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PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER GROWTH FUND
PAINEWEBBER SMALL CAP VALUE FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The three funds named above (each a "Fund" and, collectively, "Funds") are
diversified series of professionally managed, open-end investment companies
organized as Massachusetts business trusts (each a "Trust" and, collectively,
"Trusts"). PaineWebber Growth and Income Fund ("Growth and Income Fund"), a
series of PaineWebber America Fund ("America Fund"), seeks to provide current
income and capital growth; it invests primarily in dividend-paying equity
securities believed by its investment adviser to have the potential for rapid
earnings growth. PaineWebber Growth Fund ("Growth Fund"), a series of
PaineWebber Olympus Fund ("Olympus Fund"), seeks long-term capital
appreciation; it invests primarily in equity securities issued by companies
deemed by its investment adviser to have substantial potential for capital
growth. PaineWebber Small Cap Value Fund ("Small Cap Value Fund"), a series of
PaineWebber Securities Trust ("Securities Trust"), also seeks long-term
capital appreciation; it invests primarily in equity securities of small cap
companies.
The investment adviser, administrator and distributor for each Fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
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.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Funds' current Prospectus, dated May 1,
1996. A copy of the Prospectus may be obtained by calling any PaineWebber
investment executive or correspondent firm or by calling toll-free 1-800-647-
1568. This Statement of Additional Information is dated May 1, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P"), and
other nationally recognized statistical rating organizations ("NRSROs") are
private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to corporate debt
obligations by Moody's and S&P is included in the Appendix to this Statement
of Additional Information. The Funds may use these ratings in determining
whether to purchase, sell or hold a security. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices.
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Ratings of debt securities represent the NRSROs' opinions regarding their
quality, are not a guarantee of quality, and may be reduced after a Fund has
acquired the security. Mitchell Hutchins will consider such an event in
determining whether a Fund should continue to hold the security but is not
required to dispose of it. In the event that, due to a downgrade of one or
more debt securities, an amount in excess of the permitted percentage of a
Fund's net assets is held in securities rated below investment grade and
comparable unrated securities, the Fund will engage in an orderly disposition
of such securities to the extent necessary to ensure that its holdings of such
securities does not exceed that percentage.
Debt securities rated Ba or lower by Moody's, BB or lower by S&P, comparably
rated by another NRSRO or determined by Mitchell Hutchins to be of comparable
quality are below investment grade, are deemed by those agencies to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve major risk exposure to adverse
conditions. Lower rated debt securities generally offer a higher current yield
than that available for investment grade issues, but they involve higher
risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuations in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial
stress which could adversely affect their ability to make payments of interest
and principal and increase the possibility of default. In addition, such
issuers may not have more traditional methods of financing available to them
and may be unable to repay debt at maturity by refinancing. The risk of loss
due to default by such issuers is significantly greater because such
securities frequently are unsecured and subordinated to the prior payment of
senior indebtedness.
The market for lower rated debt securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. In the past, the
prices of many lower rated debt securities declined substantially, reflecting
an expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically. However, such higher yields did not reflect the value of the
income stream that holders of such securities expected, but rather the risk
that holders of such securities could lose a substantial portion of their
value as a result of the issuers' financial restructuring or default. There
can be no assurance that such declines will not recur. The market for lower-
rated debt issues generally is thinner and less active than that for higher
quality securities, which may limit a Fund's ability to sell such securities
at fair value in response to changes in the economy or financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
rated securities, especially in a thinly traded market.
RISK CONSIDERATIONS RELATING TO FOREIGN SECURITIES. Securities of foreign
issuers may not be registered with the Securities and Exchange Commission
("SEC"), nor may the issuers thereof be subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
requirements comparable to those applicable to U.S. companies.
The Funds may invest in foreign securities by purchasing American Depository
Receipts ("ADRs"). Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. For purposes of 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
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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. Each Fund may invest up to 10% of its net assets (15%
for Small Cap Value Fund) in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the
amount at which a Fund has valued the securities and includes, among other
things, purchased over-the-counter ("OTC") options, repurchase agreements
maturing in more than seven days and restricted securities other than those
Mitchell Hutchins has determined are liquid pursuant to guidelines established
by each Trust's board of trustees. The assets used as cover for OTC options
written by each Fund will be considered illiquid unless the OTC options are
sold to qualified dealers who agree that the Fund may repurchase any OTC
option it writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). 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 the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and
notes. These instruments are often restricted securities because the
securities are sold in transactions not requiring registration. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend either on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities
of domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the Funds, however, could affect adversely the
marketability of such portfolio securities, and the Funds might be unable to
dispose of such securities promptly or at favorable prices.
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Each Trust's board of trustees has delegated the function of making day-to-
day determinations of liquidity to Mitchell Hutchins, pursuant to guidelines
approved by the board. Mitchell Hutchins takes into account a number of
factors in reaching liquidity decisions, including (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of restricted securities in each Fund's
portfolio and reports periodically on such decisions to the boards.
CONVERTIBLE SECURITIES. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to non- convertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common
stocks of the same or similar issuers. Convertible securities rank senior to
common stock in a corporations' capital structure but are usually subordinated
to comparable non-convertible securities.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. The value of a convertible security is
a function of its "investment value" (determined by its yield comparison with
the yields of other securities of comparable maturity and quality that do not
have a conversion privilege) and its "conversion value" (the security's worth,
at market value, if converted into the underlying common stock). The
investment value of a convertible security is influenced by changes in
interest rates, with investment value declining as interest rates increase and
increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is
governed principally by its investment value, and generally the conversion
value decreases as the convertible security approaches maturity. To the extent
the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. In addition, a convertible security
generally will sell at a premium over its conversion value determined by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party.
Lower rated convertible securities generally offer a higher current yield
than that available from higher grade issues, but they involve higher risks,
in that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes
in the financial condition of the issuers and to price fluctuation in response
to changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress,
which could adversely affect their ability to make payments of principal and
interest (or, in the case of convertible preferred stock, dividends) and
increase the possibility of default. In addition, such issuers may not have
more
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traditional methods of financing available to them, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
GOVERNMENT SECURITIES. Government securities in which the Funds may invest
include direct obligations of the United States Treasury and obligations
issued or guaranteed by the United States government or one of its agencies or
instrumentalities ("Government Securities"). Direct obligations of the United
States Treasury include a variety of securities that differ in their interest
rates, maturities and dates of issuance. Among the Government Securities that
may be held by the Funds are instruments that are supported by the full faith
and credit of the United States; instruments that are supported by the right
of the issuer to borrow from the United States Treasury; and instruments that
are supported solely by the credit of the instrumentality.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. The Fund maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such securities. If the value of these
securities is less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement must provide additional collateral so
that at all times the collateral is at least equal to the repurchase price,
plus any agreed-upon additional amount. The difference between the total
amount to be received upon repurchase of the securities and the price that was
paid by a Fund upon acquisition is accrued as interest and included in its net
investment income. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible declines in the
market value of the underlying securities and delays and costs to the Funds if
the other party to a repurchase agreement becomes insolvent.
The Funds intend to enter into repurchase agreements only with banks and
dealers in transactions believed by Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by each Trust's board
of trustees. Mitchell Hutchins reviews and monitors the creditworthiness of
those institutions under each board's general supervision.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements with banks and securities dealers up to an aggregate value of not
more than 5% of the Fund's net assets (10% of total assets for Small Cap Value
Fund). Such agreements involve the sale of securities held by a Fund subject
to that Fund's agreement to repurchase the securities at an agreed-upon date
and 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's custodian segregates
assets to cover the Fund's obligations under the reverse repurchase agreement.
See "Investment Policies and Restrictions--Segregated Accounts."
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to 33
1/3% the total value of its portfolio securities to broker-dealers or
institutional investors that Mitchell Hutchins deems qualified, but only when
the borrower maintains acceptable collateral with that Fund's custodian bank,
marked to market daily, in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends. Acceptable collateral
is limited to cash, U.S. government securities and irrevocable letters of
credit that meet certain guidelines established by Mitchell Hutchins. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will
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monitor, all relevant facts and circumstances, including the creditworthiness
of the borrower. Each Fund will retain authority to terminate any loans at any
time. Each Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or money market instruments held as collateral to the borrower or
placing broker. Each Fund will receive reasonable interest on the loan or a
flat fee from the borrower and amounts equivalent to any dividends, interest
or other distributions on the securities loaned. Each Fund will regain record
ownership of loaned securities to exercise beneficial rights, such as voting
and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
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 defer realization of gains or losses for tax or other purposes. To
make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it will establish a margin account with the broker effecting
the short sale, and will deposit collateral with the broker. In addition, that
Fund will maintain with its custodian, in a segregated account, the securities
that could be used to cover the short sale. Each Fund will incur transaction
costs, including interest expense, in connection with opening, maintaining and
closing short sales against the box. The Funds currently do not intend to have
obligations under short sales that at any time during the coming year exceed
5% of a Fund's net assets.
The Funds might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security
owned by a Fund or a security convertible into or exchangeable for a security
owned by a Fund, or when Mitchell Hutchins wants to sell a security that a
Fund owns at a current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes. In such case, any loss in 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 position should be reduced by a
loss in the short position. The extent to which gains or losses in the long
position are reduced will depend upon the amount of the securities sold short
relative to the amount of the securities a Fund owns, either directly or
indirectly, and in the case where a Fund owns convertible securities, changes
in the investment values 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." In when-issued or delayed delivery transactions, delivery
of the securities occurs beyond normal settlement periods, but a Fund
generally would not pay for such securities or start earning interest or
dividends on them until they are delivered. However, when a Fund purchases
securities on a when-issued or delayed delivery basis, it immediately assumes
the risks of ownership, including the risk of price fluctuation. Failure by a
counter party to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an
alternative investment. Depending on market conditions, a Fund's when-issued
and delayed delivery purchase commitments could cause its net asset value per
share to be more volatile, because such securities may increase the amount by
which the Fund's total assets, including the value of when-issued and delayed
delivery securities held by the 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.
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 agrees to purchase
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securities on a when-issued basis, its custodian segregates assets to cover
the amount of the commitment. See "Investment Policies and Restrictions--
Segregated Accounts." The Funds purchase when-issued securities only with the
intention of taking delivery, but may sell the right to acquire the security
prior to delivery if Mitchell Hutchins deems it advantageous to do so, which
may result in capital gain or loss to a Fund.
SEGREGATED ACCOUNTS. When a Fund enters into certain transactions that
involve obligations to make future payments to third parties, such as reverse
repurchase agreements or the purchase of securities on a when-issued or
delayed delivery basis, it will maintain with an approved custodian in a
segregated account cash, Government Securities or other liquid high-grade debt
securities, marked to market daily, in an amount at least equal to the Fund's
obligation or commitment under such transactions. As described below under
"Hedging Strategies," segregated accounts may also be required in connection
with certain transactions involving options and futures contracts.
INVESTMENT LIMITATIONS OF THE FUNDS
Each Fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental 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.
(2) purchase any security if, as a result of that purchase, 25% or more of
the Fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities.
(3) issue senior securities or borrow money, except as permitted under the
1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency
purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances
or similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under
the federal securities laws in connection with its disposition of portfolio
securities.
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(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by
interests in real estate are not subject to this limitation, and except that
the Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be
liquidated in an orderly manner.
(7) purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but the Fund may purchase, sell or
enter in financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
The foregoing fundamental investment limitations for each Fund cannot be
changed without the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of that Fund or (b) 67% or more of the shares 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, a later increase or
decrease in percentage resulting from a change in values of portfolio
securities or amount of total assets will not be considered a violation of any
of the foregoing limitations.
The following investment restrictions are not fundamental and may be changed
by each Trust's board of trustees without shareholder approval.
Each Fund will not:
(1) purchase or retain the securities of any issuer if the officers and
trustees of its Trust and the officers and directors of Mitchell Hutchins
(each owning beneficially more than 0.5% of the outstanding securities of an
issuer) own in the aggregate more than 5% of the securities of the issuer.
(2) purchase any security if as a result more than 5% of its total assets
would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years, and
for Small Cap Value, in equity securities of issuers that are not readily
marketable.
(3) invest more than 10% of its net assets (15% of net assets for Small Cap
Value Fund) in illiquid securities, a term which means securities that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which it has valued the securities and includes,
among other things, repurchase agreements maturing in more than seven days.
(4) make investments in warrants if such investments, valued at the lower of
cost of market, exceed 5% of the value of its net assets, which amount may
include warrants that are not listed on the New York Stock Exchange, Inc
("NYSE") or the American Stock Exchange, Inc., provided that such unlisted
warrants, valued at the lower of cost or market, do not exceed 2% of its net
assets, and further provided that this restriction does not apply to warrants
attached to, or sold as a unit with, other securities. For purposes of this
restriction, the term "warrants" does not include options on securities, stock
or bond indices or futures contracts.
(5) change its investment policies to permit the Fund to invest more than
35% of its total assets in debt securities rated Ba or lower by Moody's or BB
or lower by S&P, comparably rated by another NRSRO or determined by Mitchell
Hutchins to be of comparable quality without giving at least 30 days' advance
notice to shareholders.
(6) invest in real estate limited partnerships.
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(7) 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.
(8) 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.
(9) invest in oil, gas or mineral exploration or development programs or
leases, except that investments in securities of issuers that invest in such
programs or leases and investments in asset-backed securities supported by
receivables generated from such programs or leases are not subject to this
prohibition.
(10) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act and except that this limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.
HEDGING STRATEGIES
HEDGING INSTRUMENTS. Mitchell Hutchins may use a variety of financial
instruments ("Hedging Instruments"), including certain options, futures
contracts (sometimes referred to as "futures") and options on futures
contracts, to attempt to hedge each Fund's portfolio. In particular, each Fund
may use the hedging instruments described below:
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. 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. 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 STOCK INDEXES--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values
of those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock 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 stock index.
STOCK INDEX FUTURES CONTRACTS--A stock 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 stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks 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
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<PAGE>
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 or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security
or currency, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.
GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be broadly
categorized as "short hedges" and "long hedges." A short hedge is a purchase
or sale of a Hedging Instrument intended to partially or fully 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 Hedging
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 transactions costs. In the
alternative, because the value of the put option can be expected to increase
as the value of the underlying security declines, 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 Hedging 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 Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, a Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the
exercise price of the call, a Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transactions
costs. Alternatively, a Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging 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. Hedging 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. Hedging Instruments
on debt securities may be used to hedge either individual securities or broad
fixed income market sectors.
Because the Funds intend to use options and futures for hedging purposes,
each Fund may enter into any futures contracts or options on futures contracts
as long as the aggregate of the market value of the Fund's outstanding futures
contracts and market value of the futures contracts subject to outstanding
options written by that Fund does not exceed 50% of the market value of the
total assets of that Fund. Under normal circumstances, however, the value of a
Fund's portfolio assets so hedged generally will be a much smaller amount.
10
<PAGE>
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, Mitchell Hutchins expects to discover additional opportunities in
connection with options, futures contracts and other hedging techniques. These
new opportunities may become available as Mitchell Hutchins develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, foreign currency contracts
or other techniques are developed. Mitchell Hutchins may utilize these
opportunities to the extent that they are consistent with each Fund's
investment objective and permitted by each Fund's investment limitations and
applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the ability of
Mitchell Hutchins to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the
markets in which Hedging Instruments are traded.
The effectiveness of hedges using Hedging Instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the securities being hedged. Because the Funds invest primarily
in common stocks of issuers meeting the specific criteria described in the
Prospectus, there might be a significant lack of correlation between the
portfolio and the stock indices underlying any such Hedging Instruments used
by a Fund.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a
short hedge because Mitchell Hutchins 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 might be wholly or partially offset by a decline
in the price of the Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the security,
that Fund could suffer a loss. In either such case, the Fund would have been
in a better position had it not hedged at all.
11
<PAGE>
(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 Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund was unable to
close out its positions in such Hedging 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 Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a contra party to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to a Fund.
COVER FOR HEDGING STRATEGIES. The Funds will not use Hedging Instruments for
speculative purposes or for purposes of leverage. Transactions using Hedging
Instruments, other than purchased options, expose the Funds to an obligation
to another party. The Funds will not enter into any such transactions unless
it owns either (1) an offsetting ("covered") position in securities, other
options or futures contracts or (2) cash and short-term liquid debt
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The Funds will
comply with SEC guidelines regarding cover for hedging transactions and will,
if the guidelines so require, set aside cash, U.S. government securities or
other liquid, high-grade debt 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 Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion
of a Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Funds may purchase put and call options, and write (sell)
covered put or call options, on equity and debt securities and stock indices
and foreign currencies. The purchase of call options serves as a long hedge,
and the purchase of put options serves as a short hedge. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the affected Fund will be obligated to sell the security
at less than its market value. Writing covered put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the
put option, it can be expected that the put option will be exercised and the
Fund will be obligated to purchase the security at more than its market value.
The securities or other assets used as cover for OTC options written by a Fund
would be considered illiquid to the extent described under "Investment
Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by
12
<PAGE>
purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or
call option it had purchased by writing an identical put or call option; this
is known as a closing sale transaction. Closing transactions permit a Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist
but are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between a Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on
the contra party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction. The Funds will enter into OTC option transactions
only with contra parties that have a net worth of at least $20 million.
Generally, the OTC debt options or foreign currency options used by the
Funds are European-style options. This means that the option is only
exercisable immediately prior to its expiration. This is in contrast to
American-style options, which are exercisable at any time prior to the
expiration date of the option.
The Funds' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing transactions can be made
for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Funds will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Funds, there is
no assurance that the Funds will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra party, the Funds might be unable to close out an OTC option
position at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered put or
call option written by the Fund could cause material losses because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed by
the following guidelines, which can be changed by each Trust's board of
trustees without shareholder vote:
(1) Each Fund may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums
on all other options held by that Fund, does not exceed 5% of its total
assets.
(2) The aggregate value of underlying securities on which covered calls are
written will not exceed 50% of each Fund's total assets.
(3) To the extent cash or cash equivalents, including Government Securities,
are maintained in a segregated account to collateralize options written on
currencies, securities or stock indexes, each Fund will limit
collateralization to 20% of its net assets.
13
<PAGE>
FUTURES. The Funds may purchase and sell stock index futures contracts,
interest rate futures contracts and foreign currency futures contracts. The
Funds may also purchase put and call options, and write covered put and call
options, on futures in which it is allowed to invest. The purchase of futures
or call options thereon can serve as a long hedge, and the sale of futures or
the purchase of put options thereon can serve as a short hedge. Writing
covered call options on futures contracts can serve as a limited short hedge,
and writing covered put options on futures contracts can serve as a limited
long hedge, using a strategy similar to that used for writing covered options
on securities or indices.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract 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, U.S. Government
Securities, or other liquid, high-grade debt securities, in an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to a
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high
volatility, the Funds may be required by an exchange to increase the level of
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of each Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such
sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. The Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be a liquid secondary market.
However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
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.
14
<PAGE>
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might
be increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. The Funds' use of futures and related
options is governed by the following guidelines, which can be changed by each
Trust's board of trustees without shareholder vote:
(1) To the extent a Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums on those positions
(excluding the amount by which options are "in-the-money") may not exceed 5%
of that Fund's net assets.
(2) The aggregate premiums paid on all options (including options on
securities and stock or bond indices and options on futures contracts)
purchased by a Fund that are held at any time will not exceed 20% of that
Fund's net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by each Fund will not exceed 5% of its total assets.
15
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of each Trust (the same positions are
held in each of the three Trusts, except as otherwise indicated), their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 49 Trustee and Mrs. Alexander is president, chief
President executive officer and a director of
Mitchell Hutchins (since January
1995) and also an executive vice
president and a director of
PaineWebber Incorporated
("PaineWebber"). Mrs. Alexander is
president and a director or trustee
of 30 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Richard Q. Armstrong; 60 Trustee Mr. Armstrong is chairman and prin-
78 West Brother Drive cipal of RQA Enterprises (manage-
Greenwich, CT 06830 ment consulting firm) (since April
1991 and principal occupation since
March 1995). Mr. Armstrong is also
a director of Hi Lo Automotive,
Inc. He was chairman of the board,
chief executive officer and co-
owner of Adirondack Beverages (pro-
ducer and distributor of soft
drinks and sparkling/still waters)
(October 1993-March 1995). He was a
partner of the New England Consult-
ing Group (management consulting
firm) (December 1992-September
1993). He was managing director of
LVMH U.S. Corporation (U.S. subsid-
iary of the French luxury goods
conglomerate, Luis Vuitton Moet
Hennessey Corporation) (1987-1991)
and chairman of its wine and spir-
its subsidiary, Schieffelin & Som-
erset Company (1987-1991). Mr. Arm-
strong is a director or trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
E. Garrett Bewkes, Trustee and Mr. Bewkes is a director of Paine
Jr.**; 69 Chairman of the Webber Group Inc. ("PW Group")
Board of Trustees (holding company of PaineWebber and
Mitchell Hutchins). Prior to Decem-
ber 1995, he was a consultant to PW
Group. Prior to 1988, he was chair-
man of the board, president and
chief executive officer of American
Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries
Corporation and NaPro Bio-Therapeu-
tics, Inc. and is a director or
trustee of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Richard R. Burt; 49 Trustee Mr. Burt is chairman of Interna-
1101 Connecticut Avenue, tional Equity Partners (interna-
N.W. tional investments and consulting
Washington, D.C. 20036 firm) (since March 1994) and a
partner of McKinsey & Company (man-
agement consulting firm) (since
1991). He is also a director of
American Publishing Company. He was
the chief negotiator in the Strate-
gic Arms Reduction Talks with the
former Soviet Union (1989-1991) and
the U.S. Ambassador to the Federal
Republic of Germany (1985-1989).
Mr. Burt is a director or trustee
of 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Mary C. Farrell**; 46 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 is employed
as a regular panelist on Wall
$treet Week with Louis Rukeyser.
She also serves on the Board of
Overseers of New York University's
Stern School of Business. Ms.
Farrell is a director or trustee of
29 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Meyer Feldberg; 54 Trustee Mr. Feldberg is Dean and Professor
Columbia University of Management of the Graduate
101 Uris Hall School of Business, Columbia Uni-
New York, New York 10027 versity. Prior to 1989, he was
president of the Illinois Institute
of Technology. Dean Feldberg is
also a director of AMSCO Interna-
tional Inc., Federated Department
Stores, Inc., and New World Commu-
nications Group Incorporated and is
a director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
George W. Gowen; 66 Trustee Mr. Gowen is a partner in the law
666 Third Avenue firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
partner in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is also a
director of Columbia Real Estate
Investments, Inc. Mr. Gowen is a
director or trustee of 29 invest-
ment companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ---------------------- ----------------------- --------------------
<S> <C> <C>
Frederic V. Malek; 59 Trustee Mr. Malek is chairman of Thayer Cap-
901 15th Street, N.W. ital Partners (investment bank) and
Suite 300 a co-chairman and director of CB
Washington, D.C. 20005 Commercial Group Inc. (real es-
tate). From January 1992 to Novem-
ber 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., NWA
Inc. (holding company of Northwest
Airlines Inc.) and Wings Holdings
Inc. (holding company of NWA Inc.)
Prior to 1989, he was employed by
the Marriott Corporation (hotels,
restaurants, airline catering and
contract feeding), where he most
recently was an executive vice
president and president of Marriott
Hotels and Resorts. Mr. Malek is
also a director of American Manage-
ment Systems, Inc. (management con-
sulting and computer-related serv-
ices), Automatic Data Processing,
Inc., Avis, Inc. (passenger car
rental), FPL Group, Inc. (electric
services), National Education Cor-
poration, and Northwest Airlines,
Inc. Mr. Malek is a director or
trustee of 29 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Carl W. Schafer; 60 Mr. Schafer is president of the At-
P.O. Box 1164 lantic Foundation (charitable foun-
Princeton, N.J. 08542 dation supporting mainly oceano-
graphic exploration and research).
He also is a director of Roadway
Express, Inc. (trucking), The
Guardian Group of Mutual Funds, Ev-
ans Systems, Inc. (a motor fuels,
convenience store and diversified
company), Hidden Lake Gold Mines
Ltd. (gold mining), Electronic
Clearing House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutix
Inc. (biotechnology). Prior to Jan-
uary 1993, Mr. Schafer was chairman
of the Investment Advisory Commit-
tee of the Howard Hughes Medical
Institute. Mr. Schafer is a direc-
tor or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ---------------------- ----------------------- --------------------
<S> <C> <C>
John R. Torell III; 56 Trustee Mr. Torell is chairman of Torell
767 Fifth Avenue Management, Inc. (financial advi-
Suite 4605 sory firm) (since 1989), chairman
New York, NY 10153 of Telesphere Corporation (elec-
tronic provider of financial infor-
mation) and a partner of Zilkha &
Company (merchant banking and pri-
vate investment company). He is the
former chairman and chief executive
officer of Fortune Bancorp (1990-
1991, and 1990-1994, respectively),
the former chairman, president and
chief executive officer of CalFed,
Inc. (savings association) (1988 to
1989) and former president of Manu-
facturers Hanover Corp. (bank)
(prior to 1988). Mr. Torell is also
a director of American Home Prod-
ucts Corp., New Colt Inc. (armament
manufacturer) and Volt Information
Sciences Inc. Mr. Torell is a di-
rector or trustee of 29 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president
and manager--advisory administra-
tion of Mitchell Hutchins. Prior to
November 1993, she was compliance
manager of Hyperion Capital Manage-
ment, Inc., an investment advisory
firm. Prior to April 1993, Ms.
Boyle was a vice president and man-
ager--legal administration of
Mitchell Hutchins. Ms. Boyle is a
vice president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Ellen R. Harris; 49 Vice President Ms. Harris is a managing director
(Olympus Fund) and a portfolio manager of Mitchell
Hutchins. Ms. Harris is a vice
president of three investment com-
panies for which Mitchell Hutchins
or PaineWebber serves as investment
adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS* AND BUSINESS EXPERIENCE;
AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
------------------ ----------------------- --------------------
<S> <C> <C>
Donald R. Jones; 35 Vice President Mr. Jones is a first vice president
(Securities Trust only) and a portfolio manager of Mitchell
Hutchins. Prior to February 1996,
he was a vice president in the as-
set management group of First Fi-
delity Bancorporation. Mr. Jones is
a vice president of two investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Thomas J. Libassi; 37 Vice President Mr. Libassi is a senior vice presi-
(Securities Trust only) dent and portfolio manager of
Mitchell Hutchins. Prior to May
1994, he was a vice president of
Keystone Custodian Funds Inc. with
portfolio management responsibili-
ty. Mr. Libassi is a vice president
of four investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president
Assistant Treasurer and a senior manager of the mutual
fund finance division of Mitchell
Hutchins. Mr. Maher is a vice pres-
ident and assistant treasurer of 30
investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Dennis McCauley; 49 Vice President Mr. McCauley is a managing director
(Securities Trust only) and chief investment officer--fixed
income of Mitchell Hutchins. Prior
to December 1994, he was director
of fixed income
investments of IBM Corporation.
Mr. McCauley is a vice president of
19 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of
Assistant Treasurer Mitchell Hutchins. Ms. Moran is a
vice president and assistant trea-
surer of 30 investment companies
for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
---------------------- ----------------------- --------------------
<S> <C> <C>
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice pres-
Secretary ident and deputy general counsel of
Mitchell Hutchins. Ms. O'Donnell is
a vice president and secretary of
30 investment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director
45 and general counsel of Mitchell
Hutchins. Prior to May 1994, she
was a partner in the law firm of
Arnold & Porter. Ms. Schonfeld is a
vice president of 30 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice presi-
Assistant Treasurer dent and a senior manager of the
mutual fund finance division of
Mitchell Hutchins. From August 1992
to August 1994, he was a vice pres-
ident at BlackRock Financial Man-
agement Inc. Prior to August 1992,
he was an audit manager with Ernst
& Young LLP. Mr. Schubert is a vice
president and assistant treasurer
of 30 investment companies for
which Mitchell Hutchins or Paine-
Webber serves as investment
adviser.
Nirmal Singh; 39 Vice President Mr. Singh is a first vice president
(Securities Trust only) and a portfolio manager of Mitchell
Hutchins. Prior to September 1993,
he was a member of the portfolio
management team at Merrill Lynch
Asset Management, Inc. Mr. Singh is
vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice presi-
Treasurer dent and the director of the mutual
fund finance division of Mitchell
Hutchins. Prior to 1991, he was an
audit senior manager with Ernst &
Young LLP. Mr. Sluyters is a vice
president and treasurer of 30 in-
vestment companies for which
Mitchell Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH THE TRUST OTHER DIRECTORSHIPS
- ---------------------- ----------------------- --------------------
<S> <C> <C>
Mark A. Tincher; 40 Vice President Mr. Tincher is a managing director
and chief investment officer--U.S.
equity investments of Mitchell
Hutchins. Prior to March 1995, he
was a vice president and directed
the U.S. funds management and eq-
uity research areas of Chase Man-
hattan Private Bank. Mr. Tincher is
a vice president of 14 investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Craig M. Varrelman; 37 Vice President Mr. Varrelman is a first vice presi-
(Securities Trust only) dent and a portfolio manager of
Mitchell Hutchins. Mr. Varrelman is
a vice president of five investment
companies for which Mitchell
Hutchins or PaineWebber serves as
investment adviser.
Stuart Waugh; 40 Vice President Mr. Waugh is a managing director and
(Securities Trust only) a portfolio manager of Mitchell
Hutchins responsible for global
fixed income investments and cur-
rency trading. Mr. Waugh is a vice
president of five investment compa-
nies for which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
Keith A. Weller; 34 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 29 investment companies for
which Mitchell Hutchins or
PaineWebber serves as investment
adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are "interested persons" of each
Trust as defined in the Investment Company Act of 1940 ("1940 Act") by
virtue of their positions with Mitchell Hutchins, PaineWebber, and/or PW
Group.
23
<PAGE>
Each Trust pays trustees who are not "interested persons" of the Trust
$1,000 annually for each series and $150 for each board meeting and separate
meeting of a board committee. Each of Olyupus Fund and America Fund presently
has one series and thus pays each such trustee $1,000 annually; Securities
Trust presently has two series and thus pays each such trustee $2,000
annually. In addition each trust pays any additional amounts due for board or
committee meetings. Certain committee chairs receive additional compensation
aggregating $15,000 annually from all the funds within the PaineWebber fund
complex. All trustees are reimbursed for any expenses incurred in attending
meetings. Trustees own in the aggregate less than 1% of the outstanding shares
of each Fund. Because Mitchell Hutchins and PaineWebber perform substantially
all of the services necessary for the operation of the Trusts, the Trusts
require no employees. No officer, director or employee of Mitchell Hutchins or
PaineWebber presently receives any compensation from any Trust for acting as a
trustee or officer.
The table below includes certain information relating to the compensation of
each Trust's current trustees who held office during the last fiscal year and
by all investment companies in the same complex during the calendar year ended
December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE TOTAL
COMPENSATION AGGREGATE COMPENSATION COMPENSATION
FROM PW COMPENSATION FROM PW FROM
AMERICA FUND FROM PW SECURITIES TRUST AND
(GROWTH AND OLYMPUS FUND TRUST (SMALL THE FUND
INCOME (GROWTH CAP VALUE COMPLEX PAID
NAME OF PERSON, POSITION FUND)(1) FUND)(1) FUND)(2) TO TRUSTEES(3)
- ------------------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong,
Trustee................. N/A N/A $ 563 $ 9,000
Richard R. Burt,
Trustee................. N/A N/A 750 7,750
Meyer Feldberg,
Trustee................. $3,750 $4,250 N/A 106,375
George W. Gowen,
Trustee................. 3,750 4,250 N/A 99,750
Frederic V. Malek,
Trustee................. 3,750 4,250 N/A 99,750
Carl W. Schafer,
Trustee................. N/A N/A N/A 118,175
John R. Torell III,
Trustee................. N/A N/A 2,563 28,125
</TABLE>
- --------
N/A in the first three columns indicates the individual did not serve on the
board of trustees for a particular Trust. Only independent members of the
board are compensated by the Trusts and identified above; trustees who are
"interested persons," as defined by the 1940 Act, do not receive compensation.
(1) Represents fees paid to each trustee during the fiscal year ended August
31, 1995; the Trusts do not have pension or retirement plans.
(2) Represents fees paid to each trustee during the fiscal year ended July 31,
1995.
(3) Represents total compensation paid to each trustee during the calendar
year ended December 31, 1995.
24
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to advisory contracts (each an
"Advisory Contract") with each Trust. Under the Advisory Contracts, each Fund
pays Mitchell Hutchins a fee, computed daily and paid monthly, at the annual
rate specified below. Furthermore, under a service agreement with each Trust
that is reviewed by each Trust's board of trustees annually, PaineWebber
provides certain services to the Funds not otherwise provided by the Funds'
transfer agent.
Under the terms of the Advisory Contracts, each Fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. Expenses borne by each Fund include the following: (1) the cost
(including brokerage commissions) of securities purchased or sold by the Fund
and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund's shares under federal and state
securities laws and maintenance of such registrations and qualifications; (5)
fees and salaries payable to trustees and officers who are not interested
persons (as defined in the 1940 Act) of the Fund or Mitchell Hutchins; (6) all
expenses incurred in connection with the trustees' services, including travel
expenses; (7) taxes (including any income or franchise taxes) and governmental
fees; (8) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds; (9) any costs, expenses or losses arising out of
a liability of or claim for damages or other relief asserted against the Trust
or Fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent
trustees; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to shareholders; (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Fund; (15) fees,
voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the boards and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.
As required by state regulation, Mitchell Hutchins will reimburse a Fund if
and to the extent that the aggregate operating expenses of the Fund in any
fiscal year exceed applicable limits. Currently, the most restrictive such
limit applicable to the Funds is 2.5% of the first $30 million of a Fund's
average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees and extraordinary items, are excluded from this limitation. For the last
three fiscal years, no reimbursements were required pursuant to such
limitation for any Fund.
Under each Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the contracts, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. Each Advisory Contract terminates
automatically upon assignment and is terminable at any time without penalty by
the board of trustees 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 a Fund.
25
<PAGE>
GROWTH AND INCOME FUND. Pursuant to the Advisory Contract dated March 1,
1989, between America Fund and Mitchell Hutchins, Growth and Income Fund pays
Mitchell Hutchins a fee at the annual rate of 0.70% of the Fund's average
daily net assets, computed daily and paid monthly. For the fiscal years ended
August 31, 1995, August 31, 1994 and August 31, 1993, Growth and Income Fund
paid (or accrued) to Mitchell Hutchins investment advisory and administration
fees of $3,378,079, $4,892,163 and $6,413,944, respectively. Pursuant to the
applicable service agreement, during the fiscal years ended August 31, 1995,
August 31, 1994 and August 31, 1993, Growth and Income Fund paid (or accrued)
to PaineWebber service fees of $219,613, $303,496 and $355,724, respectively.
Mitchell Hutchins Institutional Investors Inc. ("MHII"), a wholly owned
subsidiary of Mitchell Hutchins, served as sub-adviser to Growth and Income
Fund from May 19, 1994 to April 25, 1995 pursuant to a sub-advisory contract
between MHII and Mitchell Hutchins under which Mitchell Hutchins (not the
Fund) paid MHII a fee in the annual amount of 0.25% of the Fund's average
daily net assets. During the periods from September 1, 1994 to April 25, 1995
and May 19, 1994 to August 31, 1994, Mitchell Hutchins paid or accrued to MHII
sub-advisory fees of $998,353 and $405,821, respectively.
GROWTH FUND. Pursuant to the Advisory Contract dated March 1, 1989, between
Olympus Fund and Mitchell Hutchins, Growth Fund pays Mitchell Hutchins a fee
at the annual rate of 0.75% of the Fund's average daily net assets, computed
daily and paid monthly. For the fiscal years ended August 31, 1995, August 31,
1994 and August 31, 1993, the Growth Fund paid (or accrued) to Mitchell
Hutchins investment advisory and administration fees of $1,993,930, $2,069,033
and $1,402,141, respectively. Pursuant to the applicable service agreement,
during the fiscal years ended August 31, 1995, August 31, 1994 and August 31,
1993, Growth Fund paid (or accrued) to PaineWebber service fees of $114,163,
$103,435 and $75,713, respectively.
SMALL CAP VALUE FUND. Pursuant to the Advisory Contract dated January 28,
1993, between Securities Trust and Mitchell Hutchins, Small Cap Value Fund
pays Mitchell Hutchins a fee at the annual rate of 1.00% of the Fund's average
daily net assets, computed daily and paid monthly. For the fiscal year ended
July 31, 1995, the six months ended July 31, 1994, and the fiscal year ended
January 31, 1994, Small Cap Value Fund paid (or accrued) to Mitchell Hutchins
investment advisory and administrative fees of $829,906, $491,757, and
$939,774, respectively. Pursuant to the applicable service agreement during
the fiscal year ended July 31, 1995, the six months ended July 31, 1994 and
the fiscal year ended January 31, 1993, Small Cap Value Fund paid (or accrued)
to PaineWebber service fees of $72,929, $26,353 and $47,661, respectively.
Quest Advisory Corp. ("Quest") served as a sub-adviser to Small Cap Value
Fund from February 1, 1993 through March 31, 1996, pursuant to a sub-advisory
contract between Quest and Mitchell Hutchins dated January 28, 1993, under
which Mitchell Hutchins (not the Fund) paid or accrued to Quest Advisory
during the fiscal year ended July 31, 1995, the six months ended July 31, 1994
and the fiscal year ended January 31, 1994, $414,953, $245,878 and $469,887,
respectively, in sub-advisory fees.
26
<PAGE>
NET ASSETS. The following table shows the approximate net assets as of
February 29, 1996, sorted by category of investment objective, of the
investment companies as to which Mitchell Hutchins serves as adviser or sub-
adviser. An investment company may fall into more than one of the categories
below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
------------------- ----------
<S> <C>
Domestic (excluding Money Market).............................. $5,653.6
Global......................................................... 2,836.8
Equity/Balanced................................................ 2,922.3
Fixed Income (excluding Money Market).......................... 5,568.1
Taxable Fixed Income......................................... 3,854.2
Tax-Free Fixed Income........................................ 1,713.9
Money Market Funds............................................. 22,732.0
</TABLE>
PERSONNEL TRADING POLICIES. Mitchell Hutchins personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of PaineWebber mutual funds and other
Mitchell Hutchins' advisory accounts by all Mitchell Hutchins' directors,
officers and employees, establishes procedures for personal investing and
restricts certain transactions. For example, employee accounts generally must
be maintained at PaineWebber, personal trades in most securities require pre-
clearance and short-term trading and participation in initial public offerings
generally are prohibited. In addition, the code of ethics puts restrictions on
the timing of personal investing in relation to trades by PaineWebber funds
and other Mitchell Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
Class A, Class B and Class C shares of each Fund under separate distribution
contracts with each Trust dated July 7, 1993 or November 10, 1995
(collectively, "Distribution Contracts") that require Mitchell Hutchins to use
its best efforts, consistent with its other businesses, to sell shares of each
Fund. Shares of each of the Funds are offered continuously. Under separate
exclusive dealer agreements between Mitchell Hutchins and PaineWebber dated
July 7, 1993 or November 10, 1995 relating to the Class A, Class B and Class C
shares (collectively, "Exclusive Dealer Agreements"), PaineWebber and its
correspondent firms sell the Funds' shares.
Under separate plans of distribution pertaining to the Class A, Class B and
Class C shares adopted by each Trust in the manner prescribed under Rule 12b-1
under the 1940 Act ("Class A Plan," "Class B Plan" and "Class C Plan,"
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 for each Class, except that the Class A Plans for Growth and
Income Fund and Growth Fund provide that the service fee paid with respect to
shares sold prior to December 2, 1988 ("Old Shares") is paid at the annual
rate of 0.15% of the Fund's net assets represented by such Old Shares. Shares
acquired through new purchases, reinvestment of dividends and other
distributions and exchanges on/or after December 2, 1988 are not considered
"Old Shares" for this purpose. Under the Class B Plan and the Class C Plan,
those Funds also pay 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.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to each Trust's board of trustees 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 respective board of
27
<PAGE>
trustees, including those trustees who are not "interested persons" of the
relevant Trust and who have no direct or indirect financial interest in the
operation of the Plan or any agreement related to the Plan, acting in person
at a meeting called for that purpose, (3) payments by a Fund under the Plan
shall not be materially increased without the affirmative vote of the holders
of a majority of the outstanding shares of the relevant class of the Fund and
(4) while the Plan remains in effect, the selection and nomination of trustees
who are not "interested persons" of a Trust shall be committed to the
discretion of the trustees who are not "interested persons" of the respective
Trust.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each Class of each
Fund's shares to such Class based on the ratio of sales of shares of such
Class to the sales of all three Classes of shares. The fees paid by one Class
of a Fund's shares will not be used to subsidize the sale of any other Class
of Fund shares.
For the fiscal year ended August 31, 1995, (for Growth and Income Fund and
Growth Fund) and July 31, 1995 (for Small Cap Value Fund), the Funds paid (or
accrued) the following respective fees to Mitchell Hutchins under the Plans:
<TABLE>
<CAPTION>
GROWTH AND
GROWTH INCOME SMALL CAP
FUND FUND VALUE FUND
-------- ---------- ----------
<S> <C> <C> <C>
Class A.......................................... $291,331 $ 433,166 $ 52,327
Class B.......................................... 879,165 2,488,140 477,586
Class C.......................................... 235,905 310,960 143,010
</TABLE>
Mitchell Hutchins estimates that it and its parent corporation, PaineWebber,
incurred the following shareholder service-related and distribution-related
expenses with respect to each Fund during the fiscal year ended August 31,
1995 (for Growth and Income Fund and Growth Fund) and July 31, 1995 (for Small
Cap Value Fund):
CLASS A
<TABLE>
<CAPTION>
GROWTH GROWTH AND SMALL CAP
FUND INCOME FUND VALUE FUND
-------- ----------- ----------
<S> <C> <C> <C>
Marketing and advertising...................... $ 37,629 $ 111,953 $ 14,837
Printing of prospectuses and statements of
additional information to other than current
shareholders.................................. 1,835 2,720 752
Branch network costs allocated and interest ex-
pense......................................... 384,173 1,157,455 73,877
Service fees paid to PaineWebber Investment
Executives.................................... 129,035 194,925 23,548
CLASS B
Marketing and advertising...................... $ 58,340 $ 227,025 $ 30,560
Amortization of commissions.................... 517,550 1,363,224 275,572
Printing of prospectuses and statements of
additional information to other than current
shareholders.................................. 2,446 3,626 1,534
Branch network costs allocated and interest ex-
pense......................................... 717,791 2,597,092 182,972
Service fees paid to PaineWebber investment ex-
ecutives...................................... 98,906 279,915 53,729
</TABLE>
28
<PAGE>
CLASS C
<TABLE>
<CAPTION>
GROWTH GROWTH AND SMALL CAP
FUND INCOME FUND VALUE FUND
-------- ----------- ----------
<S> <C> <C> <C>
Marketing and advertising...................... $ 14,032 $ 42,022 $16,471
Amortization of commissions.................... 20,049 60,694 19,563
Printing of prospectuses and statements of ad-
ditional information to other than current
shareholders.................................. 282 418 846
Branch network costs allocated and interest ex-
pense......................................... 159,796 467,338 82,384
Service fees paid to PaineWebber investment ex-
ecutives...................................... 79,618 104,949 16,089
</TABLE>
"Marketing and advertising" includes various internal costs allocated by
Mitchell Hutchins to its efforts at distributing the Funds' shares. These
internal costs encompass office rent, salaries and other overhead expenses of
various departments and areas of operations of Mitchell Hutchins. "Branch
network costs allocated and interest expense" consist of an allocated portion
of the expenses of various PaineWebber departments involved in the
distribution of the Funds' shares, including the PaineWebber retail branch
system.
In approving each Fund's overall Flexible PricingSM system of distribution,
each Trust's board of trustees considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby
encouraging current shareholders to make additional investments in each
respective 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 a Fund in relation
to other funds that have implemented or are seeking to implement similar
distribution arrangements.
In approving the Class A Plan, the trustees of each Trust considered all the
features of the distribution system, including (1) the conditions under which
initial sales charges would be imposed and the amount of such charges, (2)
Mitchell Hutchins' belief that the initial sales charge combined with a
service fee would be attractive to PaineWebber investment executives and
correspondent firms, resulting in greater growth of the Funds than might
otherwise be the case, (3) the advantages to the shareholders of economies of
scale resulting from growth in a Fund's assets and potential continued growth,
(4) the services provided to a Fund and its shareholders by Mitchell Hutchins,
(5) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (6) Mitchell Hutchins' shareholder
service-related expenses and costs.
In approving the Class B Plan, the trustees of each Trust considered all the
features of the distribution system, including (1) the conditions under which
contingent deferred sales charges would be imposed and the amount of such
charges, (2) the advantage to investors in having no initial sales charges
deducted from Fund purchase payments and instead having the entire amount of
their purchase payments immediately invested in Fund shares, (3) Mitchell
Hutchins' belief that the ability of PaineWebber investment executives and
correspondent firms to receive sales commissions when Class B shares are sold
and continuing service fees thereafter while their customers invest their
entire purchase payments immediately in Class B shares would prove attractive
to the investment executives and correspondent firms, resulting in greater
growth of a Fund than might otherwise be the case, (4) the advantages to the
shareholders of economies of scale resulting from growth in a Fund's assets
and potential continued growth, (5) the services provided to a 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
29
<PAGE>
PaineWebber and its investment executives, without the concomitant receipt by
Mitchell Hutchins of initial sales charges, was conditioned upon its
expectation of being compensated under the Class B Plan.
In approving the Class C Plan, the trustees of each Trust 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 an investor's purchase payments
immediately invested in Fund shares, (2) the advantage to investors in being
free from contingent deferred sales charges upon redemption for shares held
more than one year and paying for distribution on an ongoing basis, (3)
Mitchell Hutchins' belief that the ability of PaineWebber investment
executives and correspondent firms to receive sales compensation for their
sales of Class C shares on an ongoing basis, along with continuing service
fees, while their customers invest their entire purchase payments immediately
in Class C shares and generally do not face contingent deferred sales charges,
would prove attractive to the investment executives and correspondent firms,
resulting in greater growth to a Fund than might otherwise be the case, (4)
the advantages to the shareholders of economies of scale resulting from growth
in a Fund's assets and potential continued growth, (5) the services provided
to a 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 investment executives
without the concomitant receipt by Mitchell Hutchins of initial sales charges
or contingent deferred sales charges upon redemption, was conditioned upon its
expectation of being compensated under the Class C Plan.
With respect to each Plan, the trustees considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The trustees also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that
Mitchell Hutchins would receive service, distribution and advisory fees which
are calculated based upon a percentage of the average net assets of each Fund,
which fees would increase if the Plan were successful and the Funds attained
and maintained significant asset levels.
Under the Distribution Contract for the Class A shares and similar prior
distribution contracts, for the fiscal years set forth below, Mitchell
Hutchins earned the following approximate amounts of sales charges and
retained the following approximate amounts, net of concessions to PaineWebber
as exclusive dealer.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1995 1994 1993
------- -------- ----------
<S> <C> <C> <C>
GROWTH FUND
Earned.............................................. $62,298 $367,454 $ 246,569
Retained............................................ 35,996 26,176 15,757
GROWTH AND INCOME FUND
Earned.............................................. 68,358 186,333 1,794,698
Retained............................................ 39,225 11,944 108,359
SMALL CAP VALUE FUND
Earned.............................................. 41,750 32,208 815,987
Retained............................................ 23,505 1,845 49,325
</TABLE>
For the last fiscal year ended, Mitchell Hutchins earned and retained
$628,261 from Growth Fund, $1,632,389 from Growth and Income Fund, and
$344,638 from Small Cap Value Fund in contingent deferred sales charges paid
upon certain redemptions of Class B shares.
30
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each Trust's board of trustees, Mitchell
Hutchins is responsible for the execution of each Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, Mitchell Hutchins seeks to obtain the best net results
for the Funds, taking into account such factors as the price (including the
applicable brokerage commission or dealer spread), size of order, difficulty
of execution and operational facilities of the firm involved. While Mitchell
Hutchins generally seeks reasonably competitive commission rates, payment of
the lowest commission is not necessarily consistent with obtaining the best
net results. Prices paid to dealers in principal transactions, through which
most debt securities and some equity securities are traded, generally include
a "spread," which is the difference between the prices at which the dealer is
willing to purchase and sell a specific security at the time. The Funds may
invest in securities traded in the OTC market and will engage primarily in
transactions directly with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker. For
the fiscal years ended August 31, 1995, August 31, 1994 and August 31, 1993,
Growth and Income Fund paid $1,241,906, $1,901,499 and $1,131,909,
respectively, in brokerage commissions. For the fiscal years ended August 31,
1995, August 31, 1994 and August 31, 1993, Growth Fund paid $273,991, $222,490
and $150,432, respectively, in brokerage commissions. For the fiscal year
ended July 31, 1995, the six months ended July 31, 1994, and the fiscal year
ended January 31, 1994, Small Cap Value Fund paid $120,717, $113,315 and
$349,051, respectively, in brokerage commissions.
The Funds have no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Funds contemplate that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through PaineWebber. The Trusts' boards of
trustees have adopted procedures in conformity with Rule 17e-1 under the 1940
Act to ensure that all brokerage commissions paid to PaineWebber are
reasonable and fair. Specific provisions in the Advisory Contracts authorize
PaineWebber to effect portfolio transactions for the Funds on such exchange
and to retain compensation in connection with such transactions. Any such
transactions will be effected and related compensation paid only in accordance
with applicable SEC regulations. For the fiscal year ended August 31, 1995,
Growth and Income Fund paid $65,991 in brokerage commissions to PaineWebber,
which represented 5.31% of the total brokerage commissions paid by the Fund
and 5.20% of the total dollar amount of transactions involving payment of
commissions. For the fiscal years ended August 31, 1994 and August 31, 1993,
Growth and Income Fund paid $47,142 and $108,080, respectively, in brokerage
commissions to PaineWebber. For the fiscal year ended August 31, 1995, Growth
Fund paid $4,200 in brokerage commissions to PaineWebber, which represented
1.53% of the total brokerage commissions paid by the Fund and 2.13% of the
total dollar amount of transactions involving payment of commissions. For the
fiscal years ended August 31, 1994 and August 31, 1993, Growth Fund paid
$9,326 and $3,500, respectively, in brokerage commissions to PaineWebber. For
the fiscal year ended July 31, 1995, Small Cap Value Fund paid $665 in
commissions to PaineWebber, which represented 0.5% of the total brokerage
commissions paid by the Fund and 0.4% of the total dollar amount of
transactions involving the payment of commissions. For the six months ended
July 31, 1994, and the fiscal year ended January 31, 1994, the Fund paid no
brokerage commissions to PaineWebber or any other affiliate of Mitchell
Hutchins.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"), who receive brokerage commissions for their services. The
Funds' procedures in selecting FCMs to execute their transactions in futures
contracts, including procedures permitting the use of PaineWebber are similar
to those in effect with respect to brokerage transactions in securities.
31
<PAGE>
Consistent with the interests of each Fund and subject to the review of each
Trust's board of trustees, Mitchell Hutchins may cause the Fund to purchase
and sell portfolio securities from and to dealers or through brokers who
provide the Fund with research, analysis, advice and similar services. In
return for such services, the Fund may pay to those brokers a higher
commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that such commission is reasonable in terms
either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the particular Fund and its other clients and that the
total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long term. For Growth and Income Fund and Growth
Fund, for the fiscal years ended August 31, 1995, Mitchell Hutchins (or, for
Growth and Income Fund, MHII) directed $125,000,872 and $6,914,330,
respectively, in portfolio transactions to brokers chosen because they
provided research services, for which the Funds paid $168,587 and $9,720,
respectively, in commissions.
For purchases or sales with broker-dealer firms which act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions,
Mitchell Hutchins will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. Moreover,
Mitchell Hutchins will not enter into any explicit soft dollar arrangements
relating to principal transactions and will not receive in principal
transactions the types of services which could be purchased for hard dollars.
Mitchell Hutchins may engage in agency transactions in OTC equity and debt
securities in return for research and execution services. These transactions
are entered into only in compliance with procedures ensuring that the
transaction (including commissions) is at least as favorable as it would have
been if effected directly with a market-maker that did not provide research or
execution services. These procedures include Mitchell Hutchins receiving
multiple quotes from dealers before executing the transactions on an agency
basis.
Information and research services furnished by brokers or dealers through
which or with which the Funds effect securities transactions may be used by
Mitchell Hutchins in advising other funds or accounts and, conversely,
information and research services furnished to Mitchell Hutchins by brokers or
dealers in connection with other funds or accounts that either of them advises
may be used in advising the Funds. Information and research received from
brokers or dealers will be in addition to, and not in lieu of, the services
required to be performed by Mitchell Hutchins under the Advisory Contract.
Investment decisions for the Funds and for other investment accounts managed
by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same
investment decision may occasionally be made for a Fund and one or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated between that
Fund and such other account(s) as to amount according to a formula deemed
equitable to the Fund and such account(s). While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as the Funds are concerned, or upon their ability to complete their entire
order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the Funds.
The Funds will not purchase securities that are offered in underwritings in
which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each Trust's board of trustees pursuant to
Rule 10f-3 under the 1940 Act. Among other things, these procedures require
that the spread or commission paid in connection with such a purchase be
reasonable and fair, the purchase be at not more than the public offering
price prior to the end of the first business day after the date of the public
offering and that PaineWebber or any affiliate thereof not participate in or
benefit from the sale to the Funds.
32
<PAGE>
PORTFOLIO TURNOVER. The Funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of each 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.
<TABLE>
<CAPTION>
PORTFOLIO
TURNOVER RATE
-------------
<S> <C>
GROWTH AND INCOME FUND
Fiscal Year Ended August 31, 1995................................. 111%
Fiscal Year Ended August 31, 1994................................. 94%
GROWTH FUND
Fiscal Year Ended August 31, 1995................................. 36%
Fiscal Year Ended August 31, 1994................................. 24%
SMALL CAP VALUE FUND
Fiscal Year Ended July 31, 1995................................... 19%
Six Months Ended July 31, 1994.................................... 20%
Fiscal Year Ended January 31, 1994................................ 98%
</TABLE>
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
COMBINED PURCHASE PRIVILEGE--CLASS A SHARES. Investors and eligible groups
of related Fund investors may combine purchases of Class A shares of the Funds
with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
table of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the Funds and Class A shares of
such other funds will be at the rates applicable to the total amount of the
combined concurrent purchases.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25%
or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust created
by the individual(s), the beneficiaries of which are the individual and/or
the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse;
33
<PAGE>
(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) an individual's accounts with the same investment adviser.
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.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where
the decedent is either the individual shareholder or owns the shares with his
or her spouse as a joint tenant with right of survivorship. This waiver
applies only to redemption of shares held at the time of death.
Certain PaineWebber mutual funds offered shares subject to contingent
deferred sales charges before the implementation of the Flexible Pricing
System on July 1, 1991 ("CDSC Funds"). The contingent deferred sales charge is
waived with respect to redemptions of Class B shares of CDSC Funds purchased
prior to July 1, 1991 by officers, directors (trustees) or employees of the
CDSC Funds, Mitchell Hutchins or their affiliates (or their spouses and
children under age 21). In addition, the contingent deferred sales charge will
be reduced by 50% with respect to redemptions of Class B shares of CDSC Funds
purchased prior to July 1, 1991 with a net asset value at the time of purchase
of at least $1 million. If Class B shares of a CDSC Fund purchased prior to
July 1, 1991 are exchanged for Class B shares of the Funds, any waiver or
reduction of the contingent deferred sales charge that applied to the Class B
Shares of the CDSC Fund will apply to the Class B shares of the Funds acquired
through the exchange.
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. This exchange
privilege is available only in those jurisdictions where the sale of
PaineWebber fund shares to be acquired through such exchange may be legally
made. Shareholders will receive at least 60 days' notice of any termination or
material modification of the exchange offer, except no notice need be given of
an amendment whose only material effect is to reduce the exchange fee and no
notice need be given if, under extraordinary circumstances, either redemptions
are suspended under the circumstances described below or a Fund temporarily
delays or ceases the sales of its shares because it is unable to invest
amounts effectively in accordance with the Fund's investment objective,
policies and restrictions.
If conditions exist that make cash payments undesirable, the Funds reserve
the right to honor any request for redemption by making payment in whole or in
part in securities chosen by the Funds and valued in the same way as they
would be valued for purposes of computing the Funds' net asset value. If
payment is made in securities, a shareholder may incur brokerage expenses in
converting these securities into cash. Each Trust has elected, however, to be
governed by Rule 18f-1 under the 1940 Act, under which the Funds are obligated
to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Funds during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal.
34
<PAGE>
The Funds may suspend redemption privileges or postpone the date of payment
during any period (1) when the NYSE is closed or trading on the NYSE is
restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its assets or (3)
as the SEC may otherwise permit. The redemption price may be more or less than
the shareholder's cost, depending on the market value of a Fund's portfolio at
the time.
SYSTEMATIC WITHDRAWAL PLAN. On or about the 15th of each month for monthly
plans and on or about the 15th of the months selected for quarterly or semi-
annual plans, PaineWebber will arrange for redemption by the Funds of
sufficient Fund shares to provide the withdrawal payment specified by
participants in the Funds' systematic withdrawal plan. The payment generally
is mailed approximately five business days after the redemption date.
Withdrawal payments should not be considered dividends, but redemption
proceeds, with the tax consequences described under "Dividends & Taxes" in the
Prospectus. If periodic withdrawals continually exceed reinvested dividends, a
shareholder's investment may be correspondingly reduced. A shareholder may
change the amount of the systematic withdrawal or terminate participation in
the systematic withdrawal plan at any time without charge or penalty by
written instructions with signatures guaranteed to PaineWebber or PFPC Inc.
("Transfer Agent").
Instructions to participate in the plan, change the withdrawal amount or
terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by the
Transfer Agent. Shareholders may request the forms needed to establish a
systematic withdrawal plan from their PaineWebber investment executives,
correspondent firms or the Transfer Agent at 1-800-647-1568.
REINSTATEMENT PRIVILEGE--CLASS A SHARES. As described in the Prospectus,
shareholders who have redeemed their Class A shares may reinstate their
account in the Funds without a sales charge. Shareholders may exercise the
reinstatement privilege by notifying the Transfer Agent of such desire and
forwarding a check for the amount to be purchased within 365 days after the
date of redemption. The reinstatement will be made at the net asset value per
share next computed after the notice of reinstatement and check are received.
The amount of a purchase under this reinstatement privilege cannot exceed the
amount of the redemption proceeds. Gain on a redemption is taxable regardless
of whether the reinstatement privilege is exercised; however, a loss arising
out of a redemption will not be deductible to the extent the reinstatement
privilege is exercised within 30 days after redemption, and an adjustment will
be made to the shareholder's tax basis for shares acquired pursuant to the
reinstatement privilege. Gain or loss on a redemption also will be adjusted
for federal income tax purposes by the amount of any sales charge paid on
Class A shares, under the circumstances and to the extent described in
"Dividends & Taxes" in the Prospectus.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLAN(SM);
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 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
35
<PAGE>
of Shares") after the trade date, and the purchase price of the shares is
withdrawn from the investor's RMA account on the settlement date from the
following sources and in the following order: uninvested cash balances,
balances in RMA money market funds, or margin borrowing power, if applicable
to the account.
To participate in the Plan, an investor must be an RMA accountholder, must
have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client
Agreement and Instruction Form available from PaineWebber. The investor must
have received a current prospectus for each PW Fund selected prior to
enrolling in the Plan. Information about mutual fund positions and outstanding
instructions under the Plan are noted on the RMA accountholder's account
statement. Instructions under the Plan may be changed at any time, but may
take up to two weeks to become effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds
may be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING.
Periodic investing in the PW Funds or other mutual funds, whether through
the Plan or otherwise, helps investors establish and maintain a disciplined
approach to accumulating assets over time, de-emphasizing the importance of
timing the market's highs and lows. Periodic investing also permits an
investor to take advantage of "dollar cost averaging." By investing a fixed
amount in mutual fund shares at established intervals, an investor purchases
more shares when the price is lower and fewer shares when the price is higher,
thereby increasing his or her earning potential. Of course, dollar cost
averaging does not guarantee a profit or protect against a loss in a declining
market, and an investor should consider his or her financial ability to
continue investing through periods of low share prices. However, over time,
dollar cost averaging generally results in a lower average original investment
cost than if an investor invested a larger dollar amount in a mutual fund at
one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT.
In order to enroll in the Plan, an investor must have opened an RMA account
with PaineWebber or one of its correspondent firms. The RMA account is
PaineWebber's comprehensive asset management account and offers investors a
number of features, including the following:
. monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(R) transactions during the period, and provide unrealized and
realized gain and loss estimates for most securities held in the account;
. comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
. automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the seven RMA money market funds--RMA Money Market Portfolio,
RMA U.S. Government Portfolio, RMA Tax-Free Fund, RMA California
Municipal Money Fund, RMA Connecticut Municipal Money Fund, RMA New
Jersey Municipal Money Fund and RMA New York Municipal Money Fund. Each
money market fund attempts to maintain a stable price per share of $1.00,
although there can be no assurance that it will be able to do so.
Investments in the money market funds are not insured or guaranteed by
the U.S. government;
36
<PAGE>
. check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
. Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
. 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
. expanded account protection to $25 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
. automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the Funds will automatically convert to Class A shares,
based on the relative net asset values per share of the two Classes, as of the
close of business on the first Business Day (as defined under "Valuation of
Shares") of the month in which the sixth anniversary of the initial issuance
of such Class B shares of each Fund occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance shall mean (i) the date on which such Class B shares were issued, or
(ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. If the
shareholder acquired Class B shares of a Fund through an exchange of Class B
shares of a CDSC Fund that were acquired prior to July 1, 1991, the
shareholder's holding period for purposes of conversion will be determined
based on the date the CDSC Fund shares were initially issued. For purposes of
conversion into Class A, 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, a pro rata portion of the Class B shares in the sub-account will also
convert to Class A. The portion will be determined by the ratio that the
shareholder's Class B shares converting to Class A bears to the shareholder's
total Class B shares not acquired through dividends and other distributions.
The availability of the conversion feature is subject to (1) the continuing
applicability of a ruling of the Internal Revenue Service 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 (2) the
continuing availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event. If the conversion
feature ceased to be available, the Class B shares of the Funds would not be
converted and would continue to be subject to the higher ongoing expenses of
the Class B shares beyond six years from the date of purchase. Mitchell
Hutchins has no reason to believe that these conditions for the availability
of the conversion feature will not continue to be met.
37
<PAGE>
VALUATION OF SHARES
The Funds determine their net asset values per share separately for each
Class of shares as of the close of regular trading (currently 4:00 p.m.,
Eastern time) on the NYSE on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Currently the NYSE is closed on
the observance of the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Securities that are listed on U.S. stock exchanges are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in
the OTC market and listed on Nasdaq are valued at the last trade price on
Nasdaq at 4:00 p.m., Eastern time; other OTC securities are valued at the last
bid price available prior to valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of each Trust's board of trustees. In
valuing lower rated corporate debt securities it should be recognized that
judgment often plays a greater role than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available.
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represents past performance and is
not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in each Fund's Performance Advertisements are calculated
according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a
specified Class
T = average annual total return of shares of that Class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the
beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over
the period. In calculating the ending redeemable value, for Class A shares,
the maximum 4.5% sales charge is deducted from the initial $1,000 payment and,
for Class B and Class C shares, the applicable contingent deferred sales
charge imposed on a redemption of Class B or Class C shares held for the
period is deducted. All dividends and other distributions are assumed to have
been reinvested at net asset value.
The 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-
38
<PAGE>
Standardized Return for specified periods of time by assuming an investment of
$1,000 in Fund shares and assuming the reinvestment of all dividends and other
distributions. The rate of return is determined by subtracting the initial
value of the investment from the ending value and by dividing the remainder by
the initial value. Neither initial nor contingent deferred sales charges are
taken into account in calculating Non-Standardized Return; the inclusion of
those charges would reduce the return.
Both Standardized Return and Non-Standardized Return for Class B shares for
periods of over six years reflect conversion of the Class B shares to Class A
shares at the end of the sixth year.
The following table shows performance information for the Class A, Class B
and Class C (formerly Class D) shares of the Funds for the periods indicated.
All returns for periods of more than one year are expressed as an average
return.
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended August 31, 1995:
Standardized Return*.................................. 12.99% 12.38% 16.37%
Non-Standardized Return............................... 18.30% 17.38% 17.37%
Five years ended August 31, 1995:
Standardized Return*.................................. 9.06% NA NA
Non-Standardized Return............................... 10.07% NA NA
Ten years ended August 31, 1995
Standardized Return*.................................. 10.31% NA NA
Non-Standardized Return............................... 10.82% NA NA
Inception** to August 31, 1995:
Standardized Return*.................................. 10.92% 7.11% 6.47%
Non-Standardized Return............................... 11.36% 7.49% 6.47%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for each Class of shares is as follows: Class A--
December 20, 1983, Class B--July 1, 1991, and Class C--July 2, 1992.
39
<PAGE>
GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Fiscal year ended August 31, 1995:
Standardized Return*.................................. 6.30% 5.40% 9.37%
Non-Standardized Return............................... 11.28% 10.40% 10.37%
Five years ended August 31, 1995:
Standardized Return*.................................. 13.40% NA NA
Non-Standardized Return............................... 14.45% NA NA
Ten years ended August 31, 1995:
Standardized Return*.................................. 12.56% NA NA
Non-Standardized Return*.............................. 13.08% NA NA
Inception** to August 31, 1995:
Standardized Return*.................................. 13.22% 10.80% 10.89%
Non-Standardized Return............................... 13.72% 11.14% 10.89%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for each Class of shares is as follows: Class A--March
18, 1985, Class B--July 1, 1991, and Class C--July 2, 1992.
SMALL CAP VALUE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
One year ended July 31, 1995:
Standardized Return*.................................. 10.63% 9.86% 13.76%
Non-Standardized Return............................... 15.80% 14.86% 14.76%
Inception** to July 31, 1995:
Standardized Return*.................................. 5.82% 5.50% 6.95%
Non-Standardized Return............................... 7.79% 6.96% 6.95%
</TABLE>
- --------
* All Standardized Return figures for Class A shares reflect deduction of the
current maximum sales charge of 4.5%. All Standardized Return figures for
Class B and Class C shares reflect deduction of the applicable contingent
deferred sales charges imposed on a redemption of shares held for the
period.
** The inception date for all Classes of shares is February 1, 1993.
OTHER INFORMATION. In Performance Advertisements, the Funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Service
("Wiesenberger"), Investment Company Data, Inc. ("ICD") or Morningstar Mutual
Funds ("Morningstar"), with the performance of recognized stock and other
indices, including (but not limited to) the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"), the Dow Jones Industrial Average, the Nasdaq
Composite Index, the Russell 2000 Index, 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 fee
40
<PAGE>
levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar.
Performance Advertisements also may refer to discussions of the Funds and
comparative mutual fund data and ratings reported in independent periodicals,
including (but not limited to) THE WALL STREET JOURNAL, MONEY Magazine,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Comparisons in Performance Advertisements may be in graphic form.
The Funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
in additional Fund shares, any future income or capital appreciation of a Fund
would increase the value, not only of the original Fund investment, but also
of the additional Fund shares received through reinvestment. As a result, the
value of a Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash.
The Funds may also compare their performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs
of major banks published by Banxquote(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 value will fluctuate. The
debt securities held by the Funds generally have longer maturities than most
CDs and may reflect interest rate fluctuations for longer term securities. An
investment in any of the Funds 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.
[GRAPHICS]
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Over time, stocks have outperformed all other investments by a wide margin,
offering a solid hedge against inflation. From 1926 to 1993, stocks beat all
other traditional asset classes. A $10 investment in the S&P 500 grew to
$8,001, significantly more than any other investment.
The chart shown is for illustrative purposes only and does not represent the
Funds' performance and should not be considered an indication or guarantee of
future results. Year-to-year fluctuations of the S&P 500 have been
significant, and total return for some periods has been negative. The S&P 500
includes companies with larger market capitalizations than those in which the
Funds invest. Unlike investors in bonds and 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 Treasury bonds with
20-year maturities.
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
Among these requirements are the following: (1) each 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 foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) each
Fund must derive less than 30% of its gross income each taxable year from the
sale or other disposition of securities, or any of the following, that were
held for less than three months--options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures
or forward contracts thereon) that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of each Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of that Fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities; and (4) at the close of
each quarter of each Fund's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Funds in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Funds and received by
the shareholders on December 31 of that year if the distributions are paid by
the Funds during the following January. Accordingly, those distributions will
be taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by each Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
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<PAGE>
If shares of any Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before
the record date for any dividend or capital gain distribution, the shareholder
will pay full price for the shares and receive some portion of the price back
as a taxable distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
Each Fund may invest in the stock of "passive foreign investment companies"
("PFICs") if such stock is a permissible investment. A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at
least 75% of its gross income is passive or (2) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, each Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain from disposition of such stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included
in each Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. If
a Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund," then in lieu of the foregoing tax and interest obligation, the Fund
will be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
would have to be distributed to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Funds, would be
entitled to elect to "mark-to-market" their stock in certain PFICs. "Marking-
to-market," in this context, means recognizing as gain for each taxable year
the excess, as of the end of that year, of the fair market value of each such
PFIC's stock over the owner's adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in effect).
The use of hedging strategies, such as writing ("selling") and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character, timing and amount of recognition of the
gains and losses the Fund realizes in connection therewith. Income from
foreign currencies (except certain gains therefrom that may be excluded by
futures regulations), and income from transactions in options, futures and
forward currency contracts derived by each Fund with respect to its business
of investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures contracts (other than those on foreign currencies) will be
subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options,
futures and forward contracts on foreign currencies, that are not directly
related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position
43
<PAGE>
during the period of the hedge for purposes of determining whether the Fund
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
limitation. Each Fund will consider whether it should seek to qualify for this
treatment for its hedging transactions. To the extent the Fund does not
qualify for this treatment, it may be forced to defer the closing out of
certain options and futures beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.
OTHER INFORMATION
Effective July 1, 1991, the name of Growth Fund was changed from
"PaineWebber Classic Growth Fund" to its current name. Growth and Income
Fund's name was changed from "PaineWebber Classic Growth and Income Fund" to
"PaineWebber Dividend Growth Fund" effective May 17, 1991 and to its current
name effective April 3, 1995. Effective on May 17, 1991, Growth and Income
Fund was combined in a tax-free reorganization with PaineWebber Classic
Dividend Growth Fund, which was at that time another series of PaineWebber
America Fund. As a result of the reorganization, each shareholder of
PaineWebber Classic Dividend Growth Fund became a shareholder of Growth and
Income Fund. Prior to November 10, 1995, each Fund's Class Y shares were known
as "Class C" shares.
PaineWebber America Fund, PaineWebber Olympus Fund, and PaineWebber
Securities Trust are entities of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of the Funds could,
under certain circumstances, be held personally liable for the obligations of
the Trusts or Funds. However, each Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trusts or the Funds and requires that
notice of such disclaimer be given in each note, bond, contract, instrument,
certificate or undertaking made or issued by the trustees or by any officers
or officer by or on behalf of any Trust or Fund, the trustees or any of them
in connection with a Trust. Each Declaration of Trust provides for
indemnification from a Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of that Fund. 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 that Mitchell Hutchins believes is
remote and not material. Upon payment of any liability incurred by a
shareholder solely by reason of being or having been a shareholder, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of that 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.
CLASS-SPECIFIC EXPENSES. Each Fund may determine to allocate certain of its
expenses (in addition to distribution fees) to the specific Classes of the
Fund's shares to which those expenses are attributable. For example, Class B
shares bear higher transfer agency fees per shareholder account than those
borne by Class A or Class C shares. The higher fee is imposed due to the
higher costs incurred by the transfer agent in tracking shares subject to a
contingent deferred sales charge because, upon redemption, the duration of the
shareholder's investment must be determined in order to determine the
applicable charge. Moreover, the tracking and calculations required by the
automatic conversion feature of the Class B shares will cause the transfer
agent to incur additional costs. Although the transfer agency fee will differ
on a per account basis as stated above, the specific extent to which the
transfer agency fees will differ between the Classes as a percentage of net
assets is not certain, because the fee as a percentage of net assets will be
affected by the number of shareholder accounts in each Class and the relative
amounts of net assets in each Class.
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<PAGE>
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Funds, has passed
upon the legality of the shares offered by the Funds' Prospectus. 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 Growth Fund and Growth and Income Fund.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, N.Y. 10036,
serves as independent auditors for Small Cap Value Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for the last fiscal year is a
separate document supplied with this Statement of Additional Information and
the financial statements, accompanying notes and report of independent
auditors appearing therein are incorporated herein by this reference. The
Semi-Annual Report to Shareholders for Small Cap Value Fund is a separate
document supplied with this Statement of Additional Information and the
financial statements and accompanying notes appearing therein are incorporated
herein by reference.
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APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC. ("MOODY'S") CORPORATE BOND
RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
a "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
AA. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future; BAA. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well; BA. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class; B. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small; CAA. Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest; CA. Bonds
which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings; C.
Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from "AA" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the
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terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; C1. The rating C1
is reserved for income bonds on which no interest is being paid; D. Debt rated
D is in default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY ANY FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions..................................... 1
Hedging Strategies....................................................... 9
Trustees and Officers.................................................... 16
Investment Advisory and Distribution Arrangements........................ 25
Portfolio Transactions................................................... 31
Reduced Sales Charges, Additional Exchange and Redemption Information and
Other Services.......................................................... 33
Conversion of Class B Shares............................................. 37
Valuation of Shares...................................................... 38
Performance Information.................................................. 38
Taxes.................................................................... 42
Other Information........................................................ 44
Financial Statements..................................................... 45
Appendix................................................................. 46
</TABLE>
(C)1996 PaineWebber Incorporated
PaineWebber
Growth and Income Fund
PaineWebber
Growth Fund
PaineWebber
Small Cap Value Fund
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Statement of Additional Information
May 1, 1996
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[LOGO OF PAINEWEBBER APPEARS HERE]
