PAINEWEBBER ENHANCED S&P 500 FUND
PAINEWEBBER ENHANCED NASDAQ-100 FUND
51 West 52nd Street
New York, New York 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Enhanced S&P 500 Fund is a diversified series of Mitchell
Hutchins Securities Trust ("Trust") and PaineWebber Enhanced Nasdaq-100 Fund is
a non-diversified series of the Trust. The Trust is a professionally managed,
open-end management investment company organized as a Delaware business trust.
The investment adviser, administrator and distributor for each fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the funds, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares. DSI International
Management, Inc. ("DSI" or "sub-adviser") serves as sub-adviser for each fund.
This SAI is not a prospectus and should be read only in conjunction with
each fund's current Prospectus, dated March 8, 2000. A copy of the Prospectus
may be obtained by calling any PaineWebber Financial Advisor or correspondent
firm or by calling toll-free 1-800-647-1568. This SAI is dated March 8, 2000.
TABLE OF CONTENTS
Page
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The Funds and Their Investment Policies............................ 2
The Funds' Investments, Related Risks and Limitations.............. 3
Strategies Using Derivative Instruments............................ 9
Organization; Trustees and Officers; Principal Holders and
Management Ownership of Securities.............................. 15
Investment Advisory, Administration and Distribution Arrangements.. 21
Portfolio Transactions............................................. 25
Reduced Sales Charges, Additional Exchange and Redemption
Information and Other Services.................................. 27
Conversion of Class B Shares....................................... 32
Valuation of Shares................................................ 32
Performance Information............................................ 33
Taxes.............................................................. 35
Other Information.................................................. 37
Financial Statements............................................... 39
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THE FUNDS AND THEIR INVESTMENT POLICIES
Neither fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
Enhanced S&P 500 Fund has an investment objective of higher total return
over the long term than the S&P 500 Index. The fund seeks to achieve its
objective by investing primarily in a selection of common stocks that are
included in the S&P 500 Index and weights its holdings of individual stocks
based on its sub-adviser's proprietary enhanced S&P 500 strategy. The fund
expects to invest in approximately 250 to 400 stocks. Relative to the stock
weightings in the S&P 500 Index, the fund overweights stocks that the model
ranks positively and underweights stocks that the model ranks negatively.
Generally, the fund gives stocks with a neutral ranking the same weight as in
the Index.
The fund seeks to control the risk of its portfolio by maintaining an
overall close correlation of at least 95% between its performance and the
performance of the S&P 500 Index over time, with a relatively low tracking
error. To maintain this close correlation, the fund gives each stock in its
portfolio a weighting that is close to the S&P 500 Index weighting and, if
necessary, readjusts the weighting when it rebalances the portfolio. The fund
also considers relative industry sector weighting and market capitalization.
DSI monitors the fund's performance relative to the S&P 500 Index at least
weekly. At least monthly, DSI reviews the fund's stock holdings and rebalances
the fund's portfolio by increasing the weightings of the stocks that are more
highly ranked by its model and reducing the weightings of the lower ranked
stocks. If appropriate, DSI also buys or sells stocks for the fund to reflect
the revised rankings.
Under normal circumstances, the fund invests at least 65% of its total
assets in common stocks that are included in the S&P 500 Index and usually
invests a higher percentage of its total assets in these securities. For
liquidity and cash management purposes, the fund may invest up to 35% of its
total assets in short-term investment grade bonds and money market instruments,
although it expects these investments usually to represent a much smaller
portion of its total assets. The fund may invest in U.S. dollar-denominated
foreign securities that are included in the S&P 500 Index and traded on U.S.
exchanges or in the U.S. over-the-counter market.
The fund may invest up to 15% of its net assets in illiquid securities. It
may purchase securities on a when-issued basis and may purchase or sell
securities for delayed delivery. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its assets. The fund may borrow money for temporary or emergency purposes in
an amount up to 33 1/3 % of its total assets, including reverse repurchase
agreements. The fund also may invest in securities of other investment companies
and may sell securities short "against the box."
Enhanced Nasdaq-100 Fund has an investment objective of higher total
return over the long term than the Nasdaq-100 Index. The fund seeks to achieve
its objective by investing primarily in the common stocks that are included in
the Nasdaq-100 Index and weighting its holdings of individual stocks based on
its sub-adviser's proprietary enhanced Nasdaq-100 strategy. The fund expects to
invest in a majority of the stocks in the Nasdaq-100 Index. Relative to the
stock weightings in the Nasdaq-100 Index, the fund overweights stocks that the
model ranks positively and underweights stocks that the model ranks negatively.
Generally, the fund gives stocks with a neutral ranking the same weight as in
the Index.
The fund seeks to control the risk of its portfolio by maintaining a
general correlation of at least 90% between its performance and the performance
of the Nasdaq-100 Index over time, with a relatively low tracking error. To
maintain this general correlation, the fund gives each stock in its portfolio a
weighting that is close to the Nasdaq-100 Index weighting and, if necessary,
readjusts the weighting when it rebalances the portfolio. The fund also
considers relative industry sector weighting and market capitalization.
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DSI monitors the fund's performance relative to the Nasdaq-100 Index at
least weekly. At least monthly, DSI reviews the fund's stock holdings and
rebalances the fund's portfolio by increasing the weightings of the stocks that
are more highly ranked by its model and reducing the weightings of the lower
ranked stocks. If appropriate, DSI also buys or sells stocks for the fund to
reflect the revised rankings. If the Nasdaq-100 Index concentrates in a
particular industry sector, the fund also will concentrate its assets in that
sector. If the Nasdaq-100 Index ceases to concentrate in a particular industry
sector, DSI would rebalance the fund's assets so that it also would cease to
concentrate in that sector. The fund also expects to invest more than 5% of its
total assets in the stocks of specific companies as needed generally to follow
the weightings of those stocks in the Nasdaq-100 Index. The fund would not do
so, however, if the investment would cause it to fail to qualify as a regulated
investment company under the Internal Revenue Code.
Under normal circumstances, the fund invests at least 65% of its total
assets in common stocks that are included in the Nasdaq-100 Index and usually
invests a higher percentage of its total assets in these securities. For
liquidity and cash management purposes, the fund may invest up to 35% of its
total assets in short-term investment grade bonds and money market instruments,
although it expects these investments usually to represent a much smaller
portion of its total assets. The fund may invest in U.S. dollar-denominated
foreign securities that are included in the Nasdaq-100 Index and traded on U.S.
exchanges or in the U.S. over-the-counter market.
The fund may invest up to 15% of its net assets in illiquid securities. It
may purchase securities on a when-issued basis and may purchase or sell
securities for delayed delivery. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its assets. The fund may borrow money for temporary or emergency purposes in
an amount up to 33 1/3% of its total assets, including reverse repurchase
agreements. The fund also may invest in securities of other investment companies
and may sell securities short "against the box."
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus and
above concerning the funds' investments, related risks and limitations. Except
as otherwise indicated in the Prospectus or this SAI, the funds have established
no policy limitations on their ability to use the investments or techniques
discussed in these documents.
Equity Securities. Equity securities include common stocks, most preferred
stocks and securities that are convertible into them, including common stock
purchase warrants and rights, equity interests in trusts, partnerships, joint
ventures or similar enterprises and depositary receipts. Common stocks, the most
familiar type, represent an equity (ownership) interest in a corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds are fixed and variable rate debt obligations, which may include
debentures, notes and similar securities, that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Preferred stock also may be converted into or exchanged for common stock.
Depositary receipts typically are issued by banks or trust companies and
evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment.
Investing in Foreign Securities. A fund may invest in U.S.
dollar-denominated equity securities of foreign issuers that are traded on
recognized U.S. exchanges or in the U.S. over-the-counter market. Securities of
foreign issuers may not be registered with the Securities and Exchange
Commission ("SEC"), and the issuers thereof may not be subject to its reporting
requirements. Accordingly, there may be less publicly available information
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concerning foreign issuers of securities held by a 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.
A fund may invest in foreign securities by purchasing American Depositary
Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. They generally are in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets. For purposes of each fund's investment policies, ADRs
are deemed to have the same classification as the underlying securities they
represent. Thus, an ADR representing ownership of common stock will be treated
as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income on certain foreign securities in which the funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the funds would be subject.
Illiquid Securities. The term "illiquid securities" means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which a fund has valued the securities and includes,
among other things, purchased over-the-counter options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins or the sub-adviser has determined are liquid pursuant to
guidelines established by the Trust's board. The assets used as cover for
over-the-counter options written by a fund will be considered illiquid unless
the over-the-counter options are sold to qualified dealers who agree that the
fund may repurchase any over-the-counter options it writes at a maximum price to
be calculated by a formula set forth in the option agreements. The cover for an
over-the-counter option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. A fund may not be able to readily
liquidate illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations. The lack of a liquid secondary
market for illiquid securities may make it more difficult for a fund to assign a
value to those securities for purposes of valuing its portfolio and calculating
its net asset value.
Restricted securities are not registered under the Securities Act of 1933,
as amended ("Securities Act"), and may be sold only in privately negotiated or
other exempted transactions or after a Securities Act registration statement has
become effective. Where registration is required, a fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time a fund may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a fund might obtain a less
favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large institutional
market has developed for many U.S. and foreign securities that are not
registered under the Securities Act. Institutional investors generally will not
seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A under the Securities Act, which establishes a "safe harbor"
from the registration requirements of that Act for resales of certain securities
to qualified institutional buyers. Such markets include automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
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of Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
a fund, however, could affect adversely the marketability of such portfolio
securities, and a 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 and the sub-adviser pursuant to guidelines
approved by the board. Mitchell Hutchins and the sub-adviser take into account a
number of factors in reaching liquidity decisions, including (1) the frequency
of trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Mitchell
Hutchins and the sub-adviser monitor the liquidity of restricted securities in
each fund's portfolio and report periodically on such decisions to the board.
Mitchell Hutchins and the sub-adviser also monitor each fund's overall
holdings of illiquid securities. If a fund's holdings of illiquid securities
comes to exceed its limitation on investments in illiquid securities for any
reason, such as a security ceasing to qualify as liquid, changes in relative
market values of portfolio securities or shareholder redemptions, Mitchell
Hutchins and the sub-adviser will consider what action would be in the best
interests of the fund and its shareholders. Such action may include engaging in
an orderly disposition of securities to reduce the fund's holdings of illiquid
securities. However, a fund is not required immediately to dispose of illiquid
securities under the circumstances and Mitchell Hutchins and the sub-adviser,
with the concurrence of the fund's board, may determine that it is in the best
interests of the fund and its shareholders to continue to hold the illiquid
securities.
Money Market Instruments. Money market instruments in which a 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); interest-bearing savings deposits in U.S. commercial
banks and savings associations; commercial paper and other short-term corporate
obligations; and variable- and floating-rate securities and repurchase
agreements. In addition, a fund may hold cash and may invest in participation
interests in the money market securities mentioned above to the extent that it
is permitted to invest in money market instruments.
U.S. Government Securities. Government securities in which a fund may
invest include direct obligations of the U.S. Treasury and obligations issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities
(collectively, "U.S. government securities"). Direct obligations of the U.S.
Treasury include a variety of securities that differ in their interest rates,
maturities and dates of issuance. Among the U.S. government securities that may
be held by a fund are instruments that are supported by the full faith and
credit of the United States and securities that are supported primarily or
solely by the creditworthiness of the government-related issuer.
Repurchase Agreements. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
A fund maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special
"tri-party" custodian or sub-custodian that maintains separate accounts for both
the fund and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by a fund upon acquisition is accrued as interest and
included in its net investment income. Each fund intends to enter into
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repurchase agreements only with counterparties in transactions believed by
Mitchell Hutchins to present minimum credit risks.
Reverse Repurchase Agreements. Reverse repurchase agreements involve the
sale of securities held by a fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and may
be entered into only for temporary purposes. While a reverse repurchase
agreement is outstanding, a fund will maintain, in a segregated account with its
custodian, cash or liquid securities, marked to market daily, in an amount at
least equal to its obligations under the reverse repurchase agreement. See "The
Funds' Investments, Related Risks and Limitations -- Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a fund might be unable to deliver them when the fund seeks to
repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or trustee or receiver may
receive an extension of time to determine whether to enforce a fund's obligation
to repurchase the securities, and the fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Lending of Portfolio Securities. Each fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables a fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of a fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. Each fund may reinvest any cash collateral in money market
investments or other short-term liquid investments, including other investment
companies. A fund also may reinvest cash collateral in private investment
vehicles similar to money market funds, including one managed by Mitchell
Hutchins. In determining whether to lend securities to a particular
broker-dealer or institutional investor, Mitchell Hutchins will consider, and
during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each fund will
retain authority to terminate any of its loans at any time. Each fund may pay
reasonable fees in connection with a loan and may pay the borrower or placing
broker a negotiated portion of the interest earned on the reinvestment of cash
held as collateral. A fund will receive amounts equivalent to any dividends,
interest or other distributions on the securities loaned. A 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 that fund's interest.
Pursuant to procedures adopted by the board governing each fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each fund. The board also has authorized the payment of 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 acted as lending agent.
PaineWebber also has been approved as a borrower under each fund's securities
lending program.
Short Sales "Against the Box." Each fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a fund, and a fund is
obligated to replace the securities borrowed at a date in the future. When a
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, a fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. Each fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
A fund might make a short sale "against the box" to hedge against market
risks when the sub-adviser believes that the price of a security may decline,
thereby causing a decline in the value of a security owned by the fund or a
security convertible into or exchangeable for a security owned by the fund. In
such case, any loss in a fund's long position after the short sale should be
reduced by a gain in the short position. Conversely, any gain in the long
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position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of securities a fund owns,
either directly or indirectly, and in the case where a fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.
When-issued and Delayed Delivery Securities. Each fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
"delayed delivery," i.e., for issuance or delivery to or by a fund later than
the normal settlement date for such securities at a stated price and yield. A
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when a fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by a fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, a fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which a fund's
total assets, including the value of when-issued and delayed delivery securities
held by that fund, exceeds its net assets.
A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect a fund's net asset value. When a fund commits to purchase securities
on a when-issued or delayed delivery basis, its custodian segregates assets to
cover the amount of the commitment. See "The Funds' Investments, Related Risks
and Limitations -- Segregated Accounts." A fund may sell the right to acquire
the security prior to delivery if the sub-adviser deems it advantageous to do
so, which may result in a gain or loss to the fund.
Counterparties. A 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 funds' board, monitors and evaluates the
creditworthiness of the parties with which the fund does business.
Investments in Other Investment Companies. Each fund may invest in
securities of other investment companies, subject to limitations under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Among
other things, these limitations currently restrict a fund's aggregate
investments in other investment companies to no more than 10% of its total
assets. A fund's investments in certain private investment vehicles are not
subject to this restriction. The shares of other investment companies are
subject to the management fees and other expenses of those companies, and the
purchase of shares of some investment companies requires the payment of sales
loads and sometimes substantial premiums above the value of such companies'
portfolio securities. At the same time, a fund would continue to pay its own
management fees and expenses with respect to all its investments, including the
securities of other investment companies.
Segregated Accounts. When a fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to a 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.
Investment Limitations of the Funds
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Fundamental Limitations. The following fundamental investment limitations
cannot be changed for a fund without the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of the fund or (b) 67% or more of the
shares of the fund present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. If a
percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations. With regard to the borrowings
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limitation in fundamental limitation (2), each fund will comply with the
applicable restrictions of Section 18 of the Investment Company Act.
Each fund will not:
(1) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities 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 its benchmark index.
(2) issue senior securities or borrow money, except as permitted under
the Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(3) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(4) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(5) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the fund may purchase, sell or enter
into financial options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative instruments.
In addition, Enhanced S&P 500 Fund will not:
(7) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental limitation: Mortgage- and asset-backed securities will not be
considered to have been issued by the same issuer by reason of the securities
having the same sponsor, and mortgage- and asset-backed securities issued by a
finance or other special purpose subsidiary that are not guaranteed by the
parent company will be considered to be issued by a separate issuer from the
parent company.
Non-Fundamental Limitations. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval. If a percentage restriction is adhered to at the time of an investment
or transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
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Each fund will not:
(1) invest more than 15% of its net assets in illiquid securities.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company 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. Each fund may use a variety
of financial instruments ("Derivative Instruments"), including certain options,
futures contracts (sometimes referred to as "futures"), and options on futures
contracts. A fund may enter into transactions involving one or more types of
Derivative Instruments under which the full value of its portfolio is at risk.
Under normal circumstances, however, a fund's use of these instruments will
place at risk a much smaller portion of its assets. The particular Derivative
Instruments that may be used by the funds are described below.
A fund might not use any Derivative Instruments or derivative strategies,
and there can be no assurance that using any strategy will succeed. If the
sub-adviser is incorrect in its judgment on market values, interest rates or
other economic factors in using a Derivative Instrument or strategy, a fund may
have lower net income and a net loss on the investment.
Options on Equity and Debt Securities. A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
Options on Securities Indices. A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
Securities Index Futures Contracts. A securities index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
9
<PAGE>
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
Interest Rate Futures Contracts. Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
Options on Futures Contracts. Options on futures contracts are similar to
options on securities, 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 Using Derivative Instruments. A fund may
use Derivative Instruments to simulate investment in its benchmark index while
retaining a cash balance for 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 cash management
purposes, a fund may attempt to reduce the risk of adverse price movements
("hedge") in the securities of its benchmark index while investing cash received
from investor purchases of fund shares or selling securities to meet shareholder
redemptions. A fund may also use Derivative Instruments to reduce transaction
costs and to facilitate trading.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of a Derivative Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a fund's portfolio. Thus, in a short hedge a fund takes a
position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, a fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a fund intends to acquire. Thus, in a long
hedge, a fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, 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.
A fund may purchase and write (sell) straddles on securities or indices of
securities. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A fund
might enter into a long straddle when the sub-adviser believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. A fund might enter into a short straddle when
the sub-adviser believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.
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Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
Income strategies using Derivative Instruments may include the writing of
covered options to obtain the related option premiums. Return or gain strategies
may include using Derivative Instruments to increase or decrease a fund's
exposure to different asset classes without buying or selling the underlying
instruments. A fund also may use derivatives to simulate full investment by the
fund while maintaining a cash balance for fund management purposes (such as to
provide liquidity to meet anticipated shareholder sales of fund shares and for
fund operating expenses).
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a fund's
ability to use Derivative Instruments may be limited by tax considerations.
See "Taxes."
In addition to the products, strategies and risks described below and in
each fund's Prospectus, the funds' sub-adviser may discover additional
opportunities in connection with Derivative Instruments and with hedging,
income, return and gain strategies. These new opportunities may become available
as regulatory authorities broaden the range of permitted transactions and as new
Derivative Instruments and techniques are developed. The sub-adviser may use
these opportunities for a fund to the extent that they are consistent with a
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The funds' Prospectus or this SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special Risks of Strategies Using Derivative Instruments. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the
ability of a fund's investment adviser to predict movements of the overall
securities and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. While the sub-adviser
is experienced in the use of Derivative Instruments, there can be no assurance
that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments that are being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in value of
the hedged investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors affecting the markets in which Derivative
Instruments are traded, rather than the value of the investments being hedged.
The effectiveness of hedges using Derivative Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because the sub-adviser projected a decline in the price of a security in
that fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Derivative Instrument. Moreover, if the price of the Derivative
Instrument declined by more than the increase in the price of the security, a
fund could suffer a loss. In either such case, a fund would have been in a
better position had it not hedged at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
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(i.e., Derivative Instruments other than purchased options). If a fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the fund sell a portfolio
security at a disadvantageous time. A fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a fund.
Cover for Strategies Using Derivative Instruments. Transactions using
Derivative Instruments, other than purchased options, expose a fund to an
obligation to another party. A fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities or
other options or futures contracts or (2) cash or liquid securities with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of a
fund's assets to cover positions or to segregated accounts could impede
portfolio management or a fund's ability to meet redemption requests or other
current obligations.
Options. Each fund may purchase put and call options, and write (sell)
covered put or call options on equity and debt securities and stock indices. The
purchase of call options may serve as a long hedge, and the purchase of put
options may serve as a short hedge. A fund may also use options to attempt to
enhance return or realize gains by increasing or reducing its exposure to an
asset class without purchasing or selling the underlying securities. Writing
covered put or call options can enable a fund to enhance income by reason of the
premiums paid by the purchasers of such options. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the affected fund will be obligated to sell the security at less than its
market value. Writing covered put options serves as a limited long hedge,
because increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for over-the-counter options written by a fund would be
considered illiquid to the extent described under "The Funds' Investments,
Related Risks and Limitations -- Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on debt securities are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contrast to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration. Options that
expire unexercised have no value.
A fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
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The funds may purchase and write both exchange-traded and over-the-counter
options. Currently, many options on equity securities (stocks) are
exchange-traded. Exchange markets for options on debt securities exist but are
relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between a fund
and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by a fund as
well as the loss of any expected benefit of the transaction.
The funds' ability to establish and close out positions in exchange-traded
options depends on the existence of a liquid market. The funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
over-the-counter options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. Although the
funds will enter into over-the-counter options only with counterparties that are
expected to be capable of entering into closing transactions with the funds,
there is no assurance that a fund will in fact be able to close out an
over-the-counter option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a fund might be unable to close out
an over-the-counter option position at any time prior to its expiration.
If a fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or call
option written by the a could cause material losses because that fund would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A fund may purchase and write put and call options on indices in much the
same manner as the more traditional options discussed above, except the index
options may serve as a hedge against overall fluctuations in a securities market
(or market sector) rather than anticipated increases or decreases in the value
of a particular security.
Futures. The funds may purchase and sell stock index futures contracts and
interest rate future contracts. A fund may also purchase put and call options,
and write covered put and call options, on futures in which it is allowed to
invest. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve as
a limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for writing
covered options on securities or indices. In addition, a fund may purchase or
sell futures contracts or purchase options thereon to increase or reduce its
exposure to an asset class without purchasing or selling the underlying
securities, either as a hedge or to enhance return or realize gains.
A fund may also write put options on futures contracts while at the same
time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. A fund will engage in this
strategy only when it is more advantageous to the fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
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as periods of high volatility, a fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a fund's obligations to or from a futures
broker. When a fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
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.
Limitation on the Use of Futures and Related Options. A fund's use of
futures and related options is governed by the following guideline, which can be
changed by the board without shareholder vote:
The aggregate initial margin and premiums on futures contracts and options
on futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), excluding the amount by which options are "in-the-money," may not
exceed 5% of a fund's net assets.
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ORGANIZATION; TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS
AND MANAGEMENT OWNERSHIP OF SECURITIES
The Trust was formed on December 23, 1999, as a business trust under the
laws of Delaware. The Trust has two series and is authorized to issue an
unlimited number of shares of beneficial interest, par value of $0.001 per
share, of existing or future series.
The Trust is governed by a board of trustees which oversees its operations
and which is authorized to establish additional series. The trustees and
executive officers of the Trust, their ages, business addresses and principal
occupations during the past five years are:
<TABLE>
<CAPTION>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 53 Trustee and President Mrs. Alexander is Chairman (since
March 1999), chief executive officer
and a director of Mitchell Hutchins
(since January 1995), and an executive
vice president and director of
PaineWebber (since March 1984). Mrs.
Alexander is president and director or
trustee of 32 investment companies for
which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal
R.Q.A. Enterprises of R.Q.A. Enterprises (management
One Old Church Road consulting firm) (since April 1991 and
Unit #6 principal occupation since March 1995).
Greenwich, CT 06830 Mr. Armstrong was chairman of the
board, chief executive officer and
co-owner of Adirondack Beverages
(producer and distributor of soft
drinks and sparkling/still waters)
(October 1993-March 1995). He was a
partner of The New England Consulting
Group (management consulting firm)
(December 1992-September 1993). He was
managing director of LVMH U.S.
Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine
and spirits subsidiary, Schieffelin &
Somerset Company (1987-1991). Mr.
Armstrong is a director or trustee of
31 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
15
<PAGE>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
E. Garrett Bewkes, Jr.**+; 73 Trustee and Chairman Mr. Bewkes is a director of Paine
of the Board of Webber Group Inc. ("PW Group")
Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to December
1995, he was a consultant to
PW Group. Prior to 1988, he was
chairman of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries
Corporation. Mr. Bewkes is a director
or trustee of 35 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Richard R. Burt; 53 Trustee Mr. Burt is chairman of IEP Advisors,
1275 Pennsylvania Ave, N.W. LLP (international investments and
Washington, DC 20004 consulting firm) (since March 1994), a
partner of McKinsey & Company
(management consulting firm) (since
1991). He is also a director of
Archer-Daniels-Midland Co.
(agricultural commodities), Hollinger
International Co. (publishing) and
Homestake Mining Corp. (gold mining),
vice chairman of Anchor Gaming
(provides technology to gaming and
wagering industry) (since July 1999)
and chairman of Weirton Steel Corp
(makes and finishes steel products)
(since April 1996). He was the chief
negotiator in the Strategic Arms
Reduction Talks with the former Soviet
Union (1989-1991) and the U.S.
Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Mary C. Farrell**+; 50 Trustee Ms. Farrell is a managing director,
senior investment strategist and
member of the Investment Policy
Committee of PaineWebber. Ms. Farrell
joined PaineWebber in 1982. She is a
member of the Financial Women's
Association and Women's Economic
Roundtable and appears as a regular
panelist on Wall $treet Week with
Louis Rukeyser. She also serves on
the Board of Overseers of New York
University's Stern School of
Business. Ms. Farrell is a director
or trustee of 30 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
16
<PAGE>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
Meyer Feldberg; 58 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior
New York, NY 10027 to 1989, he was president of the
Illinois Institute of Technology.
Dean Feldberg is also a director of
Primedia Inc. (publishing), Federated
Department Stores, Inc. (operator of
department stores) and Revlon, Inc.
(cosmetics). Dean Feldberg is a
director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm
666 Third Avenue of Dunnington, Bartholow & Miller.
New York, NY 10017 Prior to May 1994, he was a partner in
the law firm of Fryer, Ross & Gowen.
Mr. Gowen is a director or trustee of
34 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Frederic V. Malek; 63 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave, N.W. Partners (merchant bank) and chairman
Suite 350 of Thayer Hotel Investors II and
Washington, DC 20004 Lodging Opportunities Fund (hotel
investment partnerships). From January
1992 to November 1992, he was campaign
manager of Bush-Quayle '92. From 1990
to 1992, he was vice chairman and, from
1989 to 1990, he was president of
Northwest Airlines Inc. and NWA Inc.
(holding company of Northwest Airlines
Inc.). Prior to 1989, he was employed
by the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is also a
director of Aegis Communications, Inc.
(tele-services), American Management
Systems, Inc. (management consulting
and computer related services),
Automatic Data Processing, Inc.,
(computing services), CB Richard Ellis,
Inc. (real estate services), FPL Group,
Inc. (electric services), Global
Vacation Group (packaged vacations),
HCR/Manor Care, Inc. (health care),
SAGA Systems, Inc. (software company)
and Northwest Airlines Inc. Mr. Malek
is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment
adviser.
17
<PAGE>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
Carl W. Schafer; 64 Trustee Mr. Schafer is president of the
66 Witherspoon Street, #1100 Atlantic Foundation (charitable
Princeton, NJ 08542 foundation supporting mainly
oceanographic exploration and
research). He is a director of Labor
Ready, Inc. (temporary employment),
Roadway Express, Inc. (trucking), The
Guardian Group of Mutual Funds, the
Harding, Loevner Funds, E.I.I. Realty
Trust (investment company), Evans
Systems, Inc. (motor fuels,
convenience store and diversified
company), Electronic Clearing House,
Inc. (financial transactions
processing), Frontier Oil Corporation
and Nutraceutix, Inc. (biotechnology
company). Prior to January 1993, he
was chairman of the Investment
Advisory Committee of the Howard
Hughes Medical Institute. Mr. Schafer
is a director or trustee of 31
investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief
operating officer of Mitchell
Hutchins (since March 1999). Mr.
Storms was president of Prudential
Investments (1996-1999). Prior to
joining Prudential he was a managing
director at Fidelity Investments.
Mr. Storms is a director or trustee
of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and
chief investment officer--quantitative
investments of Mitchell Hutchins. Mr.
Barneby is a vice president of eight
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment
adviser.
Tom Disbrow**; 34 Vice President and Mr. Disbrow is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance department of Mitchell
Hutchins. Prior to November 1999, he
was a vice president of Zweig/Glaser
Advisers. Mr. Disbrow is a vice
president and assistant treasurer of
32 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
John J. Holmgren***; 61 Vice President Mr. Holmgren is president, chief
executive officer and a director of
DSI. He is a vice president of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment
adviser.
18
<PAGE>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
John J. Holmgren, Jr.***; 38 Vice President Mr. Holmgren is executive vice
president, chief operating officer, a
portfolio manager and a director of
DSI. Prior to January 1997, he was
president of DSC Data Services, Inc.,
a consulting firm. Mr. Holmgren is a
vice president of one investment
company for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Prior
to September 1997, he was an audit
manager in the financial services
practice of Ernst & Young LLP. Mr. Lee
is a vice president and assistant
treasurer of 32 investment companies
for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president
Assistant Treasurer and a senior manager of the mutual fund
finance department of Mitchell
Hutchins. From August 1996 through
March 1999, he was the manager of the
mutual fund internal control group of
Salomon Smith Barney. Prior to August
1996, he was an associate and assistant
treasurer for BlackRock Financial
Management L.P. Mr. Mahoney is a vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment
adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a
Assistant Treasurer manager of the mutual fund finance
department of Mitchell Hutchins. Ms.
Moran is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Dianne E. O'Donnell**; 47 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 president and secretary of 31
investment companies and a vice
president and assistant secretary of
one investment company for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
19
<PAGE>
Name and Address; Age Position with Trust Business Experience; Other Directorships
--------------------- ------------------- ----------------------------------------
Emil Polito*; 39 Vice President Mr. Polito is a senior vice president
and director of operations and control
for Mitchell Hutchins. Mr. Polito is a
vice president of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates
serves as investment adviser.
Victoria E. Schonfeld**; 49 Vice President Ms. Schonfeld is a managing director
and general counsel of Mitchell
Hutchins and (since July 1995) a
senior vice president of PaineWebber.
Ms. Schonfeld is a vice president of
31 investment companies and a vice
president and secretary of one
investment company for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment
adviser.
Paul H. Schubert**; 37 Vice President and Mr. Schubert is a senior vice
Treasurer president and director of the mutual
fund finance department of Mitchell
Hutchins. Mr. Schubert is a vice
president and treasurer of 32
investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Barney A. Taglialatela**; 39 Vice President and Mr. Taglialatela is a vice president
Assistant Treasurer and a manager of the mutual fund
finance department of Mitchell
Hutchins. Mr. Taglialatela is a vice
president and assistant treasurer of
32 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
Keith A. Weller**; 38 Vice President and Mr. Weller is a first vice president
Assistant Secretary 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
31 investment companies for which
Mitchell Hutchins, PaineWebber or one
of their affiliates serves as
investment adviser.
</TABLE>
- -------------
* This person's business address is 51 West 52nd Street, New York, New York
10019-6114.
** This person's business address is 1285 Avenue of the Americas, New York,
New York 10019.
*** This person's business address is 301 Merritt 7, Norwalk, Connecticut
06851.
+ Mrs. Alexander, Mr. Bewkes, Ms. Farrell and Mr. Storms are "interested
persons" of each fund as defined in the Investment Company Act by virtue of
their positions with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Trust pays trustees who are not "interested persons" of the Trust
$1,000 annually for each series and $150 per series for each board meeting and
each separate meeting of a board committee. The Trust presently has two series
and thus pays each such trustee $2,000 annually, plus any additional annual
amounts due for board or committee meetings. All trustees are reimbursed for any
expenses incurred in attending meetings. Because Mitchell Hutchins and
PaineWebber perform substantially all of the services necessary for the
operation of the Trust and the funds, 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.
20
<PAGE>
The table below includes certain information relating to the estimated
compensation of the Trust's trustees and the compensation of those trustees from
all PaineWebber funds during the 1999 calendar year.
COMPENSATION TABLE+
Estimated Annual
Aggregate Compensation Total Compensation from
Name of Person, Position from the Trust* the Fund Complex**
------------------------ --------------- ------------------
Richard Q. Armstrong,
Trustee.................... $ 3,500 $ 104,650
Richard R. Burt,
Trustee..................... 3,500 102,850
Meyer Feldberg,
Trustee..................... 3,500 119,650
George W. Gowen,
Trustee..................... 4,250 119,650
Frederic V. Malek,
Trustee..................... 3,500 104,650
Carl W. Schafer,
Trustee..................... 3,500 104,650
- --------------------
+ Only independent trustees are compensated by the PaineWebber funds and
identified above; trustees who are "interested persons," as defined by the
Investment Company Act, do not receive compensation from the PaineWebber
funds.
* Represents estimated aggregate annual compensation to be paid by the Trust
to each trustee indicated during its initial full fiscal year.
** Represents total compensation paid during the calendar year ended December
31, 1999, to each trustee by 31 investment companies (34 in the case of
Messrs. Feldberg and Gowen) for which Mitchell Hutchins, PaineWebber or
one of their affiliates served as investment adviser. No fund within the
PaineWebber fund complex has a bonus, pension, profit sharing or
retirement plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of March 2, 2000, Mitchell Hutchins owned 100% of all outstanding
shares of each fund and thus may be deemed a controlling shareholder of each
fund until additional investors purchase shares. None of the trustees and
officers of the Trust beneficially owned any of the outstanding shares of either
fund.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
Investment Advisory and Administration Arrangements. Mitchell Hutchins
acts as the investment adviser and administrator of each fund pursuant to an
investment advisory and administration contract ("Advisory Contract") with the
Trust. Under the Advisory Contract, Enhanced S&P 500 Fund pays Mitchell Hutchins
a fee, computed daily and paid monthly, at the annual rate of 0.40% of average
daily net assets and Enhanced Nasdaq-100 Fund pays Mitchell Hutchins a fee,
computed daily and paid monthly, at the annual rate of 0.75% of average daily
net assets.
The Advisory Contract authorizes Mitchell Hutchins to retain one or more
sub-advisers but does not require Mitchell Hutchins to do so. Under separate
sub-advisory contracts (each a "Sub-Advisory Contract") DSI International
Management, Inc. serves as sub-adviser for each fund. Under the applicable
Sub-Advisory Contract, Mitchell Hutchins (not the fund) pays DSI a fee in the
annual amount of 0.20% of average daily net assets for Enhanced S&P 500 Fund and
0.35% of average daily net assets for Enhanced Nasdaq-100 Fund.
21
<PAGE>
Under the terms of the Advisory Contract, each fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a specific series of the Trust are allocated among series by or under the
direction of the Trust's board in such manner as the board deems fair and
equitable. Expenses borne by each fund include the following: (1) the cost
(including brokerage commissions, if any) 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 a fund's shares under federal and/or state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons 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 and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders; (14) costs of mailing prospectuses and supplements thereto,
statements of additional information and supplements thereto, reports and proxy
materials to existing shareholders; (15) any extraordinary expenses (including
fees and disbursements of counsel) incurred by the fund; (16) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; (17) costs of mailing and tabulating proxies
and costs of meetings of shareholders, the board and any committees thereof;
(18) the cost of investment company literature and other publications provided
to trustees and officers; (19) costs of mailing, stationery and communications
equipment; (20) expenses incident to any dividend, withdrawal or redemption
options; (21) charges and expenses of any outside pricing service used to value
portfolio securities; (22) interest on borrowings of the fund; and (23) 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 a fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically for a fund upon its assignment and is terminable at any time
without penalty by the board or by vote of the holders of a majority of a 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.
Under each Sub-Advisory Contract, DSI will not be liable for any error or
judgment or mistake of law or for any loss suffered by the Trust, a fund, its
shareholders or Mitchell Hutchins in connection with each Sub-Advisory Contract,
except any liability to any of them to which DSI would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under each Sub-Advisory Contract. Each Sub-Advisory Contract
terminates automatically upon its assignment or the termination of the Advisory
Contract and is terminable at any time without penalty by the board or by vote
of the holders of a majority of a fund's outstanding voting securities on 60
days' notice to DSI, or by DSI on 120 days' notice to Mitchell Hutchins. Each
Sub-Advisory Contract also may be terminated by Mitchell Hutchins (1) upon
material breach by DSI of its representations and warranties, which breach shall
not have been cured within a 20 day period after notice of the breach, (2) if
DSI becomes unable to discharge its duties and obligations under the
Sub-Advisory Contract; or (3) upon 120 days' notice to DSI.
PaineWebber provides transfer agency related services to each fund
pursuant to a delegation of authority from PFPC Inc., not the funds, and is
compensated for those services by PFPC Inc. not the funds.
Net Assets. The following table shows the approximate net assets as of
January 31, 2000, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
22
<PAGE>
Net Assets
Investment Category ($mil)
------------------- ------
Domestic (excluding Money Market)................... $ 9,890.5
Global.............................................. 4,777.3
Equity/Balanced..................................... 10,074.1
Fixed Income (excluding Money Market)............... 4,593.7
Taxable Fixed Income............................. 3,171.5
Tax-Free Fixed Income............................ 1,422.2
Money Market Funds.................................. 38,247.0
Personal Trading Policies. The funds, Mitchell Hutchins and DSI each have
adopted codes of ethics under Rule 17j-1 of the Investment Company Act that
permits their trustees, directors, officers and employees to invest in
securities, including securities that may be held or purchased by a fund.
Distribution Arrangements. Mitchell Hutchins acts as the distributor of
each class of shares of each fund under separate distribution contracts with the
Trust ("Distribution Contracts"). Each Distribution Contract requires Mitchell
Hutchins to use its best efforts, consistent with its other businesses, to sell
shares of the funds. Shares of each fund are offered continuously. Under
separate exclusive dealer agreements between Mitchell Hutchins and PaineWebber
relating to each class of shares of the funds ("Exclusive Dealer Agreements"),
PaineWebber and its correspondent firms sell the funds' shares. Mitchell
Hutchins is located at 51 West 52nd Street, New York, New York 10019-6114 and
PaineWebber is located at 1285 Avenue of the Americas, New York, New York 10019.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of each fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"), each
fund pays Mitchell Hutchins a service fee, accrued daily and payable monthly, at
the annual rate of 0.25% of the average daily net assets of each class of
shares. Under the Class B Plan and the Class C Plan, Enhanced S&P 500 Fund pays
Mitchell Hutchins a distribution fee, accrued daily and payable monthly, at the
annual rate of 0.40% of the average daily net assets of the Class B shares and
Class C shares, respectively. Under the Class B Plan and the Class C Plan,
Enhanced Nasdaq-100 Fund pays Mitchell Hutchins a distribution fee, accrued
daily and payable monthly, at the annual rate of 0.75% of the average daily net
assets of the Class B shares and Class C shares, respectively. There is no
distribution plan with respect to the funds' Class Y shares, and the funds pay
no service or distribution fees with respect to their Class Y shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B and
C shares primarily to pay PaineWebber for shareholder servicing, currently at
the annual rate of 0.25% of the aggregate investment amounts maintained in each
fund by PaineWebber clients. PaineWebber then compensates its Financial Advisors
for shareholder servicing that they perform and offsets its own expenses in
servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and Class C
Plans to:
o Offset the commissions it pays to PaineWebber for selling each fund's
Class B and Class C shares, respectively.
o Offset a fund's marketing costs attributable to such classes, such as
preparation, printing and distribution of sales literature,
advertising and prospectuses to prospective investors and related
overhead expenses, such as employee salaries and bonuses.
PaineWebber compensates Financial Advisors when Class B and Class C shares
are bought by investors, as well as on an ongoing basis. Mitchell Hutchins
receives no special compensation from any of the funds or investors at the time
Class B or C shares are bought.
23
<PAGE>
Mitchell Hutchins receives the proceeds of the initial sales charge paid
when Class A shares are bought and of the contingent deferred sales charge paid
upon sales of shares. These proceeds may be used to cover distribution expenses.
The Plans and the related Distribution Contracts for Class A, Class B and
Class C shares specify that each fund must pay service and distribution fees to
Mitchell Hutchins for its service and distribution activities, not as
reimbursement for specific expenses incurred. Therefore, even if Mitchell
Hutchins' expenses exceed the service or distribution fees it receives, the
funds will not be obligated to pay more than those fees. On the other hand, if
Mitchell Hutchins' expenses are less than such fees, it will retain its full
fees and realize a profit. Expenses in excess of service and distribution fees
received or accrued through the termination date of any Plan will be Mitchell
Hutchins' sole responsibility and not that of the funds. Annually, the board of
each fund reviews the Plans and Mitchell Hutchins' corresponding expenses for
each class separately from the Plans and expenses of the other classes.
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
funds and who have no direct or indirect financial interest in the operation of
the Plan or any agreement related to the Plan, acting in person at a meeting
called for that purpose, (3) payments by a fund under the Plan shall not be
materially increased without the affirmative vote of the holders of a majority
of the outstanding shares of the applicable class of a fund and (4) while the
Plan remains in effect, the selection and nomination of trustees who are not
"interested persons" of the Trust shall be committed to the discretion of the
trustees who are not "interested persons" of the Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each class of a fund's
shares to such class based on the ratio of sales of shares of such class to the
sales of all three classes of shares. The fees paid by one class of a fund's
shares will not be used to subsidize the sale of any other class of fund shares.
In approving each 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 for each fund, 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 Financial Advisors and correspondent
firms, resulting in greater growth of the fund than might otherwise be the case,
(3) the advantages to the shareholders of economies of scale resulting from
growth in the fund's assets and potential continued growth, (4) the services
provided to the fund and its shareholders by Mitchell Hutchins, (5) the services
provided by PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell
Hutchins and (6) Mitchell Hutchins' shareholder service-related expenses and
costs.
In approving the Class B Plan for each fund, the board considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber Financial Advisors and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their entire
purchase payments immediately in Class B shares would prove attractive to the
Financial Advisors and correspondent firms, resulting in greater growth of the
fund than might otherwise be the case, (4) the advantages to the shareholders of
24
<PAGE>
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 trustees
also recognized that Mitchell Hutchins' willingness to compensate PaineWebber
and its Financial Advisors, without the concomitant receipt by Mitchell Hutchins
of initial sales charges, was conditioned upon its expectation of being
compensated under the Class B Plan.
In approving the Class C Plan for each fund, the board considered all the
features of the distribution system, including (1) the advantage to investors in
having no initial sales charges deducted from fund purchase payments and instead
having the entire amount of their purchase payments immediately invested in fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber Financial Advisors and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth of the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption, except within one
year after purchase, was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the board considered for each fund all
compensation that Mitchell Hutchins would receive under the Plan and the
Distribution Contract, including service fees and, as applicable, initial sales
charges, distribution fees and contingent deferred sales charges. The board also
considered the benefits that would accrue to Mitchell Hutchins under each Plan
in that Mitchell Hutchins would receive service, distribution and advisory fees
that are calculated based upon a percentage of the average net assets of each
fund, which fees would increase if the Plan were successful and the fund
attained and maintained significant asset levels.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, the sub-adviser is
responsible for the execution of each fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions, the
sub-adviser seeks to obtain the best net results for a fund, taking into account
such factors as the price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While the sub-adviser generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The funds may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker.
The funds have no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contract authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the funds
on such exchange and to retain compensation in connection with such
25
<PAGE>
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
funds' procedures in selecting FCMs to execute transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, the sub-adviser will consider the full range and
quality of a broker's services. Consistent with the interests of the funds and
subject to the review of the board, the sub-adviser may cause a fund to purchase
and sell portfolio securities through brokers who provide the sub-adviser with
brokerage or research services. A fund may pay those brokers a higher commission
than may be charged by other brokers, provided that the sub-adviser determines
in good faith that the commission is reasonable in terms either of that
particular transaction or of the overall responsibility of the sub-adviser to
that fund and its other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
For purchases or sales with broker-dealer firms that act as principal, the
sub-adviser seeks best execution. Although the sub-adviser 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. The sub-adviser may engage in agency
transactions in over-the-counter equity and debt securities in return for
research and execution services. These transactions are entered into only
pursuant to procedures that are designed to ensure that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services.
Research services and information received from brokers or dealers are
supplemental to the sub-adviser's own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which a fund effect securities transactions may be used by
the sub-adviser in advising other funds or accounts and, conversely, research
services furnished to the sub-adviser by brokers or dealers in connection with
other funds or accounts that it advises may be used in advising a fund.
Investment decisions for a fund and for other investment accounts managed
by the sub-adviser are made independently of each other in light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for a fund and one or more accounts. In those cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated between that fund and the other account(s) as to
amount according to a formula deemed equitable to the fund and the other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as a fund is concerned, or upon
its ability to complete its entire order, in other cases it is believed that
simultaneous transactions and the ability to participate in volume transactions
will benefit the funds.
The funds will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by the board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the funds.
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Portfolio Turnover. Each fund's annual portfolio turnover rate may vary
greatly from year to year but will not be a limiting factor in the funds'
operations. The portfolio turnover rate is calculated by dividing the lesser of
a fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
Waivers of Sales Charges/Contingent Deferred Sales Charges -- Class A
Shares. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to qualified
plans. For investments made pursuant to this waiver, Mitchell Hutchins
may make payments out of its own resources to PaineWebber and to the
variable annuity's sponsor, adviser or distributor in a total amount
not to exceed l% of the amount invested;
o Acquire shares through an investment program that is not sponsored by
PaineWebber or its affiliates and that charges participants a fee for
program services, provided that the program sponsor has entered into a
written agreement with PaineWebber permitting the sale of shares at
net asset value to that program. For investments made pursuant to this
waiver, Mitchell Hutchins may make a payment to PaineWebber out of its
own resources in an amount not to exceed 1% of the amount invested.
For subsequent investments or exchanges made to implement a
rebalancing feature of such an investment program, the minimum
subsequent investment requirement is also waived;
o Acquire shares in connection with a reorganization pursuant to which a
fund acquires substantially all of the assets and liabilities of
another fund in exchange solely for shares of the acquiring fund; or
o Acquire shares in connection with the disposition of proceeds from the
sale of shares of Managed High Yield Plus Fund Inc. that were acquired
during that fund's initial public offering of shares and that meet
certain other conditions described in its prospectus.
In addition, reduced sales charges on Class A shares are available through
the combined purchase plan or through rights of accumulation described below.
Class A share purchases of $1 million or more are not subject to an initial
sales charge; however, if a shareholder sells these shares within one year after
purchase, a contingent deferred sales charge (of 1% of the offering price or the
net asset value of the shares at the time of sale) by the shareholder, whichever
is less, is imposed.
Combined Purchase Privilege -- Class A Shares. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
funds with concurrent purchases of Class A shares of any other PaineWebber
mutual fund and thus take advantage of the reduced sales charges indicated in
the tables of sales charges for Class A shares in the Prospectus. The sales
charge payable on the purchase of Class A shares of the funds and Class A shares
of such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
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(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that other employer); or
(h) individual accounts related together under one registered investment
adviser having full discretion and control over the accounts. The registered
investment adviser must communicate at least quarterly through a newsletter or
investment update establishing a relationship with all of the accounts.
Rights of Accumulation -- Class A Shares. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class A fund shares and Class A shares of any other PaineWebber
mutual fund. The purchaser must provide sufficient information to permit
confirmation of his or her holdings, and the acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
Reinstatement Privilege -- Class A Shares. Shareholders who have redeemed
Class A shares of a fund may reinstate their account without a sales charge by
notifying the transfer agent of such desire and forwarding a check for the
amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might will not be deductible to the extent the reinstatement
privilege is exercised within 30 days after redemption, in which event an
adjustment will be made to the shareholder's tax basis for shares acquired
pursuant to the reinstatement privilege. Gain or loss on a redemption also will
be readjusted for federal income tax purposes by the amount of any sales charge
paid on Class A shares, under the circumstances and to the extent described in
"Taxes -- Special Rules for Class A Shareholders," below.
Waivers of Contingent Deferred Sales Charges -- Class B Shares. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
Purchases of Class Y Shares Through the PACESM Multi Advisor Program. An
investor who participates in the PACESM Multi Advisor Program is eligible to
purchase Class Y shares. The PACESM Multi Advisor Program is an advisory program
sponsored by PaineWebber that provides comprehensive investment services,
including investor profiling, a personalized asset allocation strategy using an
appropriate combination of funds, and a quarterly investment performance review.
Participation in the PACESM Multi Advisor Program is subject to payment of an
advisory fee at the effective maximum annual rate of 1.5% of assets. Employees
of PaineWebber and its affiliates are entitled to a waiver of this fee. Please
contact your PaineWebber Financial Advisor or PaineWebber's correspondent firms
for more information concerning mutual funds that are available through the PACE
Multi Advisor Program.
Purchases of Class A Shares Through the PaineWebber InsightOneSM Program.
Investors who purchase shares through the PaineWebber InsightOneSM Program are
eligible to purchase Class A shares without a sales load. The PaineWebber
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InsightOneSM Program offers a nondiscretionary brokerage account to PaineWebber
clients for an asset-based fee at an annual rate of up to 1.5% of the assets in
the account. Account holders may purchase or sell certain investment products
without paying commissions or other markups/markdowns.
Purchases and Sales of Class Y Shares for Participants in PW 401(k) Plus
Plan. The trustee of the PW 401(k) Plus Plan, a defined contribution plan
sponsored by PW Group, buys and sells Class Y shares of the funds that are
included as investment options under the Plan to implement the investment
choices of individual participants with respect to their Plan contributions.
Individual Plan participants should consult the Summary Plan Description and
other plan material of the PW 401(k) Plus Plan (collectively, "Plan Documents")
for a description of the procedures and limitations applicable to making and
changing investment choices. Copies of the Plan Documents are available from the
Benefits Connection, 100 Halfday Road, Lincolnshire, IL 60069 or by calling
1-888-PWEBBER (1-888-793-2237). As described in the Plan Documents, the price at
which Class Y shares are bought and sold by the trustee of PW 401(k) Plus Plan
might be more or less than the price per share at the time the participants made
their investment choices.
Additional Exchange and Redemption Information. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or the fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with a fund's investment objective, policies and
restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing a fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
Service Organizations. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form" in accordance with the policies of those service organizations. A
fund will be deemed to have received these purchase and redemption orders when a
service organization or its agent accepts them. Like all customer orders, these
orders will be priced based on a fund's net asset value next computed after
receipt of the order by the service organizations or their agents. Service
organizations may include retirement plan service providers who aggregate
purchase and redemption instructions received from numerous retirement plans or
plan participants.
Automatic Investment Plan. PaineWebber offers an automatic investment plan
with a minimum initial investment of $1,000 through which a fund will deduct $50
or more on a monthly, quarterly, semi-annual or annual basis from the investor's
bank account to invest directly in the fund. Participation in the automatic
investment plan enables an investor to use the technique of "dollar cost
averaging." When an investor invests the same dollar amount each month under the
plan, the investor will purchase more shares when a fund's net asset value per
share is low and fewer shares when the net asset value per share is high. Using
this technique, an investor's average purchase price per share over any given
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period will be lower than if the investor purchased a fixed number of shares on
a monthly basis during the period. Of course, investing through the automatic
investment plan does not assure a profit or protect against loss in declining
markets. Additionally, because the automatic investment plan involves continuous
investing regardless of price levels, an investor should consider his or her
financial ability to continue purchases through periods of both low and high
price levels.
Systematic Withdrawal Plan. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to a
contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in the
systematic withdrawal plan), less aggregate redemptions made other than pursuant
to the systematic withdrawal plan, is less than the minimum values specified
above. Purchases of additional shares of a fund concurrent with withdrawals are
ordinarily disadvantageous to shareholders because of tax liabilities and, for
Class A and Class C shares, initial sales charges. On or about the 20th of a
month for monthly, quarterly, semi-annual and annual plans, PaineWebber will
arrange for redemption by the funds of sufficient fund shares to provide the
withdrawal payments specified by participants in a 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. If
periodic withdrawals continually exceed reinvested dividends and other
distributions, a shareholder's investment may be correspondingly reduced. A
shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. Instructions to participate in the plan, change the withdrawal amount
or terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by PFPC.
Shareholders may request the forms needed to establish a systematic withdrawal
plan from their PaineWebber Financial Advisors, correspondent firms or PFPC at
1-800-647-1568.
Individual Retirement Accounts. Self-directed IRAs are available through
PaineWebber in which purchases of PaineWebber mutual funds and other investments
may be made. Investors considering establishing an IRA should review applicable
tax laws and should consult their tax advisers.
Transfer of Accounts. If investors holding shares of a fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
PaineWebber RMA Resource Accumulation PlanSM;
PaineWebber Resource Management Account(R) (RMA)(R)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
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RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
Periodic Investing and Dollar Cost Averaging. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PaineWebber's Resource Management Account. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(R) transactions during the period, and provide unrealized
and realized gain and loss estimates for most securities held in the
account;
o comprehensive year-end summary statements that provide information on
account activity for use in tax planning and tax return preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's
choice of one of the six RMA money market funds - RMA Money Market
Portfolio, RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA
California Municipal Money Fund, RMA New Jersey Municipal Money Fund
and RMA New York Municipal Money Fund. An investment in a money market
fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although a money market
fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in a money market
fund;
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
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o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used
with automatic teller machines worldwide. Purchases on the Gold
MasterCard are debited to the RMA account once monthly, permitting
accountholders to remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and
more detailed personal assistance during business hours from the RMA
Service Center;
o unlimited electronic funds transfers and bill payment service for an
additional fee;
o expanded account protection for the net equity securities balance in
the event of the liquidation of PaineWebber. This protection does not
apply to shares of funds that are held at PFPC and not through
PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of a fund will automatically convert to Class A shares of
that fund, based on the relative net asset values per share of each class, as of
the close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance of
Class B shares occurs. For the purpose of calculating the holding period
required for conversion of Class B shares, the date of initial issuance means
(1) the date on which such Class B shares were issued or (2) for Class B shares
obtained through an exchange, or a series of exchanges, the date on which the
original Class B shares were issued. For purposes of conversion to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares will be held in a separate
sub-account. Each time any Class B shares in the shareholder's regular account
(other than those in the sub-account) convert to Class A shares, a pro rata
portion of the Class B shares in the sub-account will also convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the shareholder's total Class B
shares not acquired through dividends and other distributions.
The conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares would not be converted and would continue to be subject to their higher
ongoing expenses beyond six years from the date of purchase. Mitchell Hutchins
has no reason to believe that this condition will not continue to be met.
VALUATION OF SHARES
Each fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the New York Stock Exchange on each Business Day, which is
defined as each Monday through Friday when the New York Stock Exchange is open.
Prices will be calculated earlier when the New York Stock Exchange closes early
because trading has been halted for the day. Currently the New York Stock
Exchange is closed on the observance of the following holidays: New Year's Day,
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 exchanges normally 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 the sub-adviser as the primary market. Securities traded in the
over-the-counter market and listed on The Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
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valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of the sub-adviser, the fair
value of the security. Where those market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the board. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining until maturity, unless the board
determines that this does not represent fair value.
PERFORMANCE INFORMATION
The funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Total Return Calculations. Average annual total return quotes
("Standardized Return") used in the funds' 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 3.0% sales charge for Enhanced S&P 500 Fund or 4.5% sales charge for
Enhanced Nasdaq-100 Fund is deducted from the initial $1,000 payment, for Class
B shares, the applicable contingent deferred sales charge imposed on a
redemption of Class B shares held for the period is deducted and, for Class C
shares, the applicable contingent deferred sales charge is imposed on a
redemption of Class C shares held for a one year period or less. All dividends
and other distributions are assumed to have been reinvested at net asset value.
The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
Both Standardized Return and Non-Standardized Return for Class B shares
for periods of over six years reflect conversion of the Class B shares to Class
A shares at the end of the sixth year.
Other Information. In Performance Advertisements, the funds may compare
their Standardized Return and/or its Non-Standardized Return with data published
by Lipper Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Standard
& Poor's 500 Composite Stock Index ("S&P 500"), the Standard & Poor's 600
Small-Cap Index, the Standard & Poor's 400 Mid-Cap Index, the Dow Jones
Industrial Average ("DJIA"), the Nasdaq Composite Index, the Nasdaq-100 Index,
the Russell 2000 Index, the Russell 1000 Index (including Value and Growth
sub-indexes), the Wilshire 5000 Index, the Lehman Bond Index, 30-year and
10-year U.S. Treasury bonds, the Morgan Stanley Capital International World
Index and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The funds also may refer in such materials to mutual
fund performance rankings and other data, such as comparative asset, expense and
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fee levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar.
Performance Advertisements also may refer to discussions of the funds and
comparative mutual fund data and ratings reported in independent periodicals,
including THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK,
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons in Performance
Advertisements may be in graphic form.
The funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on 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 funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the fund generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.
The funds may also compare their performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
Ibbotson Chart Plot Points
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1999
YEAR Common Stocks Long-Term Gov't Bonds Inflation/CPI Treasury Bills
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
1999 $28,456,286 $402,177 $93,998 $156,414
Source: Stocks, Bonds, Bills and Inflation 1999 YearbookTM, Ibbotson Assoc.,
Chi., (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not represent
any fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. These returns do not account for transaction costs.
Year-to-year fluctuations in certain markets have been significant and negative
returns have been experienced in certain markets from time to time. Stocks are
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measured by the S&P 500, an unmanaged weighted index comprising 500 widely held
common stocks and varying in composition. Unlike investors in bonds and U.S.
Treasury bills, common stock investors do not receive fixed income payments and
are not entitled to repayment of principal. These differences contribute to
investment risk. Returns shown for long-term government bonds are based on U.S.
Treasury bonds with 20-year maturities. Inflation is measured by the Consumer
Price Index. The indexes are unmanaged and are not available for investment.
Over time, although subject to greater risks and higher volatility, stocks
have outperformed all other investments by a wide margin, offering a solid hedge
against inflation. From January 1, 1926 to December 31, 1999, stocks beat all
other traditional asset classes. A $10,000 investment in the stocks comprising
the S&P 500 grew to $28,456,286, significantly more than any other investment.
TAXES
Backup Withholding. Each fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
Sale or Exchange of Fund Shares. A shareholder's sale (redemption) of fund
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of either fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
Special Rule for Class A Shareholders. A special tax rule applies when a
shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of a fund or another PaineWebber mutual
fund without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of the
original Class A shares would be increased, or any loss would be decreased, by
the amount of the sales charge paid when those shares were bought, and that
amount would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.
Conversion of Class B Shares. A shareholder will recognize no gain or loss
as a result of a conversion from Class B shares to Class A shares.
Qualification as a Regulated Investment Company. Each fund intends to
qualify for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code. To so qualify, each fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. These additional 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
or futures) derived with respect to its business of investing in securities
("Income Requirement"); (2) at the close of each quarter of a 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 that are 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 a fund's taxable year, not more than 25% of the
value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer. By
qualifying as a RIC, a fund (but not its shareholders) will be relieved of
federal income tax on the part of its investment company taxable income and net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss) that it distributes to its shareholders). If a fund failed to
qualify for treatment as a RIC for any taxable year, (a) it would be taxed as an
ordinary corporation on its taxable income for that year without being able to
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deduct the distributions it makes to its shareholders and (b) the shareholders
would treat all those distributions, including distributions of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), as
dividends (that is, ordinary income) to the extent of the fund's earnings and
profits. In addition, a fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
Other Information. Dividends and other distributions declared by a fund in
December of any year and payable to shareholders of record on a date in that
month will be deemed to have been paid by the fund and received by the
shareholders on December 31 if the distributions are paid by the fund during the
following January.
A portion of the dividends from each fund's investment company taxable
income (whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
federal alternative minimum tax.
If fund shares 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 thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a 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.
Each fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for the calendar year and capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
The use of hedging strategies involving 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 derived by the fund with respect to
its business of investing in securities will qualify as permissible income under
the Income Requirements.
Offsetting positions in any actively traded security, option or futures
entered into or held by a fund may constitute a "straddle" for federal income
tax purposes. Straddles are subject to certain rules that may affect the amount,
character and timing of a fund's gains and losses with respect to positions of
the straddle by requiring, among other things, that (1) loss realized on
disposition of one position of a straddle be deferred to the extent of any
unrealized gain in an offsetting position until the latter position is disposed
of, (2) a fund's holding period in certain straddle positions not begin until
the straddle is terminated (possibly resulting in gain being treated as
short-term rather than long-term capital gain) and (3) losses recognized with
respect to certain straddle positions, that otherwise would constitute
short-term capital losses, be treated as long-term capital losses. Applicable
regulations also provide certain "wash sale" rules, which apply to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period, and "short sale" rules applicable to straddles.
Different elections are available to the funds, which may mitigate the effects
of the straddle rules, particularly with respect to "mixed straddles" (i.e., a
straddle of which at least one, but not all, positions are section 1256
contracts).
When a covered call option written (sold) by a fund expires, it realizes a
short-term capital gain equal to the amount of the premium it received for
writing the option. When a fund terminates its obligations under such an option
by entering into a closing transaction, it realizes a short-term capital gain
(or loss), depending on whether the cost of the closing transaction is less (or
more) than the premium it received when it wrote the option. When a covered call
option written by a fund is exercised, the fund is treated as having sold the
underlying security, producing long-term or short-term capital gain or loss,
depending on the holding period of the underlying security and whether the sum
of the option price received on the exercise plus the premium received when it
wrote the option is more or less than the basis of the underlying security.
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If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or short sale) with
respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
the fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is a fund's risk of loss regarding that position reduced by reason
of certain specified transactions with respect to substantially identical or
related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
The foregoing is only a general summary of some of the important federal
tax considerations generally affecting the funds and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the funds' activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the fund and to
dividends and other distributions therefrom.
OTHER INFORMATION
Delaware Business Trust. The Trust is an entity of the type commonly known
as a Delaware business trust. 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 funds could, under certain conflicts of laws jurisprudence
in various states, be held personally liable for the obligations of the Trust or
the funds. However, the Trust's trust instrument disclaims shareholder liability
for acts or obligations of the Trust or its series (the funds) 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 each fund's property for all losses
and expenses of any series shareholder held personally liable for the
obligations of the funds. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which a
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 a 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 each fund in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the funds.
Delaware law gives shareholders of the Trust the right to obtain a current
list of the names and last known mailing address of the Trust's other
shareholders, subject to reasonable standards established by the board governing
the time, location and expense of providing the relevant information and
documents.
Classes of Shares. A share of each class of each fund represents an
identical interest in its investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of a
fund will affect the performance of those classes. Each share of a fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of that fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
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Voting Rights. Shareholders of each fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Voting rights
are not cumulative and, as a result, the holders of more than 50% of all the
shares of the Trust may elect all of the trustees of the Trust. The shares of a
fund will be voted together, except that only the shareholders of a particular
class of a fund may vote on matters affecting only that class, such as the terms
of a Rule 12b-1 Plan as it relates to the class.
The funds do not hold annual meetings. Shareholders of record of no less
than two-thirds of the outstanding shares of the Trust may remove a trustee
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 the trustee at the written request of holders of 10% of the outstanding
shares of the Trust.
Class-Specific Expenses. Each fund may determine to allocate certain of
its expenses to the specific classes of that fund's shares to which those
expenses are attributable. For example, Class B and Class C shares bear higher
transfer agency fees per shareholder account than those borne by Class A or
Class Y shares. The higher fee is imposed due to the higher costs incurred by
the transfer agent in tracking shares subject to a contingent deferred sales
charge because, upon redemption, the duration of the shareholder's investment
must be determined to determine the applicable charge. Although the transfer
agency fee will differ on a per account basis as stated above, the specific
extent to which the transfer agency fees will differ between the classes as a
percentage of net assets is not certain, because the fee as a percentage of net
assets will be affected by the number of shareholder accounts in each class and
the relative amounts of net assets in each class.
Custodian and Recordkeeping Agent; Transfer and Dividend Agent. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for each fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as each fund's transfer and
dividend disbursing agent. It is located at 400 Bellevue Parkway, Wilmington, DE
19809.
Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for the funds.
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FINANCIAL STATEMENTS
MITCHELL HUTCHINS SECURITIES TRUST
PAINEWEBBER ENHANCED S&P 500 FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 1, 2000
Assets:
Cash $ 50,000
Deferred offering expenses 115,000
Prepaid expenses 94,000
-----------
Total assets 259,000
-----------
Liabilities:
Offering expenses payable 115,000
Payable to adviser 94,000
-----------
Total liabilities 209,000
-----------
Net Assets (beneficial interest, $0.001 par $ 50,000
value) ===========
CLASS A:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and redemption value per $ 10.00
share ===========
Maximum offering price per share (net asset
value plus sales charge of 3.00% of $ 10.31
offering price) ===========
CLASS B:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and offering price per share $ 10.00
===========
CLASS C:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and offering price per share $ 10.00
===========
CLASS Y:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value, offering price and $ 10.00
redemption value per share ===========
Organization
PaineWebber Enhanced S&P 500 Fund ("Fund") is a diversified series of
Mitchell Hutchins Securities Trust ("Trust"), an open-end management investment
company organized as a Delaware business trust on December 23, 1999. The Fund
has had no operations other than the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), the investment adviser, a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber"), of 1,250 shares of beneficial interest
of Class A for the amount of $12,500, 1,250 shares of beneficial interest of
Class B for the amount of $12,500, 1,250 shares of beneficial interest of Class
C for the amount of $12,500 and 1,250 shares of beneficial interest of Class Y
for the amount of $12,500, on March 1, 2000. Each class represents assets of the
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Fund, and the classes are identical except for differences in ongoing service
and distribution fees and certain transfer agency expenses. The trustees of the
Trust have authority to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Class Y shares are currently offered for
sale only to limited groups of investors.
Costs incurred and to be incurred in connection with the offering and initial
registration of the Trust will be paid initially by Mitchell Hutchins; however,
the Trust will reimburse Mitchell Hutchins for such costs. Such costs will be
expensed over the first year of the Fund. Costs incurred in organizing the fund
will be borne by the adviser.
Management Agreement
Mitchell Hutchins acts as the investment adviser and administrator to the
Fund pursuant to a contract (the "Advisory Contract") with the Trust dated March
1, 2000. Under the Advisory Contract, the Fund pays Mitchell Hutchins a fee,
computed daily and paid monthly, at an annual rate of 0.40% of average daily net
assets.
Distribution Arrangements
Mitchell Hutchins is the distributor of each class of the Fund's shares and
has appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of distribution pertaining to the Class A, Class B, Class C
and Class Y shares of the Fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"), 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 each class of shares.
Under the Class B Plan and the Class C Plan, the Fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.40%
of the average daily net assets of the Class B shares and the Class C shares,
respectively. There is no distribution plan with respect to the Fund's Class Y
shares, and the Fund pays no service or distribution fees with respect to its
Class Y shares.
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MITCHELL HUTCHINS SECURITIES TRUST
PAINEWEBBER ENHANCED NASDAQ-100 FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 1, 2000
Assets:
Cash $ 50,000
Deferred offering expenses 115,000
Prepaid expenses 97,000
-----------
Total assets 262,000
-----------
Liabilities:
Offering expenses payable 115,000
Payable to adviser 97,000
-----------
Total liabilities 212,000
----------
Net Assets (beneficial interest, $0.001 par $ 50,000
value) ===========
CLASS A:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and redemption value per $ 10.00
share ===========
Maximum offering price per share (net asset
value plus sales charge of 4.50% of $ 10.47
offering price) ===========
CLASS B:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and offering price per share $ 10.00
===========
CLASS C:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value and offering price per share $ 10.00
===========
CLASS Y:
Net Assets $ 12,500
-----------
Shares outstanding 1,250
-----------
Net asset value, offering price and $ 10.00
redemption value per share ===========
Organization
PaineWebber Enhanced Nasdaq-100 Fund ("Fund") is a non-diversified series of
Mitchell Hutchins Securities Trust ("Trust"), an open-end management investment
company organized as a Delaware business trust on December 23, 1999. The Fund
has had no operations other than the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins"), the investment adviser, a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber"), of 1,250 shares of beneficial interest
of Class A for the amount of $12,500, 1,250 shares of beneficial interest of
Class B for the amount of $12,500, 1,250 shares of beneficial interest of Class
C for the amount of $12,500 and 1,250 shares of beneficial interest of Class Y
41
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for the amount of $12,500, on March 1, 2000. Each class represents assets of the
Fund, and the classes are identical except for differences in ongoing service
and distribution fees and certain transfer agency expenses. The trustees of the
Trust have authority to issue an unlimited number of shares of beneficial
interest, par value $0.001 per share. Class Y shares are currently offered for
sale only to limited groups of investors.
Costs incurred and to be incurred in connection with the offering and initial
registration of the Trust will be paid initially by Mitchell Hutchins; however,
the Trust will reimburse Mitchell Hutchins for such costs. Such costs will be
expensed over the first year of the Fund. Costs incurred in organizing the fund
will be borne by the adviser.
Management Agreement
Mitchell Hutchins acts as the investment adviser and administrator to the
Fund pursuant to a contract (the "Advisory Contract") with the Trust dated March
1, 2000. Under the Advisory Contract, the Fund pays Mitchell Hutchins a fee,
computed daily and paid monthly, at an annual rate of 0.75% of average daily net
assets.
Distribution Arrangements
Mitchell Hutchins is the distributor of each class of the Fund's shares and
has appointed PaineWebber as the exclusive dealer for the sale of those shares.
Under separate plans of distribution pertaining to the Class A, Class B, Class C
and Class Y shares of the Fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"), 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 each class of shares.
Under the Class B Plan and 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 B shares and the Class C shares,
respectively. There is no distribution plan with respect to the Fund's Class Y
shares, and the Fund pays no service or distribution fees with respect to its
Class Y shares.
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Report of Independent Auditors
To the Board of Trustees and Shareholders
Mitchell Hutchins Securities Trust
We have audited the accompanying statements of assets and liabilities of
the Mitchell Hutchins Securities Trust (comprising, PaineWebber Enhanced S&P 500
Fund and PaineWebber Enhanced Nasdaq-100 Fund) (the "Trust") as of March 1,
2000. These statements of assets and liabilities are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
statements of assets and liabilities based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the statement of assets
and liabilities is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statement of assets and liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of assets and liabilities presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Mitchell
Hutchins Securities Trust at March 1, 2000, in conformity with accounting
principals generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
March 1, 2000
<PAGE>
You should rely only on the information contained or referred to in the
Prospectus and this Statement of Additional Information. The funds and their
distributor have not authorized anyone to provide you with information that is
different. The Prospectus and this Statement of Additional Information are not
an offer to sell shares of the funds in any jurisdiction where the funds or
their distributor may not lawfully sell those shares.
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PaineWebber
Enhanced S&P 500 Fund
Enhanced Nasdaq-100 Fund
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Statement of Additional Information
March 8, 2000
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PaineWebber
(C)2000 PaineWebber Incorporated. All rights reserved.
