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PAINEWEBBER GROWTH AND INCOME FUND
PAINEWEBBER MID CAP FUND
PAINEWEBBER SMALL CAP FUND
PAINEWEBBER GROWTH FUND
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
The four funds named above (each a "Fund") are diversified series of
professionally managed, open-end management investment companies organized as
Massachusetts business trusts (each a "Trust"). 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 by investing
primarily in dividend-paying equity securities believed to have potential for
rapid earnings growth. PaineWebber Mid Cap Fund ("Mid Cap Fund"), a series of
PaineWebber Managed Assets Trust ("Managed Assets Trust"), seeks capital
appreciation by investing primarily in common stocks of medium-sized companies.
PaineWebber Small Cap Fund ("Small Cap Fund"), a series of PaineWebber
Securities Trust ("Securities Trust"), seeks long-term capital appreciation by
investing primarily in equity securities of small capitalization companies.
PaineWebber Growth Fund ("Growth Fund"), a series of PaineWebber Olympus Fund
("Olympus Fund"), seeks long-term capital appreciation by investing primarily in
equity securities of companies believed to have substantial potential for
capital growth.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly
owned asset management subsidiary of PaineWebber Incorporated ("PaineWebber"),
serves as investment adviser, administrator and distributor for each Fund. As
distributor, Mitchell Hutchins has appointed PaineWebber 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 November 30,
1998. 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 November 30,
1998.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations. Except as otherwise
indicated in the Prospectus or Statement of Additional Information, there are no
policy limitations on a Fund's ability to use the investments or techniques
discussed in these documents.
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 bonds, other debt
obligations and certain other securities. 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.
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
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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, including
lower-rated convertible 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 non-investment grade debt securities has expanded rapidly in
recent years, which has been a period of generally expanding growth and lower
inflation. These securities will be susceptible to greater risk when economic
growth slows or reverses and when inflation increases or deflation occurs. 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 defaults. There can be no
assurance that such declines will not recur. The market for non-investment grade
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 non-investment grade
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 ("OTC") in the United States and are issued
through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid directly by the ADR holders. In addition, less information is available in
the United States about an unsponsored ADR than about a sponsored ADR.
Investment income on certain foreign securities in which the Funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Funds would be subject.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets (15%
for Small Cap 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 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 ("board"). The assets
used as cover for
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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.
Restricted securities are not registered under the Securities Act of 1933
("1933 Act") and may be sold only in privately negotiated or other exempted
transactions or after a 1933 Act registration statement has become effective.
Where registration is required, 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. A large institutional market
has developed for many securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for restricted securities also have developed as a
result of Rule 144A, which establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers, providing both readily ascertainable values for restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. An insufficient number of qualified institutional
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the 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.
Each board has delegated the function of making day-to-day determinations
of liquidity to Mitchell Hutchins, pursuant to guidelines approved by the board.
Mitchell Hutchins takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Mitchell Hutchins monitors the liquidity of
restricted securities in each Fund's portfolio and reports periodically on such
decisions to the boards.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities.
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
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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.
MONEY MARKET INSTRUMENTS. Money market instruments in which each Fund may
invest include: U.S. Treasury bills and other obligations issued or guaranteed
as to interest and principal by the U.S. government, its agencies and
instrumentalities; obligations of U.S. banks (including certificates of deposit
and bankers' acceptances); interest-bearing savings deposits in U.S. commercial
and savings banks; investment grade commercial paper and other short-term
corporate obligations; variable and floating-rate securities; and repurchase
agreements. In addition, each Fund may hold cash and may invest in participation
interests in the money market securities mentioned above, to the extent that it
is permitted to invest in money market instruments.
GOVERNMENT SECURITIES. Government securities in which the Funds may invest
include direct obligations of the U.S. Treasury and obligations issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities
(collectively, "U.S. government securities"). Direct obligations of the U.S.
Treasury include a variety of securities that differ in their interest rates,
maturities and dates of issuance. Among the U.S. government securities that may
be held by the Funds are instruments that are supported by the full faith and
credit of the United States and securities that are supported primarily or
solely by the creditworthiness of the government-related issuer.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund purchases securities or other obligations and simultaneously commits to
resell them to the counterparty at an agreed-upon date or upon demand and at a
price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased obligations. The Fund maintains custody of the
underlying obligations prior to their repurchase, either through its regular
custodian or through a special "tri-party" custodian or subcustodian that
maintains separate accounts for both the Fund and its counterparty. Thus, the
obligation of the counterparty to pay the repurchase price on the date agreed to
or upon demand is, in effect, secured by such obligations. If their value
becomes less than the repurchase price, plus any agreed-upon additional amount,
the counterparty must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the obligations and the price that was paid by a Fund upon
acquisition is accrued as interest and included in its net investment income.
The Funds intend to enter into repurchase agreements only with banks and
dealers (or their affiliates) in transactions believed by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by each
board. 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 a Fund's net assets (10% of total assets for Small Cap Fund).
Such agreements involve the sale of securities held by a Fund subject to its
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
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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."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by a Fund might be unable to deliver them when the Fund seeks to
repurchase. If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or a trustee or receiver
may receive an extension of time to determine whether to enforce a Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
LENDING OF PORTFOLIO SECURITIES. Each Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains
acceptable collateral with the Fund's custodian in an amount, marked to market
daily, at least equal to the market value of the securities loaned, plus accrued
interest and dividends. Acceptable collateral is limited to cash, U.S.
government securities and irrevocable letters of credit that meet certain
guidelines established by Mitchell Hutchins. Each Fund may reinvest cash
collateral in money market instruments or other short-term liquid investments.
In determining whether to lend securities to a particular broker-dealer or
institutional investor, Mitchell Hutchins will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. Each Fund will retain authority to terminate
any of its loans at any time. Each Fund may pay reasonable fees in connection
with a loan and may pay the borrower or placing broker a negotiated portion of
the interest earned on the cash or money market instruments held as collateral.
Each Fund will receive 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.
Pursuant to procedures adopted by the boards governing each Fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for each Fund. The appropriate board also has authorized the payment of
fees (including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. Each board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under each Fund's securities
lending program.
SHORT SALES "AGAINST THE BOX". Each Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box"). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of a Fund, and that Fund is
obligated to replace the securities borrowed at a date in the future. When a
Fund sells short, it establishes a margin account with the broker effecting the
short sale, and deposits collateral with the broker. In addition, that Fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. A Fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box. No Fund currently expects to have obligations under short
sales that at any time during the coming year exceed 5% of its 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. In such case, any loss in a Fund's long position after the short sale
should be reduced by a corresponding gain in the short position. Conversely, any
gain in the long position after the short sale should be reduced by a
corresponding 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
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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 counterparty 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
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 or liquid securities, marked to market daily, in an amount at least
equal to the Fund's obligation or commitment under such transactions. As
described below under "Strategies Using Derivative Instruments," segregated
accounts may also be required in connection with certain transactions involving
options and futures contracts.
FUNDAMENTAL INVESTMENT LIMITATIONS. The following fundamental investment
limitations cannot be changed for a Fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of that Fund or (b) 67% or
more of the shares of that Fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the following limitations.
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
Investment Company Act of 1940 ("1940 Act") and then not in excess of 33 1/3% of
the Fund's total assets (including the amount of the senior securities issued
but reduced by any liabilities not constituting senior securities) at the time
of the issuance or borrowing, except that the Fund may borrow up to an
additional 5% of its total assets (not including the amount borrowed) for
temporary or emergency purposes.
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(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(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.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are not
fundamental and may be changed by each board without shareholder approval.
Each Fund will not:
(1) invest more than 10% of its net assets (15% of net assets for Small Cap
Fund) in illiquid securities.
(2) purchase portfolio securities while borrowings in excess of 5% of its
total assets are outstanding.
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the Fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the extent
permitted by the 1940 Act (except that each Fund will not purchase securities of
registered open-end investment companies or registered unit investment trusts in
reliance on sections 12(d)(1)(F) or 12(d)(1)(G) of 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.
STRATEGIES USING DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION OF DERIVATIVE INSTRUMENTS. Mitchell Hutchins may use a
variety of financial instruments ("Derivative Instruments"), including certain
options, futures contracts (sometimes referred to as "futures") and options on
futures contracts, to attempt to hedge each Fund's portfolio. A Fund may enter
into transactions involving one or more types of Derivative Instruments under
which the full value of its portfolio is at risk. Under normal circumstances,
however, a Fund's use of Derivative Instruments will place at risk a much
smaller portion of its assets. In particular, each Fund may use the Derivative
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 or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who
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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 security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
GENERAL DESCRIPTION OF STRATEGIES USING DERIVATIVE INSTRUMENTS. Hedging
strategies can be broadly categorized as "short hedges" and "long hedges." A
short hedge is a purchase or sale of a Derivative Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in a Fund's portfolio. Thus, in a short hedge, a Fund takes a
position in a Derivative Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, a
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, a Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, a Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge, a Fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, 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 transaction costs.
Alternatively, a Fund might be able to offset the price increase by closing out
an appreciated call option and realizing a gain.
A Fund may purchase and write (sell) covered straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. A Fund
might enter into a long straddle when Mitchell Hutchins believes it likely that
the prices of the securities will be more volatile during the term of the option
than the option pricing implies. A short straddle is a combination of a call and
8
<PAGE>
put written on the same security where the exercise price of the put is equal to
the exercise price of the call. A Fund might enter into a short straddle when
Mitchell Hutchins believes it unlikely that the prices of the securities will be
as volatile during the term of the option as the option pricing implies.
Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Derivative Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, a Fund's
ability to use Derivative Instruments may be limited by tax considerations. See
"Taxes."
In addition to the products, strategies and risks described below and in
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, or other techniques are
developed. Mitchell Hutchins may utilize these opportunities to the extent that
they are consistent with a Fund's investment objective and permitted by the
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 STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.
(1) Successful use of most Derivative Instruments depends upon the ability
of 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 Derivative Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Derivative Instrument and price movements of the
investments being hedged. For example, if the value of a Derivative Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors affecting the markets in which Derivative Instruments
are traded, rather than the value of the investments being hedged. The
effectiveness of hedges using Derivative Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because 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 Derivative Instrument. Moreover, if the price of the Derivative Instrument
declined by more than the increase in the price of the security, that Fund could
suffer a loss. In either case, the Fund would have been in a better position had
it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the Fund were
unable to close out its positions in such Derivative Instruments, it might be
required to continue to maintain such assets or accounts or make such payments
until the positions expired or matured. These requirements might impair a Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Derivative Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a counterparty to enter
9
<PAGE>
into a transaction closing out the position. Therefore, there is no assurance
that any position in a Derivative Instrument can be closed out at a time and
price that is favorable to a Fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Funds to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
other options or futures contracts or (2) cash and liquid securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Funds will comply with SEC guidelines
regarding cover for these transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover positions or to 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.
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. Generally, OTC options on debt securities 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. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Funds may purchase and write both exchange-traded and OTC options.
Exchange markets for options on debt securities 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 that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between a Fund and its counterparty (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when a Fund purchases
or writes an OTC option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Funds' ability to establish and close out positions in exchange-traded
options depends on the existence of a liquid market. The Funds intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will
10
<PAGE>
exist at any particular time. Closing transactions can be made for OTC options
only by negotiating directly with the counterparty, or by a transaction in the
secondary market if any such market exists. Although the Funds will enter into
OTC options only with counterparties 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 counterparty, 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 a 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.
A Fund may purchase and write put and call options on stock indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in the equity
securities market (or market sectors) rather than anticipated increases or
decreases in the value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The Funds' use of options is governed
by the following guidelines, which can be changed by each board without
shareholder vote:
(1) Each Fund may purchase a put or call option, including any
straddle or spread, only if the value of its premium, when aggregated with
the premiums on all other options held by that Fund, does not exceed 5% of
its total assets.
(2) The aggregate value of underlying securities on which a Fund
writes covered calls will not exceed 50% of its total assets.
(3) 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 one time will not exceed 20% of
its net assets.
FUTURES. The Funds may purchase and sell stock index futures contracts and
interest rate 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, obligations of
the U.S. government or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to a Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such
as periods of high volatility, a Fund may be required by an exchange to increase
the level of its initial margin payment, and initial margin requirements might
be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of 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.
11
<PAGE>
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. A Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, a Fund would continue to be required to make daily variation
margin payments and might be required to maintain the position being hedged by
the future or option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS. The Funds' use of
futures and related options is governed by the following guidelines, which can
be changed by each board 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 its 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 one time will not exceed 20% of
its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any one time by a Fund will not exceed 5% of its total
assets.
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<PAGE>
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
The trustees and executive officers of each Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 51 Trustee and Mrs. Alexander is president, chief executive
President officer and a director of Mitchell Hutch-
ins (since January 1995) and an executive
vice president and a director of Paine-
Webber (since March 1984). Mrs. Alexander
is president and a director or trustee of
32 investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Richard Q. Armstrong; 63 Trustee Mr. Armstrong is chairman and principal of
One Old Church Road R.Q.A. Enterprises (management consulting
Unit #6 firm) (since April 1991 and principal
Greenwich, CT 06830 occupation since March 1995). Mr. Armstrong
was chairman of the board, chief executive
officer and co-owner of Adirondack
Beverages (producer and distributor of soft
drinks and sparkling/still waters) (October
1993-March 1995). He was a partner of the
New England Consulting Group (management
consulting firm) (December 1992-September
1993). He was managing director of LVMH
U.S. Corporation (U.S. subsidiary of the
French luxury goods conglomerate, Louis
Vuitton Moet Hennessey Corporation)
(1987-1991) and chairman of its wine and
spirits subsidiary, Schieffelin & Somerset
Company (1987-1991). Mr. Armstrong is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
E. Garrett Bewkes, Jr.**; 72 Trustee and Mr. Bewkes is a director of Paine Webber
Chairman of the Group Inc. ("PW Group") (holding company of
Board of Trustees PaineWebber and Mitchell Hutchins). Prior
to December 1995, he was a consultant to PW
Group. Prior to 1988, he was chairman of
the board, president and chief executive
officer of American Bakeries Company.
Mr. Bewkes is also a director of Interstate
Bakeries Corporation. Mr. Bewkes is a
director or trustee of 34 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Richard R. Burt; 51 Trustee Mr. Burt is chairman of IEP Advisors Inc.
1275 Pennsylvania Avenue, N.W. (international investments and consulting
Washington, D.C. 20004 firm) (since March 1994) and a partner of
McKinsey & Company (management consulting
firm) (since 1991). He is also a director
of Archer-Daniels-Midland Co. (agricultural
commodities), Hollinger International Co.
(publishing), Homestake Mining Corp.,
Powerhouse Technologies Inc. and Wierton
Steel Corp. He was the chief negotiator in
the Strategic Arms Reduction Talks with the
former Soviet Union (1989-1991) and the
U.S. Ambassador to the Federal Republic of
Germany (1985-1989). Mr. Burt is a director
or trustee of 31 investment companies for
which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Mary C. Farrell**; 48 Trustee Ms. Farrell is a managing director, senior
investment strategist, and member of the
Investment Policy Committee of PaineWeb-
ber. Ms. Farrell joined PaineWebber in
1982. She is a member of the Financial
Women's Association and Women's Economic
Roundtable and appears as a regular
panelist on Wall $treet Week with Louis
Rukeyser. She also serves on the Board of
Overseers of New York University's Stern
School of Business. Ms. Farrell is a
director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Meyer Feldberg; 56 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of
101 Uris Hall Business, Columbia University. Prior to
New York, New York 10027 1989, he was president of the Illinois In-
stitute of Technology. Dean Feldberg is
also a director of Primedia Inc., Feder-
ated Department Stores Inc., and Revlon,
Inc. Dean Feldberg is a director or trustee
of 33 investment companies for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
George W. Gowen; 69 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to
New York, New York 10017 May 1994, he was a partner in the law firm
of Fryer, Ross & Gowen. Mr. Gowen is a
director or trustee of 31
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Frederic V. Malek; 61 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Avenue, N.W. Partners (merchant bank). From January 1992
Suite 350 to November 1992, he was campaign manager
Washington, D.C. 20004 of Bush-Quayle '92. From 1990 to 1992, he
was vice chairman, and from 1989 to 1990,
he was president of Northwest Airlines
Inc., NWA Inc. (holding company of North-
west Airlines Inc.) and Wings Holdings Inc.
(holding company of NWA Inc.) Prior to
1989, he was employed by the Marriott
Corporation (hotels, 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 Management Systems, Inc.
(management consulting and computer-related
services), Automatic Data Processing, Inc.,
CB Commercial Group, Inc. (real estate
services), Choice Hotels International
(hotel and hotel franchising), FPL Group,
Inc. (electric services), Manor Care, Inc.
(health care) and Northwest Airlines Inc.
Mr. Malek is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Carl W. Schafer; 62 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street Foundation (charitable foundation sup-
#1100 porting mainly oceanographic exploration
Princeton, N.J. 08542 and research). He is a director of Base Ten
Systems, Inc. (software), Roadway Ex-
press, Inc. (trucking), The Guardian Group
of Mutual Funds, the Harding, Loevner
Funds, Evans Systems, Inc. (a motor fuels,
convenience store and diversified company),
Electronic Clearing House, Inc. (financial
transactions processing), Frontier Oil
Corporation and Nutraceutix Inc.
(biotechnology company). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes
Medical Institute. Mr. Schafer is a
director or trustee of 31 investment
companies for which
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Christopher G. Altschul; 32 Vice President Mr. Altschul is a first vice president and a
(Managed Assets Trust only) portfolio manager of Mitchell Hutchins.
Prior to April 1995, he was an equity an-
alyst at Chase Manhattan Bank. Mr. Alt-
schul is a vice president of one invest-
ment company for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Lawrence Chinsky; 29 Vice President and Mr. Chinsky is an assistant vice president
Assistant Treasurer and investment monitoring officer of the
mutual fund finance department of Mitchell
Hutchins. Prior to August 1997, he was a
securities compliance examiner with the
Office of Compliance, Inspections and
Examinations in the New York Regional
Office of the United States Securities and
Exchange Commission. Mr. Chinsky is vice
president and assistant treasurer of 32
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Karen L. Finkel; 40 Vice President Mrs. Finkel is a senior vice president and a
(Olympus Fund only) portfolio manager of Mitchell Hutchins.
Mrs. Finkel is a vice president of three
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Ellen R. Harris; 52 Vice President Ms. Harris is a managing director and a
(Olympus Fund only) portfolio manager of Mitchell Hutchins.
Ms. Harris is a vice president of two in-
vestment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Donald R. Jones; 38 Vice President Mr. Jones is a senior vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins.
Prior to February 1996, he was a vice
president in the asset management group of
First Fidelity Bancorporation. Mr. Jones is
a vice president of two investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
John J. Lee; 30 Vice President and Mr. Lee is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of
Mitchell Hutchins. Prior to September 1997,
he was an audit manager in the financial
services practice of Ernst &
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Young LLP. Mr. Lee is a vice president and
assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Thomas J. Libassi; 39 Vice President Mr. Libassi is a senior vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins.
Prior to May 1994, he was a vice president
of Keystone Custodian Funds Inc. with
portfolio management responsibility.
Mr. Libassi is a vice president of six
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Dennis McCauley; 52 Vice President Mr. McCauley is a managing director and chief
(Securities Trust only) investment officer--fixed income of
Mitchell Hutchins. Prior to December 1994,
he was director of fixed income in-
vestments of IBM Corporation. Mr. Mc-
Cauley is a vice president of 22 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager
Assistant Treasurer of the mutual fund finance department of
Mitchell Hutchins. Ms. Moran is a vice
president and assistant treasurer of 32 in-
vestment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutch-
ins. Ms. O'Donnell is a vice president and
secretary of 31 investment companies and
vice president and assistant secretary of
one investment company for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and
director of operations and control for
Mitchell Hutchins. Mr. Polito is also vice
president of 32 investment companies for
which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Victoria E. Schonfeld; 47 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins. Pri-
or to May 1994, she was a partner in the
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
law firm of Arnold & Porter. Ms. Schon-
feld is a vice president of 31 investment
companies and a vice president and secre-
tary of one investment company for which
Mitchell Hutchins, PaineWebber or their
affiliates serve as investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and
Treasurer the director of the mutual fund finance
department of Mitchell Hutchins. From
August 1992 to August 1994, he was a vice
president at BlackRock Financial Manage-
ment Inc. Mr. Schubert is a vice president
and treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Antony J. Scott; 35 Vice President Mr. Scott is a first vice president and a
(Managed Assets Trust only) portfolio manager of Mitchell Hutchins.
Prior to May 1996, he was a research an-
alyst at Morgan Stanley. Mr. Scott is a vi-
ce president of one investment company for
which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Nirmal Singh; 42 Vice President Mr. Singh is a senior vice president and a
(Securities Trust only) portfolio manager of Mitchell Hutchins.
Mr. Singh is vice president of four invest-
ment companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance de-
partment of Mitchell Hutchins. Prior to
February 1995, he was a manager of the
mutual fund finance division of Kidder
Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and assis-
tant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or
their affiliates serve as investment
adviser.
Mark A. Tincher; 43 Vice President Mr. Tincher is a managing director and chief
investment officer--equities of Mitchell
Hutchins. Prior to March 1995, he was a
vice president and directed the U.S. funds
management and equity research areas of
Chase Manhattan Private Bank. Mr. Tincher
is a vice president of 13 investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME, ADDRESS* AND AGE POSITION WITH EACH TRUST OTHER DIRECTORSHIPS
- ------------------------------------ --------------------------- ---------------------------------------------
<S> <C> <C>
Craig M. Varrelman; 39 Vice President Mr. Varrelman is a senior vice president and
(Securities Trust only) a portfolio manager of Mitchell Hutchins.
Mr. Varrelman is a vice president of four
investment companies for which Mitchell
Hutchins, PaineWebber or their affiliates
serve as investment adviser.
Stuart Waugh; 43 Vice President Mr. Waugh is a managing director and a
(Securities Trust only) portfolio manager of Mitchell Hutchins
responsible for global fixed income in-
vestments and currency trading. Mr. Waugh
is a vice president of five investment
companies for which Mitchell Hutchins,
PaineWebber or their affiliates serve as
investment adviser.
Keith A. Weller; 37 Vice President and Mr. Weller is a first vice president and
Assistant Secretary associate general counsel of Mitchell
Hutchins. Prior to May 1995, he was an
attorney in private practice. Mr. Weller is
a vice president and assistant secretary of
31 investment companies for which Mitchell
Hutchins or PaineWebber serves as in-
vestment 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 1940 Act by virtue of their positions with Mitchell
Hutchins, PaineWebber, and/or PW Group.
Olympus Fund and America Fund each pays trustees who are not "interested
persons" of the Trust $1,500 annually for each series; each Trust presently has
one series and thus pays each such trustee $1,500 annually. Managed Assets Trust
pays trustees who are not "interested persons" of the Trust $1,000 annually for
each series; this Trust has only one series and thus pays each such board member
$1,000 annually. Securities Trust pays trustees who are not "interested persons"
of the Trust $1,500 for Small Cap Fund and $1,000 for the Trust's second series
and thus pays each such trustee $2,500 annually. Each Trust also pays $150 per
series for each board meeting and separate meeting of a board committee (other
than committee meetings held on the same day as a board meeting). Each chairman
of the audit and contract review committees of individual funds within the
PaineWebber fund complex receives additional compensation, aggregating $15,000
each from the relevant funds. All Trustees are reimbursed for any expenses
incurred in attending meetings. Trustees and officers own in the aggregate less
than 1% of the outstanding shares of each Fund. Because PaineWebber and Mitchell
Hutchins perform substantially all of the services necessary for the operation
of the Trusts and each Fund, 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 with that Trust or with other
PaineWebber funds during the period indicated.
19
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
AGGREGATE AGGREGATE AGGREGATE AGGREGATE COMPENSATION
COMPENSATION COMPENSATION COMPENSATION COMPENSATION FROM THE
FROM FROM MANAGED FROM FROM TRUSTS AND
AMERICA ASSETS SECURITIES OLYMPUS THE FUND
NAME OF PERSON, POSITION FUND(1) TRUST(4) TRUST(2) FUND(1) COMPLEX(3)
- ----------------------------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard Q. Armstrong, Trustee...... $2,400 $2,550 $4,300 $2,400 $ 94,885
Richard R. Burt, Trustee........... $2,250 $2,400 $4,000 $2,250 $ 87,085
Meyer Feldberg, Trustee............ $3,553 $3,157 $6,027 $3,157 $117,853
George W. Gowen, Trustee........... $2,400 $2,400 $4,150 $2,250 $101,567
Frederic V. Malek, Trustee......... $2,400 $2,550 $4,300 $2,400 $ 95,845
Carl W. Schafer, Trustee........... $2,400 $2,550 $4,300 $2,400 $ 94,885
</TABLE>
- ------------------
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, 1998.
(2) Represents fees paid to each trustee during the fiscal year ended July 31,
1998.
(3) Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.
(4) Represents fees paid to each trustee during the twelve months ended
August 31, 1998.
PRINCIPAL HOLDERS OF SECURITIES
The following shareholder is shown in Olympus Fund's records as owning more
than 5% of Growth Fund's shares.
<TABLE>
<CAPTION>
NUMBER AND PERCENTAGE
OF SHARES OWNED
NAME AND ADDRESS* AS OF NOVEMBER 1, 1998
- ---------------------------------------- -------------------------
<S> <C> <C>
Northern Trust Company as Trustee for
the benefit of
PaineWebber 401(k) Plan............... 966,468.429 5.97%
</TABLE>
- ------------------
* The shareholder listed may be contacted c/o Mitchell Hutchins Asset
Management Inc., 1285 Avenue of the Americas, New York, NY 10019.
20
<PAGE>
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the investment
adviser and administrator of each Fund pursuant to separate 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. Prior to August 1, 1997, pursuant to service
agreements, PaineWebber provided certain services to the Funds not otherwise
provided by the transfer agent. These agreements were reviewed annually by each
Trust's board. Effective August 1, 1997, PaineWebber provides transfer agency
related services to the Funds pursuant to a delegation of authority from PFPC
Inc. and is compensated for those services by PFPC Inc., not the Funds.
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.
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 applicable board or by vote of the holders of a majority of a Fund's
outstanding voting securities on 60 days' written notice to Mitchell Hutchins,
or by Mitchell Hutchins on 60 days' written notice to a Fund.
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, 1998, August 31, 1997 and August 31, 1996, Growth and Income Fund paid (or
accrued) to Mitchell Hutchins investment advisory and administration fees of
$8,823,952, $5,312,189 and $4,075,174, respectively. Pursuant to the applicable
service agreement, during the fiscal years ended August 31, 1997 and August 31,
1996, Growth and Income Fund paid (or accrued) to PaineWebber service fees of
$191,744, $206,622 respectively.
MID CAP FUND. Pursuant to the Advisory Contract dated March 20, 1992
between Managed Assets Trust and Mitchell Hutchins, Mid Cap Fund pays Mitchell
Hutchins a fee, computed daily and paid monthly, at the annual rate of 1.00% of
the Fund's average daily net assets. For the five-month period ended August 31,
1998 and the fiscal years ended March 31, 1998, March 31, 1997 and March 31,
1996, Mid Cap Fund paid (or accrued) to Mitchell Hutchins investment advisory
and administration fees of $964,741, $2,680,122, $2,684,390 and $2,443,715,
respectively. Pursuant to the applicable service agreement PaineWebber earned
21
<PAGE>
(or accrued) $28,077, $89,240 and $93,745, during the fiscal years ended
March 31, 1998, March 31, 1997 and March 31, 1996 respectively.
Prior to May 1, 1998, Denver Investment Advisors, LLC served as investment
sub-adviser for the Fund pursuant to a separate contract with Mitchell Hutchins
dated March 21, 1995. Under that contract and a substantially identical prior
contract, for the one month period ended May 1, 1998 and the fiscal years ended
March 31, 1998, March 31, 1997 and March 31, 1996, Mitchell Hutchins (not the
Fund) paid Denver Investment Advisors LLC sub-advisory fees in the amount of
$110,392, $1,340,049, $1,342,195 and $1,221,858, respectively.
SMALL CAP FUND. Pursuant to the Advisory Contract dated January 28, 1993,
between Securities Trust and Mitchell Hutchins, Small Cap 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 years ended July 31,
1998, July 31, 1997, and July 31, 1996, Small Cap Fund paid (or accrued) to
Mitchell Hutchins investment advisory and administration fees of $1,340,576,
$873,636 and $731,472, respectively. Pursuant to the applicable service
agreement during the fiscal years ended July 31, 1997 and July 31, 1996, Small
Cap Fund paid (or accrued) to PaineWebber service fees of $35,040 and $36,944
respectively.
Royce and Associates ("Royce"), formerly Quest Advisory Corp., served as a
sub-adviser to Small Cap Fund from February 1, 1993 through March 31, 1996,
pursuant to a sub-advisory contract between Royce and Mitchell Hutchins dated
January 28, 1993, under which Mitchell Hutchins (not the Fund) paid or accrued
to Royce Advisory $249,955 during the fiscal year ended July 31, 1996, in
sub-advisory fees.
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, 1998, August 31,
1997 and August 31, 1996, Growth Fund paid (or accrued) to Mitchell Hutchins
investment advisory and administration fees of $2,858,153, $2,934,644 and
$2,985,925, respectively. Pursuant to the applicable service agreement, during
the fiscal years ended August 31, 1997 and August 31, 1996, Growth Fund paid (or
accrued) to PaineWebber service fees of $110,890 and $134,864 respectively.
ALL FUNDS. For its services as lending agent, PaineWebber received $57,530
and $82,147 in compensation from Growth and Income Fund and Growth Fund,
respectively, for the fiscal year ended August 31, 1998, $25,267 from Small Cap
Fund for the fiscal year ended July 31, 1998 and $8,609 and $2,859, respectively
from Mid Cap Fund for the five months ended August 31, 1998 and the fiscal year
ended March 31, 1998.
NET ASSETS. The following table shows the approximate net assets as of
October 31, 1998, sorted by category of investment objective, of the investment
companies for which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
<TABLE>
<CAPTION>
NET ASSETS
INVESTMENT CATEGORY ($ MIL)
---------------------------------------- ----------
<S> <C>
Domestic (excluding Money Market)....... $ 7,761.7
Global.................................. 3,627.2
Equity/Balanced......................... 6,301.2
Fixed Income (excluding Money Market)... 5,087.7
Taxable Fixed Income.................. 3,496.1
Tax-Free Fixed Income................. 1,591.6
Money Market Funds...................... 31,335.1
</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
22
<PAGE>
addition, the code of ethics puts restrictions on the timing of personal
investing in relation to trades by PaineWebber funds and other Mitchell Hutchins
advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of each Fund under separate distribution contracts with
each Trust (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
relating to each class of 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. There is no distribution plan with respect to the Funds'
Class Y shares.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the applicable board at least quarterly, and the trustees will review,
reports regarding all amounts expended under the Plan and the purposes for which
such expenditures were made, (2) the Plan will continue in effect only so long
as it is approved at least annually, and any material amendment thereto is
approved, by the applicable board, 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 years (or periods) set forth below the Funds paid (or
accrued) the following fees to Mitchell Hutchins under the Plans:
<TABLE>
<CAPTION>
GROWTH AND
INCOME FUND MID CAP FUND SMALL CAP FUND GROWTH FUND
FISCAL YEAR FIVE MONTH FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED PERIOD ENDED ENDED ENDED ENDED
AUGUST 31, 1998 AUGUST 31, 1998 MARCH 31, 1998 JULY 31, 1998 AUGUST 31, 1998
--------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Class A................................. $ 1,500,561 $ 130,218 $ 231,601 $113,570 $ 527,772
Class B................................. $ 4,063,846 $ 345,115 $1,478,236 $541,791 $ 1,023,937
Class C................................. $ 1,378,915 $ 98,551 $ 269,903 $302,004 $ 261,217
</TABLE>
23
<PAGE>
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 these fiscal
years (or periods):
CLASS A
<TABLE>
<CAPTION>
MID CAP FUND MID CAP FUND
FIVE MONTH FISCAL YEAR
GROWTH AND PERIOD ENDED ENDED SMALL CAP GROWTH
INCOME FUND AUGUST 31, 1998 MARCH 31, 1998 FUND FUND
----------- --------------- --------------- --------- --------
<S> <C> <C> <C> <C> <C>
Marketing and advertising............... $ 869,936 $ 41,723 $ 67,337 $ 86,033 $146,724
Printing of prospectuses and statements
of additional information to other
than current shareholders............ 3,539 3,727 1,597 240 1,346
Branch network costs allocated and
interest expense..................... 1,501,826 178,830 359,909 127,400 928,808
Service fees paid to PaineWebber
investment executives................ 570,214 49,483 88,008 43,157 200,554
</TABLE>
CLASS B
<TABLE>
<CAPTION>
MID CAP FUND MID CAP FUND
FIVE MONTH FISCAL YEAR
GROWTH AND PERIOD ENDED ENDED SMALL CAP GROWTH
INCOME FUND AUGUST 31, 1998 MARCH 31, 1998 FUND FUND
----------- --------------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
Marketing and advertising............... $ 499,240 $ 27,852 $107,737 $102,602 $ 65,570
Amortization of commissions............. 1,181,623 100,306 409,312 154,734 291,301
Printing of prospectuses and statements
of additional information to other
than current shareholders............ 2,022 2,262 2,247 288 495
Branch network costs allocated and
interest expense..................... 1,090,830 124,891 599,585 168,851 432,606
Service fees paid to PaineWebber
investment executives................ 386,065 32,786 140,433 51,470 97,273
</TABLE>
CLASS C
<TABLE>
<CAPTION>
MID CAP FUND MID CAP FUND
FIVE MONTH FISCAL YEAR
GROWTH AND PERIOD ENDED ENDED SMALL CAP GROWTH
INCOME FUND AUGUST 31, 1998 MARCH 31, 1998 FUND FUND
----------- --------------- --------------- --------- --------
<S> <C> <C> <C> <C> <C>
Marketing and advertising............... $ 187,510 $ 7,938 $ 19,645 $ 57,180 $ 16,727
Amortization of commissions............. 392,990 28,087 76,923 86,071 74,447
Printing of prospectuses and statements
of additional information to other
than current shareholders............ 758 666 437 157 138
Branch network costs allocated and
interest expense..................... 322,674 34,254 105,859 85,916 106,841
Service fees paid to PaineWebber
investment executives................ 130,997 9,362 25,640 28,690 24,816
</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.
24
<PAGE>
In approving each Fund's overall Flexible PricingSM system of distribution,
each board considered several factors, including that implementation of Flexible
Pricing would (1) enable investors to choose the purchasing option best suited
to their individual situation, thereby encouraging current shareholders to make
additional investments in the Funds and attracting new investors and assets to
the Funds to the benefit of each 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, each board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber investment executives and correspondent firms,
resulting in greater growth of the Funds than might otherwise be the case,
(3) the advantages to the shareholders of economies of scale resulting from
growth in each Fund's assets and potential continued growth, (4) the services
provided to each 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, each board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from Fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in Fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber 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 each Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in each 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, was conditioned upon its expectation of being
compensated under the Class B Plan.
In approving the Class C Plan, each board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from Fund purchase payments and instead having
the entire amount of 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 each Fund
than might otherwise be the case, (4) the advantages to the shareholders of
economies of scale resulting from growth in each Fund's assets and potential
continued growth, (5) the services provided to each 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 boards 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 boards also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and
25
<PAGE>
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 Contracts for the Class A shares and similar prior
distribution contracts, for the fiscal years (or periods) 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 YEARS
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
GROWTH AND INCOME FUND
Earned.................................. $3,377,803 $1,057,894 $369,006
Retained................................ $ 200,804 $ 28,748 $ 21,741
SMALL CAP FUND
Earned.................................. $ 299,265 $ 39,599 $ 16,418
Retained................................ $ 17,983 $ 2,303 $ 1,131
GROWTH FUND
Earned.................................. $ 77,935 $ 113,033 $104,474
Retained................................ $ 5,776 $ 6,886 $ 6,032
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTH FISCAL YEARS
PERIOD ENDED ----------------------------------
AUGUST 31, 1998 1998 1997 1996
--------------- -------- ---------- --------
<S> <C> <C> <C> <C>
MID CAP FUND
Earned.................................. $ 42,878 $ 79,480 $ 124,319 $112,032
Retained................................ $ 3,039 $ 4,826 $ 7,597 $ 6,149
</TABLE>
Mitchell Hutchins earned and retained the following contingent deferred
sales charges paid upon certain redemptions of Class A, Class B and Class C
shares for the last fiscal year (and for the five month period ended August 31,
1998 for Mid Cap Fund):
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND SMALL CAP FUND GROWTH FUND
---------------------- -------------- -----------
<S> <C> <C> <C>
Class A........................................ $ 0 $ 0 $ 0
Class B........................................ $420,002 $ 81,893 $ 130,715
Class C........................................ $ 38,256 $ 13,948 $ 1,052
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTH PERIOD FISCAL YEAR ENDED
ENDED AUGUST 31, 1998 MARCH 31, 1998
--------------------- -----------------
<S> <C> <C>
MID CAP FUND
Class A............................................................... $ 0 $ 0
Class B............................................................... $ 62,744 $ 180,119
Class C............................................................... $ 873 $ 0
</TABLE>
26
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by each board, 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. During the indicated fiscal years ended
August 31 (for Growth and Income Fund and Growth Fund), March 31. (for Mid Cap
Fund) and July 31 (for Small Cap Fund) and for the five month period ended
August 31, 1998 for Mid Cap Fund, the Funds paid the brokerage commissions set
forth below:
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Growth and Income Fund.......................................... $1,782,530 $1,139,813 $1,246,465
Growth Fund..................................................... 455,002 665,156 400,232
Small Cap Fund.................................................. 163,052 147,913 211,004
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTH FISCAL YEAR ENDED MARCH 31,
PERIOD ENDED --------------------------------------
AUGUST 31, 1998 1998 1997 1996
--------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mid Cap Fund.................................. $ 673,061 $ 388,468 $ 330,810 $ 329,556
</TABLE>
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. Each board has adopted procedures in conformity
with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid
to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize PaineWebber and any of its affiliates that is a member of a
national security exchange 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. During the indicated fiscal years
ended August 31 (for Growth and Income Fund and Growth Fund), March 31, (for Mid
Cap Fund), and July 31 (for Small Cap Fund), and during the five month period
ended August 31, 1998 for Mid Cap Fund, the Funds paid to PaineWebber the
brokerage commissions set forth below:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Growth and Income Fund................................................. $51,462 $43,440 $22,470
Growth Fund............................................................ 43,380 32,130 2,400
Small Cap Fund......................................................... 0 3,900 3,066
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTH FISCAL YEARS
PERIOD ENDED --------------------------
AUGUST 31, 1998 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C> <C>
Mid Cap Fund........................................... $ 0 $ 0 $ 0 $ 0
</TABLE>
The amounts paid by the Funds to PaineWebber in brokerage commissions for
their most recent fiscal years represent (1) for Growth and Income Fund, 2.89%
of the total brokerage commission paid and 1.98% of the total dollar amount of
transactions involving the payment of brokerage commissions and (2) for Growth
Fund, 9.53% of the total brokerage commission paid and 3.37% of the total dollar
amount of transactions involving the payment of brokerage commissions.
27
<PAGE>
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.
Consistent with the interests of each Fund and subject to the review of its
board, Mitchell Hutchins may cause a Fund to purchase and sell portfolio
securities from and to dealers or through brokers who provide Mitchell Hutchins
with research, analysis, advice and similar services. A Fund may pay to those
brokers a higher commission than may be charged by other brokers, provided that
Mitchell Hutchins determines in good faith that such commission is reasonable in
terms either of that particular transaction or of the overall responsibility of
Mitchell Hutchins to the Fund and its other clients and that the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. During the fiscal years ended August 31, 1998 (for
Growth and Income Fund and Growth Fund) March 31, 1998 (for Mid Cap Fund) and
July 31, 1998 (for Small Cap Fund), and during the five month period ended
August 31, 1998 for Mid Cap Fund, Mitchell Hutchins directed the portfolio
transactions indicated below to brokers chosen because they provide research and
analysis, for which the Funds paid the brokerage commissions indicated below:
<TABLE>
<CAPTION>
AMOUNT OF PORTFOLIO BROKERAGE COMMISSIONS
TRANSACTIONS PAID
------------------- ---------------------
<S> <C> <C>
Growth and Income Fund.................................... $ 180,923,115 $ 201,780
Small Cap Fund............................................ 2,147,789 5,880
Growth Fund............................................... 71,769,640 84,992
Mid Cap Fund
Five month period ended August 31, 1998................. $ 50,417,243 $ 67,575
Fiscal year ended March 31, 1998........................ $ 189,974,320 $ 104,232
</TABLE>
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 were
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 Contracts.
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 board pursuant
28
<PAGE>
to Rule 10f-3 under the 1940 Act. Among other things, these procedures require
that the spread or commission paid in connection with such a purchase be
reasonable and fair, the purchase be at not more than the public offering price
prior to the end of the first business day after the date of the public offering
and that PaineWebber or any affiliate thereof not participate in or benefit from
the sale to the Funds.
PORTFOLIO TURNOVER. The 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, 1998................. 62%
Fiscal Year Ended August 31, 1997................. 70%
MID CAP FUND
Five Month Period Ended August 31, 1998........... 80%
Fiscal Year Ended March 31, 1998.................. 64%
Fiscal Year Ended March 31, 1997.................. 56%
SMALL CAP FUND
Fiscal Year Ended July 31, 1998................... 45%
Fiscal Year Ended July 31, 1997................... 54%
GROWTH FUND
Fiscal Year Ended August 31, 1998................. 52%
Fiscal Year Ended August 31, 1997................. 86%
</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 such individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
29
<PAGE>
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts.
The registered investment adviser must communicate at least quarterly
through a newsletter or investment update establishing a relationship with
all of the accounts.
RIGHTS OF ACCUMULATION--CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related Fund investors (as defined above) are permitted to purchase
Class A shares of the Funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus
(2) an amount equal to the then-current net asset value of the purchaser's
combined holdings of Class A Fund shares and Class A shares of any other
PaineWebber mutual fund. The purchaser must provide sufficient information to
permit confirmation of his or her holdings, and the acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time.
WAIVERS OF SALES CHARGES--CLASS B SHARES. Among other circumstances, the
contingent deferred sales charge on Class B shares is waived where a total or
partial redemption is made within one year following the death of the
shareholder. The contingent deferred sales charge waiver is available where the
decedent is either the individual shareholder or owns the shares with his or her
spouse as a joint tenant with right of survivorship. This waiver applies only to
redemption of shares held at the time of death.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the Funds may be exchanged for shares of the
corresponding class of 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. Any such
redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. Each Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which a
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of its net asset value during any 90-day period for one shareholder. This
election is irrevocable unless the SEC permits its withdrawal. The Funds may
suspend redemption privileges or postpone the date of payment during any period
(1) when the New York Stock Exchange ("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.
SERVICE ORGANIZATIONS. A Fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A Fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the Fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
AUTOMATIC INVESTMENT PLAN. Participation in the Automatic Investment Plan
enables an investor to use the technique of "dollar cost averaging." When an
investor invests the same dollar amount each month under the Plan, the investor
will purchase more shares when a Fund's net asset value per share is low and
fewer shares when the net asset value per share is high. Using this technique,
an investor's average purchase price per share over any given period will be
lower than if the investor purchased a fixed number of shares on a monthly basis
during the period. Of course, investing through the automatic investment plan
does not assure
30
<PAGE>
a profit or protect against loss in declining markets. Additionally, because the
automatic investment plan involves continuous investing regardless of price
levels, an investor should consider his or her financial ability to continue
purchases through periods of both low and high price levels.
SYSTEMATIC WITHDRAWAL PLAN. An investor's participation in the systematic
withdrawal plan will terminate automatically if the "Initial Account Balance" (a
term that means the value of the Fund account at the time the investor elects to
participate in the systematic withdrawal plan) less aggregate redemptions made
other than pursuant to the systematic withdrawal plan is less than $5,000 for
Class A and Class C shareholders or $20,000 for Class B shareholders. Purchases
of additional Fund shares concurrent with withdrawals are ordinarily
disadvantageous to shareholders because of tax liabilities and, for Class A
shares, initial sales charges. On or about the 20th of each month for monthly,
quarterly, semiannual or annual plans, PaineWebber will arrange for redemption
by a Fund of sufficient Fund shares to provide the withdrawal payment specified
by participants in the Fund's systematic withdrawal plan. The payment generally
is mailed approximately five Business Days (defined under "Valuation of Shares")
after the redemption date. Withdrawal payments should not be considered
dividends, but redemption proceeds, with the tax consequences described under
"Dividends & Taxes" in the Prospectus. If periodic withdrawals continually
exceed reinvested dividends, 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(ServiceMark);
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(REGISTERED)(RMA)(REGISTERED)
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 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
31
<PAGE>
current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the Plan,
may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the PW
Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to accumulating assets
over time, de-emphasizing the importance of timing the market's highs and lows.
Periodic investing also permits an investor to take advantage of "dollar cost
averaging." By investing a fixed amount in mutual fund shares at established
intervals, an investor purchases more shares when the price is lower and fewer
shares when the price is higher, thereby increasing his or her earning
potential. Of course, dollar cost averaging does not guarantee a profit or
protect against a loss in a declining market, and an investor should consider
his or her financial ability to continue investing through periods of both low
and high share prices. However, over time, dollar cost averaging generally
results in a lower average original investment cost than if an investor invested
a larger dollar amount in a mutual fund at one time.
PAINEWEBBER'S RESOURCE MANAGEMENT ACCOUNT. In order to enroll in the Plan,
an investor must have opened an RMA account with PaineWebber or one of its
correspondent firms. The RMA account is PaineWebber's comprehensive asset
management account and offers investors a number of features, including the
following:
o monthly Premier account statements that itemize all account activity,
including investment transactions, checking activity and Gold
MasterCard(Registered) transactions during the period, and provide
unrealized and realized gain and loss estimates for most securities held
in the account;
o comprehensive preliminary 9-month and year-end summary statements that
provide information on account activity for use in tax planning and tax
return preparation;
o automatic "sweep" of uninvested cash into the RMA accountholder's choice
of one of the six RMA money market funds--RMA Money Market Portfolio, RMA
U.S. Government Portfolio, RMA Tax-Free Fund, RMA California Municipal
Money Fund, RMA New Jersey Municipal Money Fund and RMA New York
Municipal Money Fund. An investment in a money market fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although a money market fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose money
by investing in a money market fund.
o check writing, with no per-check usage charge, no minimum amount on
checks and no maximum number of checks that can be written. RMA
accountholders can code their checks to classify expenditures. All
canceled checks are returned each month;
o Gold MasterCard, with or without a line of credit, which provides RMA
accountholders with direct access to their accounts and can be used with
automatic teller machines worldwide. Purchases on the Gold MasterCard are
debited to the RMA account once monthly, permitting accountholders to
remain invested for a longer period of time;
o 24-hour access to account information through toll-free numbers, and more
detailed personal assistance during business hours from the RMA Service
Center;
o expanded account protection to $100 million in the event of the
liquidation of PaineWebber. This protection does not apply to shares of
the RMA money market funds or the PW Funds because those shares are held
at the transfer agent and not through PaineWebber; and
o automatic direct deposit of checks into your RMA account and automatic
withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the Gold
MasterCard, with an additional fee of $40 if the investor selects an optional
line of credit with the Gold MasterCard.
32
<PAGE>
CONVERSION OF CLASS B SHARES
Class B shares of a Fund will automatically convert to Class A shares of
that Fund, based on the relative net asset values per share of the two classes,
as of the close of business on the first Business Day (as defined under
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of such Class B shares occurs. For the purpose of calculating
the holding period required for conversion of Class B shares, the date of
initial issuance shall mean (i) the date on which such Class B shares were
issued, or (ii) for Class B shares obtained through an exchange, or a series of
exchanges, the date on which the original Class B shares were issued. For
purposes of conversion to Class A shares, Class B shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
will also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
availability of an opinion of counsel to the effect that the dividends and other
distributions paid on Class A and Class B shares will not result in
"preferential dividends" under the Internal Revenue Code and the conversion of
shares will not constitute a taxable event. If the conversion feature ceased to
be available, the Class B shares would not be converted and would continue to be
subject to the higher ongoing expenses of the Class B shares beyond six years
from the date of purchase. Mitchell Hutchins has no reason to believe that this
condition for the availability of the conversion feature will not be met.
VALUATION OF SHARES
Each Fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading on the NYSE
(usually 4:00 p.m., Eastern time) on each Business Day, which is defined as each
Monday through Friday when the NYSE is open. Prices will be calculated earlier
when the NYSE closes early because trading has been halted for the day.
Currently the NYSE is closed on the observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities that are listed on U.S. stock exchanges are valued at the last
sale price prior to valuation on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by Mitchell Hutchins as the primary market.
Securities traded in the OTC market and listed on the Nasdaq Stock Market
("Nasdaq") are valued at the last sale price on Nasdaq prior to valuation; other
OTC securities are valued at the last bid price available prior to valuation
(other than short-term investments that mature in 60 days or less, which are
valued as described further below). 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 board. It should be recognized that
judgment often plays a greater role in valuing thinly traded securities and
lower rated securities than is the case with respect to securities for which a
broader range of dealer quotations and last-sale information is available. The
amortized cost method of valuation generally is used to value debt obligations
with 60 days or less remaining until maturity, unless the board determines that
this does not represent fair value.
PERFORMANCE INFORMATION
The Funds' performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
33
<PAGE>
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each Fund's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<S> <C> <C>
n
P(1 + T) = 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.
</TABLE>
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-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 each classs of 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 CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended August 31, 1998:
Standardized Return*.................. (7.85)% (8.67)% (5.11)% (3.24)%
Non-Standardized Return............... (3.51)% (4.28)% (4.23)% (3.24)%
Five years ended August 31, 1998:
Standardized Return*.................. 12.63 % 12.54 % 12.81 % 13.98 %
Non-Standardized Return............... 13.67 % 12.79 % 12.81 % 13.98 %
Ten years ended August 31, 1998
Standardized Return*.................. 12.22 % NA NA NA
Non-Standardized Return............... 12.74 % NA NA NA
Inception** to August 31, 1998:
Standardized Return*.................. 12.19 % 11.25 % 11.18 % 10.80 %
Non-Standardized Return............... 12.54 % 11.25 % 11.18 % 10.80 %
</TABLE>
MID CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
One year ended August 31, 1998:
Standardized Return*.................. (23.88)% (23.20)% (21.33)% NA
Non-Standardized Return............... (20.28)% (20.91)% (20.89)% NA
Five years ended August 31, 1998:
Standardized Return*.................. 7.21 % 7.18 % 7.38 % NA
Non-Standardized Return*.............. 8.21 % 7.39 % 7.38 % NA
Inception* to August 31, 1998:
Standardized Return*.................. 8.55 % 8.50 % 10.14 % (26.82)%
Non-Standardized Return............... 9.33 % 8.50 % 10.14 % (26.82)%
</TABLE>
34
<PAGE>
SMALL CAP FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
One year ended July 31, 1998:
Standardized Return*.................. 3.58% 2.69% 6.63% 8.74%
Non-Standardized Return............... 8.45% 7.60% 7.61% 8.74%
Five years ended July 31, 1998:
Standardized*......................... 11.71% 11.64% 11.88% NA
Non-Standardized...................... 12.74% 11.90% 11.88% NA
Inception** to July 31, 1998:
Standardized Return*.................. 11.05% 11.03% 11.12% 21.58%
Non-Standardized Return............... 11.98% 11.14% 11.12% 21.58%
</TABLE>
GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal year ended August 31, 1998:
Standardized Return*.................. (1.27)% (1.21)% 1.83 % 3.61 %
Non-Standardized Return............... 3.37 % 2.55 % 2.59 % 3.61 %
Five years ended August 31, 1998:
Standardized Return*.................. 9.05 % 8.94 % 9.21 % 10.37 %
Non-Standardized Return*.............. 10.06 % 9.20 % 9.21 % 10.37 %
Ten years ended August 31, 1998:
Standardized Return*.................. 13.23 % NA NA NA
Non-Standardized Return*.............. 13.75 % NA NA NA
Inception** to August 31, 1998:
Standardized Return*.................. 13.02 % 11.41 % 11.17 % 11.31 %
Non-Standardized Return............... 13.41 % 11.41 % 11.17 % 11.31 %
</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.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, Non-Standardized Return is identical to Standardized Return.
** The inception date for each class of shares is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Growth and Income Fund.................................... 12/20/83 07/01/91 07/02/92 02/12/92
Mid Cap Fund.............................................. 04/07/92 04/07/92 07/02/92 03/17/98
Small Cap Fund............................................ 02/01/93 02/01/93 02/01/93 07/26/96
Growth Fund............................................... 03/18/85 07/01/91 07/02/92 08/26/91
</TABLE>
35
<PAGE>
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 the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), the Standard & Poor's 600 Small-Cap Index, the Standard & Poor's 400 Mid-
Cap Index, the Dow Jones Industrial Average, the Nasdaq Composite Index, the
Russell 2000 Index, the Russell 1000 Index (including Value and Growth
sub-indexes), the Wilshire 5000 Index, Standard & Poor's Mid Cap Financials
Index, Standard & Poor's Super Composite Financials Index, Standard & Poor's
Financial 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 levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the Funds and comparative mutual fund data and ratings reported
in independent periodicals, including THE WALL STREET JOURNAL, MONEY, SMART
MONEY, MUTUAL FUNDS, 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(Registered) 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 Fund involves greater risks than an investment in either a money market
fund or a CD.
The Funds may also compare their performance to general trends in the stock
and bond markets, as illustrated by the following graph prepared by Ibbotson
Associates, Chicago.
36
<PAGE>
[LINE CHART TO COME]
The chart is shown for illustrative purposes only and does not represent
any Fund's performance. These returns consist of income and capital appreciation
(or depreciation) and should not be considered an indication or guarantee of
future investment results. Year-to-year fluctuations in certain markets have
been significant and negative returns have been experienced in certain markets
from time to time. Small cap stocks are represented by an index of the ninth and
tenth decile of the NYSE plus stocks listed on the American Stock Exchange
(AMEX) and OTC with the same or less capitalization as the upper bound of the
NYSE ninth decile. Common stocks are measured by the S&P 500, an unmanaged
weighted index comprising 500 widely held common stocks and varying in
composition. Unlike investors in bonds and U.S. Treasury bills, common stock
investors do not receive fixed income payments and are not entitled to repayment
of principal. These differences contribute to investment risk. Returns shown for
long-term government bonds are based on U.S. Treasury bonds with 20-year
maturities. Inflation is measured by the Consumer Price Index. The indices are
unmanaged and are not available for investment.
- ------------------
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook(Trademark) Ibbotson
Assoc., Chi., (annual updates work by Roger C. Ibbotson & Rex A
Sinquefield).
Over time, small cap and large cap stocks have outperformed all other
investments by a wide margin, offering a solid hedge against inflation. From
1926 to 1997, stocks beat all other traditional asset classes.
TAXES
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 and net short-term
capital gain) ("Distribution Requirement") and must meet several additional
requirements. For each Fund, these requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other
37
<PAGE>
disposition of securities, or other income (including gains from options or
futures) derived with respect to its business of investing in securities
("Income Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If a Fund failed to qualify for treatment as a RIC for any taxable
year, it would be taxed as an ordinary corporation on its taxable income for
that year (even if that income was distributed to its shareholders) and all
distributions out of its earnings and profits would be taxable to its
shareholders as dividends (that is, ordinary income).
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each Fund's investment company taxable
income (whether paid in cash or additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by a Fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
alternative minimum tax.
If shares of a 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--other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which a
Fund is a shareholder--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, a 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 that 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 the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)--which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax--even if those earnings and
gain were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
38
<PAGE>
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. A Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken thereunder (and under regulations proposed
in 1992 that provided a similar election with respect to the stock of certain
PFICs).
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses a Fund realizes in connection
therewith. Gains from options and futures derived by a Fund with respect to its
business of investing in securities will qualify as permissible income under the
Income Requirement.
If a Fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, futures contract or short sale) with
respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the same or substantially
similar property, the Fund will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures contract entered into by a Fund or a related
person with respect to the same or substantially similar property. In addition,
if the appreciated financial postion is itself a short sale or such a contract,
acquisition of the underlying property or substantially similar property will be
deemed a constructive sale. The foregoing will not apply, however, to any
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of
that year and the Fund holds the appreciated financial position unhedged for
60 days after that closing (i.e., at no time during that 60-day period is the
Fund's risk of loss with respect to that position reduced by reason of certain
specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
OTHER INFORMATION
Prior to April 3, 1995, Growth and Income Fund was known as "PaineWebber
Dividend Growth Fund." Prior to May 1, 1998, Mid Cap Fund was known as
"PaineWebber Capital Appreciation Fund." Prior to July 26, 1996, Small Cap Fund
was known as "PaineWebber Small Cap Value Fund." On July 26, 1996, Small Cap
Fund was combined in a tax-free reorganization with PaineWebber Small Cap Growth
Fund, a series of PaineWebber Investment Trust III. As a result of the
reorganization, each shareholder of PaineWebber Small Cap Growth Fund became a
shareholder of Small Cap Fund. Prior to November 10, 1995, each Fund's Class C
shares were known as "Class D" shares. Prior to November 10, 1995, the Class Y
shares of Growth and Income Fund and Growth Fund were known as Class C shares.
Each Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a Fund could, under
certain circumstances, be held personally liable for the obligations of the
applicable Trust or Fund. However, each Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust or the Fund 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 the Trust or Fund, the trustees or any of
them in connection with the 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
39
<PAGE>
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 service and distribution fees) to the specific
classes of its shares to which those expenses are attributable. For example,
Class B and Class C shares bear higher transfer agency fees per shareholder
account than those borne by Class A or Class Y shares. The higher fee is imposed
due to the higher costs incurred by the Transfer Agent in tracking shares
subject to a contingent deferred sales charge because, upon redemption, the
duration of the shareholder's investment must be determined in order to
determine the applicable charge. Although the transfer agency fee will differ on
a per account basis as stated above, the specific extent to which the transfer
agency fees will differ between the classes as a percentage of net assets is not
certain, because the fee as a percentage of net assets will be affected by the
number of shareholder accounts in each class and the relative amounts of net
assets in each class.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the Funds.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as independent auditors for Growth and Income Fund, Mid Cap Fund and
Growth Fund. PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York 10036, serves as independent accountants for Small Cap Fund.
FINANCIAL STATEMENTS
Each Fund's Annual Report to Shareholders for its 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.
40
<PAGE>
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<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"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 S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong; AA. An obligation rated AA differs from the higher rated
issues only in small degree; A. An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still strong;
BBB. An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions; BB. An obligation rated
BB is less vulnerable to nonpayment than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation; BB. An obligation rated BB is
less vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation; B. An obligation rated B is
more vulnerable to nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its
A-1
<PAGE>
financial commitment on the obligation; CCC. An obligation rated CCC is
currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitments on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation; CC. An obligation rated CC is currently
highly vulnerable to nonpayment; C. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued; D. An obligation
rated D is in payment default. The D rating category is used when payments on an
obligation are not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
A-2
<PAGE>
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<PAGE>
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<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE 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>
Statement of Additional Information............ 1
Investment Policies and Restrictions........... 1
Strategies Using Derivative Instruments........ 7
Trustees and Officers; Principal Holders of
Securities................................... 13
Investment Advisory and Distribution
Arrangements................................. 21
Portfolio Transactions......................... 27
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.... 29
Conversion of Class B Shares................... 33
Valuation of Shares............................ 33
Performance Information........................ 33
Taxes.......................................... 37
Other Information.............................. 39
Financial Statements........................... 40
Appendix....................................... A-1
</TABLE>
(Copyright)1998 PaineWebber Incorporated
PaineWebber
Growth and Income Fund
PaineWebber
Mid Cap Fund
PaineWebber
Small Cap Fund
PaineWebber
Growth Fund
Statement of Additional Information
November 30, 1998
PAINEWEBBER
