As filed with the Securities and Exchange Commission on December 3, 1999
1933 Act Registration No. 2-91362
1940 Act Registration No. 811-4040
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 65 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 58 [ X ]
(Check appropriate box or boxes.)
PAINEWEBBER MANAGED INVESTMENTS TRUST
(Exact name of registrant as specified in charter)
51 West 52nd Street
New York, New York 10019-6114
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
DIANNE E. O'DONNELL, ESQ.
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ELINOR W. GAMMON, ESQ.
BENJAMIN J. HASKIN, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202)778-9000
Approximate Date of Proposed Public Offering: Effective Date of this
Post-Effective Amendment.
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to Rule 485(b)
[X] On DECEMBER 5, 1999 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] On ________________pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] On ________________ pursuant to Rule 485(a)(2)
Title of Securities Being Registered: Class A, B, C and Y Shares of Beneficial
Interest of PaineWebber Tax- Managed Equity Fund.
<PAGE>
PAINEWEBBER
TAX-MANAGED EQUITY FUND
------------------------
PROSPECTUS
DECEMBER 6, 1999
------------------------
This prospectus offers shares in one of PaineWebber's stock funds. The fund
offers four classes of shares -- Classes A, B, C and Y. Each class has different
sales charges and ongoing expenses. You can choose the class that is best for
you based on how much you plan to invest and how long you plan to hold your fund
shares. Class Y shares are available only to certain types of investors.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
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PaineWebber Tax-Managed Equity Fund
CONTENTS
THE FUND
------------------------------------------------------
What every investor 3 Tax-Managed Equity Fund
should know about
the fund 5 More About Risks and Investment Strategies
YOUR INVESTMENT
------------------------------------------------------
Information for 7 Managing Your Fund Account
managing your fund --Flexible Pricing
account --Buying Shares
--Selling Shares
--Exchanging Shares
--Pricing and Valuation
ADDITIONAL INFORMATION
------------------------------------------------------
Additional important 12 Management
information about
the fund 13 Dividends and Taxes
14 Financial Highlights
------------------------------------------------------
Where to learn more Back Cover
about PaineWebber
mutual funds
------------------------------------------------------
The fund is not a complete or
balanced investment program.
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Prospectus Page 2
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PaineWebber Tax-Managed Equity Fund
PaineWebber Tax-Managed Equity Fund
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
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FUND OBJECTIVE
Maximize after-tax total return.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in common stocks that Mitchell Hutchins Asset
Management Inc., its investment adviser, believes have reasonable valuations and
favorable earnings forecasts. Mitchell Hutchins seeks to minimize the taxes the
fund's shareholders incur, primarily by minimizing the fund's realized capital
gains and by realizing capital losses that can offset present or future capital
gains.
The fund may invest in U.S. dollar denominated securities of foreign
issuers. The fund's investments may include convertible bonds, including to a
limited extent those that are not investment grade. The fund may (but is not
required to) use options, futures contracts and other derivatives as part of its
investment strategy or to help manage portfolio risks.
In buying and selling securities for the fund, Mitchell Hutchins follows a
disciplined investment process that relies on a tax-advantaged valuation model,
which screens a universe of companies and ranks them. The model may apply a
number of factors, which may include cash flow, forecasted earnings, revenues,
price momentum, profitability, financial leverage, price of the security, return
on equity and projected dividends. The model seeks to determine the
reasonableness of the valuation of individual securities by comparing their
relative valuation with other individual securities or the U.S. equity
securities market. Through the use of the model, the fund seeks to hold
individual securities for the long term, although it may hold securities for
shorter periods. Mitchell Hutchins may then apply traditional fundamental
analysis to select specific securities ranked highly by the model. Mitchell
Hutchins may make changes to the model or its investment process over time.
PRINCIPAL RISKS
An investment in the fund is not guaranteed; you may lose money by investing in
the fund.
Equity securities generally fluctuate in value more than other types of
securities. The fund could lose all of its investment in a company's stock.
Notwithstanding the fund's use of tax management strategies, the fund may have
taxable income and may realize taxable capital gains from time to time.
Investors may realize capital gains when they sell their shares.
More information about these and other risks of an investment in the fund is
provided below in "More About Risks and Investment Strategies." In particular,
see the following headings:
o Equity Risk
o Risks of Tax Management Strategies
o Foreign Securities Risk
o Derivatives Risk
INFORMATION ON THE FUND'S INVESTMENT STRATEGIES AND RECENT HOLDINGS CAN BE FOUND
IN ITS CURRENT ANNUAL/SEMI-ANNUAL REPORTS (SEE BACK COVER FOR INFORMATION ON
ORDERING THOSE REPORTS).
The fund commenced operations on December 14, 1998. As a result, it does not
have performance information of at least one calendar year to include in a bar
chart or table reflecting average annual returns.
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PROSPECTUS PAGE 3
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PaineWebber Tax-Managed Equity Fund
EXPENSES AND FEE TABLES
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FEES AND EXPENSES These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of offering price) .................................................. 4.5% None None None
Maximum Contingent Deferred Sales Charge (Load) (CDSC)
(as a % of offering price) .................................................. None 5% 1% None
Exchange Fee ................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Management Fees ................................................................ 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees ....................................... 0.25 1.00 1.00 None
Other Expenses1 ................................................................ 0.52 0.47 0.46 0.37
---- ---- ---- ----
Total Annual Fund Operating Expenses1........................................... 1.52% 2.22% 2.21% 1.12%
==== ==== ==== ====
</TABLE>
1 These figures do not include non-recurring organizational expenses of $125,000
during the fund's initial fiscal period ended August 31, 1999. If those
expenses were included, for Class A, B, C and Y shares "Other Expenses" would
be 0.87%, 0.82%, 0.81% and 0.72% and "Total Annual Fund Operating Expenses"
would be 1.87%, 2.57%, 2.56% and 1.47%, respectively.
EXAMPLE
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A .................................................... $598 $ 909 $1,242 $2,181
Class B (assuming sale of all shares at end of period) ..... 725 994 1,390 2,216
Class B (assuming no sale of shares) ....................... 225 694 1,190 2,216
Class C (assuming sale of all shares at end of period) ..... 324 691 1,185 2,544
Class C (assuming no sale of shares) ....................... 224 691 1,185 2,544
Class Y .................................................... 114 356 617 1,363
</TABLE>
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PROSPECTUS PAGE 4
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PaineWebber Tax-Managed Equity Fund
MORE ABOUT RISKS
AND INVESTMENT STRATEGIES
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PRINCIPAL RISKS
The main risks of investing in the fund are described below.
Other risks of investing in the fund, along with further detail about some of
the risks described below, are discussed in the fund's Statement of Additional
Information ("SAI"). Information on how you can obtain the SAI is on the back
cover of this prospectus.
EQUITY RISK. The prices of common stocks and other
equity securities generally fluctuate more than those of other investments. They
reflect changes in the issuing company's financial condition and changes in the
overall market. The fund may lose a substantial part, or even all, of its
investment in a company's stock.
RISKS OF TAX MANAGEMENT STRATEGIES. By following tax-management strategies, the
fund may miss opportunities to purchase or sell securities at advantageous
times. Notwithstanding the fund's use of tax management strategies, the fund may
have taxable income and may realize taxable capital gains from time to time. In
addition, investors purchasing fund shares when the fund has large accumulated
capital gains could receive a significant part of the purchase price of their
shares back as a taxable capital gain distribution. State or federal tax laws or
regulations may be amended at any time, including adverse changes to applicable
tax rates or long-term capital gain holding periods. Over time, securities with
unrealized gains may comprise a substantial portion of the fund's assets. While
the fund may use a number of strategies to avoid having to recognize large
capital gains, these strategies may not be successful.
FOREIGN SECURITIES RISK. Foreign securities involve risks
that normally are not associated with securities of U.S. issuers. These include
risks relating to political, social and economic developments abroad and
differences between U.S. and foreign regulatory requirements and market
practices.
DERIVATIVES RISK. The value of "derivatives" - so called because
their value "derives" from the value of an underlying asset, reference rate or
index - may rise or fall more rapidly than other investments. For some
derivatives, it is possible for the fund to lose more than the amount it
invested in the derivative. Options and futures contracts are examples of
derivatives. If the fund uses derivatives to adjust or "hedge" the overall risk
of its portfolio, it is possible that the hedge will not succeed. This may
happen for various reasons, including unexpected changes in the value of the
derivatives that are not matched by opposite changes in the value of the rest of
the fund's portfolio.
ADDITIONAL RISKS
YEAR 2000 RISK. The fund could be adversely affected by problems relating to the
inability of computer systems used by Mitchell Hutchins and the fund's other
service providers to recognize the year 2000. While year 2000-related computer
problems could have a negative effect on the fund, Mitchell Hutchins is working
to avoid these problems with respect to its own computer systems and to obtain
assurances from service providers that they are taking similar steps.
Similarly, the companies in which the fund invests and trading systems used by
the fund could be adversely affected by this issue. The ability of a company or
trading system to respond successfully to the issue requires both technological
sophistication and diligence, and there can be no assurance that any steps taken
will be sufficient to avoid an adverse impact on the fund.
ADDITIONAL INVESTMENT STRATEGIES
TEMPORARY AND DEFENSIVE POSITIONS; CASH RESERVES. In order to protect itself
from adverse market conditions, the fund may take a temporary defensive position
that is different from its normal investment strategy. This means that the fund
may temporarily invest a larger-than-normal part, or even 100%, of its assets in
cash or money market instruments. Since these investments provide relatively low
income, a defensive position may not be consistent with achieving the fund's
investment objective. The fund may invest up to 35% of its total assets in cash
or money market instruments as a cash reserve for liquidity.
SALES OF SECURITIES. If Mitchell Hutchins decides to sell a particular
appreciated security, under normal conditions management will attempt to sell
share lots that qualify for
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PROSPECTUS PAGE 5
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PaineWebber Tax-Managed Equity Fund
long-term capital gain treatment and, among those, the share lots with the
highest cost basis.
PORTFOLIO TURNOVER. The fund does not seek to use portfolio turnover to maximize
total after-tax return to its shareholders. The fund may have higher portfolio
turnover if Mitchell Hutchins believes that market conditions warrant or if
Mitchell Hutchins believes that opportunities exist to sell securities and
realize capital losses that can be used to offset capital gains. The fund does
not restrict the frequency of trading to limit expenses.
High portfolio turnover may increase the portion of the fund's capital gains
that are realized for tax purposes in any given year. This may increase the
fund's taxable dividends in that year. Frequent trading also may increase the
portion of the fund's realized capital gains that are considered "short-term"
for tax purposes. Shareholders will pay higher taxes on dividends that represent
net short-term capital gains than they would pay on dividends that represent net
long-term capital gains. Frequent trading also may result in higher fund
expenses due to transaction costs.
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PROSPECTUS PAGE 6
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PaineWebber Tax-Managed Equity Fund
YOUR INVESTMENT
MANAGING YOUR FUND ACCOUNT
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Tax-exempt institutions or investors funding qualified retirement plans or
individual retirement accounts ("IRA") will not benefit from the fund's
tax-management strategies. These investors are not subject to tax on their
income and, therefore, are generally not required to pay taxes on fund
distributions.
FLEXIBLE PRICING
The fund offers four classes of shares - Class A, Class B, Class C and Class Y.
Each class has different sales charges and ongoing expenses. You can choose the
class that is best for you, based on how much you plan to invest and how long
you plan to hold your fund shares. Class Y shares are only available to certain
types of investors.
The fund has adopted a plan under rule 12b-1 for its Class A, Class B and Class
C shares that allows it to pay service and (for Class B and Class C shares)
distribution fees for the sale of its shares and services provided to
shareholders. Because the 12b-1 distribution fees for Class B and Class C shares
are paid out of the fund's assets on an ongoing basis, over time they will
increase the cost of your investment and may cost you more than if you paid a
front-end sales charge.
CLASS A SHARES
Class A shares have a front-end sales charge that is included in the offering
price of the Class A shares. This sales charge is not invested in the fund.
Class A shares pay an annual 12b-1 service fee of 0.25% of average net assets,
but they pay no 12b-1 distribution fees. The ongoing expenses for Class A shares
are lower than for Class B and Class C shares.
The Class A sales charges for the fund are described in the following table.
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF: DISCOUNT TO SELECTED DEALERS AS
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED PERCENTAGE OF OFFERING PRICE
- ------------------- ------------ ------------------ ---------------------------
<S> <C> <C> <C>
Less than $50,000 ........................ 4.50% 4.71% 4.25%
$50,000 to $99,999 ....................... 4.00 4.17 3.75
$100,000 to $249,999 ..................... 3.50 3.63 3.25
$250,000 to $499,999 ..................... 2.50 2.56 2.25
$500,000 to $999,999 ..................... 1.75 1.78 1.50
$1,000,000 and over (1) .................. None None 1.00(2)
</TABLE>
(1) A contingent deferred sales charge of 1% of the shares' offering price or
the net asset value at the time of sale by the shareholder, whichever is
less, is charged on sales of shares made within one year of the purchase
date. Class A shares representing reinvestment of dividends are not subject
to this 1% charge. Withdrawals in the first year after purchase of up to 12%
of the value of the fund account under the Fund's Systematic Withdrawal Plan
are not subject to this charge.
(2) Mitchell Hutchins pays 1% to PaineWebber.
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PROSPECTUS PAGE 7
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PaineWebber Tax-Managed Equity Fund
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for a lower sales charge if
you already own Class A shares of a PaineWebber mutual fund. You can combine the
value of Class A shares that you own in other PaineWebber funds and the purchase
amount of the Class A shares of the PaineWebber fund that you are buying.
You may also qualify for a lower sales charge if you combine your purchases with
those of:
o your spouse, parents or children under age 21;
o your Individual
Retirement Accounts (IRAs);
o certain employee benefit plans, including 401(k)
plans;
o a company that you control;
o a trust that you created; o Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act accounts created by you or by a group of investors for your
children; or
o accounts with the same adviser. You may qualify for a complete waiver of the
sales charge if you:
o Are an employee of PaineWebber or its affiliates or the spouse, parent or
child under age 21 of a PaineWebber employee;
o Buy these shares through a PaineWebber Financial
Advisor who was formerly employed as an investment executive with a competing
brokerage firm that was registered as a broker-dealer with the SEC, and
-- you were the Financial Advisor's client at the competing brokerage
firm;
-- within 90 days of buying shares in a fund, you sell shares of one or
more mutual funds that were principally underwritten by the
competing brokerage firm or its affiliates, and you either paid a
sales charge to buy those shares, pay a contingent deferred sales
charge when selling them or held those shares until the contingent
deferred sales charge was waived; and
-- you purchase an amount that does not exceed the total amount of money
you received from the sale of the other mutual fund.
o Acquire these shares through the reinvestment of dividends of a PaineWebber
unit investment trust;
o Are a 401(k) or 403(b) qualified employee benefit plan with 50 or more
eligible employees in the plan or at least $1 million in assets;
o Are a participant in the PaineWebber Members OnlySM Program. For investments
made pursuant to this waiver, Mitchell Hutchins may make payments out of its
own resources to PaineWebber and to participating membership organizations in
a total amount not to exceed 1% of the amount invested; or
o Acquire these shares through a PaineWebber InsightOneSM Program brokerage
account.
NOTE: See the fund's SAI for some other sales charge waivers. If you think you
qualify for any sales charge reductions or waivers, you will need to provide
documentation to PaineWebber or the fund. For more information, you should
contact your PaineWebber Financial Advisor or correspondent firm or call
1-800-647-1568. If you want information on the fund's Systematic Withdrawal
Plan, see the SAI or contact your PaineWebber Financial Advisor or correspondent
firm.
CLASS B SHARES
Class B shares have a contingent deferred sales charge. When you purchase Class
B shares, we invest 100% of your purchase in fund shares. However, you may have
to pay the deferred sales charge when you sell your fund shares, depending on
how long you own the shares.
Class B shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
If you hold your Class B shares for six years, they will automatically convert
to Class A shares, which have lower ongoing expenses.
If you sell Class B shares before the end of six years, you will pay a deferred
sales charge. We calculate the deferred sales charge by multiplying the lesser
of the net asset value of the Class B shares at the time of purchase or the net
asset value at the time of sale by the percentage shown below:
PERCENTAGE BY WHICH THE
IF YOU SELL SHARES' NET ASSET
SHARES WITHIN: VALUE IS MULTIPLIED:
---------- -----------------
1st year since purchase 5%
2nd year since purchase 4
3rd year since purchase 3
4th year since purchase 2
5th year since purchase 2
6th year since purchase 1
7th year since purchase None
We will not impose the deferred sales charge on Class B shares representing
reinvestment of dividends or on with-
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PROSPECTUS PAGE 8
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PaineWebber Tax-Managed Equity Fund
drawals in any year of up to 12% of the value of your Class B shares under the
Systematic Withdrawal Plan.
To minimize your deferred sales charge, we will assume that you are selling:
o First, Class B shares representing reinvested dividends, and
o Second, Class B shares that you have owned the longest.
SALES CHARGE WAIVERS. You may qualify for a waiver of the deferred sales charge
on a sale of shares if:
o You participate in the Systematic Withdrawal Plan;
o You are older than 59-1/2 and are selling shares to take a distribution from
certain types of retirement plans;
o You receive a tax-free return of an excess IRA contribution;
o You receive a tax-qualified retirement plan distribution following retirement;
o The shares are sold within one year of your death and you owned the shares
either (1) as the sole shareholder or (2) with your spouse as a joint tenant
with the right of survivorship; or
o You are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of these pools.
NOTE: If you think you qualify for any of these sales charge waivers, you will
need to provide documentation to PaineWebber or the fund. For more information,
you should contact your PaineWebber Financial Advisor or correspondent firm or
call 1-800-647-1568. If you want information on the Systematic Withdrawal Plan,
see the SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS C SHARES
Class C shares have a level load sales charge in the form of ongoing 12b-1
distribution fees. When you purchase Class C shares, we will invest 100% of your
purchase in fund shares.
Class C shares pay an annual 12b-1 distribution fee of 0.75% of average net
assets, as well as an annual 12b-1 service fee of 0.25% of average net assets.
Class C shares do not convert to another class of shares. This means that you
will pay the 12b-1 fees for as long as you own your shares.
Class C shares also have a contingent deferred sales charge. You may have to pay
the deferred sales charge if you sell your shares within one year of the date
you purchased them. We calculate the deferred sales charge on sales of Class C
shares by multiplying 1.00% by the lesser of the net asset value of the Class C
shares at the time of purchase or the net asset value at the time of sale. We
will not impose the deferred sales charge on Class C shares representing
reinvestment of dividends or on withdrawals in the first year after purchase, of
up to 12% of the value of your Class C shares under the Systematic Withdrawal
Plan.
You may be eligible to sell your shares without paying a contingent
deferred sales charge if you:
o Are a 401(k) or 403(b) qualified employee benefit plan with fewer than 100
employees or less than $1 million in assets; or
o Are eligible to invest in certain offshore investment pools offered by
PaineWebber, your shares are sold before March 31, 2000 and the proceeds are
used to purchase interests in one or more of these pools.
NOTE: If you want information on the Fund's Systematic Withdrawal Plan, see the
SAI or contact your PaineWebber Financial Advisor or correspondent firm.
CLASS Y SHARES
Class Y shares have no sales charge. Only specific types of investors can
purchase Class Y shares. You may be eligible to purchase Class Y shares if you:
o Buy shares through PaineWebber's PACE Multi-Advisor Program;
o Buy $10 million or more of PaineWebber fund shares at any one time;
o Are a qualified retirement plan with 5,000 or more eligible employees or $50
million in assets; or
o Are an investment company advised by PaineWebber or an affiliate of
PaineWebber.
The trustee of PaineWebber's 401(k) Plus Plan for its
employees is also eligible to purchase Class Y shares.
Class Y shares do not pay ongoing distribution or service fees or sales charges.
The ongoing expenses for Class Y shares are the lowest for all the classes.
BUYING SHARES
If you are a PaineWebber client, or a client of a PaineWebber correspondent
firm, you can purchase fund shares through your Financial Advisor. Otherwise,
you can invest in the fund through the fund's transfer agent, PFPC
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PROSPECTUS PAGE 9
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PaineWebber Tax-Managed Equity Fund
Inc. You can obtain an application by calling 1-800-647-1568. You must complete
and sign the application and mail it, along with a check, to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you wish to invest in other PaineWebber Funds, you can do so by:
o Contacting your Financial Advisor (if you have an account at PaineWebber or at
a PaineWebber correspondent firm);
o Mailing an application with a check; or
o Opening an account by exchanging shares from another PaineWebber fund.
You do not have to complete an application when you make additional investments
in the same fund.
The fund and Mitchell Hutchins reserve the right to reject a purchase order or
suspend the offering of shares.
MINIMUM INVESTMENTS
To open an account ..................... $1,000
To add to an account ................... $ 100
The fund may waive or reduce these amounts for:
o Employees of PaineWebber or its affiliates; or
o Participants in certain pension plans, retirement accounts, unaffiliated
investment programs or the fund's automatic investment plans.
FREQUENT TRADING. The interests of the fund's long-term shareholders and its
ability to manage its investments may be adversely affected when its shares are
repeatedly bought and sold in response to short-term market fluctuations -- also
known as "market timing." When large dollar amounts are involved, the fund may
have difficulty implementing long-term investment strategies, because it cannot
predict how much cash it will have to invest. Market timing also may force the
fund to sell portfolio securities at disadvantageous times to raise the cash
needed to buy a market timer's fund shares. These factors may hurt the fund's
performance and its shareholders. When Mitchell Hutchins believes frequent
trading would have a disruptive effect on ability to manage its investments,
Mitchell Hutchins and the fund may reject purchase orders and exchanges into the
fund by any person, group or account that Mitchell Hutchins believes to be a
market timer. The fund may notify the market timer that a purchase order or an
exchange has been rejected after the day the order is placed.
SELLING SHARES
You can sell your fund shares at any time. If you own more than one class of
shares, you should specify which class you want to sell. If you do not, the fund
will assume that you want to sell shares in the following order: Class A, then
Class C, then Class B and last, Class Y.
If you want to sell shares that you purchased recently, the fund may delay
payment until it verifies that it has received good payment. If you purchased
shares by check, this can take up to 15 days.
If you have an account with PaineWebber or a PaineWebber correspondent
firm, you can sell shares by contacting your Financial Advisor. If you do not
have an account at PaineWebber or a correspondent firm, and you bought your
shares through the transfer agent, you can sell your shares by writing to the
fund's transfer agent. Your letter must include:
o Your name and address;
o The fund's name;
o The fund account number;
o The dollar amount or number of shares you want to sell; and
o A guarantee of each registered owner's signature. A signature guarantee may be
obtained from a financial institution, broker, dealer or clearing agency that
is a participant in one of the medallion programs recognized by the Securities
Transfer Agents Association. These are: Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York
Stock Exchange Medallion Signature Program (MSP). The fund will not accept
signature guarantees that are not a part of these programs.
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
If you sell Class A shares and then repurchase Class A shares of the same fund
within 365 days of the sale, you can reinstate your account without paying a
sales charge.
It costs the fund money to maintain shareholder accounts. Therefore, the fund
reserves the right to repurchase all shares in any account that has a net asset
value of less than
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PROSPECTUS PAGE 10
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PaineWebber Tax-Managed Equity Fund
$500. If the fund elects to do this with your account, it
will notify you that you can increase the amount invested to $500 or more within
60 days. The fund will not repurchase shares in accounts that fall below $500
solely because of a decrease in the fund's net asset value.
EXCHANGING SHARES
You may exchange Class A, Class B or Class C shares of the fund for shares of
the same class of most other PaineWebber funds. You may not exchange Class Y
shares.
You will not pay either a front-end sales charge or a deferred sales
charge when you exchange shares. However, you may have to pay a deferred sales
charge if you later sell the shares you acquired in the exchange. The fund will
use the date that you purchased the shares in the first fund to determine
whether you must pay a deferred sales charge when you sell the shares in the
acquired fund.
Other PaineWebber funds may have different minimum investment
amounts. You may not be able to exchange your shares if your exchange is not as
large as the minimum investment amount in that other fund.
You may exchange shares of one fund for shares of another fund only after the
first purchase has settled and the first fund has received your payment.
PAINEWEBBER CLIENTS. If you bought your shares through PaineWebber or a
correspondent firm, you may exchange your shares by placing an order with your
PaineWebber Financial Advisor.
OTHER INVESTORS. If you are not a PaineWebber client, you may exchange
your shares by writing to the fund's transfer agent. You must include:
o Your name and address;
o The name of the fund whose shares you are selling and the name of the fund
whose shares you want to buy;
o Your account number;
o How much you are exchanging (by dollar amount or by number of shares to be
sold); and
o A guarantee of your signature. (See "Buying Shares" for information on
obtaining a signature guarantee.)
Mail the letter to:
PFPC Inc.
Attn.: PaineWebber Mutual Funds
P.O. Box 8950
Wilmington, DE 19899.
The fund may modify or terminate the exchange privilege at any time.
PRICING AND VALUATION
The price at which you may buy, sell or exchange fund shares is based on net
asset value per share. The fund calculates net asset value on days that the New
York Stock Exchange is open. The fund calculates net asset value separately for
each class as of the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). The NYSE normally is not open, and the fund does not price its
shares, on most national holidays and on Good Friday. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, the fund's net asset value
per share will be calculated as of the time trading was halted.
Your price for buying, selling or exchanging shares will be based on the net
asset value that is next calculated after the fund accepts your order. If you
place your order through PaineWebber, your PaineWebber Financial Advisor is
responsible for making sure that your order is promptly sent to the fund.
You should keep in mind that a front-end sales charge may be applied to your
purchase if you buy Class A shares. A deferred sales charge may be applied when
you sell Class B or Class C shares.
The fund calculates its net asset value based on the current market value for
its portfolio securities. The fund normally obtains market values for its
securities from independent pricing services that use reported last sales
prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. If a market value is
not available from an independent pricing source for a particular security, that
security is valued at a fair value determined by or under the direction of the
fund's board. The fund normally uses the amortized cost method to value bonds
that will mature in 60 days or less.
Judgment plays a greater role in valuing thinly traded securities, including
many lower-rated bonds, because there is less reliable, objective data
available.
- --------------------------------------------------------------------------------
PROSPECTUS PAGE 11
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tax-Managed Equity Fund
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Mitchell Hutchins is the fund's investment adviser and administrator. Mitchell
Hutchins is located at 51 West 52nd Street, New York, New York 10019-6114, and
is a wholly owned asset management subsidiary of PaineWebber Incorporated, which
is wholly owned by Paine Webber Group Inc., a publicly owned financial services
holding company. On October 31, 1999, Mitchell Hutchins was adviser or
sub-adviser of 33 investment companies with 76 separate portfolios and aggregate
assets of approximately $48.9 billion.
PORTFOLIO MANAGERS
Mark A. Tincher and Christopher G. Altschul are primarily responsible for the
day-to-day portfolio management of the fund.
Mr. Tincher is a managing director and chief investment officer of equities of
Mitchell Hutchins, responsible for overseeing the management of equity
investments. Mr. Tincher has held his fund responsibilities since inception.
Prior to March 1995, Mr. Tincher worked for Chase Manhattan Private Bank
("Chase"), where he was a vice president. Mr. Tincher directed the U.S. funds
management and equity research area at Chase, and oversaw the management of all
Chase U.S. equity funds.
Mr. Altschul is a first vice president of Mitchell Hutchins and has held his
fund responsibilities since April 1999. He is currently responsible for the
quantitative equity valuation model and has various analytical responsibilities.
Prior to joining Mitchell Hutchins in April 1995, Mr. Altschul worked as an
equity analyst at Chase.
Upon his arrival at Mitchell Hutchins, Mr. Tincher formed the Mitchell Hutchins
Equity Research Team. Each analyst on the Team focuses on different industries.
As a result, the Team provides the PaineWebber Stock Funds with more specialized
knowledge of the various industries in which the Funds generally invest. The
Equity Research Team is also assisted by members of Mitchell Hutchins' fixed
income groups, who provide input on market outlook, interest rate forecasts and
other considerations pertaining to domestic equity and fixed income investments.
ADVISORY FEES
The fund pays Mitchell Hutchins for its advisory services at the annual contract
rate of 0.75% of its average daily net assets.
OTHER INFORMATION
The fund has received an exemptive order from the SEC that permits its board to
appoint and replace sub-advisers and to amend sub-advisory contracts without
obtaining shareholder approval.
- --------------------------------------------------------------------------------
PROSPECTUS PAGE 12
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tax-Managed Equity Fund
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
The fund normally declares and pays dividends annually.
Classes with higher expenses are expected to have lower dividends. For example,
Class B shares and Class C are expected to have the lowest dividends of any
class of the fund's shares, while Class Y shares are expected to have the
highest.
You will receive dividends in additional shares of the same class unless you
elect to receive them in cash. Contact your Financial Advisor at PaineWebber or
one of its correspondent firms if you prefer to receive dividends in cash.
TAXES
The dividends that you receive from the fund generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. If you hold fund shares through a tax-exempt account or plan, such as
an IRA or 401(k) plan, dividends on your shares generally will not be subject to
tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange fund shares for shares of another
PaineWebber mutual fund, the transaction will be treated as a sale of the fund
shares, and any gain will be subject to federal income tax.
The fund expects that its dividends will be comprised primarily of capital gain
distributions. The distribution of capital gains will be taxed at a lower rate
than ordinary income if the fund held the assets that generated the gains for
more than 12 months. The fund will tell you how you should treat its dividends
for tax purposes.
- --------------------------------------------------------------------------------
PROSPECTUS PAGE 13
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tax-Managed Equity Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
fund's financial performance for the fiscal period December 14, 1998
(commencement of operations) through August 31, 1999. Certain information
reflects financial results for a single fund share. In the table, "total
investment return" represents the rate that an investor would have earned (or
lost) on an investment in the fund, assuming reinvestment of all dividends.
The information in the financial highlights has been audited by Ernst & Young
LLP, independent auditors, whose report, along with the fund's financial
statements, are included in the fund's Annual Report to Shareholders. The Annual
Report may be obtained without charge by calling 1-800-647-1568.
- --------------------------------------------------------------------------------
PROSPECTUS PAGE 14
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tax-Managed Equity Fund
FINANCIAL HIGHLIGHTS
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 14,1998+
THROUGH AUGUST 31, 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A CLASS B CLASS C CLASS Y
------- ------- ------- -------
Net asset value, beginning of period .......................... $ 12.50 $ 12.50 $ 12.50 $12.50
------- ------- ------- -------
Net investment income (loss) .................................. 0.04 (0.03) (0.02) 0.01
Net realized and unrealized gains from investments ............ 1.40 1.39 1.38 1.37
------- ------- ------- -------
Total increase from investment operations ..................... 1.44 1.36 1.36 1.38
------- ------- ------- -------
Net asset value, end of period ................................ $ 13.94 $ 13.86 $ 13.86 $13.88
======= ======= ======= =======
Total investment return (1) ................................... 11.52% 10.88% 10.88% 11.04%
======= ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (000's) ............................. $17,728 $23,990 $19,493 $ 116
Expenses to average net assets, net of waivers
from adviser ................................................ 1.62%* 2.37%* 2.37%* 1.37%*
Expenses to average net assets, before waivers
from adviser ................................................ 1.87%* 2.57%* 2.56%* 1.47%*
Net investment income (loss) to average net assets,
net of waivers from adviser ................................. 0.43%* (0.31)%* (0.31)%* 0.84%*
Net investment income (loss) to average net assets,
before waivers from adviser ................................. 0.18%* (0.51)%* (0.50)%* 0.74%*
Portfolio turnover rate ....................................... 47% 47% 47% 47%
</TABLE>
- ---------------
* Annualized.
+ Commencement of operations.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates and a sale at
net asset value on the last day of the period reported. The figures do not
include sales charges or programs fees; results would be lower if sales
charges or programs fees were included. Total investment return for the
period has not been annualized.
- --------------------------------------------------------------------------------
PROSPECTUS PAGE 15
<PAGE>
- --------------------------------------------------------------------------------
PaineWebber Tax-Managed Equity Fund
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the fund's investments is available in the fund's
annual and semi-annual reports to shareholders. In the fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the fund's performance during the last fiscal period.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the fund and is incorporated by
reference into this prospectus.
You may discuss your questions about the fund by contacting your PaineWebber
Financial Advisor. You may obtain free copies of annual and semi-annual reports
and the SAI by contacting the fund directly at 1-800-647-1568.
You may review and copy information about the fund, including shareholder
reports and the SAI, at the Public Reference Room of the Securities and Exchange
Commission. You can get text-only copies of reports and other information about
the fund and about the operations of the SEC's Public Reference Room:
o For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
o Free, from the SEC's Internet website at: http://www.sec.gov
PaineWebber Managed Investments Trust
- PaineWebber Tax-Managed Equity Fund
Investment Company Act File No. 811-4040
(C) 1999 PaineWebber Incorporated. All rights reserved. Member SIPC.
- -------------------------------------------------------------------------------
Prospectus Page 16
<PAGE>
PAINEWEBBER TAX-MANAGED EQUITY FUND
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019-6114
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Tax-Managed Equity Fund is a diversified series of
PaineWebber Managed Investments Trust ("Trust"), a professionally managed,
open-end management investment company organized as a Massachusetts business
trust.
The investment adviser, administrator and distributor for the fund is
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned
asset management subsidiary of PaineWebber Incorporated ("PaineWebber"). As
distributor for the fund, Mitchell Hutchins has appointed PaineWebber to serve
as the exclusive dealer for the sale of fund shares.
Portions of the fund's Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information ("SAI"). The Annual
Report accompanies this SAI. You may obtain an additional copy of the fund's
Annual Report by calling toll-free 1-800-647-1568.
This SAI is not a prospectus and should be read only in conjunction
with the fund's current Prospectus, dated December 6, 1999. A copy of the
Prospectus may be obtained by calling any PaineWebber Financial Advisor or
correspondent firm or by calling toll-free 1-800-647-1568. This SAI is dated
December 6, 1999.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
The Fund and Its Investment Policies.............................................................. 2
The Fund's Investments, Related Risks and Limitations............................................. 2
Strategies Using Derivative Instruments........................................................... 10
Organization; Trustees, Officers and Principal Holders of Securities.............................. 16
Investment Advisory, Administration and Distribution Arrangements................................. 23
Portfolio Transactions............................................................................ 27
Reduced Sales Charges, Additional Exchange and Redemption Information and Other Services.......... 29
Conversion of Class B Shares...................................................................... 34
Valuation of Shares............................................................................... 35
Performance Information........................................................................... 35
Taxes............................................................................................. 38
Other Information................................................................................. 41
Financial Statements.............................................................................. 42
Appendix.......................................................................................... A-1
</TABLE>
<PAGE>
THE FUND AND ITS INVESTMENT POLICIES
The fund's investment objective may not be changed without shareholder
approval. Except where noted, the other investment policies of the fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that the fund will achieve its investment objective.
The fund's investment objective is to maximize after-tax total return.
The fund seeks to achieve this objective by investing primarily in a diversified
portfolio of equity securities believed by Mitchell Hutchins to have reasonable
valuations and favorable earnings forecasts.
The fund seeks to invest substantially all of its assets in equity
securities and, except under unusual market conditions, invests at least 65% of
its total assets in these securities. Up to 25% of the fund's total assets may
be invested in U.S. dollar-denominated equity securities of foreign issuers that
are traded on recognized U.S. exchanges or in the U.S. over-the-counter market.
Up to 10% of the fund's total assets may be invested in convertible bonds that
are rated below investment grade.
The fund may invest up to 15% of its net assets in illiquid securities.
The fund may purchase securities on a when-issued basis and may purchase or sell
securities for delayed delivery. The fund may lend its portfolio securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets. The fund may also borrow from banks or through reverse
repurchase agreements for temporary or emergency purposes, but not in excess of
33 1/3% of its total assets. The fund also may invest in securities of other
investment companies and may sell securities short "against the box."
THE FUND'S INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the fund's investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or this SAI, the fund has
established no policy limitations on its ability to use the investments or
techniques discussed in these documents.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depository receipts. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation.
Preferred stock has certain fixed income features, like a bond, but
actually it is equity that is senior to a company's common stock. Convertible
bonds are fixed and variable rate debt obligations, which may include
debentures, notes and similar securities, that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Preferred stock also may be converted into or exchanged for common stock.
Depository receipts typically are issued by banks or trust companies and
evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that the fund may experience a substantial or
complete loss on an individual equity investment.
CONVERTIBLE BONDS. Convertible bonds generally are used by corporations
and governments to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and normally must repay the amount borrowed
on or before maturity. Some convertible bonds are "perpetual" in that they have
no maturity date. Convertible preferred stock has many of the same features as
convertible bonds.
2
<PAGE>
Convertible bonds are subject to interest rate risk and credit risk.
Interest rate risk is the risk that interest rates will rise and that, as a
result, bond prices will fall, lowering the value of the fund's investments in
bonds. In general, convertible bonds having longer durations are more sensitive
to interest rate changes than are convertible securities with shorter durations.
Credit risk is the risk that an issuer may be unable or unwilling to pay
interest and/or principal on the bond. Credit risk can be affected by many
factors, including adverse changes in the issuer's own financial condition or in
economic conditions.
A convertible bond entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to non-convertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible bonds rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable non-convertible
securities.
Convertible bonds 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 bond is a function
of its "investment value" (determined by its yield comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the bond's worth, at market
value, if converted into the underlying common stock). The investment value of a
convertible bond 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 bond's investment value. The conversion value of a
convertible bond 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 bond is governed principally by its investment value,
and generally the conversion value decreases as the convertible bond approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible bond
will be increasingly influenced by its conversion value. In addition, a
convertible bond 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 bond 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 bond held by the 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.
CREDIT RATINGS; NON-INVESTMENT GRADE CONVERTIBLE SECURITIES. Moody's
Investors Service ("Moody's"), Standard & Poor's a division of The McGraw-Hill
Companies, Inc. ("S&P"), and other rating agencies are private services that
provide ratings of the credit quality of bonds, debt obligations and certain
other securities, including convertible securities. A description of the ratings
assigned to corporate bonds by Moody's and S&P is included in the Appendix to
this SAI. Credit ratings attempt to evaluate the safety of principal and
interest payments, but they do not evaluate the volatility of a debt security's
value or its liquidity and do not guarantee the performance of the issuer.
Rating agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. There is a risk that rating agencies may
downgrade the rating of a bond. The fund 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.
In addition to ratings assigned to individual bond issues, Mitchell
Hutchins will analyze interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds are dependent on a variety of factors, including
general money market conditions, general conditions in the bond market, the
financial condition of the issuer, the size of the offering, the maturity of
3
<PAGE>
the obligation and its rating. There is a wide variation in the quality of
bonds, both within a particular classification and between classifications. An
issuer's obligations under its bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of bond
holders or other creditors of an issuer; litigation or other conditions may also
adversely affect the power or ability of issuers to meet their obligations for
the payment of interest and principal on their bonds.
Investment grade bonds are rated in one of the four highest rating
categories by Moody's, S&P, or comparably rated by another rating agency or, if
unrated, determined by Mitchell Hutchins to be of comparable quality. Moody's
considers bonds rated Baa (its lowest investment grade rating) to have
speculative characteristics. This means that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.
The fund may invest up to 10% of its total assets in convertible bonds
that are rated below investment grade. Non-investment grade bonds (commonly
known as "junk bonds") are rated Ba or lower by Moody's, BB or lower by S&P,
comparably rated by another rating agency or determined by Mitchell Hutchins to
be of comparable quality. The fund's investments in non-investment grade bonds
entail greater risk than its investments in higher rated bonds. Non-investment
grade bonds, which are sometimes referred to as "high yield" bonds, are
considered predominantly speculative with respect to the issuer's ability to pay
interest and repay principal and may involve significant risk exposure to
adverse conditions. Non-investment grade bonds generally offer a higher current
yield than that available for investment grade issues; however, they involve
higher risks, in that they are especially sensitive 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 by collateral and will not receive
payment until more senior claims are paid in full.
The market for non-investment grade bonds, especially those of foreign
issuers, 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, many lower rated bonds
experienced substantial price declines reflecting an expectation that many
issuers of such securities might experience financial difficulties. As a result,
the yields on lower rated bonds rose dramatically. However, such higher yields
did not reflect the value of the income stream that holders of such securities
expected, but rather the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuers' financial
restructurings or defaults. There can be no assurance that such declines will
not recur.
The market for non-investment grade bonds generally is thinner and less
active than that for higher quality securities, which may limit the 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.
INVESTING IN FOREIGN SECURITIES. The fund may invest up to 25% of its
total assets in U.S. dollar denominated equity securities of foreign issuers
that are traded on recognized U.S. exchanges or in the U.S. over-the-counter
market. Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the fund than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
4
<PAGE>
The fund may invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. They
generally are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. For purposes of the fund's
investment policies, ADRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
Investment income on certain foreign securities in which the fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the fund would be subject.
ILLIQUID SECURITIES. The fund may invest up to 15% of its net assets in
illiquid securities. The term "illiquid securities" means securities that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which the fund has valued the securities and
includes, among other things, purchased over-the-counter options, repurchase
agreements maturing in more than seven days and restricted securities other than
those Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the Trust's board. The assets used as cover for over-the-counter
options written by the fund will be considered illiquid unless the
over-the-counter options are sold to qualified dealers who agree that the fund
may repurchase any over-the-counter options they write at a maximum price to be
calculated by a formula set forth in the option agreements. The cover for an
over-the-counter option written subject to this procedure would be considered
illiquid only to the extent that the maximum repurchase price under the formula
exceeds the intrinsic value of the option. The fund may not be able to readily
liquidate illiquid securities and may have to sell other investments if
necessary to raise cash to meet its obligations. The lack of a liquid secondary
market for illiquid securities may make it more difficult for the fund to assign
a value to those securities for purposes of valuing its portfolio and
calculating its net asset value.
Restricted securities are not registered under the Securities Act of
1933, as amended ("Securities Act"), and may be sold only in privately
negotiated or other exempted transactions or after a Securities Act registration
statement has become effective. Where registration is required, the fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the fund
might obtain a less favorable price than prevailed when it decided to sell.
However, not all restricted securities are illiquid. A large
institutional market has developed for many U.S. and foreign securities that are
not registered under the Securities Act. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Institutional markets for restricted securities also have developed as
a result of Rule 144A under the Securities Act, which establishes a "safe
harbor" from the registration requirements of that Act for resales of certain
securities to qualified institutional buyers. Such markets include automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc. An insufficient number of
qualified institutional buyers interested in purchasing Rule 144A-eligible
restricted securities held by the fund, however, could affect adversely
5
<PAGE>
the marketability of such portfolio securities, and the fund might be unable to
dispose of such securities promptly or at favorable prices.
The board has delegated the function of making day-to-day
determinations of liquidity to Mitchell Hutchins pursuant to guidelines approved
by the board. Mitchell Hutchins takes into account a number of factors in
reaching liquidity decisions, including (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how bids are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in the fund's portfolio and reports
periodically on such decisions to the board.
MONEY MARKET INSTRUMENTS. Money market instruments in which the fund
may invest include U.S. Treasury bills and other obligations issued or
guaranteed as to interest and principal by the U.S. government, its agencies and
instrumentalities; obligations of U.S. banks (including certificates of deposit
and bankers' acceptances); interest-bearing savings deposits in U.S. commercial
banks and savings associations; commercial paper and other short-term corporate
obligations; and variable and floating-rate securities and repurchase
agreements. In addition, the fund may hold cash and may invest in participation
interests in the money market securities mentioned above to the extent that it
is permitted to invest in money market instruments.
U.S. GOVERNMENT SECURITIES. Government securities in which the fund may
invest include direct obligations of the U.S. Treasury and obligations issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities
(collectively, "U.S. government securities"). Direct obligations of the U.S.
Treasury include a variety of securities that differ in their interest rates,
maturities and dates of issuance. Among the U.S. government securities that may
be held by the fund are instruments that are supported by the full faith and
credit of the United States and securities that are supported primarily or
solely by the creditworthiness of the government-related issuer.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which
the fund purchases securities or other obligations from a bank or securities
dealer (or its affiliate) and simultaneously commits to resell them to the
counterparty at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased obligations. 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 sub-custodian that maintains separate accounts
for both the fund and its counterparty. Thus, the obligation of the counterparty
to pay the repurchase price on the date agreed to or upon demand is, in effect,
secured by such obligations.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the obligations and
the price that was paid by the fund upon acquisition is accrued as interest and
included in its net investment income. The fund intends to enter into repurchase
agreements only with counterparties in transactions believed by Mitchell
Hutchins to present minimum credit risks .
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the sale of securities held by the fund subject to its agreement to repurchase
the securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Such agreements are considered to be borrowings and may
be entered into only for temporary purposes. While a reverse repurchase
agreement is outstanding, the fund will maintain, in a segregated account with
its custodian, cash or liquid securities, marked to market daily, in an amount
at least equal to its obligations under the reverse repurchase agreement. See
"The Fund's Investments, Related Risks and Limitations Segregated Accounts."
Reverse repurchase agreements involve the risk that the buyer of the
securities sold by the fund might be unable to deliver them when the fund seeks
to repurchase. If the buyer of securities under a reverse repurchase
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agreement files for bankruptcy or becomes insolvent, such buyer or trustee or
receiver may receive an extension of time to determine whether to enforce that
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. The fund is authorized to lend its
portfolio securities to broker-dealers or institutional investors that Mitchell
Hutchins deems qualified. Lending securities enables the fund to earn additional
income, but could result in a loss or delay in recovering these securities. The
borrower of the fund's portfolio securities must maintain acceptable collateral
with the fund's custodian in an amount, marked to market daily, at least equal
to the market value of the securities loaned, plus accrued interest and
dividends. Acceptable collateral is limited to cash, U.S. government securities
and irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins. The fund may reinvest any cash collateral in money market
investments 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. The fund will retain authority to terminate any of its loans at any
time. The fund may pay reasonable fees in connection with a loan and may pay the
borrower or placing broker a negotiated portion of the interest earned on the
reinvestment of cash held as collateral. The fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights, when regaining such
rights is considered to be in the fund's interest.
Pursuant to procedures adopted by the board governing the fund's
securities lending program, PaineWebber has been retained to serve as lending
agent for the fund. The board also has authorized the fund to pay fees
(including fees calculated as a percentage of invested cash collateral) to
PaineWebber for these services. The board periodically reviews all portfolio
securities loan transactions for which PaineWebber acted as lending agent.
PaineWebber also has been approved as a borrower under the fund's securities
lending program.
SHORT SALES "AGAINST THE BOX." The 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 the fund, and the fund is
obligated to replace the securities borrowed at a date in the future. When the
fund sells short, it establishes a margin account with the broker effecting the
short sale and deposits collateral with the broker. In addition, the fund
maintains with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The fund incurs transaction costs, including
interest expense, in connection with opening, maintaining and closing short
sales against the box.
The fund might make a short sale "against the box" 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 the fund
or a security convertible into or exchangeable for a security owned by the fund.
In such case, any loss in the fund's long position after the short sale should
be reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of securities the fund owns,
either directly or indirectly, and in the case where the fund owns convertible
securities, changes in the investment value or conversion premiums of such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The fund may purchase
securities on a "when-issued" basis or may purchase or sell securities for
"delayed delivery," I.E., for issuance or delivery to or by the fund later than
the normal settlement date for such securities at a stated price and yield. The
fund generally would not pay for such securities or start earning interest on
them until they are received. However, when the fund undertakes a when-issued or
delayed delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the fund on a when-issued or delayed delivery basis may
result in the fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, the 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.
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A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuation in the value of the security from the time of the commitment date
will affect the fund's net asset value. When the fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian segregates
assets to cover the amount of the commitment. See "The Fund's Investments,
Related Risks and Limitations--Segregated Accounts." The fund may sell the right
to acquire the security prior to delivery if Mitchell Hutchins deems it
advantageous to do so, which may result in a gain or loss to the fund.
COUNTERPARTIES. The fund may be exposed to the risk of financial
failure or insolvency of another party. To help lessen those risks, Mitchell
Hutchins, subject to the supervision of the fund's board, monitors and evaluates
the creditworthiness of the parties with which the fund does business.
SEGREGATED ACCOUNTS. When the fund enters into certain transactions
that involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis and reverse
repurchase agreements, it will maintain with an approved custodian in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to 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.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. The fund may invest in
securities of other investment companies, subject to Investment Company Act of
1940, as amended ("Investment Company Act") limitations, which at present
restrict investments in registered investment companies to no more than 10% of
the fund's total assets. The shares of other investment companies are subject to
the management fees and other expenses of those companies, and the purchase of
shares of some investment companies requires the payment of sales loads and
sometimes substantial premiums above the value of such companies' portfolio
securities. At the same time, the fund would continue to pay its own management
fees and expenses with respect to all its investments, including the securities
of other investment companies.
INVESTMENT LIMITATIONS OF THE FUND
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for the fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this
fundamental 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
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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 and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the board without shareholder
approval. If a percentage restriction is adhered to at the time of an investment
or transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
The fund will not:
(1) invest more than 15% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which it has valued
the securities and includes, among other things, repurchase agreements maturing
in more than seven days.
(2) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
(3) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(4) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(5) purchase securities of other investment companies, except to the
extent permitted by the Investment Company 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.
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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 the fund's portfolio, to
simulate full investment by the fund while retaining a cash balance for fund
management purposes (such as to provide liquidity to meet anticipated
shareholder sales of fund shares and for fund operating expenses), to facilitate
trading, or to enhance returns. The fund may enter into transactions involving
one or more types of Derivative Instruments under which the full value of its
portfolio is at risk. Under normal circumstances, however, the fund's use of
these instruments will place at risk a much smaller portion of its assets. The
particular Derivative Instruments that may be used by the fund are described
below.
The fund might not use any Derivative Instruments or derivative
strategies, and there can be no assurance that using any strategy will succeed.
If Mitchell Hutchins is incorrect in its judgment on market values, interest
rates or other economic factors in using a Derivative Instrument or strategy,
the fund may have lower net income and a net loss on the investment.
OPTIONS ON EQUITY AND DEBT SECURITIES. A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the call option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to deliver the underlying security against
payment of the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the option term or at specified times or at the
expiration of the option, depending on the type of option involved. The writer
of the put option, who receives the premium, has the obligation, upon exercise
of the option during the option term, to buy the underlying security at the
exercise price.
OPTIONS ON SECURITIES INDICES. A securities index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the
same way as a more traditional securities option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
SECURITIES INDEX FUTURES CONTRACTS. A securities index futures contract
is a bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a specified
dollar amount times the difference between the securities index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
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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 partially
or fully to offset potential declines in the value of one or more investments
held in the fund's portfolio. Thus, in a short hedge the fund takes a position
in a Derivative Instrument whose price is expected to move in the opposite
direction of the price of the investment being hedged. For example, the fund
might purchase a put option on a security to hedge against a potential decline
in the value of that security. If the price of the security declined below the
exercise price of the put, the fund could exercise the put and thus limit its
loss below the exercise price to the premium paid plus transaction costs. In the
alternative, because the value of the put option can be expected to increase as
the value of the underlying security declines, the fund might be able to close
out the put option and realize a gain to offset the decline in the value of the
security.
Conversely, a long hedge is a purchase or sale of a Derivative
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that the fund intends to acquire.
Thus, in a long hedge, the fund takes a position in a Derivative Instrument
whose price is expected to move in the same direction as the price of the
prospective investment being hedged. For example, the fund might purchase a call
option on a security it intends to purchase in order to hedge against an
increase in the cost of the security. If the price of the security increased
above the exercise price of the call, the fund could exercise the call and thus
limit its acquisition cost to the exercise price plus the premium paid and
transaction costs. Alternatively, the fund might be able to offset the price
increase by closing out an appreciated call option and realizing a gain.
The fund may purchase and write (sell) straddles on securities or
indices of securities. A long straddle is a combination of a call and a put
option purchased on the same security or on the same futures contract, where the
exercise price of the put is equal to the exercise price of the call. The 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
a put written on the same security where the exercise price of the put is equal
to the exercise price of the call. The 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 the
fund owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which the fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
Income strategies using Derivative Instruments may include the writing
of covered options to obtain the related option premiums. Return or gain
strategies may include using Derivative Instruments to increase or decrease the
fund's exposure to different asset classes without buying or selling the
underlying instruments. The fund also may use derivatives to simulate full
investment by the fund while maintaining a cash balance for fund management
purposes (such as to provide liquidity to meet anticipated shareholder sales of
fund shares and for fund operating expenses).
The use of Derivative Instruments is subject to applicable regulations
of the SEC, the several options and futures exchanges upon which they are traded
and the Commodity Futures Trading Commission ("CFTC"). In addition, the 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 may discover additional opportunities in
connection with Derivative Instruments and with hedging, income, return and gain
strategies. These new opportunities may become available as regulatory
authorities broaden the range of permitted transactions and as new Derivative
Instruments and techniques are developed. Mitchell Hutchins may use these
opportunities for the fund to the extent that they are consistent with the
fund's investment objective and permitted by its investment limitations and
applicable regulatory authorities. The fund's Prospectus or this SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
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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
strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between price
movements of a Derivative Instrument and price movements of the investments that
are being hedged. For example, if the value of a Derivative Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors affecting the markets in which Derivative Instruments
are traded, rather than the value of the investments being hedged. The
effectiveness of hedges using Derivative Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities being hedged. Because the fund invests primarily in
common stock of issuers meeting the specific criteria described in the
Prospectus, there might be a significant lack of correlation between the
portfolio and the stock indices underlying any such Derivative Instruments used
by the fund.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Derivative Instrument. Moreover, if the price of the
Derivative Instrument declined by more than the increase in the price of the
security, the fund could suffer a loss. In either such case, the fund would have
been in a better position had it not hedged at all.
(4) As described below, the fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Derivative Instruments involving obligations to third parties
(i.e., Derivative Instruments other than purchased options). If the fund 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 the
fund's ability to sell a portfolio security or make an investment at a time when
it would otherwise be favorable to do so, or require that the fund sell a
portfolio security at a disadvantageous time. The fund's ability to close out a
position in a Derivative Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of a counterparty to enter into a transaction
closing out the position. Therefore, there is no assurance that any hedging
position can be closed out at a time and price that is favorable to the fund.
COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the fund to an
obligation to another party. The fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities or
other options or futures contracts or (2) cash or liquid securities with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The fund will comply with SEC guidelines
regarding cover for such transactions and will, if the guidelines so require,
set aside cash or liquid securities in a segregated account with its custodian
in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Derivative Instrument is open, unless
they are replaced with similar assets. As a result, committing a large portion
of the 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.
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OPTIONS. The fund may purchase put and call options, and write (sell)
covered put or call options on equity and debt securities and stock indices. The
purchase of call options may serve as a long hedge, and the purchase of put
options may serve as a short hedge. The fund may also use options to attempt to
enhance return or realize gains by increasing or reducing its exposure to an
asset class without purchasing or selling the underlying securities. Writing
covered put or call options can enable the fund to enhance income by reason of
the premiums paid by the purchasers of such options. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the fund will be obligated to sell the security at less than
its market value. Writing covered put options serves as a limited long hedge,
because increases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the fund will be obligated
to purchase the security at more than its market value. The securities or other
assets used as cover for over-the-counter options written by fund would be
considered illiquid to the extent described under "The Fund's Investments,
Related Risks and Limitations--Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Generally, over-the-counter options on debt securities are
European-style options. This means that the option can only be exercised
immediately prior to its expiration. This is in contrast to American-style
options that may be exercised at any time. There are also other types of options
that may be exercised on certain specified dates before expiration.
Options that expire unexercised have no value.
The fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
The fund may purchase and write both exchange-traded and
over-the-counter options. Currently, many options on equity securities (stocks)
are exchange-traded. Exchange markets for options on debt securities exist but
are relatively new, and these instruments are primarily traded on the
over-the-counter market. Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, over-the-counter options are contracts between the
fund and its counterparty (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the fund purchases or writes an
over-the-counter option, it relies on the counterparty to make or take delivery
of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the fund
as well as the loss of any expected benefit of the transaction.
The fund's ability to establish and close out positions in
exchange-traded options depends on the existence of a liquid market. The fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for over-the-counter options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although the fund will enter into over-the-counter options only with
counterparties that are expected to be capable of entering into closing
transactions with the fund, there is no assurance that the fund will in fact be
able to close out an over-the-counter option position at a favorable price prior
to expiration. In the event of insolvency of the counterparty, the fund might be
unable to close out an over-the-counter option position at any time prior to its
expiration.
13
<PAGE>
If the fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered put or
call option written by the fund could cause material losses because the fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised.
The fund may purchase and write put and call options on indices in much
the same manner as the more traditional options discussed above, except the
index options may serve as a hedge against overall fluctuations in a securities
market (or market sector) rather than anticipated increases or decreases in the
value of a particular security.
LIMITATIONS ON THE USE OF OPTIONS. The fund's use of options is
governed by the following guidelines, which can be changed by the board without
shareholder vote:
(1) The fund may purchase a put or call option, including any straddle
or spread, only if the value of its premium, when aggregated with the premiums
on all other options held by the fund, does not exceed 5% of its total assets.
(2) The aggregate value of underlying securities on which the fund
writes covered calls will not exceed 50% of its total assets.
(3) To the extent cash or cash equivalents, including U.S. government
securities, are maintained in a segregated account to collateralize options
written on securities or stock indices, the fund will limit collateralization to
20% of its net assets.
FUTURES. The fund may purchase and sell stock index futures contracts
and interest rate future contracts. The fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options on securities or indices. In addition, the fund
may purchase or sell futures contracts or purchase options thereon to increase
or reduce its exposure to an asset class without purchasing or selling the
underlying securities, either as a hedge or to enhance return or realize gains.
Futures strategies also can be used to manage the average duration of
the fund's convertible securities portfolio. If Mitchell Hutchins wishes to
shorten the average duration of the fund's convertible securities portfolio, the
fund may sell a futures contract or a call option thereon, or purchase a put
option on that futures contract. If Mitchell Hutchins wishes to lengthen the
average duration of the fund's convertible securities portfolio, the fund may
buy a futures contract or a call option thereon, or sell a put option thereon.
The fund may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The fund will engage in this
strategy only when it is more advantageous to the fund than is purchasing the
futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, obligations of
the United States or obligations fully guaranteed as to principal and interest
by the United States, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the fund may be required by an exchange to
increase the level of
14
<PAGE>
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the fund's obligations to or from a futures
broker. When the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the fund purchases
or sells a futures contract or writes a call option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
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 fund's use
of futures and related options is governed by the following guidelines, which
can be changed by the board without shareholder vote:
(1) To the extent the fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on those positions (excluding
the amount by which options are "in-the-money") may not exceed 5% of its net
assets.
(2) The aggregate premiums paid on all options (including options on
securities, stock or bond indices and options on futures contracts) purchased by
the fund that are held at any time will not exceed 20% of its net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by the fund will not exceed 5% of its total assets.
15
<PAGE>
ORGANIZATION; TRUSTEES, OFFICERS AND PRINCIPAL HOLDERS OF SECURITIES
The Trust was formed on November 21, 1986, as a business trust under
the laws of the Commonwealth of Massachusetts. The Trust has eight operating
series and is authorized to issue an unlimited number of shares of beneficial
interest, par value of $0.001 per share, of existing or future series.
The Trust is governed by a board of trustees which oversees its
operations and which is authorized to establish additional series. The trustees
and executive officers of the Trust , their ages, business addresses and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- --------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Margo N. Alexander*+; 52 Trustee and President Mrs. Alexander is chairman (since March 1999),
chief executive officer and a director of
Mitchell Hutchins (since January 1995), and an
executive vice president and a director of
PaineWebber (since March 1984). Mrs. Alexander is
president and a director or trustee of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Richard Q. Armstrong; 64 Trustee Mr. Armstrong is chairman and principal of
R.Q.A. EnterprisesOne Old Church Road R.Q.A. Enterprises (management consulting firm)
Unit #6 (since April 1991 and principal occupation
Greenwich, CT 06830 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 one of their affiliates serves as
investment adviser.
16
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- --------------------- ----------------------- ----------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.** +; 73 Trustee and Chairman of Mr. Bewkes is a director of Paine Webber Group
the Board of Trustees Inc. ("PW Group") (holding company of
PaineWebber and Mitchell Hutchins). Prior to
December 1995, he was a consultant to PW Group.
Prior to 1988, he was chairman of the board,
president and chief executive officer of
American Bakeries Company. Mr. Bewkes is a
director of Interstate Bakeries Corporation.
Mr. Bewkes is a director or trustee of 35
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Richard R. Burt; 52 Trustee Mr. Burt is chairman of IEP Advisors, Inc.
1275 Pennsylvania Ave., N.W. (international investments and consulting firm)
Washington, DC 20004 (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
commod-ities), Hollinger International Co.
(publishing), Homestake Mining Corp. (gold
mining), Powerhouse Technologies Inc. (provides
technology to gaming and wagering industry) and
Chairman of Weirton Steel Corp. (makes and
finishes steel products) since April 1996. He
was the chief negotiator in the Strategic Arms
Reduction Talks with the former Soviet Union
(1989-1991) and the U.S. Ambassador to the
Federal Republic of Germany (1985-1989). Mr.
Burt is a director or trustee of 31 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves
as investment adviser.
Meyer Feldberg; 57 Trustee Mr. Feldberg is Dean and Professor of
Columbia University Management of the Graduate School of Business,
101 Uris Hall Columbia University. Prior to 1989, he was
New York, NY 10027 president of the Illinois Institute of
Technology. Dean Feldberg is also a director of
Primedia, Inc. (publishing), Federated
Department Stores, Inc. (operator of department
stores) and Revlon, Inc. (cosmetics). Dean
Feldberg is a director or trustee of 34
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
George W. Gowen; 70 Trustee Mr. Gowen is a partner in the law firm of
666 Third Avenue Dunnington, Bartholow & Miller. Prior to May
New York, NY 10017 1994, he was a partner in the law firm of
Fryer, Ross & Gowen. Mr. Gowen is a director or
trustee of 34 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
17
<PAGE>
Frederic V. Malek; 62 Trustee Mr. Malek is chairman of Thayer Capital
1455 Pennsylvania Ave., N.W. Partners (merchant bank). From January 1992 to
Suite 350 November 1992, he was campaign manager of
Washington, DC 20004 Bush-Quayle `92. From 1990 to 1992, he was vice
chairman and, from 1989 to 1990, he was
president of Northwest Airlines Inc. and NWA
Inc. (holding company of Northwest Airlines
Inc.). Prior to 1989, he was employed by the
Marriott Corporation (hotels, restaurants,
airline catering and contract feeding), where
he most recently was an executive vice
president and president of Marriott Hotels and
Resorts. Mr. Malek is also a director of Aegis
Communications, Inc. (tele-services), American
Management Systems, Inc. (management consulting
and computer related services), Automatic Data
Processing, Inc. (computing services), CB
Richard Ellis, Inc. (real estate services), FPL
Group, Inc. (electric services), Global
Vacation Group (packaged vacations), HCR/Manor
Care, Inc. (health care) and Northwest Airlines
Inc. Mr. Malek is a director or trustee of 31
investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Carl W. Schafer; 63 Trustee Mr. Schafer is president of the Atlantic
66 Witherspoon Street, #1100 Foundation (charitable foundation supporting
Princeton, NJ 08542 mainly oceanographic exploration and research).
He is a director of EII Realty Trust
(investment company), Labor Ready, Inc.
(temporary employment), Roadway Express, Inc.
(trucking), The Guardian Group of Mutual Funds,
the Harding, Loevner Funds, Evans Systems, Inc.
(motor fuels, convenience store and diversified
company), Electronic Clearing House, Inc.
(financial transactions processing), Frontier
Oil Corporation and Nutraceutix, Inc.
(bio-technology company). Prior to January
1993, he was chairman of the Investment
Advisory Committee of the Howard Hughes Medical
Institute. Mr. Schafer is a director or trustee
of 31 investment companies for which Mitchell
Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
18
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- --------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Brian M. Storms*+; 45 Trustee Mr. Storms is president and chief operating
officer of Mitchell Hutchins (since March 1999).
Mr. Storms was president of Prudential
Investments (1996-1999). Prior to joining
Prudential, he was a managing director at
Fidelity Investments. Mr. Storms is a director or
trustee of 31 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Christopher G. Altschul*; 32 Vice President Mr. Altschul is a first vice president and
portfolio manager of Mitchell Hutchins. Prior to
April 1995, he was an equity analyst at Chase
Manhattan Bank. Mr. Altschul is a vice president
of two investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
T. Kirkham Barneby*; 53 Vice President Mr. Barneby is a managing director and chief
investment officer quantitative investments of
Mitchell Hutchins. Prior to September 1994, he
was a senior vice president at Vantage Global
Management. Mr. Barneby is a vice president of
seven investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
Julieanna Berry*; 36 Vice President Ms. Berry is a first vice president and a
portfolio manager of Mitchell Hutchins. Ms. Berry
is a vice president of two investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment adviser.
James F. Keegan*; 39 Vice President Mr. Keegan is a senior vice president and a
portfolio manager of Mitchell Hutchins. Prior to
March 1996, he was director of fixed income
strategy and research of Merrion Group, L.P. From
1987 to 1994, he was a vice president of global
investment management of Bankers Trust. Mr.
Keegan is a vice president of four investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
John J. Lee**; 31 Vice President and Mr. Lee is a vice president and a 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 & Young LLP. Mr. Lee is a vice president
and of 32 investment companies for which Mitchell
Hutchins, PaineWebber or one of their affiliates
serves as investment adviser.
19
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- --------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Thomas J. Libassi*; 40 Vice President Mr. Libassi is a senior vice president and a
portfolio manager of Mitchell Hutchins, where he
has been employed since 1994. Mr. Libassi is a
vice president of six investment companies for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Kevin J. Mahoney**; 34 Vice President and Mr. Mahoney is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
department of Mitchell Hutchins. From August 1996
through March 1999, he was the manager of the
mutual fund internal control group of Salomon
Smith Barney. Prior to August 1996, he was an
associate and assistant treasurer for BlackRock
Financial Management L.P. Mr. Mahoney is a vice
president and assistant treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Dennis McCauley*; 52 Vice President Mr. McCauley is a managing director and chief
investment officer--fixed income of Mitchell
Hutchins. Prior to December 1994, he was director
of fixed income investments of IBM Corporation.
Mr. McCauley is a vice president of 22 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Ann E. Moran**; 42 Vice President and Ms. Moran is a vice president and a manager of
Assistant Treasurer the mutual fund finance department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment adviser.
Dianne E. O'Donnell**; 47 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 31
investment companies and a vice president and
assistant secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one of
their affiliates serves as investment adviser.
Emil Polito*; 40 Vice President Mr. Polito is a senior vice president and
director of operations and control for Mitchell
Hutchins. Mr. Polito is a vice president of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
20
<PAGE>
<CAPTION>
NAME AND ADDRESS; AGE POSITION WITH THE TRUST BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- --------------------- ----------------------- ----------------------------------------
<S> <C> <C>
Victoria E. Schonfeld**; 48 Vice President Ms. Schonfeld is a managing director and
general counsel of Mitchell Hutchins since May
1994 and a senior vice president of PaineWebber
Incorporated since July 1995. Ms. Schonfeld is a
vice president of 31 investment companies and a
vice president and secretary of one investment
company for which Mitchell Hutchins, PaineWebber
or one of their affiliates serves as investment
adviser.
Paul H. Schubert**; 36 Vice President and Mr. Schubert is a senior vice president and
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. Mr. Schubert is a vice
president and treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Nirmal Singh*; 43 Vice President Mr. Singh is a senior vice president and a
portfolio manager of Mitchell Hutchins. Mr. Singh
is a vice president of four investment companies
for which Mitchell Hutchins, PaineWebber or one
of their affiliates serves as investment adviser.
Barney A. Taglialatela**; 38 Vice President and Mr. Taglialatela is a vice president and a
Assistant Treasurer manager of the mutual fund finance department 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 assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one of their
affiliates serves as investment adviser.
Mark A. Tincher*; 44 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 one of their affiliates
serves as investment adviser.
Keith A. Weller**; 38 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, PaineWebber or one
of their affiliates serves as investment adviser.
</TABLE>
21
<PAGE>
- -------------
** 1 * The business address of each listed person is 51 West 52nd Street,
New York, New York 10019-6114.
** The business address of each listed person is 1285 Avenue of the Americas,
New York, New York 10019.
* 1 moved from here; text not shown
+ Mrs. Alexander, Mr. Bewkes and Mr. Storms are "interested persons" of the
Trust as defined in the Investment Company Act by virtue of their positions
with Mitchell Hutchins, PaineWebber, and/or PW Group.
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $1,000 annually for each series. The Trust pays such
trustees $150 per series for each board meeting and each separate meeting of a
board committee (other than committee meetings held on the same day as the board
meeting). The Trust presently has eight series and thus pays each such trustee
$8,000 annually, plus any additional annual amounts due for board or committee
meetings. Each chairman of the audit and contract review committees of
individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually from the relevant funds. All trustees
are reimbursed for any expenses incurred in attending meetings. Because Mitchell
Hutchins and PaineWebber perform substantially all of the services necessary for
the operation of the Trust and the fund, the Trust requires no employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Trust for acting as a trustee or officer.
Trustees and officers own in the aggregate less than 1% of each class of shares
of the fund.
The table below includes certain information relating to the
compensation of the current trustees who held office with the Trust during the
fund's fiscal period ended August 31, 1999, and the compensation of those
trustees from all PaineWebber funds during the 1998 calendar year.
COMPENSATION TABLE+
ESTIMATED ANNUAL
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM THE TRUST AND THE
NAME OF PERSON, POSITION THE TRUST* FUND COMPLEX**
------------------------ ----------------- ----------------------
Richard Q. Armstrong, Trustee $14,000 $101,372
Richard R. Burt, Trustee 14,000 101,372
Meyer Feldberg, Trustee 14,000 116,222
George W. Gowen, Trustee 17,640 108,272
Frederic V. Malek, Trustee 14,000 101,372
Carl W. Schafer, Trustee 14,000 101,372
- --------------------
+ Only independent trustees are compensated by the fund and identified
above; trustees who are "interested persons," as defined by the
Investment Company Act, do not receive compensation from the fund.
* Represents estimated aggregate annual compensation paid by the Trust to
each trustee indicated.
** Represents total compensation paid during the calendar year ended
December 31, 1998, to each trustee by 31 investment companies (33 in
the case of Messrs. Feldberg and Gowen) for which Mitchell Hutchins,
22
<PAGE>
PaineWebber or one of their affiliates served as investment adviser. No
fund within the PaineWebber fund complex has a bonus, pension, profit
sharing or retirement plan.
PRINCIPAL HOLDERS AND MANAGEMENT OWNERSHIP OF SECURITIES
As of November 30, 1999, the fund's records showed no shareholders as
owning 5% or more of any -- class of the fund's shares.
INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Mitchell Hutchins acts as the
investment adviser and administrator of the fund pursuant to an advisory
contract ("Advisory Contract") with the Trust dated November 12, 1998. Under the
Advisory Contract, the fund pays Mitchell Hutchins a fee, computed daily and
paid monthly, at the annual rate of 0.75% of average daily net assets. During
the fiscal period December 14, 1998 (commencement of operations) through August
31, 1999, Mitchell Hutchins earned (or accrued) $269,530 in advisory fees.
Under the terms of the Advisory Contract, the fund bears all expenses
incurred in its operation that are not specifically assumed by Mitchell
Hutchins. General expenses of the Trust not readily identifiable as belonging to
a specific series of the Trust are allocated among series by or under the
direction of the Trust's board in such manner as the board deems fair and
equitable. Expenses borne by the fund include the following: (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by the
fund and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of the fund by Mitchell Hutchins; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of the fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the Trust or Mitchell
Hutchins; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the Trust or fund for violation of any law; (10) legal, accounting and
auditing expenses, including legal fees of special counsel for the independent
trustees; (11) charges of custodians, transfer agents and other agents; (12)
costs of preparing share certificates; (13) expenses of setting in type and
printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders and costs of mailing such materials to existing 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 board and any committees thereof; (17) the cost of investment company
literature and other publications provided to trustees and officers; and (18)
costs of mailing, stationery and communications equipment.
Under the Advisory Contract, Mitchell Hutchins will not be liable for
any error of judgment or mistake of law or for any loss suffered by the fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Mitchell Hutchins in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of the fund's outstanding
voting securities, on 60 days' written notice to Mitchell Hutchins or by
Mitchell Hutchins on 60 days' written notice to the fund.
PaineWebber provides transfer agency related services to the fund
pursuant to a delegation of authority from PFPC Inc. and is compensated for
those services by PFPC Inc. not the fund.
SECURITIES LENDING. During the fiscal period December 14, 1998
(commencement of operation) through August 31, 1999 the fund paid (or accrued)
$31 to PaineWebber for its services as securities lending agent.
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NET ASSETS. The following table shows the approximate net assets as of
October 31, 1999, sorted by category of investment objective, of the investment
companies as to which Mitchell Hutchins serves as adviser or sub-adviser. An
investment company may fall into more than one of the categories below.
NET ASSETS
INVESTMENT CATEGORY ($MIL)
------------------- ----
Domestic (excluding Money Market).................................$7,873.90
Global............................................................ 4,651.40
Equity/Balanced................................................... 7,822.00
Fixed Income (excluding Money Market)............................. 4,703.30
Taxable Fixed Income .................................... 3,233.70
Tax-Free Fixed Income.................................... 1,469.60
Money Market Funds................................................36,069.20
PERSONAL 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 funds and other Mitchell
Hutchins advisory accounts by all Mitchell Hutchins' directors, officers and
employees, establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of
each class of shares of the fund under a distribution contract with the Trust
("Distribution Contract") that requires Mitchell Hutchins to use its best
efforts, consistent with its other businesses, to sell shares of the fund.
Shares of the fund are offered continuously. Under an exclusive dealer agreement
between Mitchell Hutchins and PaineWebber relating to each class of shares of
the fund ("Exclusive Dealer Agreement"), PaineWebber and its correspondent firms
sell the fund's shares.
Under separate plans of distribution pertaining to the Class A, Class B
and Class C shares of the fund adopted by the Trust in the manner prescribed
under Rule 12b-1 under the Investment Company Act (each, respectively, a "Class
A Plan," "Class B Plan" and "Class C Plan," and collectively, "Plans"), the fund
pays Mitchell Hutchins a service fee, accrued daily and payable monthly, at the
annual rate of 0.25% of the average daily net assets of each class of shares.
Under the Class B Plan and the Class C Plan, the fund pays Mitchell Hutchins a
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
of the average daily net assets of the Class B shares and Class C shares,
respectively. There is no distribution plan with respect to the fund's Class Y
shares.
Mitchell Hutchins uses the service fees under the Plans for Class A, B
and C shares primarily to pay PaineWebber for shareholder servicing, currently
at the annual rate of 0.25% of the aggregate investment amounts maintained in
the fund by PaineWebber clients. PaineWebber then compensates its Financial
Advisors for shareholder servicing that they perform and offsets its own
expenses in servicing and maintaining shareholder accounts.
Mitchell Hutchins uses the distribution fees under the Class B and
Class C Plans to:
o Offset the commissions it pays to PaineWebber for selling the
fund's Class B and Class C shares, respectively.
o Offset the fund's marketing costs attributable to such
classes, such as preparation, printing and distribution of
sales literature, advertising and prospectuses to prospective
investors and related overhead expenses, such as employee
salaries and bonuses.
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PaineWebber compensates Financial Advisors when Class B and Class C
shares are bought by investors, as well as on an ongoing basis. Mitchell
Hutchins receives no special compensation from any of the funds or investors at
the time Class B or C shares are bought.
Mitchell Hutchins receives the proceeds of the initial sales charge
paid when Class A shares are bought and of the contingent deferred sales charge
paid upon sales of shares. These proceeds may be used to cover distribution
expenses.
The Plans and the related Distribution Contracts for Class A, Class B
and Class C shares specify that the fund must pay service and distribution fees
to Mitchell Hutchins for its activities, not as reimbursement for specific
expenses incurred. Therefore, even if Mitchell Hutchins' expenses exceed the
service or distribution fees it receives, the fund will not be obligated to pay
more than those fees. On the other hand, if Mitchell Hutchins' expenses are less
than such fees, it will retain its full fees and realize a profit. Expenses in
excess of service and distribution fees received or accrued through the
termination date of any Plan will be Mitchell Hutchins' sole responsibility and
not that of the fund. Annually, the board of the fund reviews the Plans and
Mitchell Hutchins' corresponding expenses for each class separately from the
Plans and expenses of the other classes.
Among other things, each Plan provides that (1) Mitchell Hutchins will
submit to the board at least quarterly, and the trustees will review, reports
regarding all amounts expended under the Plan and the purposes for which such
expenditures were made, (2) the Plan will continue in effect only so long as it
is approved at least annually, and any material amendment thereto is approved,
by the applicable board, including those trustees who are not "interested
persons" of the fund and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan, acting in person
at a meeting called for that purpose, (3) payments by the fund under the Plan
shall not be materially increased without the affirmative vote of the holders of
a majority of the outstanding shares of the relevant class of the fund and (4)
while the Plan remains in effect, the selection and nomination of trustees who
are not "interested persons" of the fund shall be committed to the discretion of
the trustees who are not "interested persons" of the fund.
In reporting amounts expended under the Plans to the trustees, Mitchell
Hutchins allocates expenses attributable to the sale of each class of the fund's
shares to such class based on the ratio of sales of shares of such class to the
sales of all three classes of shares. The fees paid by one class of the fund's
shares will not be used to subsidize the sale of any other class of fund shares.
The fund paid (or accrued) the following service and/or distribution
fees to Mitchell Hutchins under the Class A, Class B and Class C Plans during
the fiscal period December 14, 1998 (commencement of operations) through August
31, 1999:
Class $28,328
A.........................................
Class $137,150
B..........................................
Class $108,776
C..........................................
Mitchell Hutchins estimates that it and its parent corporation,
PaineWebber, incurred the following shareholder service-related and
distribution-related expenses with respect to the fund during the fiscal period
December 14, 1998 (commencement of operations) through August 31, 1999:
CLASS A
Marketing and advertising............................... $37,486
Amortization of commissions............................. $0
Printing of prospectuses and SAIs....................... $1,534
Branch network costs allocated and interest expense..... $20,065
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Service fees paid to PaineWebber Financial Advisors..... $11,234
CLASS B
Marketing and advertising............................... $45,168
Amortization of commissions............................. $51,066
Printing of prospectuses and SAIs....................... $2,076
Branch network costs allocated and interest expense..... $23,692
Service fees paid to PaineWebber Financial Advisors..... $13,162
CLASS C
Marketing and advertising............................... $35,972
Amortization of commissions............................. $31,331
Printing of prospectuses and SAIs....................... $1,687
Branch network costs allocated and interest expense..... $17,868
Service fees paid to PaineWebber Financial Advisors..... $10,443
"Marketing and advertising" includes various internal costs allocated
by Mitchell Hutchins to its efforts at distributing the fund's 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 fund's shares, including the PaineWebber retail branch system.
In approving the fund's overall Flexible PricingSM system of
distribution, the board considered several factors, including that
implementation of Flexible Pricing would (1) enable investors to choose the
purchasing option best suited to their individual situation, thereby encouraging
current shareholders to make additional investments in the fund and attracting
new investors and assets to the fund to the benefit of the fund and its
shareholders, (2) facilitate distribution of the fund's shares and (3) maintain
the competitive position of the fund in relation to other funds that have
implemented or are seeking to implement similar distribution arrangements.
In approving the Class A Plan, the board considered all the features of
the distribution system, including (1) the conditions under which initial sales
charges would be imposed and the amount of such charges, (2) Mitchell Hutchins'
belief that the initial sales charge combined with a service fee would be
attractive to PaineWebber Financial Advisors and correspondent firms, resulting
in greater growth of the fund than might otherwise be the case, (3) the
advantages to the shareholders of economies of scale resulting from growth in
the fund's assets and potential continued growth, (4) the services provided to
the fund and its shareholders by Mitchell Hutchins, (5) the services provided by
PaineWebber pursuant to its Exclusive Dealer Agreement with Mitchell Hutchins
and (6) Mitchell Hutchins' shareholder service-related expenses and costs.
In approving the Class B Plan, the board considered all the features of
the distribution system, including (1) the conditions under which contingent
deferred sales charges would be imposed and the amount of such charges, (2) the
advantage to investors in having no initial sales charges deducted from fund
purchase payments and instead having the entire amount of their purchase
payments immediately invested in fund shares, (3) Mitchell Hutchins' belief that
the ability of PaineWebber Financial Advisors and correspondent firms to receive
sales commissions when Class B shares are sold and continuing service fees
thereafter while their customers invest their entire purchase payments
immediately in Class B shares would prove attractive to the Financial Advisors
and correspondent firms, resulting in greater growth of the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors,
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without the concomitant receipt by Mitchell Hutchins of initial sales charges,
was conditioned upon its expectation of being compensated under the Class B
Plan.
In approving the Class C Plan, the board considered all the features of
the distribution system, including (1) the advantage to investors in having no
initial sales charges deducted from fund purchase payments and instead having
the entire amount of their purchase payments immediately invested in fund
shares, (2) the advantage to investors in being free from contingent deferred
sales charges upon redemption for shares held more than one year and paying for
distribution on an ongoing basis, (3) Mitchell Hutchins' belief that the ability
of PaineWebber Financial Advisors and correspondent firms to receive sales
compensation for their sales of Class C shares on an ongoing basis, along with
continuing service fees, while their customers invest their entire purchase
payments immediately in Class C shares and generally do not face contingent
deferred sales charges, would prove attractive to the Financial Advisors and
correspondent firms, resulting in greater growth to the fund than might
otherwise be the case, (4) the advantages to the shareholders of economies of
scale resulting from growth in the fund's assets and potential continued growth,
(5) the services provided to the fund and its shareholders by Mitchell Hutchins,
(6) the services provided by PaineWebber pursuant to its Exclusive Dealer
Agreement with Mitchell Hutchins and (7) Mitchell Hutchins' shareholder service-
and distribution-related expenses and costs. The trustees also recognized that
Mitchell Hutchins' willingness to compensate PaineWebber and its Financial
Advisors, without the concomitant receipt by Mitchell Hutchins of initial sales
charges or contingent deferred sales charges upon redemption after one year
following purchase was conditioned upon its expectation of being compensated
under the Class C Plan.
With respect to each Plan, the board considered all compensation that
Mitchell Hutchins would receive under the Plan and the Distribution Contract,
including service fees and, as applicable, initial sales charges, distribution
fees and contingent deferred sales charges. The board also considered the
benefits that would accrue to Mitchell Hutchins under each Plan in that Mitchell
Hutchins would receive service, distribution and advisory fees that are
calculated based upon a percentage of the average net assets of the fund, which
fees would increase if the Plan were successful and the fund attained and
maintained significant asset levels.
Under the Distribution Contract between the fund and Mitchell Hutchins
for the Class A shares for the fiscal period December 14, 1998 (commencement of
operations) through August 31, 1999, Mitchell Hutchins earned approximately
$375,731 of sales charges and retained approximately $24,846 net of concessions
to PaineWebber as exclusive dealer.
Mitchell Hutchins earned and retained contingent deferred sales charges
paid upon certain redemptions of shares for the fiscal period December 14, 1998
(commencement of operations) through August 31, 1999:
Class A...................... $0
Class B......................$12,264
Class C......................$ 1,209
PORTFOLIO TRANSACTIONS
Subject to policies established by the board, Mitchell Hutchins is
responsible for the execution of the fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions,
Mitchell Hutchins seeks to obtain the best net results for the fund, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While Mitchell Hutchins generally seeks
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The fund may invest in securities traded
in the OTC market and will engage primarily in transactions directly with the
dealers who make
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markets in such securities, unless a better price or execution could be obtained
by using a broker. During the fiscal period December 14, 1998 (commencement of
operations) through August 31, 1999, the fund paid $130,181 in brokerage
commissions.
The fund has no obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. The fund contemplates that,
consistent with the policy of obtaining the best net results, brokerage
transactions may be conducted through Mitchell Hutchins or its affiliates,
including PaineWebber. The board has adopted procedures in conformity with Rule
17e-1 under the Investment Company Act to ensure that all brokerage commissions
paid to PaineWebber are reasonable and fair. Specific provisions in the Advisory
Contracts authorize Mitchell Hutchins and any of its affiliates that is a member
of a national securities exchange to effect portfolio transactions for the fund
on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
For the fiscal period December 14, 1998 (commencement of operations)
through August 31, 1999 the fund paid $3,960 in brokerage commissions to
PaineWebber. The brokerage commissions paid by the fund during such period
represented 3.04% of the total commissions paid by the fund and 3.69% of the
aggregate dollar amount of the fund's transactions involving commission
payments.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The fund's procedures in selecting FCMs to execute its transactions in
futures contracts, including procedures permitting the use of Mitchell Hutchins
and its affiliates, are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, Mitchell Hutchins will consider the full range
and quality of a broker's services. Consistent with the interests of the funds
and subject to the review of each board, Mitchell Hutchins may cause the fund to
purchase and sell portfolio securities through brokers who provide Mitchell
Hutchins with brokerage or research services. The fund may pay those brokers a
higher commission than may be charged by other brokers, provided that Mitchell
Hutchins determines in good faith that the 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.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
securities analysts, economists, corporate and industry spokespersons and
government representatives.
During the fiscal period December 14, 1998 (commencement of operations)
through August 31, 1999, the fund directed $43,943,722 of portfolio transactions
to brokers chosen because they provide brokerage or research services, for which
the fund paid $69,654 in brokerage commissions.
For purchases or sales with broker-dealer firms that act as principal,
Mitchell Hutchins seeks best execution. Although Mitchell Hutchins may receive
certain research or execution services in connection with these transactions, it
will not purchase securities at a higher price or sell securities at a lower
price than would otherwise be paid if no weight was attributed to the services
provided by the executing dealer. 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 pursuant to
procedures that are designed to ensure that the transaction (including
commissions) is at least as favorable as it would have been if effected directly
with a market-maker that did not provide research or execution services.
Research services and information received from brokers or dealers are
supplemental to Mitchell Hutchins' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into their investment
processes. Information and research services furnished by brokers or dealers
through which or with
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which the funds effect securities transactions may be used by Mitchell Hutchins
in advising other funds or accounts and, conversely, research services furnished
to Mitchell Hutchins by brokers or dealers in connection with other funds or
accounts that either of them advises may be used in advising the fund.
Investment decisions for the fund and for other investment accounts
managed by Mitchell Hutchins are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for the fund and one or more accounts. In
those cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated between the fund and the other
account(s) as to amount according to a formula deemed equitable to the fund and
the other account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that simultaneous transactions and the ability to participate in volume
transactions will benefit the fund.
The fund will not purchase securities that are offered in underwritings
in which PaineWebber is a member of the underwriting or selling group, except
pursuant to procedures adopted by each board pursuant to Rule 10f-3 under the
Investment Company Act. Among other things, these procedures require that the
spread or commission paid in connection with such a purchase be reasonable and
fair, the purchase be at not more than the public offering price prior to the
end of the first business day after the date of the public offering and that
PaineWebber or any affiliate thereof not participate in or benefit from the sale
to the fund.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in
the fund's operations and the fund's annual portfolio turnover rate may vary
from year to year. The fund may have higher portfolio turnover in certain years
if Mitchell Hutchins believes that market conditions warrant or if Mitchell
Hutchins believes that that opportunities exist to sell securities and realize
capital losses that can be used to offset capital gains. The portfolio turnover
rate is calculated by dividing the lesser of the fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of securities in the portfolio during the year. During the
fiscal period December 14, 1998 (commencement of operations) through August 31,
1999, the fund's portfolio turnover rate was 47%.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
WAIVERS OF SALES CHARGES/CONTINGENT DEFERRED SALES CHARGES -- CLASS A
SHARES. The following additional sales charge waivers are available for Class A
shares if you:
o Purchase shares through a variable annuity offered only to
qualified plans. For investments made pursuant to this waiver,
Mitchell Hutchins may make payments out of its own resources to
PaineWebber and to the variable annuity's sponsor, adviser or
distributor in a total amount not to exceed l% of the amount
invested;
o Acquire shares through an investment program that is not sponsored
by PaineWebber or its affiliates and that charges participants a
fee for program services, provided that the program sponsor has
entered into a written agreement with PaineWebber permitting the
sale of shares at net asset value to that program. For investments
made pursuant to this waiver, Mitchell Hutchins may make a payment
to PaineWebber out of its own resources in an amount not to exceed
1% of the amount invested. For subsequent investments or exchanges
made to implement a rebalancing feature of such an investment
program, the minimum subsequent investment requirement is also
waived;
o Acquire shares in connection with a reorganization pursuant to
which the fund acquires substantially all of the assets and
liabilities of another fund in exchange solely for shares of the
acquiring fund; or
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o Acquire shares in connection with the disposition of proceeds from
the sale of shares of Managed High Yield Plus Fund Inc. that were
acquired during that fund's initial public offering of shares and
that meet certain other conditions described in its prospectus.
In addition, reduced sales charges on Class A shares are available
through the combined purchase plan or through rights of accumulation described
below. Class A share purchases of $1 million or more are not subject to an
initial sales charge; however, if a shareholder sells these shares within one
year after purchase, a contingent deferred sales charge of 1% of the offering
price or the net asset value of the shares at the time of sale by the
shareholder, whichever is less, is imposed.
COMBINED PURCHASE PRIVILEGE -- CLASS A SHARES. Investors and eligible
groups of related fund investors may combine purchases of Class A shares of the
fund with concurrent purchases of Class A shares of any other PaineWebber mutual
fund and thus take advantage of the reduced sales charges indicated in the
tables of sales charges for Class A shares in the Prospectus. The sales charge
payable on the purchase of Class A shares of the fund and Class A shares of such
other funds will be at the rates applicable to the total amount of the combined
concurrent purchases.
An "eligible group of related fund investors" can consist of any
combination of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her individual retirement account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more
employee benefit plans of a company controlled by the individual(s);
(e) an individual (or eligible group of individuals) and a trust
created by the individual(s), the beneficiaries of which are the individual
and/or the individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers
to Minors Act account created by the individual or the individual's spouse;
(g) an employer (or group of related employers) and one or more
qualified retirement plans of such employer or employers (an employer
controlling, controlled by or under common control with another employer is
deemed related to that other employer); or
(h) individual accounts related together under one registered
investment adviser having full discretion and control over the accounts. The
registered investment adviser must communicate at least quarterly through a
newsletter or investment update establishing a relationship with all of the
accounts.
RIGHTS OF ACCUMULATION -- CLASS A SHARES. Reduced sales charges are
available through a right of accumulation, under which investors and eligible
groups of related fund investors (as defined above) are permitted to purchase
Class A shares of the funds among related accounts at the offering price
applicable to the total of (1) the dollar amount then being purchased plus (2)
an amount equal to the then-current net asset value of the purchaser's combined
holdings of Class The 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.
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REINSTATEMENT PRIVILEGE -- CLASS A SHARES. Shareholders who have
redeemed Class A shares of the fund may reinstate their account without a sales
charge by notifying the transfer agent of such desire and forwarding a check for
the amount to be purchased within 365 days after the date of redemption. The
reinstatement will be made at the net asset value per share next computed after
the notice of reinstatement and check are received. The amount of a purchase
under this reinstatement privilege cannot exceed the amount of the redemption
proceeds. Gain on a redemption is taxable regardless of whether the
reinstatement privilege is exercised, although a loss arising out of a
redemption might not be deductible under certain circumstances. See "Taxes"
below.
WAIVERS OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The
maximum 5% contingent deferred sales charge applies to sales of shares during
the first year after purchase. The charge generally declines by 1% annually,
reaching zero after six years. Among other circumstances, the contingent
deferred sales charge on Class B shares is waived where a total or partial
redemption is made within one year following the death of the shareholder. The
contingent deferred sales charge waiver is available where the decedent is
either the sole shareholder or owns the shares with his or her spouse as a joint
tenant with right of survivorship. This waiver applies only to redemption of
shares held at the time of death.
* 2 moved from here; text not shown NON-RESIDENT ALIENS WAIVER OF
CONTINGENT DEFERRED SALES CHARGE. Until March 31, 2000, investors who are
non-resident aliens will be able to sell their fund shares without incurring a
contingent deferred sales charge, if they use the sales proceeds to immediately
purchase shares of certain offshore investment pools available through
PaineWebber. The fund will waive the contingent deferred sales charge that would
otherwise apply to a sale of Class A, Class B or Class C shares of the fund.
Fund shareholders who want to take advantage of this waiver should review the
offering documents of the offshore investment pools for further information,
including investment minimums, and fees and expenses. Shares of the offshore
investment pools are available only in those jurisdictions where the sale is
authorized and are not available to any U.S. person, including, but not limited
to, any citizen or resident of the United States, and U.S. partnership or U.S.
trust, and are not available to residents of certain other countries. For more
information on how to take advantage of the deferred sales charge waiver,
investors should contact their PaineWebber Financial Advisors.
** 2 PURCHASES OF CLASS Y SHARES THROUGH THE PACE MULTI ADVISOR
PROGRAM. An investor who participates in the PACE Multi Advisor Program is
eligible to purchase Class Y shares. The PACE Multi Advisor Program is an
advisory program sponsored by PaineWebber that provides comprehensive investment
services, including investor profiling, a personalized asset allocation strategy
using an appropriate combination of funds, and a quarterly investment
performance review. Participation in the PACE Multi Advisor Program is subject
to payment of an advisory fee at the effective maximum annual rate of 1.5% of
assets. Employees of PaineWebber and its affiliates are entitled to a waiver of
this fee. Please contact your PaineWebber Financial Advisor or PaineWebber's
correspondent firms for more information concerning mutual funds that are
available through the PACE Multi Advisor Program.
PURCHASES OF CLASS A SHARES THROUGH THE PAINEWEBBER INSIGHTONESM
PROGRAM. Investors who purchase shares through the PaineWebber InsightOneSM
Program are eligible to purchase Class A shares without a sales load. The
PaineWebber InsightOneSM Program offers a nondiscretionary brokerage account to
PaineWebber clients for an asset-based fee at an annual rate of up to 1.50% of
the assets in the account. Account holders may purchase or sell certain
investment products without paying commissions on other markups/markdowns.
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, eligible shares of the funds may be exchanged for shares of the
corresponding class of most other PaineWebber mutual funds. Class Y shares are
not eligible for exchange. Shareholders will receive at least 60 days' notice of
any termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or the fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the fund's investment objective, policies and
restrictions.
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If conditions exist that make cash payments undesirable, the fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. 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. The fund has
elected, however, to be governed by Rule 18f-1 under the Investment Company Act,
under which it is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
The fund may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange ("NYSE") is
closed or trading on the NYSE is restricted as determined by the SEC, (2) when
an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the fund's portfolio at the time.
SERVICE ORGANIZATIONS. The fund may authorize service organizations,
and their agents, to accept on its behalf purchase and redemption orders that
are in "good form" in accordance with the policies of those service
organizations. The 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. PaineWebber offers an automatic investment
plan with a minimum initial investment of $1,000 through which the fund will
deduct $50 or more on a monthly, quarterly, semi-annual or annual basis from the
investor's bank account to invest directly in the fund. Participation in the
automatic investment plan enables an investor to use the technique of "dollar
cost averaging." When an investor invests the same dollar amount each month
under the plan, the investor will purchase more shares when the fund's net asset
value per share is low and fewer shares when the net asset value per share is
high. Using this technique, an investor's average purchase price per share over
any given period will be lower than if the investor purchased a fixed number of
shares on a monthly basis during the period. Of course, investing through the
automatic investment plan does not assure a profit or protect against loss in
declining markets. Additionally, because the automatic investment plan involves
continuous investing regardless of price levels, an investor should consider his
or her financial ability to continue purchases through periods of both low and
high price levels.
SYSTEMATIC WITHDRAWAL PLAN. The systematic withdrawal plan allows
investors to set up monthly, quarterly (March, June, September and December),
semi-annual (June and December) or annual (December) withdrawals from their
PaineWebber Mutual fund accounts. Minimum balances and withdrawals vary
according to the class of shares:
o Class A and Class C shares. Minimum value of fund shares is $5,000;
minimum withdrawals of $100.
o Class B shares. Minimum value of fund shares is $10,000; minimum
monthly, quarterly, and semi-annual and annual withdrawals of $100,
$200, $300 and $400, respectively.
Withdrawals under the systematic withdrawal plan will not be subject to
a contingent deferred sales charge if the investor withdraws no more than 12% of
the value of the fund account when the investor signed up for the Plan (for
Class B shares, annually; for Class A and Class C shares, during the first year
under the Plan). Shareholders who elect to receive dividends or other
distributions in cash may not participate in this plan.
An investor's participation in the systematic withdrawal plan will
terminate automatically if the "Initial Account Balance" (a term that means the
value of the fund account at the time the investor elects to participate in
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<PAGE>
the systematic withdrawal plan), less aggregate redemptions made other than
pursuant to the systematic withdrawal plan, is less than the minimum values
specified above. Purchases of additional shares of the fund 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 a month for monthly, quarterly, semi-annual and annual plans, PaineWebber
will arrange for redemption by the funds of sufficient fund shares to provide
the withdrawal payments specified by participants in the fund's systematic
withdrawal plan. The payments generally are mailed approximately five Business
Days (defined under "Valuation of Shares") after the redemption date. Withdrawal
payments should not be considered dividends, but redemption proceeds. If
periodic withdrawals continually exceed reinvested dividends and other
distributions, a shareholder's investment may be correspondingly reduced. A
shareholder may change the amount of the systematic withdrawal or terminate
participation in the systematic withdrawal plan at any time without charge or
penalty by written instructions with signatures guaranteed to PaineWebber or
PFPC Inc. Instructions to participate in the plan, change the withdrawal amount
or terminate participation in the plan will not be effective until five days
after written instructions with signatures guaranteed are received by PFPC.
Shareholders may request the forms needed to establish a systematic withdrawal
plan from their PaineWebber Financial Advisors, correspondent firms or PFPC at
1-800-647-1568.
INDIVIDUAL RETIREMENT ACCOUNTS. Self-directed IRAs are available
through PaineWebber in which purchases of PaineWebber mutual funds and other
investments may be made. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisers.
TRANSFER OF ACCOUNTS. If investors holding shares of the fund in a
PaineWebber brokerage account transfer their brokerage accounts to another firm,
the fund shares will be moved to an account with PFPC. However, if the other
firm has entered into a selected dealer agreement with Mitchell Hutchins
relating to the fund, the shareholder may be able to hold fund shares in an
account with the other firm.
PAINEWEBBER RMA RESOURCE ACCUMULATION PLANSM;
PAINEWEBBER RESOURCE MANAGEMENT ACCOUNT(R) (RMA)(R)
Shares of PaineWebber mutual funds (each a "PW Fund" and, collectively,
the "PW Funds") are available for purchase through the RMA Resource Accumulation
Plan ("Plan") by customers of PaineWebber and its correspondent firms who
maintain Resource Management Accounts ("RMA accountholders"). The Plan allows an
RMA accountholder to continually invest in one or more of the PW Funds at
regular intervals, with payment for shares purchased automatically deducted from
the client's RMA account. The client may elect to invest at monthly or quarterly
intervals and may elect either to invest a fixed dollar amount (minimum $100 per
period) or to purchase a fixed number of shares. A client can elect to have Plan
purchases executed on the first or fifteenth day of the month. Settlement occurs
three Business Days (defined under "Valuation of Shares") after the trade date,
and the purchase price of the shares is withdrawn from the investor's RMA
account on the settlement date from the following sources and in the following
order: uninvested cash balances, balances in RMA money market funds, or margin
borrowing power, if applicable to the account.
To participate in the Plan, an investor must be an RMA accountholder,
must have made an initial purchase of the shares of each PW Fund selected for
investment under the Plan (meeting applicable minimum investment requirements)
and must complete and submit the RMA Resource Accumulation Plan Client Agreement
and Instruction Form available from PaineWebber. The investor must have received
a current prospectus for each PW Fund selected prior to enrolling in the Plan.
Information about mutual fund positions and outstanding instructions under the
Plan are noted on the RMA accountholder's account statement. Instructions under
the Plan may be changed at any time, but may take up to two weeks to become
effective.
The terms of the Plan, or an RMA accountholder's participation in the
Plan, may be modified or terminated at any time. It is anticipated that, in the
future, shares of other PW Funds and/or mutual funds other than the PW Funds may
be offered through the Plan.
PERIODIC INVESTING AND DOLLAR COST AVERAGING. Periodic investing in the
PW Funds or other mutual funds, whether through the Plan or otherwise, helps
investors establish and maintain a disciplined approach to
33
<PAGE>
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 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 unlimited electronic funds transfers and bill payment service for an
additional fee
o expanded account protection for the net equity securities balance in
the event of the liquidation of PaineWebber. This protection does not
apply to shares of funds that are held at PFPC and not through
PaineWebber; and
o automatic direct deposit of checks into your RMA account and
automatic withdrawals from the account.
The annual account fee for an RMA account is $85, which includes the
Gold MasterCard, with an additional fee of $40 if the investor selects an
optional line of credit with the Gold MasterCard.
CONVERSION OF CLASS B SHARES
Class B shares of the fund will automatically convert to Class A shares
of the fund, based on the relative net asset values per share of each class, as
of the close of business on the first Business Day (as defined under
34
<PAGE>
"Valuation of Shares") of the month in which the sixth anniversary of the
initial issuance of Class B shares occurs. For the purpose of calculating the
holding period required for conversion of Class B shares, the date of initial
issuance means (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 conversion feature is subject to the continuing availability of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A and Class B shares will not result in "preferential dividends" under
the Internal Revenue Code and that the conversion of shares does not constitute
a taxable event. If the conversion feature ceased to be available, the Class B
shares would not be converted and would continue to be subject to the higher
ongoing expenses of the Class B shares beyond six years from the date of
purchase. Mitchell Hutchins has no reason to believe that this condition will
not continue to be met.
VALUATION OF SHARES
The fund determines its net asset value per share separately for each
class of shares, normally as of the close of regular trading (usually 4:00 p.m.,
Eastern time) on the NYSE 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 exchanges normally are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Mitchell Hutchins as the primary market. Securities traded in the
OTC market and listed on The Nasdaq Stock Market ("Nasdaq") normally are valued
at the last available sale price on Nasdaq prior to valuation; other OTC
securities are valued at the last bid price available prior to valuation. Where
market quotations are readily available, portfolio securities are valued based
upon market quotations, provided those quotations adequately reflect, in the
judgment of Mitchell Hutchins, the fair value of the security. Where those
market quotations are not readily available, securities are valued based upon
appraisals received from a pricing service using a computerized matrix system or
based upon appraisals derived from information concerning the security or
similar securities received from recognized dealers in those securities. All
other securities and other assets are valued at fair value as determined in good
faith by or under the direction of the applicable board. It should be recognized
that judgment often plays a greater role in valuing thinly traded securities,
including many lower rated bonds, 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
applicable board determines that this does not represent fair value.
PERFORMANCE INFORMATION
The fund's 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.
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<PAGE>
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. In calculating the ending redeemable value, for Class A shares, the
maximum 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 fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value. Neither
initial nor contingent deferred sales charges are taken into account in
calculating Non-Standardized Return; the inclusion of those charges would reduce
the return.
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 tables show performance information for each class of the
fund's shares outstanding for the periods indicated.
CLASS CLASS A CLASS B CLASS C CLASS Y
(INCEPTION DATE) (12/14/98) (12/14/98) (12/14/98) (12/14/98)
Inception to August 31, 1999:
Standardized Return*........... 6.49% 5.88% 9.88% 11.04%
Non-Standardized Return........ 11.52% 10.88% 10.88% 11.04%
- --------------------------
* 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 charge imposed on a redemption of shares held for the period.
Class Y shares do not impose an initial or contingent deferred sales charge;
therefore, the performance information is the same for both standardized
return and non-standardized return for the periods indicated.
OTHER INFORMATION. In Performance Advertisements, the fund may compare
its Standardized Return and/or its Non-Standardized Return with data published
by Lipper Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Standard
& Poor's 500 Composite Stock 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 ("DJIA"), the Nasdaq Composite Index, the Russell 2000 Index,
the Russell 1000 Index (including Value and Growth sub-indexes), the Wilshire
5000 Index, the Lehman Bond Index, 30-year and 10-year U.S. Treasury bonds, the
Morgan Stanley Capital International World Index and changes in the Consumer
Price Index as published by the U.S.
36
<PAGE>
Department of Commerce. The fund also may refer in such materials to mutual fund
performance rankings and other data, such as comparative asset, expense and fee
levels, published by Lipper, CDA, Wiesenberger, ICD or Morningstar. Performance
Advertisements also may refer to discussions of the fund and comparative mutual
fund data and ratings reported in independent periodicals, including THE WALL
STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
and THE KIPLINGER LETTERS. Comparisons in Performance Advertisements may be in
graphic form.
The fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the fund investment are reinvested
in additional fund shares, any future income or capital appreciation of the fund
would increase the value, not only of the original fund investment, but also of
the additional fund shares received through reinvestment. As a result, the value
of the fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the fund's
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the fund are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. The debt securities
held by the fund generally have longer maturities than most CDs and may reflect
interest rate fluctuations for longer term debt securities. An investment in the
fund involves greater risks than an investment in either a money market fund or
a CD.
The fund may also compare its performance to general trends in the
stock and bond markets, as illustrated by the following graph prepared by
Ibbotson Associates, Chicago.
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[OBJECT OMITTED-See plot points below}
<TABLE>
<CAPTION>
Ibbotson Chart Plot Points
Chart showing performance of S&P 500, long-term U.S. government bonds,
Treasury Bills and inflation from 1925 through 1998
YEAR Common Stocks Long-Term Gov't Bonds Inflation/CPI Treasury Bills
<S> <C> <C> <C> <C>
1925 $10,000 $10,000 $10,000 $10,000
1926 $11,162 $10,777 $9,851 $10,327
1927 $15,347 $11,739 $9,646 $10,649
1928 $22,040 $11,751 $9,553 $11,028
1929 $20,185 $12,153 $9,572 $11,552
1930 $15,159 $12,719 $8,994 $11,830
1931 $8,590 $12,044 $8,138 $11,957
1932 $7,886 $14,073 $7,300 $12,072
1933 $12,144 $14,062 $7,337 $12,108
1934 $11,969 $15,472 $7,486 $12,128
1935 $17,674 $16,243 $7,710 $12,148
1936 $23,669 $17,464 $7,803 $12,170
1937 $15,379 $17,504 $8,045 $12,207
1938 $20,165 $18,473 $7,821 $12,205
1939 $20,082 $19,570 $7,784 $12,208
1940 $18,117 $20,761 $7,859 $12,208
1941 $16,017 $20,955 $8,622 $12,216
1942 $19,275 $21,629 $9,423 $12,248
1943 $24,267 $22,080 $9,721 $12,291
1944 $29,060 $22,702 $9,926 $12,332
1945 $39,649 $25,139 $10,149 $12,372
1946 $36,449 $25,113 $11,993 $12,416
1947 $38,529 $24,454 $13,073 $12,478
1948 $40,649 $25,285 $13,426 $12,580
1949 $48,287 $26,916 $13,184 $12,718
1950 $63,601 $26,932 $13,948 $12,870
1951 $78,875 $25,873 $14,767 $13,063
1952 $93,363 $26,173 $14,898 $13,279
1953 $92,439 $27,125 $14,991 $13,521
1954 $141,084 $29,075 $14,916 $13,638
1955 $185,614 $28,699 $14,972 $13,852
1956 $197,783 $27,096 $15,400 $14,193
1957 $176,457 $29,117 $15,866 $14,639
1958 $252,975 $27,342 $16,145 $14,864
1959 $283,219 $26,725 $16,387 $15,303
1960 $284,549 $30,407 $16,629 $15,711
1961 $361,060 $30,703 $16,741 $16,045
1962 $329,545 $32,818 $16,946 $16,483
1963 $404,685 $33,216 $17,225 $16,997
1964 $471,388 $34,381 $17,430 $17,598
1965 $530,081 $34,625 $17,765 $18,289
1966 $476,737 $35,889 $18,361 $19,159
1967 $591,038 $32,594 $18,920 $19,966
1968 $656,415 $32,509 $19,814 $21,005
1969 $600,590 $30,860 $21,024 $22,388
1970 $624,653 $34,596 $22,179 $23,849
1971 $714,058 $39,173 $22,924 $24,895
1972 $849,559 $41,400 $23,706 $25,851
1973 $725,003 $40,942 $25,792 $27,643
1974 $533,110 $42,725 $28,939 $29,855
1975 $731,443 $46,653 $30,969 $31,588
1976 $905,842 $54,470 $32,458 $33,193
1977 $840,766 $54,095 $34,656 $34,893
1978 $895,922 $53,458 $37,784 $37,398
1979 $1,061,126 $52,799 $42,812 $41,279
1980 $1,405,137 $50,715 $48,120 $45,917
1981 $1,336,161 $51,657 $52,421 $52,671
1982 $1,622,226 $72,507 $54,451 $58,224
1983 $1,987,451 $72,979 $56,518 $63,347
1984 $2,111,991 $84,274 $58,753 $69,586
1985 $2,791,166 $110,371 $60,968 $74,960
1986 $3,306,709 $137,446 $61,657 $79,580
1987 $3,479,675 $133,716 $64,376 $83,929
1988 $4,064,583 $146,650 $67,221 $89,257
1989 $5,344,555 $173,215 $70,345 $96,728
1990 $5,174,990 $183,924 $74,640 $104,286
1991 $6,755,922 $219,420 $76,927 $110,121
1992 $7,274,115 $237,092 $79,159 $113,982
1993 $8,000,785 $280,339 $81,334 $117,284
1994 $8,105,379 $258,556 $83,510 $121,862
1995 $11,139,184 $340,435 $85,630 $128,680
1996 $13,709,459 $337,265 $88,475 $135,381
1997 $18,272,762 $390,735 $89,897 $142,496
1998 $23,495,420 $441,777 $91,513 $149,416
</TABLE>
- ---------------------
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook(TM) Ibbotson Assoc.,
Chi. (annual updates work by Roger G. Ibbotson & Rex A. Sinquefield).
The chart is shown for illustrative purposes only and does not
represent the fund's performance. These returns consist of income and capital
appreciation (or depreciation) and should not be considered an indication or
guarantee of future investment results. These returns do not account for
transaction costs. The average return represents a compound annual return.
Year-to-year fluctuations in certain markets have been significant and negative
returns have been experienced in certain markets from time to time. Stocks are
measured by the S&P 500, an unmanaged weighted index comprising 500 widely held
common stocks and varying in composition. Unlike investors in bonds and U.S.
Treasury bills, common stock investors do not receive fixed income payments and
are not entitled to repayment of principal. These differences contribute to
investment risk. Returns shown for long-term government bonds are based on U.S.
Treasury bonds with 20-year maturities. Inflation is measured by the Consumer
Price Index. The indexes are unmanaged and are not available for investment.
Over time, although subject to greater risks and higher volatility,
stocks have outperformed all other investments by a wide margin, offering a
solid hedge against inflation. From January 1, 1926 to December 31, 1998, stocks
beat all other traditional asset classes. A $10,000 investment in the stocks
comprising the S&P 500 grew to $23,495,420, significantly more than any other
investment.
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[OBJECT OMITTED]
Compound Annual Return
Stocks 11.0%
Stocks After Taxes 8.5%
Bonds 5.2%
Bonds After Taxes 3.8%
Cash 3.8%
Cash After Taxes 2.1%
Inflation 3.1%
Federal income tax is calculated using the 1925- 1998 marginal tax
rates for a single taxpayer earning $75,000 in 1989 dollars every year. (This
annual income is adjusted using the Consumer Price Index in order to obtain the
corresponding income level for each year.) No state income taxes are included.
The following assumptions have also been made: 1) stocks purchased were held for
five years, then sold, and the capital gains realized; 2) the net proceeds from
the sale were reinvested and dividends were taxed when earned and reinvested; 3)
bonds were turned over 19 times within the 73-year period at various times; and
4) capital gains were realized at the time of sale and reinvested.
TAXES
BACKUP WITHHOLDING. The fund is required to withhold 31% of all
dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
fund or PaineWebber with a correct taxpayer identification number. Withholding
at that rate also is required from dividends and capital gain distributions
payable to those shareholders who otherwise are subject to backup withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
fund shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares
(which normally includes any initial sales charge paid on Class A shares). An
exchange of the fund's shares for shares of another PaineWebber mutual fund
generally will have similar tax consequences. In addition, if the fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
SPECIAL RULE FOR CLASS A SHAREHOLDERS. A special tax rule applies when
a shareholder sells or exchanges Class A shares within 90 days of purchase and
subsequently acquires Class A shares of the fund or another PaineWebber mutual
fund without paying a sales charge due to the 365-day reinstatement privilege or
the exchange privilege. In these cases, any gain on the sale or exchange of the
original Class A shares would be increased, or any loss would be decreased, by
the amount of the sales charge paid when those shares were bought, and that
amount would increase the basis of the PaineWebber mutual fund shares
subsequently acquired.
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<PAGE>
CONVERSION OF CLASS B SHARES. A shareholder will recognize no gain or
loss as a result of a conversion from Class B shares to Class A shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. To continue to qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code, the fund must distribute to its shareholders for each taxable year
at least 90% of its investment company taxable income (consisting generally of
net investment income and net short-term capital gain ) ("Distribution
Requirement") and must meet several additional requirements. These additional
requirements include the following: (1) the fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of securities ,
or other income (including gains from options or futures) derived with respect
to its business of investing in securities ("Income Requirement"); (2) at the
close of each quarter of 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 that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (3) at the close of each quarter of
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 the fund failed to qualify for
treatment as a RIC for any taxable year, (a) it would be taxed as an ordinary
corporation on its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (b) the shareholders would treat
all those distributions, including distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), as dividends
(that is, ordinary income) to the extent of the fund's earnings and profits. In
addition, the fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
OTHER INFORMATION. Dividends and other distributions declared by the
fund in December of any year and payable to shareholders of record on a date in
that month will be deemed to have been paid by the fund and received by the
shareholders on December 31 if the distributions are paid by the fund during the
following January.
A portion of the dividends from the fund's investment company taxable
income (whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by the fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
federal alternative minimum tax.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received thereon. Investors also
should be aware that if shares are purchased shortly before the record date for
a dividend or capital gain distribution, the shareholder will pay full price for
the shares and receive some portion of the price back as a taxable distribution.
The fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for the calendar year and capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
The fund may invest in the stock of "passive foreign investment
companies" ("PFICs") if that stock is a permissible investment. A PFIC is any
foreign corporation (with certain exceptions) 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, the fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain from disposition of such stock (collectively
"PFIC income"), plus interest thereon, even if the fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in 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.
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If the 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 will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
(which it may have to distribute to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax) even if the QEF does not distribute those
earnings and gain to the fund. In most instances it will be very difficult, if
not impossible, to make this election because of certain of its requirements.
The 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
the fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the 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 under the election. The fund's adjusted basis in each PFIC's
stock with respect to which it has made this election will be adjusted to
reflect the amounts of income included and deductions taken thereunder.
The use of hedging strategies involving Derivative Instruments, such as
writing (selling) and purchasing options and futures contracts, involves complex
rules that will determine for income tax purposes the amount, character and
timing of recognition of the gains and losses the fund realizes in connection
therewith. Gains from options and futures derived by the fund with respect to
its business of investing in securities will qualify as permissible income under
the Income Requirements.
Offsetting positions in any actively traded security, option or futures
entered into or held by the fund may constitute a "straddle" for federal income
tax purposes. Straddles are subject to certain rules that may affect the amount,
character and timing of the fund's gains and losses with respect to positions of
the straddle by requiring, among other things, that (1) loss realized on
disposition of one position of a straddle be deferred to the extent of any
unrealized gain in an offsetting position until the latter position is disposed
of, (2) the fund's holding period in certain straddle positions not begin until
the straddle is terminated (possibly resulting in gain being treated as
short-term rather than long-term capital gain) and (3) losses recognized with
respect to certain straddle positions, that otherwise would constitute
short-term capital losses, be treated as long-term capital losses. Applicable
regulations also provide certain "wash sale" rules, which apply to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period, and "short sale" rules applicable to straddles.
Different elections are available to the fund, which may mitigate the effects of
the straddle rules, particularly with respect to "mixed straddles" (I.E., a
straddle of which at least one, but not all, positions are section 1256
contracts).
When a covered call option written (sold) by the fund expires, it
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When the fund terminates its obligations under
such an option by entering into a closing transaction, it realizes a short-term
capital gain (or loss), depending on whether the cost of the closing transaction
is less (or more) than the premium it received when it wrote the option. When a
covered call option written by the fund is exercised, the fund is treated as
having sold the underlying security, producing long-term or short-term capital
gain or loss, depending on the holding period of the underlying security and
whether the sum of the option price received on the exercise plus the premium
received when it wrote the option is more or less than the basis of the
underlying security.
If the fund has an "appreciated financial position"-- generally, an
interest (including an interest through an option, futures or short sale) with
respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the position, the fund will be
treated as having made an actual sale thereof, with the result that gain will be
recognized at that time. A constructive sale generally consists of a short sale,
an offsetting notional principal contract or a futures contract entered into by
the fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial
41
<PAGE>
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to the fund's
transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of
that year and the fund holds the appreciated financial position unhedged for 60
days after that closing (i.e., at no time during that 60-day period is the
fund's risk of loss regarding that position reduced by reason of certain
specified transactions with respect to substantially identical or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
The foregoing is only a general summary of some of the important
federal tax considerations generally affecting the fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the fund's activities, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the fund and to
dividends and other distributions therefrom.
OTHER INFORMATION
MASSACHUSETTS BUSINESS TRUST. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of the fund could, under certain circumstances, be held personally
liable for the obligations of the fund or the Trust. However, the Trust's
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
the fund, the trustees or any of them in connection with the Trust. The
Declaration of Trust provides for indemnification from the fund's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the fund itself would be unable to meet its obligations, a possibility 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 would be entitled to
reimbursement from the general assets of the fund. The trustees intend to
conduct the fund's operations in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the fund.
CLASSES OF SHARES. A share of each class of the fund represents an
identical interest in the fund's investment portfolio and has the same rights,
privileges and preferences. However, each class may differ with respect to sales
charges, if any, distribution and/or service fees, if any, other expenses
allocable exclusively to each class, voting rights on matters exclusively
affecting that class, and its exchange privilege, if any. The different sales
charges and other expenses applicable to the different classes of shares of the
fund will affect the performance of those classes. Each share of the fund is
entitled to participate equally in dividends, other distributions and the
proceeds of any liquidation of the fund. However, due to the differing expenses
of the classes, dividends and liquidation proceeds on Class A, B, C and Y shares
will differ.
VOTING RIGHTS. Shareholders of the fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of the Trust (which has more than one series) may elect all of the
trustees of the Trust. The shares of the fund will be voted together, except
that only the shareholders of a particular class of the fund may vote on matters
affecting only that class, such as the terms of a Rule 12b-1 Plan as it relates
to the class. The shares of each series of the Trust will be voted separately,
except when an aggregate vote of all the series of the Trust is required by law.
The fund does not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called to vote on the removal
of a trustee at the written request of holders of 10% of the outstanding shares
of the Trust.
CLASS-SPECIFIC EXPENSES. The 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
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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.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. State
Street Bank and Trust Company, located at One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian and recordkeeping agent for the fund.
PFPC Inc., a subsidiary of PNC Bank, N.A., located at 400 Bellevue Parkway,
Wilmington, DE 19809, serves as the fund's transfer and dividend disbursing
agent.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the fund.
Kirkpatrick & Lockhart LLP also acts as counsel to PaineWebber and Mitchell
Hutchins in connection with other matters.
AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, serves as independent auditors for the fund.
FINANCIAL STATEMENTS
The fund's Annual Report to Shareholders for its fiscal period ended August 31,
1999 is a separate document supplied with this SAI, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated herein by this reference.
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APPENDIX
RATINGS INFORMATION
DESCRIPTION OF MOODY'S(R) CORPORATE LONG TERM 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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues; AA.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than in Aaa securities; A. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; BAA. Bonds
which are rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well; BA. Bonds which are rated Ba are judged to
have speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small; CAA. Bonds which are rated Caa are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; CA. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings; C. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Moody's(R) bond ratings, where specified, are applied to senior bank
obligations and insurance company senior policyholder and claims obligations
with an original maturity in excess of one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's(R) assigns ratings to individual long-term debt securities
issued from medium-term note (MTN) programs, in addition to indicating ratings
to MTN programs themselves. Notes issued under MTN programs with such indicated
ratings are rated at issuance at the rating applicable to all pari passu notes
issued under the same program, at the program's relevant indicated rating,
provided such notes do not exhibit any of the following characteristics listed
below. For notes with any of the following characteristics, the rating of the
individual note may differ from the indicated rating of the program:
1. Notes containing features which link the cash flow and/or market
value to the credit performance of any third party or parties.
2. Notes allowing for negative coupons, or negative principal.
3. Notes containing any provision which could obligate the investor to
make any additional payments.
Market participants must determine whether any particular note is
rated, and if so, at what rating level. Moody's(R) encourages market
participants to contact Moody's(R) Ratings Desks directly if they have questions
regarding ratings for specific notes issued under a medium-term note program.
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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 highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong; A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong; BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation; BB, B, CCC, CC, C. Obligations rated BB, B, CCC, CC and C are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations 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 certainties 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 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 commitment 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 not 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 a obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
r. This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUND AND ITS
DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT
AN OFFER TO SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE FUND OR ITS
DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
(C)1999 PaineWebber Incorporated. All rights reserved.
Member SIPC.
PaineWebber
Tax-Managed Equity Fund
------------------------------------
Statement of Additional Information
December 6, 1999
------------------------------------
PAINEWEBBER
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
(1) (a) Amended and Restated Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective April 8, 1998 2/
(c) Amendment to Declaration of Trust effective July 9, 1998 2/
(d) Amendment to Declaration of Trust effective August 19, 1998 3/
(e) Amendment to Declaration of Trust effective June 24, 1999 4/
(f) Amendment to Declaration of Trust effective July 28, 1999
(filed herewith)
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 5/
(4) (a) Investment Advisory and Administration Contract 1/
(b) Investment Advisory and Administration Contract with
respect to PaineWebber Tax-Managed Equity Fund and
PaineWebber Strategy Fund 3/
(c) Investment Advisory Fee Agreement with respect to PaineWebber
Utility Income Fund 1/
(d) Investment Advisory Fee Agreement with respect to PaineWebber
Low Duration U.S. Government Income Fund 1/
(e) Investment Advisory Fee Agreement with respect to PaineWebber
Asia Pacific Growth Fund 6/
(f) Investment Advisory Fee Agreement with respect to
PaineWebber Strategy Fund (filed herewith)
(g) Sub-Investment Advisory Contract with respect to PaineWebber
Low Duration U.S. Government Income Fund 7/
(h) Sub-Advisory Contract with respect to PaineWebber Asia
Pacific Growth Fund 5/
(5) (a) Distribution Contract with respect to Class A Shares 1/
(b) Distribution Contract with respect to Class B Shares 1/
(c) Distribution Contract with respect to Class C Shares 8/
(d) Distribution Contract with respect to Class Y Shares 8/
(e) Exclusive Dealer Agreement with respect to Class A Shares 1/
(f) Exclusive Dealer Agreement with respect to Class B Shares 1/
(g) Exclusive Dealer Agreement with respect to Class C Shares 8/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 8/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
(8) Transfer Agency Agreement 9/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditor's consent
(filed herewith)
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(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 3/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 3/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 3/
(d) Addendum to Class C Plan for PaineWebber Strategy Fund (filed
herewith)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3 10/
- -----------------
1/ Incorporated by reference from Post-Effective Amendment No. 52 to the
registration statement, SEC File No. 2-91362, filed February 27, 1998.
2 Incorporated by reference from Post-Effective Amendment No. 54 to the
registration statement, SEC File No. 2-91362, filed July 21, 1998.
3/ Incorporated by reference from Post-Effective Amendment No. 59 to the
registration statement, SEC File No. 2-91362, filed February 26, 1999.
4/ Incorporated by reference from Post-Effective Amendment No. 63 to the
registration statement, SEC File No. 2-91362, filed July 29, 1999.
5/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Amended and Restated Declaration of Trust and from
Articles II, VII and X of Registrant's Restated By-Laws.
6/ Incorporated by reference from Post Effective Amendment No. 50 to the
registration statement, SEC File No. 2-91362, filed July 7, 1997.
7/ Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, SEC File No. 2-91362, filed March 31, 1995.
8/ Incorporated by reference from Post-Effective Amendment No. 39 to the
registration statement, SEC File No. 2-91362, filed February 14, 1996.
9/ Incorporated by reference from Post-Effective Amendment No. 53 to the
registration statement, SEC File No. 2-91362, filed March 31, 1998.
10/ Incorporated by reference from Post-Effective Amendment No. 43 to the
registration statement, SEC File No. 2-91362, filed July 31, 1996.
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Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
Section 2 of "Indemnification" in Article X of the Declaration of Trust
provides that the Registrant will indemnify its trustees and officers to the
fullest extent permitted by law against claims and expenses asserted against or
incurred by them by virtue of being or having been a trustee or officer;
provided that no such person shall be indemnified where there has been an
adjudication or other determination, as described in Article X, that such person
is liable to the Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant. Section 2 of "Indemnification" in Article X also provides that the
Registrant may maintain insurance policies covering such rights of
indemnification.
Additionally, "Limitation of Liability" in Article X of the Declaration
of Trust provides that the trustees or officers of the Registrant shall not be
personally liable to any person extending credit to, contracting with, or having
a claim against, the Trust; and that, provided they have exercised reasonable
care and have acted under the reasonable belief that their actions are in the
best interest of the Registrant, the trustees and officers shall not be liable
for neglect or wrongdoing by them or any officer, agent, employee or investment
adviser of the Registrant.
Section 2 of Article XI of the Declaration of Trust additionally
provides that, subject to the provisions of Section 1 of Article XI and to
Article X, the trustees shall not be liable for errors of judgment or mistakes
of fact or law, or for any act or omission in accordance with advice of counsel
or other experts, or failing to follow such advice, with respect to the meaning
and operation of the Declaration of Trust.
Article XI of the By-Laws provides that the Registrant may purchase and
maintain insurance on behalf of any person who is or was a trustee, officer or
employee of the Trust, or is or was serving at the request of the Trust as a
trustee, officer or employee of a corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the Registrant would have the power to indemnify him or
her against such liability, provided that the Registrant may not acquire
insurance protecting any trustee or officer against liability to the Registrant
or its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.
Section 9 of each Investment Advisory and Administration Contract
("Advisory Contract") between Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins") and the Trust provides that Mitchell Hutchins shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Registrant in connection with the matters to which the Advisory Contract
relates, except for a loss resulting from willful misfeasance, bad faith, or
gross negligence of Mitchell Hutchins in the performance of its duties or from
its reckless disregard of its obligations and duties under the Advisory
Contract. The sub-advisory contracts with respect to PaineWebber Low Duration
U.S. Government Income Fund and PaineWebber Asia Pacific Growth Fund contain
similar provisions with respect to those sub-advisers. Section 10 of each
Advisory Contract provides that the trustees shall not be liable for any
obligations of the Trust under the Advisory Contract and that Mitchell Hutchins
shall look only to the assets and property of the Trust in settlement of such
right or claim and not to the assets and property of the trustees.
Section 9 of each Distribution Contract provides that the Trust will
indemnify Mitchell Hutchins and its officers, directors or controlling persons
against all liabilities arising from any alleged untrue statement of material
fact in the Registration Statement or from any alleged omission to state in the
Registration Statement a material fact required to be stated in it or necessary
to make the statements in it, in light of the circumstances under which they
were made, not misleading, except insofar as liability arises from untrue
statements or omissions made in reliance upon and in conformity with information
furnished by Mitchell Hutchins to the Trust for use in the Registration
Statement; and provided that this indemnity agreement shall not protect any such
persons against liabilities arising by reason of their bad faith, gross
negligence or willful misfeasance; and shall not inure to the benefit of any
such
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<PAGE>
persons unless a court of competent jurisdiction or controlling precedent
determines that such result is not against public policy as expressed in the
Securities Act of 1933. Section 9 of each Distribution Contract also provides
that Mitchell Hutchins agrees to indemnify, defend and hold the Trust, its
officers and trustees free and harmless of any claims arising out of any alleged
untrue statement or any alleged omission of material fact contained in
information furnished by Mitchell Hutchins for use in the Registration Statement
or arising out of an agreement between Mitchell Hutchins and any retail dealer,
or arising out of supplementary literature or advertising used by Mitchell
Hutchins in connection with each Distribution Contract.
Section 9 of each Exclusive Dealer Agreement contains provisions
similar to Section 9 of each Distribution Contract, with respect to PaineWebber
Incorporated ("PaineWebber").
Section 10 of each Distribution Contract contains provisions similar to
that of the section of the Investment Advisory and Administration Contracts
limiting the liability of the Trust's trustees.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to trustees, officers and controlling
persons of the Trust, pursuant to the foregoing provisions or otherwise, the
Trust has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a trustee, officer or controlling person of the Trust in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Trust by such
trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Mitchell Hutchins, a Delaware corporation, is a registered investment
advisor and is a wholly owned subsidiary of PaineWebber which is, in turn, a
wholly owned subsidiary of Paine Webber Group Inc. Mitchell Hutchins is
primarily engaged in the investment advisory business. Information as to the
officers and directors of Mitchell Hutchins is included in its Form ADV, as
filed with the Securities and Exchange Commission (registration number
801-13219), and is incorporated herein by reference.
Pacific Investment Management Company ("PIMCO") serves as sub-adviser
for PaineWebber Low Duration U.S. Government Income Fund. PIMCO, a Delaware
general partnership, is a registered investment adviser and a subsidiary
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). The general partners of
PIMCO Advisors are PIMCO Advisors Holding L.P., a publicly traded company listed
on the New York Stock Exchange under the symbol "PA" and PIMCO Partners, G.P., a
a general partnership between Pacific Life Insurance Company and PIMCO Partners,
LLC., a limited liability company controlled by the PIMCO managing directors.
PIMCO is primarily engaged in the investment advisory business. Information as
to the officers and managing directors and partners of PIMCO is included in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-48187) and is incorporated herein by reference.
Schroder Capital Management International Inc. ("Schroder Capital")
serves as investment sub-adviser for PaineWebber Asia Pacific Growth Fund.
Schroder Capital, a New York corporation, is a registered investment adviser and
is primarily engaged in the investment advisory business. Schroder Capital is a
wholly owned indirect subsidiary of Schroders plc, the London Stock Exchange
listed holding company parent of a large worldwide group of banks and financial
services companies (referred to as the "Schroder Group") with associated
companies and branch and representative offices located worldwide. Information
regarding the officers and directors of Schroder Capital is included in its Form
ADV, as filed with the Securities and Exchange Commission (registration number
801-15834) and is incorporated herein by reference.
C-4
<PAGE>
Item 27. PRINCIPAL UNDERWRITERS
(a) Mitchell Hutchins serves as principal underwriter and/or investment
adviser for the following other investment companies:
ALL-AMERICAN TERM TRUST INC.
GLOBAL HIGH INCOME DOLLAR FUND INC.
GLOBAL SMALL CAP FUND INC.
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
MANAGED HIGH YIELD FUND INC.
MANAGED HIGH YIELD PLUS FUND INC.
MITCHELL HUTCHINS LIR MONEY SERIES
MITCHELL HUTCHINS PORTFOLIOS
MITCHELL HUTCHINS SERIES TRUST
PAINEWEBBER AMERICA FUND
PAINEWEBBER FINANCIAL SERVICES GROWTH FUND INC.
PAINEWEBBER INDEX TRUST
PAINEWEBBER INVESTMENT SERIES
PAINEWEBBER INVESTMENT TRUST
PAINEWEBBER INVESTMENT TRUST II
PAINEWEBBER MANAGED ASSETS TRUST
PAINEWEBBER MANAGED INVESTMENTS TRUST
PAINEWEBBER MASTER SERIES, INC.
PAINEWEBBER MUNICIPAL SERIES
PAINEWEBBER MUTUAL FUND TRUST
PAINEWEBBER OLYMPUS FUND
PAINEWEBBER SECURITIES TRUST
STRATEGIC GLOBAL INCOME FUND, INC.
2002 TARGET TERM TRUST INC.
(b) Mitchell Hutchins is the principal underwriter for the Registrant.
PaineWebber acts as exclusive dealer for the shares of the Registrant. The
directors and officers of Mitchell Hutchins, their principal business addresses
and their positions and offices with Mitchell Hutchins are identified in its
Form ADV, as filed with the Securities and Exchange Commission (registration
number 801-13219). The directors and officers of PaineWebber, their principal
business addresses and their positions and offices with PaineWebber are
identified in its Form ADV, as filed with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby incorporated
by reference. The information set forth below is furnished for those directors
and officers of Mitchell Hutchins or PaineWebber who also serve as trustees or
officers of the Registrant.
<TABLE>
<CAPTION>
Position and Offices with
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
<S> <C> <C>
Margo N. Alexander* Trustee and President Chairman, Chief Executive Officer and a
Director of Mitchell Hutchins and an
Executive Vice President and a Director
of PaineWebber
Brian M. Storms* Trustee President and Chief Operating Officer of
Mitchell Hutchins
T. Kirkham Barneby* Vice President Managing Director and Chief Investment
Officer - Quantitative Investments of
Mitchell Hutchins
C-5
<PAGE>
Position and Offices with
Name Position With Registrant Underwriter or Exclusive Dealer
- ---- ------------------------ -------------------------------
<S> <C> <C>
Julieanna Berry* Vice President First Vice President and a Portfolio
Manager of Mitchell Hutchins
James F. Keegan* Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
John J. Lee** Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Thomas J. Libassi* Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Kevin J. Mahoney** Vice President and Assistant First Vice President and a Senior
Treasurer Manager of the Mutual Fund Finance
Department of Mitchell Hutchins
Dennis McCauley* Vice President Managing Director and Chief Investment
Officer - Fixed Income of Mitchell
Hutchins
Ann E. Moran** Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Dianne E. O'Donnell** Vice President and Secretary Senior Vice President and Deputy General
Counsel of Mitchell Hutchins
Emil Polito* Vice President Senior Vice President and Director of
Operations and Control for Mitchell
Hutchins
Victoria E. Schonfeld** Vice President Managing Director and General Counsel of
Mitchell Hutchins and a Senior Vice
President of PaineWebber
Paul H. Schubert** Vice President and Treasurer Senior Vice President and Director of
the Mutual Fund Finance Department of
Mitchell Hutchins
Nirmal Singh* Vice President Senior Vice President and a Portfolio
Manager of Mitchell Hutchins
Barney A. Taglialatela** Vice President and Assistant Vice President and a Manager of the
Treasurer Mutual Fund Finance Department of
Mitchell Hutchins
Mark A. Tincher* Vice President Managing Director and Chief Investment
Officer - Equities of Mitchell Hutchins
Keith A. Weller** Vice President and Assistant First Vice President and Associate
Secretary General Counsel of Mitchell Hutchins
- ---------
* The business address of this person is 51 West 52nd Street, New York, New York 10019-6114.
** The business address of this person is 1285 Avenue of the Americas, New York, New York, 10019.
(c) None.
</TABLE>
C-6
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Mitchell Hutchins, 1285 Avenue of the Americas, New York,
New York 10019 and Mitchell Hutchins, 51 West 52nd Street, New York, New York
10019-6114. All other accounts, books and documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent and
custodian.
Item 29. MANAGEMENT SERVICES
Not applicable.
Item 30. UNDERTAKINGS
None.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 30th day of November, 1999.
PAINEWEBBER MANAGED INVESTMENTS TRUST
By: /s/ DIANNE E. O'DONNELL
-----------------------------
Dianne E. O'Donnell
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Trustee November 30, 1999
- --------------------------------- (Chief Executive Officer)
Margo N. Alexander *
/s/ E. Garrett Bewkes, Jr. Trustee and Chairman November 30, 1999
- ------------------------------- of the Board of Trustees
E. Garrett Bewkes, Jr. *
/s/ Richard Q. Armstrong Trustee November 30, 1999
- -------------------------------
Richard Q. Armstrong *
/s/ Richard R. Burt Trustee November 30, 1999
- -------------------------------
Richard R. Burt *
/s/ Meyer Feldberg Trustee November 30, 1999
- -------------------------------
Meyer Feldberg *
/s/ George W. Gowen Trustee November 30, 1999
- -------------------------------
George W. Gowen *
/s/ Frederic V. Malek Trustee November 30, 1999
- -------------------------------
Frederic V. Malek *
/s/ Carl W. Schafer Trustee November 30, 1999
- -------------------------------
Carl W. Schafer *
/s/ Brian M. Storms Trustee November 30, 1999
- -------------------------------
Brian M. Storms **
/s/ Paul H.Schubert Vice President and Treasurer (Chief November 30, 1999
- ------------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>
<PAGE>
SIGNATURES (CONTINUED)
* Signature affixed by Elinor W. Gammon pursuant to powers of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 30 to the registration statement of PaineWebber Managed
Municipal Trust, SEC File 2-89016, filed June 27, 1996.
** Signature affixed by Elinor W. Gammon pursuant to power of attorney
dated May 14, 1999 and incorporated by reference from Post-Effective
Amendment No. 61 to the registration statement of PaineWebber Managed
Investments Trust, SEC File 2-91362, filed June 1, 1999.
<PAGE>
PAINEWEBBER MANAGED INVESTMENTS TRUST
EXHIBIT INDEX
Exhibit
Number
(1) (a) Amended and Restated Declaration of Trust 1/
(b) Amendment to Declaration of Trust effective April 8, 1998 2/
(c) Amendment to Declaration of Trust effective July 9, 1998 2/
(d) Amendment to Declaration of Trust effective August 19, 1998 3/
(e) Amendment to Declaration of Trust effective June 24, 1999 4/
(f) Amendment to Declaration of Trust effective July 28, 1999
(filed herewith)
(2) Restated By-Laws 1/
(3) Instruments defining the rights of holders of the Registrant's shares
of beneficial interest 5/
(4) (a) Investment Advisory and Administration Contract 1/
(b) Investment Advisory and Administration Contract with
respect to PaineWebber Tax-Managed Equity Fund and
PaineWebber Strategy Fund 3/
(c) Investment Advisory Fee Agreement with respect to PaineWebber
Utility Income Fund 1/
(d) Investment Advisory Fee Agreement with respect to PaineWebber
Low Duration U.S. Government Income Fund 1/
(e) Investment Advisory Fee Agreement with respect to PaineWebber
Asia Pacific Growth Fund 6/
(f) Investment Advisory Fee Agreement with respect to
PaineWebber Strategy Fund (filed herewith)
(g) Sub-Investment Advisory Contract with respect to PaineWebber
Low Duration U.S. Government Income Fund 7/
(h) Sub-Advisory Contract with respect to PaineWebber Asia
Pacific Growth Fund 5/
(5) (a) Distribution Contract with respect to Class A Shares 1/
(b) Distribution Contract with respect to Class B Shares 1/
(c) Distribution Contract with respect to Class C Shares 8/
(d) Distribution Contract with respect to Class Y Shares 8/
(e) Exclusive Dealer Agreement with respect to Class A Shares 1/
(f) Exclusive Dealer Agreement with respect to Class B Shares 1/
(g) Exclusive Dealer Agreement with respect to Class C Shares 8/
(h) Exclusive Dealer Agreement with respect to Class Y Shares 8/
(6) Bonus, profit sharing or pension plans - none
(7) Custodian Agreement 1/
<PAGE>
(8) Transfer Agency Agreement 9/
(9) Opinion and consent of counsel (filed herewith)
(10) Other opinions, appraisals, rulings and consents: Auditor's
consent (filed herewith)
(11) Financial statements omitted from prospectus - none
(12) Letter of investment intent 1/
(13) (a) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class A Shares 3/
(b) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class B Shares 3/
(c) Plan of Distribution pursuant to Rule 12b-1 with respect to
Class C Shares 3/
(d) Addendum to Class C Plan for PaineWebber Strategy Fund (filed
herewith)
(14) and
(27) Financial Data Schedule (not applicable)
(15) Plan pursuant to Rule 18f-3 10/
- -----------------
1/ Incorporated by reference from Post-Effective Amendment No. 52 to the
registration statement, SEC File No. 2-91362, filed February 27, 1998.
2 Incorporated by reference from Post-Effective Amendment No. 54 to the
registration statement, SEC File No. 2-91362, filed July 21, 1998.
3/ Incorporated by reference from Post-Effective Amendment No. 59 to the
registration statement, SEC File No. 2-91362, filed February 26, 1999.
4/ Incorporated by reference from Post-Effective Amendment No. 63 to the
registration statement, SEC File No. 2-91362, filed July 29, 1999.
5/ Incorporated by reference from Articles III, VIII, IX, X and XI of
Registrant's Amended and Restated Declaration of Trust and from
Articles II, VII and X of Registrant's Restated By-Laws.
6/ Incorporated by reference from Post Effective Amendment No. 50 to the
registration statement, SEC File No. 2-91362, filed July 7, 1997.
7/ Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, SEC File No. 2-91362, filed March 31, 1995.
8/ Incorporated by reference from Post-Effective Amendment No. 39 to the
registration statement, SEC File No. 2-91362, filed February 14, 1996.
9/ Incorporated by reference from Post-Effective Amendment No. 53 to the
registration statement, SEC File No. 2-91362, filed March 31, 1998.
10/ Incorporated by reference from Post-Effective Amendment No. 43 to the
registration statement, SEC File No. 2-91362, filed July 31, 1996.
Exhibit No. 1(f)
PAINEWEBBER MANAGED INVESTMENTS TRUST
CERTIFICATE OF VICE PRESIDENT AND SECRETARY
I, Dianne E. O'Donnell, Vice President and Secretary of PaineWebber
Managed Investments Trust ("Trust"), hereby certify that the board of trustees
of the Trust adopted the following resolutions at a meeting held July 28, 1999,
that the resolutions became effective on that date, and that the Amended and
Restated Schedule A attached to this certificate is a true copy of the Amended
and Restated Schedule A to the Trust's Declaration of Trust that was approved by
the board of trustees at its July 28, 1999 meeting:
RESOLVED, that pursuant to Section 7 of Article XI of the
Trust's Declaration of Trust, the name of the Series of the Trust
designated as "PaineWebber Research Fund" be, and hereby is, changed to
"PaineWebber Strategy Fund"; and be it further
RESOLVED, that Schedule A of the Trust's Declaration of Trust
be, and hereby is, amended and restated to reflect the name change of
the Series.
Dated: August 6, 1999 By: /s/ DIANNE E. O'DONNELL
--------------------------
Dianne E. O'Donnell
Vice President and Secretary
PaineWebber Managed Investments Trust
Subscribed and sworn before me this 6th day of August, 1999:
/s/ CRISTINA PARADISO
- --------------------------------
Cristina Paradiso
Notary Public State of New York
Qual. N.Y. Cty
No. 01PA6017191
Comm. Exp. 12/07/2000
<PAGE>
SCHEDULE A TO DECLARATION OF TRUST OF
PAINEWEBBER MANAGED INVESTMENTS TRUST
(AS AMENDED AND RESTATED JULY 28, 1999)
SERIES OF THE TRUST
PaineWebber Asia Pacific Growth Fund
PaineWebber High Income Fund
PaineWebber International Equity Fund
PaineWebber Investment Grade Income Fund
PaineWebber Low Duration U.S. Government Income Fund
PaineWebber Strategy Fund
PaineWebber Tax-Managed Equity Fund
PaineWebber U.S. Government Income Fund
PaineWebber Utility Income Fund
CLASSES OF SHARES OF EACH SERIES
An unlimited number of shares of beneficial interest have been established by
the Board as Class A shares, Class B shares, Class C shares and Class Y shares
of each of the above Series. Each of the Class A shares, Class B shares, Class C
shares and Class Y shares of a Series represents interests in the assets of only
that Series and has the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of shares, except as provided in the Trust's
Declaration of Trust and as set forth below with respect to the Class B shares
of each Series:
1. Each Class B share, other than a share purchased through the
reinvestment of a dividend or a distribution with respect to the
Class B share, shall be converted automatically, and without any
action or choice on the part of the holder thereof, into Class A
shares of the same Series, based on the relative net asset value of
each such class at the time of the calculation of the net asset value
of such class of shares on the date that is the first Business Day
(as defined in the Series' prospectus and/or statement of additional
information) of the month in which the sixth anniversary of the
issuance of such Class B shares occurs (which, for the purpose of
calculating the holding period required for conversion, shall mean
(i) the date on which the issuance of such Class B shares occurred or
(ii) for Class B shares obtained through an exchange, the date on
which the issuance of the Class B shares of an eligible PaineWebber
fund occurred, if such shares were exchanged directly, or through a
series of exchanges for the Series' Class B shares (the "Conversion
Date")).
2. Each Class B share purchased through the reinvestment of a dividend
or a distribution with respect to the Class B shares and the
dividends and distributions on such shares shall be segregated in a
separate sub-account on the stock records of the Series for each of
the holders of record thereof. On any Conversion Date, a number of
the shares held in the sub-account of the holder of record of the
share or shares being
<PAGE>
converted, calculated in accordance with the next following sentence,
shall be converted automatically, and without any action or choice on
the part of the holder thereof, into Class A shares of the same
Series. The number of shares in the holder's sub-account so converted
shall bear the same relation to the total number of shares maintained
in the sub-account on the Conversion Date as the number of shares of
the holder converted on the Conversion Date pursuant to Paragraph
2(a) hereof bears to the total number of Class B shares of the holder
on the Conversion Date not purchased through the automatic
reinvestment of dividends or distributions with respect to the Class
B shares.
3. The number of Class A shares into which a Class B share is converted
pursuant to paragraphs 1 and 2 hereof shall equal the number
(including for this purpose fractions of a share) obtained by
dividing the net asset value per share of the Class B shares for
purposes of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date by the net
asset value per share of the Class A shares for purposes of sales and
redemptions thereof at the time of the calculation of the net asset
value on the Conversion Date.
4. On the Conversion Date, the Class B shares converted into Class A
shares will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof will cease (except
the right to receive declared but unpaid dividends to the Conversion
Date).
For purposes of Paragraph 1 above, the term "eligible PaineWebber fund" includes
any and all mutual funds for which PaineWebber Incorporated or Mitchell Hutchins
Asset Management Inc. serves as investment adviser that offer shares with a
contingent deferred sales charge imposed upon certain redemptions of such shares
and that are exchangeable with the Class B shares of the Series.
2
Exhibit No. 4(f)
INVESTMENT ADVISORY AND ADMINISTRATION FEE AGREEMENT
Agreement made as of September 27, 1999, between PAINEWEBBER MANAGED
INVESTMENTS TRUST, a Massachusetts business trust ("Trust"), on behalf of
PaineWebber Strategy Fund ("Fund"), a series of shares of beneficial interest of
the Trust, and MITCHELL HUTCHINS ASSET MANAGEMENT INC. ("Mitchell Hutchins"), a
Delaware corporation registered as a broker-dealer under the Securities Exchange
Act of 1934, as amended, and as an investment adviser under the Investment
Advisers Act of 1940, as amended.
WHEREAS, the Trust has appointed Mitchell Hutchins as investment
adviser and administrator for PaineWebber Tax-Managed Equity Fund, another
series of the Trust, pursuant to an Investment Advisory and Administration
Contract, dated November 12, 1998, between the Trust and Mitchell Hutchins
("Advisory Contract"); and
WHEREAS, the Advisory Contract may be made applicable to any other
series of the Trust; and
WHEREAS, the Fund has been established as a new series of the Trust;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. For the services provided and the expenses assumed pursuant to the
Advisory Contract with respect to the Fund, the Fund will pay to Mitchell
Hutchins a fee, computed daily and paid monthly, at the annual rate of 0.75% of
its average daily net assets.
2. This Fee Agreement shall be subject to all of the terms and
conditions of the Advisory Contract.
3. This Fee Agreement shall become effective upon the date written
above, provided that it shall not take effect unless it has first been approved
(i) by a vote of a majority of the Trustees of the Trust who are not parties to
this Fee Agreement or the Advisory Contract or interested persons of any such
persons at a meeting called for the purpose of such approval and (ii) by vote of
a majority of the Fund's outstanding voting securities.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
PAINEWEBBER MANAGED INVESTMENTS TRUST,
on behalf of PaineWebber Strategy Fund
By: /s/ DIANNE E. O'DONNELL
-------------------------------
Name: Dianne E. O'Donnell
Title: Vice President
MITCHELL HUTCHINS ASSET MANAGEMENT INC.
By: /s/ DIANNE E. O'DONNELL
------------------------------
Name: Dianne E. O'Donnell
Title: Senior Vice President
Exhibit No. 9
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE 202-778-9000
WWW.KL.COM
December 3, 1999
PaineWebber Managed Investments Trust
51 West 52nd Street
New York, New York 10019-6114
Ladies and Gentlemen:
You have requested our opinion, as counsel to PaineWebber Managed
Investments Trust ("Trust"), as to certain matters regarding the issuance of
certain Shares of the Trust. As used in this letter, the term "Shares" means the
Class A, Class B, Class C and Class Y shares of beneficial interest of the
series of the Trust listed below that may be issued during the time that
Post-Effective Amendment No. 65 to the Trust's Registration Statement on Form
N-1A ("PEA") is effective and has not been superseded by another post-effective
amendment. The series of the Trust is PaineWebber Tax-Managed Equity Fund.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by investment companies organized as business trusts in that State and to
the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that creditors of,
contractors with and claimants against the
<PAGE>
PaineWebber Managerd Investments Trust
December 3, 1999
Page 2
Trust or any series shall look only to the assets of the Trust for the
appropriate series for payment. It also requires that notice of such disclaimer
be given in each note, bond, contract, certificate, undertaking or instrument
made or issued by the officers or the trustees of the Trust on behalf of the
Trust. The Declaration of Trust further provides: (1) for indemnification from
the assets of the Trust or the appropriate series for all loss and expense of
any shareholder held personally liable for the obligations of the Trust or any
series by virtue of ownership of shares of the Trust or such series; and (2) for
the Trust or appropriate series to assume the defense of any claim against the
shareholder for any act or obligation of the Trust or series. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust or series would be unable to meet
its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated October
14, 1999 for PaineWebber Tax-Managed Equity Fund in this Registration Statement
(Form N-1A No. 2-91362) of PaineWebber Managed Investments Trust.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
New York, New York
December 1, 1999
Exhibit No. 13(d)
PAINEWEBBER MANAGED INVESTMENTS TRUST
CLASS C SHARES
ADDENDUM TO
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, PaineWebber Managed Investments Trust ("Trust") is registered
under the Investment Company Act of 1940, as amended ("1940 Act"), as an
open-end management investment company; and
WHEREAS, the Trust has adopted a Plan of Distribution ("Plan") pursuant
to Rule 12b-1 under the 1940 Act with respect to the Class C shares of each
series of shares of beneficial interest as now exists and as may hereafter be
designated by the Trust's board of trustees ("Board") and have Class C shares
established; and
WHEREAS, the Trust has entered into a Distribution Contract
("Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
pursuant to which Mitchell Hutchins has agreed to serve as Distributor of the
Class C shares of each such series; and
WHEREAS, the Trust has established a new series of shares of beneficial
interest designated as the PaineWebber Strategy Fund ("New Series") and has
established Class C shares with respect to the New Series; and
NOW, THEREFORE, the Trust hereby adopts the Plan with respect to the
Class C shares of the New Series in accordance with Rule 12b-1 under the 1940
Act.
1. The New Series is authorized to pay to Mitchell Hutchins, as
compensation for Mitchell Hutchins' services as Distributor of its Class C
shares, distribution fees at the rate of 0.75% (on an annualized basis) of the
average daily net assets of the New Series' Class C shares. Such fee shall be
calculated and accrued daily and paid monthly or at such other intervals as the
Board shall determine.
2. This Addendum shall be subject to all other terms and conditions of
the Plan, including the authorization of the payment to Mitchell Hutchins of a
service fee at the rate of 0.25% (on an annualized basis) of the average daily
net assets of the New Series.
3. This Addendum shall not become effective unless (a) it first has
been approved, together with any related agreements, by votes of a majority of
both (i) the Board and (ii) those Trustees of the Trust who are not "interested
persons" of the Trust and have no direct or indirect financial interest in the
operation of this Plan or any agreements related thereto ("Independent
Trustees") cast in person at a meeting (or meetings) called for the purpose of
voting on such approval; and until the Trustees who approve the Plan's taking
effect with respect to the Class C shares of the New Series have reached the
conclusion required by Rule 12b-1(e) under the 1940 Act and (b) it has been
approved by a vote of the then-sole shareholder of the Class C shares of the New
Series.
<PAGE>
IN WITNESS WHEREOF, the Trust has caused this Plan of Distribution to
be executed on the day and year set forth below in New York, New York.
Date: September 27, 1999
PAINEWEBBER MANAGED INVESTMENTS TRUST
By: /s/ DIANNE E. O'DONNELL
----------------------
Name: Dianne E. O'Donnell
Title: Secretary and Vice President
Attest:
By: /s/ CRISTINA PARADISO
---------------------
Name: Cristina Paradiso
Title: Assistant Secretary
