executives without the
concomitant receipt by Mitchell Hutchins of initial sales charges or
contingent deferred sales charges upon redemption, was conditioned upon its
expectation of being compensated under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service and, as applicable, initial sales charge and distribution
fees. The board also considered the benefits that would accrue to Mitchell
Hutchins under the Plan in that Mitchell Hutchins would receive service and
advisory fees which are calculated based upon a percentage of the average net
assets of the Fund, which would increase if the Plan were successful and the
Fund attained and maintained significant asset levels.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins is
responsible for the execution of the Fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins generally seeks to obtain the best net results for the Fund,
taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. While Mitchell Hutchins
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 some equity
securities and most debt 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 Fund may invest in
securities traded in the OTC market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker. For the period
December 31, 1997 (commencement of operations) to May 31, 1998, the Fund paid
$ in brokerage commissions.
18
<PAGE>
The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through PaineWebber. The 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 Fund 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.
For the period December 31, 1997 (commencement of operations) to May 31, 1998,
the Fund paid $ in brokerage commissions to PaineWebber, which represented
% of the total brokerage commissions paid and % of the total dollar amount
of transactions involving the payment of brokerage commissions.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute its 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 Fund and subject to the review of the
board, Mitchell Hutchins may cause the Fund to purchase and sell portfolio
securities from and to dealers or through brokers who provide that Fund with
research, analysis, advice and similar services. In return for such services,
the Fund may pay to those brokers a higher commission than may be charged by
other brokers, provided that Mitchell Hutchins 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 the Fund and its
other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
it 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 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 may
engage in agency transactions in OTC equity 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 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 Fund effects securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts and, conversely,
research services furnished to Mitchell Hutchins by brokers or dealers in
connection with other funds or accounts that it advises may be used in
advising the Fund. 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.
Investment decisions for the 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 the 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 the
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 Fund is concerned, or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate in
volume transactions will be beneficial to the Fund.
19
<PAGE>
The Fund 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 the board pursuant to Rule 10f-3 under the
1940 Act. Among other things, these procedures require that the spread or
commission paid in connection with such a purchase be reasonable and fair, the
purchase be at not more than the public offering price prior to the end of the
first business day after the date of the public offering and that PaineWebber
or any affiliate thereof not participate in or benefit from the sale to the
Fund.
PORTFOLIO TURNOVER. The Fund's 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 the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. Mitchell
Hutchins estimates that the Fund's annual portfolio turnover rate will not
exceed 50% during its first fiscal year. For the period December 31, 1997
(commencement of operations) to May 31, 1998, the Fund's portfolio turnover
rate (annualized) was %.
If conditions exist that make cash payments undesirable, the Fund reserves
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Fund and valued in the same way as they would
be valued for purposes of computing the Fund's net asset value. If payment is
made in securities, a shareholder may incur brokerage expenses in converting
these securities into cash.
The Fund may suspend redemption privileges or postpone the date of payment
during any period (1) when the New York Stock Exchange ("NYSE") is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the Fund's portfolio at the time.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the
investor will purchase more shares when the Fund's net asset value per share
is low and fewer shares when the net asset value per share is high. Using this
technique, an investor's average purchase price per share over any given
period will be lower than if the investor purchased a fixed number of shares
on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, because the automatic investment plan
involves continuous investing regardless of price levels, an investor should
consider his or her financial ability to continue purchases through periods of
low price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance"
(a term that means the value of the Fund account at the time the investor
elects to participate in the systematic withdrawal plan) less aggregate
redemptions made other than pursuant to the systematic withdrawal plan is less
than $25,000 for Class A shareholders. Purchases of additional shares of the
Fund concurrent with withdrawals are ordinarily disadvantageous to
shareholders because of tax liabilities. On or about the 20th of each month
for monthly, quarterly, semiannual or annual plans, PaineWebber will arrange
for redemption by the Fund of sufficient Fund shares to provide the withdrawal
payments specified by participants in the Fund's systematic withdrawal plan.
The payments generally are mailed approximately five Business Days (defined
under "Valuation of Shares") after the redemption date. Withdrawal payments
should not be considered dividends, but redemption proceeds, with the tax
consequences described under "Dividends & Taxes" in the Prospectus. If
periodic withdrawals continually exceed reinvested dividends and other
distributions, a shareholder's investment may be correspondingly reduced. A
shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. ("Transfer Agent"). Instructions to participate in the plan, change
the withdrawal amount or terminate participation in the plan will not be
effective until five days after written instructions with signatures
guaranteed
20
<PAGE>
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 of the Fund may reinstate
their account without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the redemption
proceeds are reinvested, if the reinstatement privilege is exercised within 30
days after redemption, and an adjustment will be made to the shareholder's tax
basis for the shares acquired pursuant to the reinstatement privilege. Gain or
loss on a redemption also will be adjusted for federal income tax purposes by
the amount of any sales charge paid on Class A shares, under the circumstances
and to the extent described in "Dividends & Taxes" in the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA)(R)
Shares of PaineWebber mutual funds, including the Fund (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 continually to 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, deemphasizing 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.
21
<PAGE>
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:
. 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;
. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
. 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;
. 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;
. 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;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
. 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
. 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.
VALUATION OF SHARES
The Fund determines its net asset value per share separately for each class
of shares as of the close of regular trading (currently 4:00 p.m., Eastern
time) on the NYSE on each Business Day, which is defined as each Monday
through Friday when the NYSE is open. Currently the NYSE is closed on the
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Securities that are listed on stock exchanges are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day,
at the last available bid price. In cases where securities are traded on more
than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in
the OTC market and listed on the Nasdaq Stock Market ("Nasdaq") are valued at
the last trade price on Nasdaq at 4:00 p.m., Eastern time; other OTC
securities are valued at the last bid price available prior to valuation
(other than short-term investments that mature in 60 days or less which are
valued at amortized cost, unless the board determines that this does not
represent fair value). Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
or under the direction of the board.
22
<PAGE>
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is
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 the Fund's Performance Advertisements are calculated
according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of
a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value, for Class A shares,
the maximum 2.5% sales charge is deducted from the initial $1,000 payment and,
for Class C shares, the applicable contingent deferred sales charge imposed on
a redemption of 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 Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The Fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in Fund
shares and assuming the reinvestment of all dividends and other distributions.
The rate of return is determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the initial
value. Neither initial nor contingent deferred sales charges are taken into
account in calculating Non-Standardized Return; the inclusion of those charges
would reduce the return.
The following table shows performance information for the Fund's Class Y
shares outstanding for the period indicated.
<TABLE>
<CAPTION>
CLASS
Y
-----
<S> <C>
Inception* to May 31, 1998:
Standardized Return.....................................................
Non-Standardized Return.................................................
</TABLE>
- --------
* The inception date for Class Y shares was December 31, 1997. There were no
Class A or C shares outstanding as of May 31, 1998.
OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
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 S&P 500 Index, the
Dow Jones Industrial Average, the International Finance Corporation Global
Total Return Index, the Nasdaq Composite Index, the Russell 2000 Index, the
Wilshire 5000 Index, the Lehman Bond Index, the Lehman Brothers 20+ Year
Treasury Bond Index, the Lehman Brothers Government/Corporate Bond Index,
other similar Lehman Brothers indices or components thereof, 30-year and 10-
year U.S. Treasury bonds, the Morgan Stanley Capital International Perspective
Indices, the Morgan Stanley Capital International Energy Sources Index, the
Standard & Poor's Oil Composite Index, the Morgan Stanley
23
<PAGE>
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 Fund 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
Fund 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 Fund 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 the Fund investment are
reinvested in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(R) Money Markets. In comparing the
Fund's 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 Fund are not insured or guaranteed by
the U.S. government and returns and net asset values will fluctuate. The debt
securities held by the Fund may have longer maturities than most CDs and may
reflect interest rate fluctuations for longer term debt securities. An
investment in the Fund involves greater risks than an investment in either a
money market fund or a CD.
The Fund may also compare its performance to general trends in the stock and
bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.*
LOGO
- --------
* Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook(TM) Ibbotson
Assoc., Chi., (annual updates work by Roger G. Ibbotson & Rex A.
Sinquefield).
The chart is shown for illustrative purposes only and does not represent the
Fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant, and
24
<PAGE>
negative returns have been experienced in certain markets from time to time.
Stocks are measured by the S&P 500 Index, an unmanaged weighted index
comprising 500 widely held common stocks and varying in composition. Unlike
investors in bonds and U.S. Treasury bills, common stock investors do not
receive fixed income payments and are not entitled to repayment of principal.
These differences contribute to investment risk. Returns shown for long-term
government bonds are based on U.S. Treasury bonds with 20-year maturities.
Inflation is measured by the Consumer Price Index. The indexes are unmanaged
and are not available for investment.
Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1925 to 1997, stocks beat all
other traditional asset classes. A $10,000 investment in the S&P 500 grew to
$18,272,762, significantly more than any other investment.
TAXES
To qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code, the Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income and net short-term capital gain)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of securities, or other income (including gains from options and futures)
derived with respect to its business of investing in securities ("Income
Requirement"); at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and
cash items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets
and that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable income
(whether paid in cash or additional shares) may be eligible for the dividends-
received deduction allowed to corporations. The eligible portion may not
exceed the aggregate dividends received by the Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
25
<PAGE>
The use of hedging strategies using Derivative Instruments, such as writing
(selling) and purchasing options and futures contracts, involves complex rules
that will determine for income tax purposes the amount, character and timing
of recognition of the gains and losses the Fund realizes in connection
therewith. Gains from options and futures contracts derived by the Fund with
respect to its business of investing in securities will qualify as permissible
income under the Income Requirement.
OTHER INFORMATION
The Trust is a Delaware business trust. The Trust has authority to issue an
unlimited number of shares of beneficial interest. The 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, and the
costs of doing so will be borne by the Trust. The Trust currently consist of
one operating series with three 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 the Fund
could, under certain conflicts of laws jurisprudence in various states, be
held personally liable for the obligations of the Trust or the Fund. However,
the Trust's trust instrument disclaims shareholder liability for acts or
obligations of the Trust or its series (the Fund) 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 the Fund's property for all losses and
expenses of any series shareholder held personally liable for the obligations
of the Fund. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
itself would be unable to meet its obligations, a possibility 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 the Fund, the shareholder paying such liability will be
entitled to reimbursement from the general assets of the Fund. The trustees
intend to conduct the operations of the Fund in such a way as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Fund.
Shareholders of the Fund are entitled to participate equally in the
dividends and other distributions from, and the proceeds of any liquidation
of, the Fund, 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.
CLASS-SPECIFIC EXPENSES. The Fund may determine to allocate certain of its
expenses to the specific classes of the Fund's shares to which those expenses
are attributable.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the period ended May 31, 1998
is a separate document supplied with this Statement of Additional Information,
and the financial statements, accompanying notes and report of independent
auditors appearing therein are incorporated herein by this reference.
26
<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 FUND OR ITS DISTRIBUTOR. THE PROSPECTUS
AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
-----------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Policies And Restrictions........................................ 1
Strategies Using Derivative Instruments..................................... 5
Trustees And Officers; Principal Holders Of Securities...................... 10
Investment Advisory And Distribution Arrangements........................... 16
Portfolio Transactions...................................................... 18
Redemption Information And Other Services...................................
Valuation Of Shares......................................................... 22
Performance Information..................................................... 23
Taxes....................................................................... 25
Other Information........................................................... 26
Financial Statements........................................................ 26
</TABLE>
(C)1998 PaineWebber Incorporated
PAINEWEBBER
S&P 500 INDEX FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
- --------------------------------------------------------------------------------
LOGO
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
--------
(1) Trust Instrument 1/
-
(2) By-Laws 1/
-
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
-
(4) Investment Advisory and Administration Contract (to be filed)
(5) (a) Distribution Contract (Class A Shares) (to be filed)
(b) Distribution Contract (Class C Shares) (to be filed)
(c) Distribution Contract (Class Y Shares) (to be filed)
(d) Exclusive Dealer Agreement (Class A Shares) (to be filed)
(e) Exclusive Dealer Agreement (Class C Shares) (to be filed)
(f) Exclusive Dealer Agreement (Class Y Shares) (to be filed)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (to be filed)
(8) Form of Transfer Agency Agreement (to be filed)
(9) Opinion and consent of counsel (to be filed)
(10) Auditors' consent (to be filed)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent 3/
-
(13) (a) Rule 12b-1 Plan of Distribution with respect to Class A Shares
(to be filed)
(b) Rule 12b-1 Plan of Distribution with respect to Class C Shares
(to be filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan Pursuant to Rule 18f-3 (to be filed)
- ----------------------------
1/ Incorporated by reference from Registrant's initial Registration Statement,
- -
SEC File No. 333-27917, filed May 28, 1997.
2/ 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.
3/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 333-27917, filed October 17, 1997.
C-1
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
PaineWebber Incorporated ("PaineWebber"), a Delaware corporation,
owned approximately 80% of the outstanding securities of PaineWebber S&P 500
Index Fund as of May 15, 1997. PaineWebber is a wholly owned subsidiary of
PaineWebber Group Inc., a publicly owned financial services holding company.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), the investment
adviser and administrator of the Trust, is a wholly owned subsidiary of
PaineWebber.
Item 25. 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.
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
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
C-2
<PAGE>
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 26. 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 27. Principal Underwriters
----------------------
a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
b) Mitchell Hutchins is the Registrant's principal underwriter.
PaineWebber acts as exclusive dealer of the Registrant's shares. The directors
and officers of Mitchell Hutchins, their principal business addresses, and their
positions and offices with Mitchell Hutchins are identified in its Form ADV, as
filed with the Securities and Exchange Commission (registration number 801-
13219). The directors and officers of PaineWebber, their principal business
addresses, and their positions and offices with PaineWebber are identified in
its Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-7163). The foregoing information is hereby incorporated herein by
reference. The information set forth below is furnished for those directors and
officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant. Unless otherwise indicated, the principal business
address of each person named is 1285 Avenue of the Americas, New York, NY 10019.
C-3
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices With Positions and Offices With Underwriter or
Name Registrant Exclusive Dealer
- ---- ---------- ----------------
<S> <C> <C>
Margo Alexander President and Trustee Director, President and Chief Executive
Officer of Mitchell Hutchins and Executive
Vice President of PaineWebber
Mary C. Farrell Trustee Managing Director, Senior Investment
Strategist and member of Investment
Policy Committee of PaineWebber
T. Kirkham Barneby Vice President Managing Director, Chief Investment
Officer-Quantitative Investments of
Mitchell Hutchins
John J. Lee Vice President and Assistant Vice President of Mitchell Hutchins and a
Treasurer Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Ann E. Moran Vice President and Assistant Vice President of Mitchell Hutchins and a
Treasurer Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Dianne E. O'Donnell Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Emil Polito Vice President Senior Vice President and Director of
Operations and Control of Mitchell
Hutchins
Victoria E. Schonfeld Vice President Senior Director and General Counsel of
Mitchell Hutchins
Paul H. Schubert Vice President and Treasurer Senior Vice President and Director of the
Mutual Fund Finance Department of
Mitchell Hutchins
Barney A. Taglialatela Vice President and Assistant Vice President and a Manager of the Mutual
Treasurer Fund Finance Department of Mitchell
Hutchins
Keith A. Weller Vice President and Assistant First Vice President and Associate General
Secretary Counsel of Mitchell Hutchins
</TABLE>
c) None
Item 28. 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 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
None.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to its 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 30th day of July, 1998.
PAINEWEBBER INDEX TRUST
By: /s/ Dianne E. O'Donnell
-----------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee July 30, 1998
- --------------------------------------------
Margo N. Alexander * (Chief Executive Officer)
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman July 30, 1998
- --------------------------------------------
E. Garrett Bewkes, Jr. * of the Board of Trustees
/s/ Richard Q. Armstrong Trustee July 30, 1998
- --------------------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee July 30, 1998
- --------------------------------------------
Richard R. Burt *
/s/ Mary C. Farrell Trustee July 30, 1998
- --------------------------------------------
Mary C. Farrell *
/s/ Meyer Feldberg Trustee July 30, 1998
- --------------------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee July 30, 1998
- --------------------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee July 30, 1998
- --------------------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee July 30, 1998
- --------------------------------------------
Carl W. Schafer *
/s/ Paul H. Schubert Vice President and Treasurer (Chief July 30, 1998
- --------------------------------------------
Paul H. Schubert Financial and Accounting Officer)
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney dated
October 8, 1997 and incorporated by reference from Pre-Effective Amendment
No. 1 to the registration statement of PaineWebber Index Trust, SEC File
333-27917, filed October 17, 1997.
<PAGE>
PAINEWEBBER INDEX TRUST
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
(1) Trust Instrument 1/
-
(2) By-Laws 1/
-
(3) Instruments defining the rights of holders of Registrant's shares of
beneficial interest 2/
-
(4) Investment Advisory and Administration Contract (to be filed)
(5) (a) Distribution Contract (Class A Shares ) (to be filed)
(b) Distribution Contract (Class C Shares ) (to be filed)
(c) Distribution Contract (Class Y Shares) (to be filed)
(d) Exclusive Dealer Agreement (Class A Shares) (to be filed)
(e) Exclusive Dealer Agreement (Class C Shares) (to be filed)
(f) Exclusive Dealer Agreement (Class Y Shares) (to be filed)
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement (to be filed)
(8) Form of Transfer Agency Agreement (to be filed)
(9) Opinion and consent of counsel (to be filed)
(10) Auditors' consent (to be filed)
(11) Financial Statements omitted from Part B - none
(12) Letter of investment intent 3/
-
(13) (a) Rule 12b-1 Plan of Distribution with respect to Class A Shares (to
be filed)
(b) Rule 12b-1 Plan of Distribution with respect to Class C Shares (to be
filed)
(14) and
(27) Financial Data Schedule (to be filed)
(15) Plan Pursuant to Rule 18f-3 (to be filed)
______________________________
1/ Incorporated by reference from Registrant's initial Registration Statement,
- -
SEC File No. 333-27917, filed May 28, 1997.
2/ 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.
3/ Incorporated by reference from Pre-Effective Amendment No. 1 to the
- -
Registration Statement, SEC File No. 333-27917, filed October 17, 1997.
<PAGE>
KIRKPATRICK & LOCKHART LLP
2ND FLOOR
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000
FACSIMILE 202-778-9100
WWW.KL.COM
July 31, 1998
VIA EDGAR
- ---------
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: PaineWebber Index Trust
Post-Effective Amendment No. 1
File Nos. 333-27917 and 811-8229
--------------------------------
Dear Sir or Madam:
Transmitted herewith for filing pursuant to the Securities Act of 1933, as
amended ("1933 Act"), and Rule 485(a) of Regulation C thereunder, and pursuant
to the Investment Company Act of 1940, as amended ("1940 Act"), and the
regulations thereunder, is Post-Effective Amendment No. 1 ("Amendment") to the
currently effective registration statement on Form N-1A of PaineWebber Index
Trust ("Trust"). This transmission includes a conformed signature page, the
manually signed original of which is maintained at the offices of the Trust.
The primary purpose of this filing is to include disclosure about two new
classes of shares for the Trust's initial series, PaineWebber S&P 500 Index Fund
("Fund"). The Fund expects to offer three classes of shares Class A shares,
Class C shares and Class Y shares. Only the Class Y shares were included in the
Trust's currently effective registration statement on Form N-1A. The Class A
shares and Class C shares described in the Amendment are new classes of shares
for the Fund. (The currently effective registration statement also offers Class
X shares of the Fund but this offering will be discontinued when the Amendment
becomes effective.)
As described in the Amendment, Class A shares are sold with a front-end
sales charge and are subject to a service fee at the annual rate of 0.25% of
average daily net assets represented by the Class A shares. Investors who
purchase $1 million or more of Class A shares do not pay any front-end sales
charge but are subject to a contingent deferred sales charge if they redeem the
shares within one year after purchase. Class C shares are sold at net asset
value and are subject to a service fee at the annual rate of 0.25% and a
distribution fee at the annual rate of 0.75% of average daily net assets
represented by the Class C shares. Investors who redeem Class C shares within
one
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Securities and Exchange Commission
July 31, 1998
Page 2
year after purchase pay a contingent deferred sales charge of 1.00%. Class Y
shares are sold to limited groups of investors at net asset value and are
subject to no front-end sales charges, contingent deferred sales charges,
service fees or distribution fees.
The disclosure included in the Amendment concerning the Class A, Class C
and Class Y shares of the Fund is substantially identical to the disclosure
concerning Class A, Class C and Class Y shares offered by other PaineWebber
funds that participate in the Flexible Pricing SystemSM. We refer you
specifically to the prospectus and statement of additional information for
PaineWebber Global Income Fund, a series of PaineWebber Investment Series (File
Nos 33-11025 and 811-5259), which filed a post-effective amendment under Rule
485(a) to update its joint prospectus and SAI on December 31, 1997 (Post-
Effective Amendment No. 36, EDGAR Accession No. 0000889812-97-002767). That
post-effective amendment, together with a subsequent post-effective amendment
filed under Rule 485(b), became effective automatically on March 1, 1998.
Because the Trust has conformed those portions of its prospectus and SAI
that relate to the Class A, Class C and Class Y shares to the corresponding
disclosure contained in the prospectus and SAI of PaineWebber Global Income
Fund, we believe that pursuant to the Guidelines published in 1933 Act Release
No. 6510 (February 15, 1984), a selective review is appropriate. Other than the
disclosure concerning the new classes of shares, the Amendment contains no
changes that could not be filed in an amendment pursuant to Rule 485(b) under
the 1933 Act.
On or before the effective date of the Amendment, the Trust expects to file
a post-effective amendment pursuant to Rule 485(b) to include updated financial
information for the Fund's initial fiscal period ended May 31, 1998, to file the
consent of its independent auditors and to file all exhibits not previously
filed.
If you have any questions or comments concerning the foregoing, please do
not hesitate to contact me at (202) 778-9090 or Ben Haskin at (202) 778-9369.
Very truly yours,
/s/ Elinor W. Gammon
Elinor W. Gammon
Enclosures
